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On the Edge?
Timmy G. is in Europe urging the financial leaders to, “ Do it Big
and do it Fast!”. I think this was typical Dumb Tim. He is
setting this up to come to a boiling point ASAP. That is the worst
possible outcome. There are no short-term solutions to Europe’s
problems. The EU has to buy itself some time to try to make adjustments.
We need some cooler heads in charge. Instead "Cowboy Tim" starts
shooting off a six-gun. As with most gunplay someone is going to get
hurt.
The calendar is working against the Euro. With all that is going on I
think positions are already light for the US interbank players. There is
always risk for something to happen on a weekend. This weekend is no
exception. To add to the problem is the three-day bank holiday. Based on
past experience I would expect that the ‘commercials’ are likely to get
involved in the market before the weekend begins. In this case I am
referring to the hundreds of big time CFOs around the globe who have
corporate Euro exposures. Almost all of them have natural long positions
in either/or cash, inventory, earnings and profits, inter-company
accounts and fixed assets. This crowd has been hearing the “rumor”
of a change in Chinese reserve management all afternoon from the FX
Corporate desks. They will look to lower risk before the weekend.
Of course there is no truth to the rumor that China is rethinking its
holdings. It does not work like that. I would expect that China and many
of the other big reserve countries will be reducing their incremental
holdings of Euros for some time to come. That is a significant
difference from big ticket selling. I am sure that there has been CB
selling, there will be more in the future, but not the Chinese. That
does not matter. Just the talk is going to keep the money moving.
NY equities were just a puke-out. That close is going to roll to Asia
and later Europe. A bad day for Euro equities is going to put more
visible pressure on the Euro against all crosses. It does not matter if
this is logical or not. It just works that way.
If you measure sentiment by the talking heads, the markets are
positioned for a “predictable” bounce off recent low levels. A 10-12%
correction often brings that result. But we don’t have Europe blowing up
very often either.
We took out the 110 level on the E/Yen today. I bet we will hear some
silly statement tonight from a Japanese finance official, “A
strong Yen is not desirable, MITI is monitoring market closely”.
This crap talk will not work. But I doubt the Japanese will intervene.
We are playing with E/$1.2150 as Asia opens. There is a big black hole
of uncertainty if we go under 1.21. I can’t imagine that we will not see
this test soon.
The E/CHF is back to 1.4160. There was an explosion of trading a week
ago in this cross. I maintain that the Swiss National Bank intervened
very aggressively when the exchange rate fell to 1.4000. As with the $/E
rate there is nothing blow 1.40. We have never seen that. Therefore by
definition that is a high stress situation. Markets being markets I
think it will have to go back to that 1.40 level just to see if the SNB
is still around.
If the Swiss are not there, get a parachute.
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Is there anything left in our economic outlook that is not dependent on government intervention or government talk? Yes, we seem to be "on the edge".
Thanks Bruce for your insights. Always appredciate your take, seems like you are more in the know than most.
You call this "The edge?" This is no stinking edge. I can remember more than a few occasions in the 1980s when both sides of the cold war were on the hair trigger and had bombers out at fail-safe points. Now that was the edge.
I was there too. Duck and cover.
It's all relative. Today when your TD Ameritrade account is down for an hour that's a disaster!
+1
Thank you Bruce, Excellent summary, I couldn't agree more.
And, of course, I wake up to news that China denies the rumor, futures sharply higher.
This is impossible to trade.
Come on man. You gotta trade this market or the terrorists win...
i think that's the point
I would love to find out who started that absolutely egregious rumor yesterday that the PRC was goign to short the Euro.
If anyone can keep a secret, it is the Chinese. If the Chinese were really going to sell, believe me, there would be no leaks about it.
The rumor was about as transparent a lie as they come.
The buffalo have noticed all that thunder and lightning to the east. Kick a rock and they'll run.
Running buffalo? Not a happy outcome.
You can't roller skate in a buffalo herd.
Dang me, it's good.
While i am very bearish, i dont think there will be any "collapse". It wont be allowed to happen. Governments have guaranteed everyone so we have this sureal situation where the whole system is insolvent but no-one will ever admit it and we will keep trundling along borrowing more and pretending it will be paid back sometime in the future.
There is no free market any longer. The whole system is now one big central bank.
Sorry, Mr. Physics and Mrs. Geology will stop that from happening. See for this current economic model to continue existing, it needs infinite growth, thus it requires increasing amounts of energy and raw materials. Over 40% of our civilization's energy comes from oil, as do many products such as virtually all food, pharmaceuticals, plastics and rubber, asphalt, synthetic chemicals, everything you have has been made available by courtesy of fossile fuels, most importantly crude oil.
