Eye on the Market I December 13, 2011 J.P.Morgan Scenes from a Marriage (Europe, US equity strategists, a brief history of taxing the rich, and Chinese equities) Note: our 2012 "Eye on the Market" Outlook on financial markets, economics and portfolio investments will be released on January 2nd. This week is the annual Christmas essay. Bergman's Scenes from a Marriage' is the most apt metaphor I can think of regarding the last two years in Europe: a long- winded, claustrophobic and ultimately unresolved narrative of a divorce. I remember watching it with my parents in 1974. The recent EU summit brought back some memories: there were some significant compromises made, but I still doubt the various parties have what it takes to make the marriage work in the long run. The compromises made include: • 26 of 27 Eurozone members appear to have agreed to adopt and enforce constitutional deficit and debt brakes • The deficit brake is 3%, with a "structural" deficit limit of 0.5% (e.g., after adjusting for swings in the economic cycle) • They agreed to sanctions from a supranational body if they do not adhere to the limits • Only qualified majorities are needed from now on to disburse one of the bilateral bailout funds • EU central banks will lend money to the IMF's General Account (in other words, available to all countries, not just European ones). Perhaps other countries like China and Russia will follow suit • The ECB will finance (at low rates and for 3 years) just about any asset that could conceivably be owned by a bank, providing annual subsidies worth tens of billions of Bums. Deutsche Bank has some excellent Gerard Richter works at 60 Wall Street that may soon have an ECB repo tag on them • Vague language suggesting that if bilateral lending facilities for sovereigns are too small, they will revisit in March to discuss raising them This is all well and good, and reduces the immediate divorce risk substantially. EU banks have a lender of las