Archive - Sep 2012 - Story

Just when all hope was gone that the market has lost all connection with newsflow, discounting, or fundamentals, and all that mattered was how loudly this or that head of printing could jaw(or finger)bone stocks up, here comes that patron saint of all contrarian indicators, the Barron's cover, and "Tough as Teflon." Or at least this was before central planning. Nowadays, every downtick is a catalyst to buy, as it has become a well known fact that even a 0.1% drop in the market is not only a catalyst for widespread panic, but also grounds for immediate promises of endless easing by any and all Goldman affiliated central banks (that would be all of them).

Several days ago we reported that Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country's entire asset base, picked up and left, the bulk of it most likely taking the well-known path of least resistance to the safety of Swiss and German bank vaults. We showed how this looks visually, and as the chart below confirms it can be summarized in one word only: waterfall. And while in isolation this news was bad enough, a far more troubling implication arises when one considers that in Europe's financial Ice-9 world, in which the interbank market has been dead for over a year, and where the ECB is the shadow lender of only resort, providing funding via various repo channels to local banks to fund Spain's deficit by purchasing sovereign bonds in the primary market. To wit: since the entire financial system's liabilities (deposits) just declined by a record EUR74 in one month, since the consolidated balance sheet has to balance, either Spain's (thoroughly insolvent) banks had to generate EUR74 billion in shareholder equity in one month, i.e. profits - a prospect which is rather amusing considering Spain's banking system recently officially demanded a European bailout, or banks had to sell a like amount of assets in order to fund this outflow. Naturally, they chose the latter. The problem is that the security they sold is the one which only the banks have been buying recently in order to preserve the illusion that Spain is solvent. It was Spanish sovereign bonds.