{"id":120033,"date":"2022-06-12T16:42:53","date_gmt":"2022-06-12T20:42:53","guid":{"rendered":"http:\/\/stateofthenation.co\/?p=120033"},"modified":"2022-06-12T16:43:25","modified_gmt":"2022-06-12T20:43:25","slug":"while-russias-smo-has-greatly-accelerated-a-european-union-breakup-the-eu-leadership-response-guarantees-it-will-be-ugly","status":"publish","type":"post","link":"http:\/\/stateofthenation.co\/?p=120033","title":{"rendered":"

While Russia’s SMO has greatly accelerated a European Union breakup, the EU leadership response guarantees it will be ugly.<\/b><\/h2>"},"content":{"rendered":"

Lagarde Capitulates As the Euro-Zone
\nDivides<\/h1>\n

\"\"<\/p>\n

Tom Luongo
\nGold Goats ‘n Guns<\/a><\/p>\n

I know you probably get tired of me saying this but the Euro-zone is headed for a massive crisis. \u00a0On Thursday, June 9th, the ECB came out with its policy statement, less than one week before the next FOMC meeting statement (June 14th).<\/p>\n

It was a doozy. \u00a0Christine Lagarde attempted early on to project that soothing calm central bankers are supposed to exude even when everything is collapsing around them.<\/p>\n

But, truly this was Lagarde\u2019s \u2018Baghdad Bob\u2019 moment. \u00a0She stood up there and read the ECB\u2019s policy statement off the teleprompter like she had something caught in her throat, likely the remnants of what is left of her conscience, because even she couldn\u2019t swallow the bullshit she was slinging.<\/p>\n

We have inflation under control. \u00a0We will still grow in 2022 (BWAHAHAHA!) and growth will accelerate in 2023 and 2024. \u00a0These people haven\u2019t gotten one quarterly forecast right in \u2026 forever, and yet they project this idea that they have any clue what GDP growth will be in 2024?<\/p>\n

But,\u00a0as Zerohedge pointed out<\/a>, Lagarde then reversed herself during the press conference, trying to resurrect the ghost of Mario Draghi, saying that she stands ready to do \u2018whatever it takes\u2019 to stabilize the situation.<\/p>\n

From ZH:<\/p>\n

She notes there are existing instruments with the reinvestment capacity under the PEPP.<\/p>\n

\u201cAnd if it is necessary, as we have amply demonstrated in the past, we will deploy either existing or new instruments that will be made available.\u201d<\/strong><\/em><\/p>\n

Lagarde states that \u201cwithin our mandate we are committed to preventing fragmentation risks within the euro area.\u201d<\/p>\n

So some kind of asset purchase scheme for peripherals? The vagueness is intentional as\u00a0it appears Lagarde is trying to pull off a Draghi \u2018Whatever it takes\u2019 moment while keeping her foot on the hawkish pedal.<\/strong><\/p>\n

As\u00a0The IIF\u2019s Robin Brooks pointed out<\/a>:<\/p>\n

If the ECB says to markets: \u201cwe will defend Italy\u2019s spread,\u201d markets will for sure test that statement.<\/strong>\u00a0So \u2013 in effect \u2013 what the ECB did today is to raise the odds of markets trying to force its hand.All this is avoidable. Don\u2019t hike. The Euro zone is going into recession\u2026<\/strong><\/em><\/p><\/blockquote>\n

The end result was obvious to anyone with ears to hear, we are reluctantly following the Fed\u2019s lead in ending QE hoping that someone will still think that Italian BTP\u2019s trading at 65 bps above US Treasuries of the same maturity is a \u2018good deal,\u2019 and invest in a country that now carries increasing redenomination risk.<\/p>\n

If it wasn\u2019t so over-the-top moronic, it would be funny. \u00a0 Now with the horrific US CPI print red-pilling a whole lot of investors that the Fed has the green light to be even more hawkish, the mad scramble is on to figure out where to park that money that\u2019s been frozen by the clown show that is US domestic politics.<\/p>\n

The Fed\u2019s in control here, but not in the way a lot of people think. The next level of insight that should begin to take hold, especially if the next CPI print is equally awful, will be what I\u2019ve been saying for a year now\u2026.<\/p>\n

The Fed isn\u2019t raising rates to combat inflation. The Fed is raising rates to break the ECB and Davos.<\/strong><\/em><\/p>\n

Spread Eagled ECB<\/h3>\n

Two months ago Italian debt, thanks to Lagarde\u2019s lying and everyone\u2019s front-running her trades, was trading at a premium to US debt. \u00a0Um, Chrissy, you\u2019re going to need to see that spread vs. US debt be more like 650 bps (6.5%) rather than 65, if you want to attract even the average NFT investor at this point.<\/p>\n

\"\"<\/figure>\n

The bond markets are all now moving away from the monetary experiments Lagarde inherited from Mario Draghi and she has neither the experience nor the gravitas to carry this charade off any longer.<\/p>\n

