“We are clearly confronted with a tension within the system, the ill-famous dilemma of being a monetary union and not a full-fledged economic and political union. This tension has been there since the single currency was created. However, the general public was not really made aware of it.”

- European Council President, Herman Van Rompuy, 25th May 2010.

I remember Neil Kinnock extolling the advantages of only needing one currency to take you to many holiday destinations – it was probably the only advantage he was aware of and as it has now turned out he was absolutely right! The EC President has confirmed, what anyone with an ounce of common knew all along, that the euro was a political plaything and they got it completely wrong.

For further quotes in a similar vein I recommend Open Europe’s latest publication that you can get via the link below. It won’t spoil your reading if I give you a few more snippets.

“The single currency, far from being an agent of continental style corporatism, is

probably the greatest export vehicle of Anglo-Saxon economics. The euro has done

more to enforce budgetary discipline, to promote privatisation and force through labour

and product market liberalisation in the rest of Europe than any number of exhortations

from the IMF, the OECD, or the editors of The Economist”.

- Lib Dem leader, Nick Clegg, 2002

“The reality of the euro has exposed the absurdity of many anti-European scares while

increasing the public thirst for information. Public opinion is already changing […] as

people can see the success of the new currency on the mainland and the alarming fall in

inward investment into Britain as international companies show an increasing reluctance

to locate here”.

- Kenneth Clarke MP, 2002

“The euro has been a rock of stability, as illustrated by the contrasting fortunes of

Iceland and Ireland. Joining the single currency would be a major step”.

- Former Labour MEP Richard Corbett, 2009

If that doesn’t make you weep the following quote from the Commissioner of the Commodities and Futures Trading Commission (CFTC) will leave you wondering which century you are in. Trades may be carried out faster than the blink of an eye but the watchdog charged with overseeing the US futures markets has admitted that they are still in the dark ages.

In remarks at a CFTC hearing on Wednesday, Mr O’Malia highlighted how behind the agency was, saying: “Unfortunately, here at the Commission, we struggle to keep pace with technological advances as we continue to receive account data via facsimile and enter that data manually.” Well I never…and the last one through the door at night blows the candles out.

Open Europe link http://www.openeurope.org.uk/research/eurotheysaidit.pdf

John Lennon, from whose book I have plagiarised this week’s title, would have approved of the current “anarchy” in the markets. He was fond of nonsense and there is certainly a lot of that around at the moment. Who are the anarchists? The speculative “wolf packs”, the all knowing governments or the self serving central banks? And just who is manipulating whom and what and when and how often?

Markets plunge in minutes, stocks fall to one penny and then as quickly they rise again. Currencies are no less volatile as central banks intervene one day only for the markets to ignore them the next. Long bond yields are at significant lows (US 10 year 3.1%, Germany 2.5% and even the much derided gilt 3.4%!) while gold is close to its all time high.

The flight to quality has taken off and is stuck on autopilot while the doughty aeronauts ponder how high government bond prices will take them before they have to try and land the thing. Equity markets are torn between worrying about which will be the next significant bank to fail and the probability of North Korea, or South for that matter, “glowing in the dark”. On top of that the Germans have banned naked short selling on sovereign CDS’s and selected banks and are threatening to extend the ban to all stocks traded in Germany.

In the US a financial regulatory bill has passed through the Senate and Congress, but they are both different! Sad but true! And now Tim Geithner, the Secretary of State for the US Treasury is in Europe telling Trichet, Sarkozy and Merkel how much it’s going to cost to have the Fed bail them out to get their act together.

With so much uncertainty why are we surprised that the markets have taken umbrage? The bad news is “coming through in waves” leaving us all “uncomfortably numb”. Since the April peak we have had one “decent” rally but this was pretty much a one day wonder followed by a few tentative higher plots on low volume before the downtrend kicked in again.

We need to see a good two to three days of strong up moves on significant volume before calling an end to this downtrend, but the news from the Iberian peninsula suggests there is going to be a Spaniard or two in the works, and the real relief rally may have to wait a little while yet.

