Recap 9-10-12: Soros’ Proposal


Soro’s speech today was an interesting read. His proposal for pro-EU forces in Germany to push for allowing prolonged inflation in excess of 2% seems a bit of a stretch, given the virulently anti-inflation stance that is etched into the German consciousness. BUT it’s worthwhile to note that the ECB is essentially already pursuing such a policy. Recall that the ECB’s mandate centers only on containing inflation – NOT on supporting growth. And on Thursday, Draghi noted that the ECB forecasts 2013 HICP inflation to be around 1.9% – at the ECB’s “below, but close to, 2%” mandate. Yet despite this, the ECB governing council was almost unanimous in maintaining a dovish bias.

The more interesting bit was Soro’s view that Germany is likely to do the minimum necessary to prevent a breakup – thereby maximizing its own welfare. With the ECB now backstopping sovereign funding, this suggests that Germany’s contributions to the EU rebalancing effort are mostly finished. Additional German funds in excess of those pledged are unlikely to be forthcoming. Policy changes that help rebalance intra-EU competitiveness are also looking less likely as German growth slows. This all suggests that the probability of a sharper & shorter contraction in the EU has been changed in favor of a shallower & longer recession.


  • Soros:
  1. The real economy of the eurozone is in decline while Germany is doing relatively well. This means that the divergence is getting wider.
  2. Unfortunately, even unlimited intervention may not be sufficient to prevent the division of the euro area into creditor and debtor countries from becoming permanent. It will not eliminate the risk premiums, only narrow them and the conditionality imposed on the debtor countries by the EFSF is likely to push them into a deflationary trap. As a consequence they will not be able to regain competitiveness until the pursuit of debt reduction through austerity is abandoned.
  3. A disorderly breakup would be catastrophic for the euro area and indirectly for the whole world. Germany, having fared better than the other members of the euro area, has further to fall than the others – therefore it will continue to do the minimum that it considers necessary to prevent a breakup.
  4. The class differentiation will become permanent because the debtor countries will have to pay significant risk premiums for access to capital and it will become impossible for them to catch up with the creditor countries. The divergence in economic performance, instead of narrowing, will become wider. Both human and financial resources will be attracted to the center and the periphery will become permanently depressed.

GS: 50% of US banks are not earning their cost of capital, with structural issues (i.e., regulation and capital) forming a larger drag than cyclical factors.

FT reports Deutsche Bank will announce a substantial cut to ROE to 12-13% from the 25% pre-tax forecast. The new co-CEO’s will outline a plan to integrate the company’s business lines.

Companies are on pace to set dividend payout records in Q3. The combined yield for the S&P 500 for dividends and buybacks exceeds 4%. FT

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