Raoul Pal @RaoulGMI Founder/CEO - Global Macro Investor and Real Vision Group, Business Cycle Economist, Investment Strategist, Economic Historian, Traveller and Rum Drinker.. Jul. 07, 2019 3 min read

Big, important thread alert:

There is a lot going on in Europe that feels like it's coming to a head soon... probably by the end of the summer. The EU economy is in mild recession...

But it is unlikely to deteriorate further for a month or two until the CESI up-cycle finishes around the end of the summer

But inflation expectation are collapsing (5yr shown) and show no signs of abating..

And we know that the ECB is only driven by ONE mandate - inflation. Therefore, they HAVE TO ease policy. Problem is that they have few levers to pull, so first it'll be lower rates. 2 yrs can go back to below -1%....

And bund yields will keep falling too...using a regression channel, it would suggest that -1.6% is the objective...

That's all well and good, but it's killing the banks, which are correlated with falling yields...(cause vs effect? Im not sure. Probably a bit of both). Chart is of EU Banks sector vs 10 yr bunds...

We are all well aware that $DB is a total shit show and is something I have been talking about for the last few years. The news out this weekend of a restructuring and loss of 20,000 jobs simply can not be achieved fast enough and all the senior leaders are bolting for the exits

They've tried mergers. Fail. They are trying bad bank. Not sure it will get done yet. And now they are trying restructuring. Too late/no time. Meanwhile, the ECB will push yields lower, putting $DB closer to the End Game. How else can they fight a recession? They cant use fiscal

But, this is NOT a DB problem, it is a STRUCTURAL EU/Swiss problem, on a scale not understood by most. UBS is about to break support and head to zero...

Credit Suisse is arguably worse...that support is the life/death line.

And in France, Soc Gen is also in free fall, with its own Cliff of Death approaching...

In Spain, all the banks look terrible, as I have been shouting from the roof tops for a while. BBVA is right at the Cliff of Death

And even Barclays in the UK looks bad too

So, the knock on effects are all lining up to push one bank after another of the Cliff of Death...and there ain't a thing the ECB can do about it, as they have only one mandate - inflation. They HAVE TO cut rates. And this is why Christine Lagarde has been brought in...

The ECB is going to need to become political. It is going to have to rescue an EU-wide banking system and put the banks into state hands and buy the extra gov debt and they are going to need to force fiscal reforms and massive fiscal stimulus. They will use the situation to force

through tighter EU fiscal consolidation, maybe even leaving some nations behind. Lagarde is perfect for this. It's what the IMF does. She is also a lawyer and a politician. The problem is, this stuff takes time. The ECB will buy any credit instrument to avoid capital

markets seizing up but shareholders are going to sense an equity wipeout over the debt holders, so equities bear the brunt of it (and bunds go more negative). The dollar will get bid as the $ funding crisis can not easily be solved by the ECB and lending at the margin tightens

And a strong dollar would destroy the banks and the global economy. It's all very circular and there are very few circuit breakers. Throw in heightened trade wars between EU/US (highly likely) and China/EU/US and you have a very big issue. And my problem with all of this

It's that the probability is much much higher than I'd like. And that is the reason to own bonds, dollars, bitcoin and gold. The former two are the beneficiaries of current needs, and the latter two are the high-gamma options on this escalating into an extreme policy event.

This all needs to be watched very closely. I am concerned that the summer will end with a building sense of crisis. You can already see the signs as liquidity issues come to the fore.. (Woodford, H20). None of this is a certain but the odds are exploding.

End.


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