There is more than a whiff of panic in the air. Central banks, regulators, governments and politicians are increasingly invoking the knee jerk as a response to problems they should have dealt with some time ago. No I am not talking about hindsight, just a dose of common sense. But common sense doesn’t always get you re-elected or help relationships with the major funders of your next campaign.

Mrs Merkel tried to fudge the Greek debt issue until after the elections in North Rhine-Westphalia but failed miserably. The German electorate is just not that stupid and her majority was lost. Even sadder was the loss of confidence in the EU to solve anything decisively; not that there was that much to lose in the first place. By throwing €750 billion at the markets and threatening dire retribution on the hyenas, jackals, wolves as well as mere speculators the EU bought themselves just one days respite in the downward trajectory of the euro. The bounce on May 10^th reached $1.31; as we speak nine days later – $1.21…

This evening we hear that the Germans are to ban short selling in sovereign CDS and some of the larger banks and insurance companies. Existing (and not insubstantial) short positions will likely have to be closed out and quickly. The chaos that might engender will be another unintended consequence that could easily take on Lehmanesque characteristics.

In the US the SEC have announced their intention to introduce circuit breakers to halt trading in any S&P 500 stock that moves more than 10% in a 30 minute period. This is in response to the “bungee jumping episode” on May 6th the causes of which the SEC “still doesn’t fully understand”. It’s not easy being a regulator…

Meanwhile in Washington any Senator with “today’s best idea” is lining up with amendments to the financial regulatory bill. One that was passed on Monday night but has received little press or acknowledgement across Europe is the Cornyn amendment. If not vetoed by the President, this will require the government to appraise any loan made by the IMF where the recipient government has a debt/GDP ratio in excess of 100%. If the government is not of the opinion that the loan can be repaid in full it must use its IMF vote to say no and withhold any funding. So farewell then Greece and, in the not too distant future, pretty much any other government requiring a bail out; including quite possibly the US of A itself! Have a nice day…

There is something almost sensuous about holding a bar of gold that you just don’t get close to when you buy a gold ETF. You no longer even get a certificate to clutch in your little hand and how much physical gold actually backs your investment? Most gold ETFs entitle you to the movement in price of the metal, but not physical delivery. In normal market conditions – if there is such a state I have forgotten what it feels like – this doesn’t much matter. Storing and insuring gold is a right pain and having someone else to do it for you, silently in the background, is well worth the basis points an ETF manager will charge you.

But things aren’t normal evidenced by the fact that ETFs that do guarantee physical delivery are trading at a premium to the spot price in the same way that gold coins and “small” bars do. We are told that due to efficiencies in the market place gold ETFs don’t have to trade at a premium. We were also told to fill our boots with AAA rated mortgage backed securities yielding 8%, precipice bonds that would pay out if a basket of bank shares didn’t fall by more than 50% and numerous other snake oil products.

There is a similar question mark over futures trading. Metal exchange stocks are at very low levels and should there be a surge in demand for delivery, prices could go vertical. In fact in a worst case scenario there wouldn’t be any price at which paper gold holders could get delivery. But surely I could still sell my ETF and cash in my profits; only if the gold is there to back the price. Think of it like coming off the gold standard!

Could this happen? Watch the silver market for some clues. One of the investment banks is allegedly short silver in size and has been for some time. There is a tenuous relationship between gold and silver (although silver can be much more volatile) and but for the shorts silver should be trading at a much higher price. The spotlight on trading activity in the stock markets seems to be spilling over into the precious metals futures markets and we should soon start to see prices that reflect reality rather than an “inside” position.

There are rumours of bullion dealers in Germany and Austria running out of stock as the good burghers realise that the euro is not even half the currency that they thought it might be and start looking for a new home for their fiat money. As for me I have three gold sovereigns in my pocket so I am off down the pub for a game of spoof! If you have never played spoof it’s a bit like investment banking but with beer…