Archive - Sep 9, 2011

We’re heading into the END GAME for the markets. What’s coming will see debt defaults in Europe and the US, a stock market Crash that makes 2008 look like a picnic, civil unrest and more.

and speaking of Europe...

Our joke di giorno has an unusual source: a Prime Minister with a penchant for buggery, who in this case has discovered a very curious source for all of Italy's woes...

A historic look at gold to S&P correlations.

No sooner has the EFSF "passed" the German constitutional court (with large caveats, most notably that the German government will have a much greater say in any and all future European bailouts, assuming such are actually needed and the Euro does not implode), that we learn that yet another hurdle for the Greek bailout presents itself courtesy of primary fund provider, Germany, which is now finally very angry (as suggested first here "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" two months ago) at what it realizes is an ongoing transfer without checks and balances (remember: the insolvent PIIGS hold all the trump cards) of capital from Europe's prudent workers to those who are, well, not. To wit, according to the Spiegel, German FDP Party has just announced that it will seek a referendum on the ESM/EFSF. What this means is that while the hurdle is not insurmountable from a legal perspective, it will merely add further uncertainty to the final bailout of a country that according to the market at least is 100% bankrupt in an alternative universe in which fundamentals matters.

You know the saying...It's not paranoia if they're really after you. Europe is much, much closer to universal bank collapse than the media is letting on. You, my friends, are getting a distorted picture of mis(or dis, depending on your paranoia level)information. Enter Bear Stearns 2.0 without a JPM to swallow it with Fed help, or Lehman Brothers 4.0x5!

Is that H₂SO₄ that Warren is pouring for his next deeply introspective bath? Or will he double down and throw good money after bad money that was good as recently as 2 weeks ago (and according to Cramer was supposed to trigger a "massive short covering squeeze in the XLF.")

The global financial system is experiencing great stress as it adapts to the new, post-crisis rules of the game.  Those new rules are both explicit and implicit.  They call for more capital, reduced leverage, lower risk appetites, more thorough supervision, and stronger regulation, at both the systemic and individual institution levels.  In this environment, open dialog is all the more important as we collectively reach a common understanding of how the new rules should work in practice.

Timber time. Next up: another round of hopeless and very much helpless BOJ intervention. Because after the FX wars come the trade wars, and after the trade wars come the shooting wars.

I can't take credit for finding this graph of Eur Basis Swap [the cross currency basis swap between 3M EURIBOR and 3M LIBOR], but it seems to be a decent indicator of European banks having difficulty funding their USD business.  Maybe I'm reading more into the chart than there is, but that is what I see going on. It makes sense with all the other data that is out there and the anecdotal evidence that US banks are pulling back their lending to European banks.

I fully believe that the financial system is now more in danger of systemic collapse than at any point in history (including 2008). Do NOT be fooled by the rally of the last few days. We saw rallies of 8%, 11%, even 17% during 2008. Those investors who bought into them got taken to the cleaners.

Literally seconds after the Greek finance ministry announce that any rumors of a Greek default over the weekend are absolute rubbish (we wonder who would admit such rumors?), we get the following from Bloomberg: "Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress." Looks like at least one very "naive" government is not buying the latest batch of lies from Greece.

While it is not all too surprising in light of news that Greece may be insolvent in 48 hours, that the ECB is about to commence printing with the abandon of a drunken chairsatan, and that New York has a "credible threat" of another terrorist attack, it is a fact that liquidity across virtually every European vertical is now at its worst levels in years, starting with the EURIBOR-OIS (or interbank/central bank funding spread), which soared by 6 bps to 81.2, or the most since March 2009, the 3M USD LIBOR rising for the 34th day in a row to 0.338% at multi-year highs, and with deposit facility usage at the ECB rising to a new one year high of €172.9 billion, an increase of €7 billion overnight. Of particular note is the dramatic deterioration at Credit Agricole overnight which hit 0.4% in the 3M USD Libor, far worse than the "self-reported" dollar funding at Barclays and RBS which as we reported earlier, are perceived as the riskiest European banks should the inevitable bond haircut take place. Just as Dexia long-CDS was the slam dunk trade of H1, is CA poised to be the H2 one?

Europlosion in T minus 3... 2... 1...

Since by now even my mother knows that US stocks rally when Europe goes home, it only makes sense to rally well ahead of it?  It has become too well known that this trend exists and as others have also mentioned, when those simple rules break, they often break ugly.  I would be very careful betting that we get a rally when Europe goes home.