The people are revolting! They stink on ice.

Alright, this caption is somewhat gratuitous, but it isn’t often that we can work in Mel Brooks’ material. We are, of course, referring to the demonstrations in Spain and Greece which have turned violent. The basis for the protests is opposition to budget cuts and regulations changes. The protests began peacefully, but our old friends, the anarchists, arrived on the scene and made their presence known by instilling violence and, in Greece, throwing Molotov Cocktails. These developments are casting doubt on whether or not the eurozone can remain intact. In response, the vigilantes pushed the yield of Spain’s 10-year note to over 6.00%. This is the first time since September 6th, when ECB President, Mario Draghi, announced that the ECB’s plan to engage in unlimited bond buying, if conditions are met and formal bailouts are requested. Spain’s’ Prime Minister Mariano Rajoy told the Wall Street Journal that Spain will “100 percent” seek a rescue if borrowing costs stayed “too high.” The question is: Will the people stand idly by and allow Mr. Rajoy to agree to austerity, reforms and a dilution of Spanish sovereignty? The markets are, once again, becoming concerned that things might end badly for the eurozone. However, although U.S. equity prices a trending lower and the prices of long-dated U.S. Treasuries are rallying, the price action we have seen this morning appears to be underreacting to overnight developments in Europe. In truth they are not underreacting. They are merely continuing the trend which began last week. The market began to lose faith in the ability of the money-printing crowd (A.K.A. central bankers) to engineer economic recoveries on their own. This is a good thing because central bankers cannot do it alone. Fiscal policy makers will have to react, sooner or later. This is the two-month anniversary of Mario Draghi’s promise to do whatever it takes to keep the eurozone together. The color from the market participants and pundits is quite telling as to where allegiances lie (or lay). Most U.S.-based market participants, strategists and commentators have cast doubt on the ability of European leaders to successfully engineer a true periphery restructuring and solution. Their European counterparts fire back stating that; U.S. market participants do not truly understand the situation in Europe. This disagreement is most evident in their outlooks for the euro versus the dollar. European and Europhile market participants continue to point to Fed policy as the reason the value of the U.S. dollar must decline and why U.S. interest rates have to rise. U.S. market participants point to the fact that, what the ECB is proposing is exactly the same thing. Whether the ECB buys bonds or the eurozone fragments, the result is a bad outcome for Europe. If can kicking becomes the overarching strategy, how could the euro not decline? In times of trouble, capital will gravitate to the currency of country which is best able to weather a storm and which has the most comparative advantages over its peers. Please do not point to China as having a comparative advantage over the U.S. Yes, it can produce “widgets” more cost-effectively, but that is where the advantages end. Property rights and the free flow of capital are fairly important advantages which China just does not have at this time. This could be good news for investors in U.S. assets and anyone who owns and spends dollars. For in spite of the Fed’s desire to ease monetary conditions, the U.S. dollar refuses to weaken. This is good for consumers looking to spend, but bad for export-driven businesses. What does it mean for jobs? Probably not much as increased exports may not translate into mass hiring. With the global economy sputtering and China’s “landing” being somewhat harder than many had anticipated, the U.S. will not be able to export its way out of the doldrums. Foreign central banks will see to that as well. We will know more about the direction of Europe this later this week when Spain and France announce their new budgets. Is it just us or does France seem like not only the periphery’s enable, but a periphery “wanna be?” So much for the bubble in Treasuries. Tom Byrne tom@bond-squad.com. www.bond-squad.com www.mksense.blogspot.com 347-927-7823 Twitter: @Bond_Squad Disclaimer: The opinions expressed in this publication are those of the author. They are not, nor should they be considered solicitations to purchase or sell securities.