The big takeaway, and the reason why the euro had a mild bout of myocarditis Thursday Morning before collapsing on its way to the bathroom, is because Lagarde is open to creating a new, improved, QQEternity, alphabet soup program in the future if this ending QE \u2018experiment\u2019 doesn\u2019t work.<\/p>\n

With the Fed now secure in its role as European liquidation agent, there\u2019s nothing Lagarde can do other than follow the yellow brick road make the best of a terrible situation getting worse by the day.<\/p>\n

That said, I have to ask the serious question, are they really worried about Italy at this point? \u00a0It\u2019s not like the folks at\u00a0Davos Central<\/em>\u00a0didn\u2019t manipulate the Italian political scene to achieve exactly this state of affairs. So, I honestly don\u2019t think they care at all about Italy.<\/p>\n

In fact, I\u2019d argue that they would rather have Mario Draghi ride Italy into the ground and turn the country into a smoking ruin in the hopes of saving the northern European currency bloc.<\/p>\n

The whole point of putting Draghi in charge was to liquidate Italy. \u00a0Italy\u2019s financial implosion would be just the\u00a0cause celibre<\/em>\u00a0Davos<\/em>\u00a0has been trying to create to consolidate power within the ECB by taking complete control over its banking system when all the banks collapse.<\/p>\n

Think back to the\u00a0Banco Popular implosion where it was forcibly liquidated by Draghi<\/a>\u00a0when he was ECB president and sold to Santander for $1. \u00a0The power that Draghi exhibited there was astounding. And it was a warning shot to investors that no one\u2019s money is safe from the commissars at the ECB.<\/p>\n

While Draghi kept things together through strong-arming and, at the time, a sympathetic FOMC with Janet Yellen at the helm, the precedent was set then that the ECB has power over its member banks that the Fed doesn\u2019t have. Today, looking at the situation, I\u2019d say this is a very good thing.<\/p>\n

You\u2019re going to see a lot of this going forward in Europe and too many commentators are not prepared for the idea that this is all deliberate.<\/p>\n

It\u2019s not the plan they wanted, which was for this collapse of the Euro-zone to occur on their timetable not the markets, but it\u2019s still the plan. \u00a0They hoped they\u2019d have a compliant Fed putting the New York banks on notice that they have no friends left.<\/p>\n

Davos<\/em>\u00a0may be improvising here, because the Fed is clearly working them over the coals as Eurodollar markets dry up, but they are still trying to make the best of a bad situation.<\/p>\n

\"\"<\/figure>\n

And that\u2019s why Lagarde was trying to soften the market up by saying, \u201cWe have everything under control and still have tools.\u201d \u00a0It\u2019s all you ever hear from these central bankers, when, in reality, they have zero real clue anymore than we do.<\/p>\n

If the European banking system collapses in the way I am forecasting this is what will destroy the Eurodollar markets, as those banks which previously levered up their dollar balances will have zero ability to do so after they are absorbed by the ECB.<\/p>\n

Once this potential outcome is truly digested by the markets, and I think Friday\u2019s complete shitshow was the beginning of that realization, then that\u2019s when we are going to see rapid shifts in bond spreads, O\/N money market rates and blow-outs in things like 1 month and 3 month USD LIBOR.<\/p>\n

Speaking of that, the SOFR\/1month LIBOR spread blew out to 44 bps on Wednesday. \u00a0After the ECB\u2019s performance and the worse than expected US CPI print (8.6% vs. 8.3% expected), I\u2019m having a hard time believing we won\u2019t see a wider spread than the 53 bps we saw the day of the last FOMC meeting by Wednesday\u2019s next FOMC meeting.<\/p>\n

\"\"<\/figure>\n

The Political Fallout<\/h3>\n

What is most important here is that the ECB being exposed as having no \u2018there there\u2019 undermines the political positions of nearly every major politician across the euro-zone. \u00a0It\u2019s not like a banking crisis is going to make Olaf Scholz\u2019 coalition in Germany stronger or Draghi\u2019s caretaker government in Italy.<\/p>\n

These guys will finally begin to feel real political anger for change as inflation eats away the middle class, high energy prices gut corporate profits and there is no end to the regulatory tyranny coming from Brussels, hell bent on forcing an anti-hydrocarbon agenda down everyone\u2019s throat.<\/p>\n

That said, you know\u00a0Davos\u00a0<\/em>will try to keep a tight lid on the EU\u2019s core, because it carries the most political power. \u00a0What they won\u2019t be able to control, once this begins to unravel, is what the so-called periphery does.<\/p>\n

Bulgaria\u2019s Davos-backed government<\/a>\u00a0lost a key partner this morning. \u00a0Boris Johnson is toast in the UK as the Night of the Tories Long Knives has come and gone. No one knows how to turn on their leadership like the Tories \u2014 Thatcher, May, now Johnson.<\/p>\n

Turkey has all but declared war on Greece over Erdogan\u2019s creative interpretation Greece\u2019s sovereignty, accusing it of militarizing islands in the Aegean. Estonia lost its majority last week over inflation not caused by Russia, but by their own rabid Russophobia.<\/p>\n

