Old Rivalries
Research for Online Investors

12/16/11

Recriminations are in the air, as the eurozone struggles to spin the proposed fiscal integration. Fitch has placed six European countries on “credit watch negative” but affirmed France's “AAA” rating…for now. British Prime Minister David Cameron cast the lone dissenting vote against fiscal integration last weekend.

The French Prime Minister Francois Fillon commented that Britain has a higher deficit, more debt and economic growth below the EU average.  If Standard & Poor’s downgrades France’s credit rating, Fillon suggested that Britain should follow.

This created a firestorm in the British press.  Sky News reports that Deputy Prime Minister Nick Clegg called the comments “simply unacceptable.”  Fillon had called Clegg after Fillon’s comments became public to apologize.  He insisted he did not intend to call the UK’s credit rating into question.

The Guardian has a great story recounting the history of conflict between France and Great Britain.  France’s finance minister said “One would rather be French than British at the moment” in reference to the credit agency reviews expected over the next few weeks.  This along with the Prime Minister’s comments have a good exchange going between the countries.  French President Nicolas Sarkozy said David Cameron acted “like a stubborn child” at the EU summit last weekend.

Napoleon Bonaparte, a feared French leader who died in British prison.  And we thought a common monetary union was supposed to reduce old tensions!

Sky News also reports the new “European Agreement” will take effect after only nine participating countries ratify it.  That is a neat trick.  European Union treaties call for unanimous approval of any changes.  By declaring it effective if only nine countries ratify, Germany and France hope to restore confidence in the debt markets.

David Cameron has come under pressure in Britain from the Liberal Democrats, his coalition partner in governing.  Cameron called the European Council president Herman van Rompuy to agree to take part in “technical discussions.”  Deputy Liberal Democrat leader Simon Hughes said “Unless the eurozone area sorts out its economy and we avoid repetition of things like what happened in Greece and Italy and Spain and Portugal then, to be honest, we won’t avoid the consequences because they’re our biggest trading partners.”

Britain does not want to be on the sidelines when negotiations take place.  Mischief by the French, or others, could damage their economy.  The Czech Republic and Hungary have second thoughts on the agreement.  Their leaders announced they would not sign the pact unless tax harmonization plans were dropped.  We think Ireland will require the same as they have a low corporate tax that other eurozone nations have demanded they raise.

If you are like most of us, you have lost money on interest rates in the past year.  We lost money on TBT along with many others.  Bill Gross of PIMCO lost money by liquidating his holdings in U.S. Treasuries.  Today's chart illustrates the 112-year trend of the 10-year Treasury bond yield (thick blue line). Investors have sought safety in the U.S. dollar as a struggling global economy has increased fear in equities; this has caused a significant decline of the 10-year Treasury bond yield.

The 10-year yield has declined 300+ basis points (3%) since the peak of the credit bubble. This decline has brought the 10-year Treasury bond yield to a 112-year monthly low. Notice the quarter-century downtrend of the 10-year bond yield remains intact and will remain intact even if the 10-year yield were to drop significantly below 1.5% over the near-term.  Yuk!  I don’t know when it will turn, but turn it will.

Chart courtesy of www.chartoftheday.com

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top