The sooner Germany reverts to a sovereign currency, the better – Patrick Clark

The basic position of the markets has not changed significantly since I made my comments last month. We are at an inflection point, and it is too early for me to determine whether the markets will hold up here. A move lower from here will mark a breach of long term support and usher in a long term trend change from bullish to bearish.

What we are seeing in Europe, and Greece in particular, finds some parallels in the crisis in U.S.-based mortgage backed securities in late 2008. Investors are now realizing that an asset that had been previously deemed safe is anything but safe. In the absence of concerted EU government intervention, the Greek government would have already defaulted on its bonds. Greek bonds as an asset class share the risk profile and story line of mortgage backed securities. The fear of this asset’s decline has prompted a similar governmental intervention.

This pattern of governmental involvement in various markets makes valuation of these markets quite difficult. In addition to the traditional assessment of market factors, one must also weigh political will to support the asset. In the case of Greek bonds, like mortgage backed securities, all market forces point to a default, but my assessment of European political will counters this view and points to the continued support of Greek debt.

I have lived in Germany almost continuously since 1992. As a young military member stationed in Germany in the early 90s, I met and married a beautiful woman from the foothills of the German Alps in southern Bavaria. I stayed in Germany over the years to allow my wife to stay close to her family. For this reason, I lived here before the Euro emerged. The move to the Euro was never a popular idea in the German public. The German public liked the stability of their Deutsch Mark and feared the effect of coupling their currency with those of Italy, Portugal, Greece and Spain. The Italian Lire, for example, traded in the thousands to one against the German Mark. So as a result, there was a kind of mini-bubble in foreign equity mutual funds in the years leading to the transition to the new currency. The German public widely believed that its currency would be dragged down by the weaker member economies.

However, in the years following Euro implementation, their new currency was surprisingly strong. Skeptics of the Euro eventually fell silent and old worries about the new currency were forgotten. Now, with the benefit of hindsight, one can see that the initial, widely held concerns about the Euro were very much warranted. But of course most German citizens failed to protect their savings, due to the timing of their analysis and the moves of the currency markets.

So now the question is how long the German population will be willing to fund the failed economies of the weaker European member states. Unfortunately, there is no easy way out of this situation for Germany. In my opinion, the common currency premise is fundamentally flawed. The sooner Germany cuts its losses and reverts to a sovereign currency, the better. However, I expect the Germans to continue to prop up Greece and other failing economies of member states for years to come, until German damage is substantial and the German people demand that the government stop squandering their resources on these failed economies.

The ironic aspect of this whole crisis is that the Greek and German populations appear to want the same thing – the default of Greek bonds. It is the bankers and politicians who are unwilling to allow this, not the average citizen of Europe. This draws another parallel to the 2008 U.S. crisis in mortgage backed securities. The bailing out of the U.S. banks was popular only with bankers and politicians and revealed that the loyalty of government lies with big business, often at the expense of normal taxpayers.