There is a lot going on in Europe that feels like it’s coming to a head soon – probably by the end of the summer – with the EU economy already in mild recession, says Raoul Pal, from Global Macro Investor. He reckons things probably come to a head at the end of the summer (When the CESI up-cycle finishes), but the backdrop looks very ominous. Pal highlights a series of charts. 1) Inflation expectations are collapsing and showing no signs of abating. 2) ECB’s hand tied? Because its only driven by ONE mandate – inflation, they therefore HAVE TO ease policy, but they have few levers to pull. Pal forecasts 2-year yields go back to below -1%, and keep falling. Using a regression channel, he suggests that -1.6% is the objective. 3) The negative knock effects however are that it’s killing the banks (correlated with falling yields) and there’s a scary chart of EU Banks sector vs 10 yr bunds. 4) Meanwhile, the ECB will push yields lower, putting Deutsche Bank closer to the End Game. But, as Pal highlights in a series of charts, right across all EZ jurisdictions, the banks are looking vulnerable. In the end, says Pal, the ECB is going to need to become political. It is going to have to rescue an EU-wide banking system and put the banks into state hands and buy the extra government debt and they are going to need to force fiscal reforms and massive fiscal stimulus. Pal provides a great twitter thread here that covers this in much more detail. Click below.