The economic realities of what Lagarde et.al. have set in motion but can\u2019t control will be the collapse of nearly every major government in Europe over the next year or two while incentivizing countries like Hungary to declare independence from Brussels.<\/p>\n

This is why Lagarde was so keen to remind us that she is aware of \u2018fragmentation risks\u2019 and that she\u2019s on top of it. Too bad this is more bucking bronco than bucolic burro. I\u2019ve got the under on whether she lasts the 8 seconds or not.<\/p>\n

The key is Russia continuing to grind out victories in Eastern Ukraine while using the time to reinforce its positions in the south and expose the utter bankruptcy of the West. \u00a0 I told you that this was a\u00a0race to someone\u2019s Great Reset, not necessarily\u00a0Davos\u2019<\/em><\/a>\u00a0when the war broke out.<\/p>\n

Putin is upping the operational tempo on the neolibs of\u00a0The Davos Crowd<\/em>\u00a0in Europe and the White House and their neocon useful idiots in the US\/UK foreign policy circles, Congress and intelligence services to create the ultimate geopolitical Russian cauldron for their avarice.<\/p>\n

Ukraine represents everyone\u2019s existential threat.<\/p>\n

If the neocons lose, they are done as an influence within foreign policy circles in the West forever because they will have failed to penetrate\u00a0Fortress Russia<\/em>.<\/p>\n

If\u00a0Davos\u00a0<\/em>loses, their grand plans for global domination become diminished to, at best, the European Union and some parts of the Commonwealth.<\/p>\n

If Russia loses,\u00a0the entire Global South<\/a>, fails to escape the fiat, debt-based slavery of the Western central banking cartel, because they will control the flow of Russian natural resources in such a way that they will not be stopped. More on this later.<\/p><\/blockquote>\n

After Bojo the Bozo in the UK the big question is who\u2019s next?<\/p>\n

There\u2019s a lot of speculation that the German government will fall, but I\u2019ve seen this story play out in Italy before. \u00a0The coalition could fail and the President Frank-Walter Steinmeyer, a Davos man through and through, will refuse to sanction new elections and should force the parties to cobble together a new technocratic government that will be indistinguishable in policy from the existing one.<\/p>\n

Since the Greens are embedded in nearly every state delegations to the German Bundesrat (upper house) there will be no real policy change since they control what legislation actually gets passed.<\/p>\n

This is why Scholz is so weak.<\/p>\n

?token-time=1656288000&token-hash=qddbOa4U4rA8D-8MGt9EllJF4B8VEwlVqjQ3J7fikRg%3D\u201d alt=\u201d\u201d\/><\/figure>\n

Since each state in the Bundesrat votes as a bloc, the Greens control 41 of the 69 votes there, giving them effective control over policy. \u00a0This was Merkel\u2019s greatest achievement while Chancellor while also bamboozling Putin in to thinking the Minsk agreements were something other than a time-waster while NATO built and trained the Ukrainian army his men are now pummeling into dust.<\/p>\n

This is what she set up with each of the state governments, by refusing any AFD coalitions to form in any state, she ensured that no matter what happened, there would be no challenge to the Greens revolution of Germany\u2019s legislative agenda.<\/p>\n

Davos is setting up the failure of the German government to hand it to Brussels. \u00a0So, if the German government fails and Steinmeyer refuses to go for new elections, then the resultant caretaker government will be even weaker than Scholz\u2019 government and ensure the complete betrayal of the German people to the EU.<\/p>\n

And the worst part will be that they will still feel like they have control over what happens to them next because the German people are still told they control EU policy at the top.<\/p>\n

When in reality all that will happen is the EU will fracture along capital efficiency lines and the euro will drive it into bankruptcy, forcing real political fracturing. Eastern Europe will break off the moment the EU tries to enforce the energy embargo on Russia, especially if Russia gains Odessa and access to the Danube river system. Watch Bulgaria carefully as the next Soros-backed junta to fall completely to the economic reality of a dying EU.<\/p>\n

Good job, Chrissie, you\u2019ve achieved the exact opposite of what you intended, which is a unitarian banking and political system. \u00a0Because, as always, people respond to incentives. \u00a0In the US, we said no to Climate Change, CBDC\u2019s and gun control. \u00a0In Russia, they said no to debt and Nazis. \u00a0And in China, they simply said no to oligarchs who weren\u2019t Chinese.<\/p>\n

Pretty easy to tear up the EUSSR under this scenario. Pretty easy to see what happens next.<\/p>\n

___
\nhttps:\/\/tomluongo.me\/2022\/06\/12\/lagarde-capitulates-euro-zone-divides\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Lagarde Capitulates As the Euro-Zone Divides<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-120033","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"http:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts\/120033","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=120033"}],"version-history":[{"count":0,"href":"http:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts\/120033\/revisions"}],"wp:attachment":[{"href":"http:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=120033"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=120033"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=120033"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}