For a few happy years, European Central Bank head Jean-Claude Trichet looked down from Mt. Olympus—which is really his 35th floor office—and saw that all was good.
The invention of the Euro was successful beyond expectations.
The gods were even deeming it worthy to be the world's second reserve currency.
But the thunderstorm came, the vestal virgins took a hike, and the Daily Telegraph (London) went so far last week as to say, "It seems inevitable that the zone might break apart. At the bottom end, Greece and Portugal are favorites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new hard currency zone led by Germany."
Trichet, caught in the middle, said that there is no way the zone would support individual country bonds, and then he did just that.
A large Quantitative Easing Program might help offset a downturn but, as of the moment, the ECB and Trichet say they will not go down that road.
And, indeed, they are "sterilizing" all government bond purchases, as we noted last week. The market feels European governments will prove incapable of pushing through austerity measures and the debt crisis will only accelerate. Angela Merkel's short sale restrictions increase the worry that European officials are at odds on what policies should be used to combat the crisis. LIBOR rates have moved up across the curve, and credit in Europe is becoming increasingly difficult to obtain.
And what's with the joke of the new Iranian sanctions agreed to by the US, China, and Russia? After 20 rounds of alleged "hard bargaining," there are no restrictions on investments in Iran's energy sector. China gets more than 10% of its oil from Iran, and oil accounts for 50% of the Iranian government budget. To exempt oil from attempted sanctions shows they have no teeth. Most of the new measures are left to the discretion of individual nations. Countries are "called upon" to inspect ships suspected of having contraband. Financial elements of the sanctions are to be implemented on a voluntary basis, and countries are again only "called upon" to oppose Iranian banks setting up on their territories, but aren't required to do so.
The next few weeks will showcase the Senate and the House trying to blend together the financial reform package. They will hammer out a bill, but the only thing it is likely to do is to reduce the profitability of the financial sector. Spinning off derivative divisions or passing a tough Volker rule that might strip in-house hedge funds and private equity funds does nothing to address what caused the crisis.
More oversight is not better oversight.
The Financial Times said, "The global financial system was already scrutinized by hundreds of governments, regulators and central banks. None of them spotted trouble last time - neither will this new lot next time."
It's a mystery to me why hedge funds, prop desks and private equity funds have emerged as villains. They had nothing to do with the financial crisis. The crisis was caused because house prices dropped. The reason for an overpriced housing sector starts with the Federal Reserve and low interest rates, the Community Reinvestment Act, greedy borrowers, stupid lenders and (at best) sound-asleep rating agencies. This Financial Regulatory Act will be expensive, generate lots of paperwork, reduce profits and, at the end of the day, be worthless.
My guess on the stock market is that we'll be lucky to bottom out at 1065, which was the "flash crash" low. Last February's low of 1045 happens to coincide almost exactly with a 1/3 correction of the advance that started last year.
PROGRAMMING NOTE: Mr. Farrell will be on CNBC today at 10:30 am/et.
_______________________________________
Vincent Farrell, Jr.
is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.