The funding costs of European sovereigns has been moving one ways since March. Spain has hit 7.5% on its 10 year bonds while Italy is at 6.57%. These are two levels that are unsustainable over the long run considering current deficits and weak economies:
Ray Dalio, the head of one of the most well respected hedge funds in the world sees more pain to come:
“The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce…We think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted,” Bridgewater said. “We think there are good reasons to doubt that the European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way.“
With this as the backdrop, does anyone see a discrepancy between where the Dollar, the US 10 year yield and the S&P are trading?
The equity market expects QE 3, but the equity market will not get QE 3 until Mr. Bernanke gets deflation – which would imply lower levels on the S&P 500 as one measure and at the very least lower measures on breakeven inflation rates: