Those who think that the election of Emmanuel Macron to the Presidency of France is the savior of the Euro probably believe that politicians are really there for the people rather than themselves. Macron’s idea of federalizing Europe some call the “transfer-union” is politically never going to happen. The EU is being torn apart at the seams for centralized government dictating to an economy and regulating everything just does not work. Ask Russia and China.

Socialism is the same as Communism, with the minor distinction that you formally own your property, but are regulated and taxed so you are still not “free” to do as you like. To a large degree socialism is worse for you have to fill out forms and pretend that your vote will actually change something – when they do not listen anyway.

The federalization of Europe dictated from Brussels cannot work. The people of Europe will NOT be happy to send 20% or so of GDP through Brussels. Unemployment is at the very best double that on the United States on average and in the South you have a 60% level of unemployment among the youth.

The “transfer-union” idea of Macron is really trying to solve France’s problems by spreading the losses to everyone else. He was the bureaucrat under Hollande and his “investment banking” experience in Paris is a joke. He understands no more about international markets than a teller at a drive up window.

This is just not going to happen! You cannot solve the problems of Europe with the very same thinking process that created it! The EU is creating the risk of a European War fueling the tensions rising from old wounds. The idea that a single government would end European War was a dream theory. The problem has been the EU mismanagement and now it’s all about forcing states to prop-up Brussels.

This coming week is what we would call in horse racing a trifecta with former FBI director James Comey’s testimony, the U.K. election, and the ECB monetary-policy meeting. Then our capital flow models seem to be picking up European buying of both US shares and bonds taking advantage of a rally in the Euro. The big money seems to have no faith in the Euro and is looking at rallies as an opportunity to divest more out of Europe.

On Friday, the government bonds remained in rally mode, pushing the benchmark 10-year Treasury note yield to a seven-month low as American pundits on Wall Street keep rubbing their eyes to make sure they are really awake. Stocks up and bonds up is a very strange thing for them to experience. The simultaneous run-up in stocks along with government paper has many just scratching their head. Does this mean the Fed will not raise rate? They are hard pressed for explanations when they only look domestically.

The 10-year Treasury yield fell from -2.17% to 2.15%, which is its lowest level since mid November. Even the Dow is starting to make new all-time highs at the same time.  Some have watched the unemployment number drop to a 16-year low at 4.3%. Some just think that equity and bond investors are not talking to each other and have been looking at different data. The bond pundits are watching the jobs numbers. Wall Street is pricing in two additional increases to benchmark interest rates in 2017. Others fear that Trump is in trouble and this puts at risk his whole agenda of deregulation, tax cuts and an increase to infrastructure spending, had tempered policy expectations.

The uninformed analysts actually think that weaker numbers will cause Congress to get behind Trump and push his agenda forward. That seems to be the least likely outcome. The likelihood of Republicans getting their act together when the smell blood in the White House is highly unlikely. Politics and posturing always come before the people.

The bottom line? Simply, we show capital inflows were running rather strong with Europeans looking to buy the bargains and china attacked the shorts in the yuan because of too much capital outflows. It may be a Comey testimony where he can say whatever he wants and the press will take it and run. But in Europe, the risk of the ECB collapsing is rising and this is why the sudden move to create a consolidated bond for Europe to find buyers to sell off what the ECB has bought and for European states to find funding when the ECB stops buying.

COMMENT: Well Mr. Armstrong, perhaps you are wrong at last. It looks like your meetings in Brussels that quite a few people noted you shuffling around town did have an impact. Looks like your constant warning about the structure of the euro’s failure is being corrected. Looks like you did make a difference. So congratulations on being wrong I suppose.

WH

ANSWER: Perhaps. But it has taken 20 years to make this point. Granted, the recent proposal to create a debt for the Eurozone is a compromise, but it is still not a consolidation of the national debts of Europe. This new compromise proposal from the EU Commission shows that they are listening at last but not for the reason I have been warning about. However, I would not say I am wrong. What I have always said is only when the collapse becomes eminent do we see the political change. My point is no change comes without the pain and typically only with the crash and burn. People who want to pretend they are advisors to government are usually bullshit artists. Government will NEVER listen to anyone if you try to get them to act without pain. Now this maneuver is not what it appears. It’s a bailout for the ECB.

