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Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!
Guest Post: An (important) point regarding the Eurocalypse...
When
last week's Italian 10Y surged from 5% to 6%, it marked something
irreparable, which was not indicated in the extent of the move, but its
violence.
Six percent, as we know, is unsustainable for Italy (more
than its GDP nominal growth which is closer to 2-3% today, and getting
worse...)
Whats even more important is that VAR has
gone crazy everywhere. Not only banks, even insurers and money managers
take volatility of an asset as an input. When you lose 7% in capital in
one week, which is 7x the 100bp spread you hoped to make in 1 year,
something is very wrong. Even stock market indices failed to sell off as
much in a week (and rarely do so)...
Thusly, nobody in their right mind is going to buy Italy (or Spain). The only natural buyers now stem from:
- short covering (profit taking) activity,
- passive buying from Italian accounts for ALM purposes (they must be "invited" to do so)
- and public buying trying to prop up the market, but their pockets aren't deep enough.
As a result, we
may have the very few next auctions doing ok (especially if yields go
up and short covering continues), but then its chaos Portugal-style.. it
could take only a few weeks (or even days!) from here.
The only way I envision it not happening is Euro-bonds gaining traction
and actually being implemented (but that doesnt seem likely if you
believe the press reports) or financial repression.
Financial Repression???!!!
By financial repression, I mean taking out short sellers,,,, seriously! Not only banking stocks (like was done in 2008:
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SEC Extends Ban On Shorting Of Financial Stocks - Forbes.com Oct 1, 2008 – Restrictions will expire Oct. 17, about the time a slew of bank earnings are set to be released.
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SEC Halts Short Selling of Financial Stocks to Protect Investors Sep 19, 2008 – SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets. Commission Also Takes Steps to Increase Market Transparency ...
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S.E.C. Temporarily Blocks Short Sales of Financial Stocks ... Sep 19, 2008 – The Securities and Exchange Commission issued a temporary ban on short ... Short selling — a bet that a stock price will decline — is the ..
but
on govt debt as well, making void all CDS contracts on sovereigns (or
saying they will expire or cash settle at a very soon date) and trying
to shut out HFs by increasing regulation, disclosure and taxation on
them.
Excess volatility is not good for the markets, and it would
surely cause huge short covering, but it could buy some time, and if the
move is surprisingly large (bringing us to 4% range...!!!) then maybe
it's not just buying time, and we are underestimating the extent of the
short sellers which currently have the market in hand (and we know all
the "good" reasons why).
Reggie here:
Of course, the people who conceive of, and implement these grand
schemes tend to be quite shortsighted. This was exemplified by:
- the
inability of exchange traded option market makers to hedge their
positions, thus instantaneously draining liquidity out of those markets - the removal of natural buyers in a market crash (short seller covering) causing a floorless plunge
- the extreme jump in option, swap and other synthetic short and bearish trade instruments
- and
the most obvious issue - most of the companies covered in the ban
deserved to be shorted and once the ban was lifted the party was on, its
just that the music was blasted all the much louder!
Now, back to our regularly scheduled, guest writer programming...
Higher
taxation is quite evident down the road. After all, there have been
many tax cuts here and there to support the FIRE industry; including
banks, HFs.... that didn't help the deficits, so the logical thing would
be to reverse this, but with QE1,2... govts are doing exactly the
contrary, handing more and more money disappearing into corporate bonus
pools!!
Reggie Here: I
clearly delineated a very practical, market-based solution to this
dilemma for the Financial Times about a year and a half ago. See The Financial Times' Banker on Bonuses
The
problem is undoing quickly what has been done in 20+ years/ It will not
be easy and will not be without unintended consequences. In a paper
money system where debt = money, it is no wonder banks are holding tons
of sovereign debt, it is not bad bank management, it is almost a FEATURE
or RULE of the system.
You cant blame only the bankers or the
politicians, or the HFs (SPVs) who bought these debts, everybody is
involved. SOMEBODY had to buy it, and it could only be the banks, as
long as these were the riskless assets you could refinance at the CB in
indefinite amount. States issued more because there was demand (as
artificially contrived as said demand was, it was demand nonetheless)...
The average person, getting benefits from the state and reelecting all
our govts in the last 20 years is responsible as well.
Anyway, were all fucked, but now its almost the common view.
The
focus is how to try to cope with this in the short and long term, and
prepare for the (hopefully good) things which are beyond.
- advertisements -
Nicky Santoro: [voice-over] Me? Thats why The Bosses sent me out here - they wanted me to make sure none of the other crews robbed the joint. Like these two fuckin' ballonheads over here. They were gonna try to bang us outta two hundred fuckin' grand? Yeah, right, I'm sure.
Reggie, have you changed your opinion on Apple yet?? Ready to throw in the towel?
Im thinking about Apple too, but keep concluding its better to just let it all ride on 'red' in Vegas because at least there you get air conditioning and free drinks from scantilly clad waitresses, and the odds are much more in your favor.
'There have been many tax cuts'....all I notice is paying ever higher taxes, I dont really know what youre talking about there, what tax cuts.
Perhaps you should try being a bank.
Ban the shorts....ok now who are they going to squeeze?
If we only knew to who the FED lended out the stock they keep on their books...
Oh yeah.....kill the shorts. Except for the big banker bets. I knew as soon as the uptick rule was removed things we're going to go to hell.
The bears noticed, and probably the central banks. But the financial media didn't notice, and who else is going to report it?