The Jibes of June

06/03/2010 11:46 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

I've been reading The Guns of August, Barbara Tuchman's classic chronicle of the buildup to World War I. The greatest human tragedy to that point sprang, in part, from a series of miscalculations by the French and German leaders and military officers. The countries were consumed by mutual mistrust and loathing and equally determined to change the outcome of the last war they'd fought, which ended with France humiliated but Germany denied the primacy it sought.

And while Belgians needn't start looking for bomb shelters just yet, there are undeniable echoes for those long-ago guns in the trenches now separating the rival factions of the European Central Bank.

On one side of the divide is ECB chief Jean-Claude Trichet, the Frenchman who signed off on a bailout aggressively pushed by French President Nicolas Sarkozy, as well as his possible challenger for the job, International Monetary Fund managing director Dominique Strauss-Kahn. Trichet agreed to buy sovereign euro zone bonds just four days after he said his board hadn't even discussed that option.

Dug in across a no-man's zone is Trichet's most presumed successor, German Bundesbank president Axel Weber. Weber has openly criticized the bailout as inflationary and potentially destabilizing, and called for strict limits on the ECB's bond purchases.

The split got uglier over the weekend with suggestions that ECB purchases of Greek debt were bailing out French banks at the expense of German rivals who've committed not to sell it.

No one at the ECB has made a peep about guaranteeing any bank debt, as was done in the US and the UK to good effect. Instead, the ECB has urged governments to step up budget cuts, warning that sovereign bond issues could otherwise crowd out fund raising by banks and other corporations.

And meanwhile, it rains harder in Spain, as credit downgrades and bank mergers mark the early stages of a deflating housing bubble. Caja Madrid may need three billion euros from Madrid, on top of the growing tab for the 20% of Spaniards who are formally unemployed.

The ECB has responded by urging austerity, staging intramural food fights in the press, and warning of an additional $237 billion in banking losses through the end of 2011, almost as much as was lost in the first stage of the crisis that ended last year.

According to the ECB, the markets and national economies it oversees are threatened by "hazardous contagion." And the internal divide is between "doves" who advocate fasting and bloodletting and "hawks" who would let nature take its course.

Germany is forging ahead with its short-selling ban, widely panned by its European partners. Though German prices were falling as recently as last year, and though inflation is now running at all of 1%, Weber and kin continue to burnish inflation-fighting credentials that would have come in handy in 1919 but seem superfluous currently.

Thankfully, Europe hasn't been a global locomotive for some years, which should soften the blow. The omens elsewhere are better. The US manufacturing sector continues to ramp up. Canada's doing well enough for its central bank to hike rates by a largely symbolic quarter-point. China's industry has cooled off somewhat, which should dampen the inflationary threat. The UK, with its 3.7% inflation rate and negligible growth, has a lot less room for maneuver.

Even a double-dipping Europe will burn lots of natural gas for electricity and heat, gas Russian giant Gazprom (OGZPY.PK) will be only too happy to supply—with fewer disruptions thanks to its new allies in neighboring Ukraine. Gazprom's ADRs, which fetched more than $27 in October, are down to $21 and change despite rallying 10% over the last week.

Andrew McHattie profiles a London manager who argues Gazprom and Russia are excellent buys. For those who like to live less dangerously, Canadian National Railway (NYSE: CNI) may be just the ticket, Roger Conrad writes. It's pushing a plan to move crude from the northern oil sands south by rail, perhaps as a prelude to shipment across the Pacific. They're not fasting in Asia. And they're not waiting for Europe to sort itself out.

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