The EU Commission intends to issue securities that “bundle” the entire Eurozone debt. So in other words, these will be the CDO instruments for Europe. Instead of bundling mortgages and assuming that the collective process will somehow be worth more than the individual parts, that is the compromise here. The securities are to be launched on the market as a “European Safe Asset” in order to attract the euro government bonds to investors. This is not quite what I had proposed from the outset. My proposal was they should have consolidated all the debt at the beginning, thereafter each member state would issue its own state debt as in the USA. But they were trying to sell the idea that a single currency would produce a single interest rate for all. That is what I warned them would NEVER HAPPEN.

This comprise proposal is ​​consolidating government bonds into asset backed securities (ABS). This is intended to pack the national government bonds into securities in order to ensure the financing of the states even after the end of the ECB’s buying-up program. Draghi has created a huge problem buying 40% of the government bonds. Who will buy when the ECB stops?

This is the crash and burn. The EU officials hope and pray that this scheme will increase the demand for governments’ debts of the weaker economies within the Eurozone. They also hope that this will secure the reserves of the European banks where right now a good stiff wind will blow them over. This, they hope and pray, will better diversify bank risks by diversifying their portfolios and ignoring political problems emerging in the south.

This is still a half-hearted measure to move toward federalization of Europe without consolidating the debts, which they fear will still be rejected by the North v the South. Wolfgang Schäuble had said that he no longer opposes a transferunion in principle and this ABS market has dropped sharply post-2007 because it was a subprime crisis. So here the same idea behind the mortgage crisis is being applied to the European debt. What is dangerous here is that the opposite of the original idea behind a single currency will unfold. Originally, they pitched that a single currency would create a single interest rate look at the United States. I warned that was only federally and you had to pick up the rug to see that the 50 states were subject to their own credit rating. Under this scheme, the idea of creating an ABS instead of consolidating the debt runs the risk that countries like Germany will find themselves (1) no longer the target for a capital flight among Eurozone states, and (2) that the overall interest rate will rise because of the lower quality being included. Therefore, you will not achieve the lowest rate for all as initially proposed back in the ’90s, but rates will rise to reflect the risks in Southern Europe.

While this EU initiative is designed to prepare for the time when the ECB stops its Quantitative Easing that has trapped the ECB and Draghi is pleading for help Behind the Curtain. They are hoping and praying that this is the solution to defuse the ECB risk of its absurd policies. Like the worst trader who buys and never defines where he is wrong, Draghi has made that same mistake. There is a major risk that the ECB itself can collapse.

The EU officials are still shaking in their boots with regard to Italy and the Movementso Cinque Stelli (Five Star Movement). If Italy pulls out of the Euro, the ECB can collapse. The EU feels comfortable about Merkel winning the Bundestag election in Germany. They are still concerned about Italy, Greece, and a split in Spain. One goes, and then all will go.

This compromise proposal to create an ABS  is being put forth because of the German resistance to Eurobonds. The crisis is coming to a head for when the ECB quantitative easing ends, the interest rates will be substantially higher and the budgets of member states will explode beyond set limits. They are beginning to see that the ECB will soon face difficulties for as rates rise, the value of their bond holdings will drop like a stone. I have warned that the ECB is the one central bank that can collapse thanks to Draghi.

The EU Commission is also working on a proposal to establish a joint budget for the Eurozone, which is the end game of federalization. The aim was to cement the monetary union in place and thereby prevent any more BREXIT nonsense from their view. This has risen to the top of considerations with the French presidential election and the victory of Macron. But France is in trouble. There is no money to fund what Macron promised. This becomes another patch to try to keep a failed system together.

This is why I am holding the July 22nd, 2017 seminar just on the Eurozone at the end of July. The details and tickets will go up for sale this week. This will be reasonable for it is only a half-day. The price of a seat will be $350