Light sweet crude oil production peaked in 2005, the more expensive heavy crude production peaked in 2008. Now even the US military (of all people) is warning we will see severe oil shortages by 2015, although they aren't advertising it too much.
http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply
Hence, game probably over, unless Jesus our lord and savior slides down a magical golden rainbow with his spaceship, and brings us self-replicating fusion reactors from planet Cialis in the Boner Nebula. Then because of our infinite growth paradigm, we end up consuming everything else until one day the headlines say "We've reached Peak Molecule, there is nothing left".
Plainly put, there is no replacement for oil. But oil isn't really the problem, it's the infinite growth paradigm that has it's roots in monetarism, upon which every popular ideology is based upon, from capitalism to communism. This is where real-world physics, math and geology step in. No amount of Benny's magical accounting tricks can change this. It's going to be a slow slide, but we'll get there, don't you worry.
Uncle Technology may just allow us to keep bumbling along for awhile yet.
I've pretty much arrived at that conclusion as well.
1 month Libor .35
3 month Libor .54
Corporate borrowers will struggle to adjust to the “powerful regime change” as a long-term process of companies and countries cutting debt damps global growth, Stephen Moyer and Michael Watchorn, money managers at Newport Beach, California-based Pacific Investment Management Co., which runs the world’s largest bond fund, wrote in a report May 25.
“We believe this distressed cycle will continue,” offering opportunities for investors to continue to pick up bargains, they wrote. “The end is not near.”
http://www.bloomberg.com/apps/news?pid=20601010&sid=atn4lTDhUcZo
They will be reducing their incremental holdings for some time to come.
Most people will prefer the sexiest story, they are getting rid of their euros.
I can't seem to get my head around what is happening in Europe (perhaps for obvious reasons). I always thought that in general the Europeans had smaller governmental budget deficits as a % of GDP as well as smaller trade deficits with the outside world, in comparison to the USA. The European economies actually manufacture and produce things, whereas all of America's manufacturing migrated to China. You would think from that that the euro would be stronger than the dollar. In addition, if France is a good example, private persons use debit cards rather than credit cards and liar loans were not used to buy houses, as in the US. Thus, household debt in Europe is much less of a problem than that of the burned out consumer in the US. There seems to be more of a disconnect between the real economy and the banking sector. These are just personal impressions of a man on the street in Europe.
However, you do have the problem of the PIIGS. The famous NY Times diagram of who owes what to whom shows that the major European banks are in a precarious position. French banks, for example, are owed $500 billion by the PIIGs. So in Europe you have relatively stronger economies, at least in the north and not including Britain, but crap banks. The south has basket case economies. Is this situation, on balance, worse than what we have in the US with the problems we have, for instance, with the states?
My impression from watching the gyrations of the FX and equity markets is that markets are constantly overreacting to imperfect knowledge as each new fact or idea makes its appearance. This is what causes the gyrations up and down. Now it's the euros turn to be taken to the woodshed because market participants are currently focusing on and overreacting to the current state of understanding of European problems.
Is there a way to neutralize or tazer-stun the problems of the European banks that will stabilize the euro, given that the strength of the northern economies counterbalances the weak economies of the south, and given that at least the Europeans still make things, unlike the US?
European banks did not internally subprime their domestic populations, but they did do subprime lending to PIGS and East Europe...smaller countries are easy to make a run at when they are wobbly...and bailouts are for banks, not borrowers.
But really, fundementals are not most important thing, most improtant thing where money chooses to flow to or flow away from...a real solid country, maybe pretty safe from attack, but those that are weak enough to be succesfully attacked, will not necessarily be the worst first.
And unlike, say Malayasia, Greece does not have sovereign rights to intervene in currency trading, print own currency etc...so any Euro, or Euro-ized country his little armor once the vultures descend
Escapeclaws, your thinking seems to be all in black/white (pun on your avatar).
Tending to "always", "none", "never", etc., is not helpful. Try "some", "part", "a few", etc.
It's all in a state of flux and what was "all" a minute ago is "none" now -- there are gradations in between the extreme states.
Indeed, you do misunderstand Europe. Their problems stem from massive, overgenerous, unsustainable welfare states that tax families to death, literally, and punish effort and creativity in just about every sphere. They've rendered life so unpleasant for families that families have responded by not having enough kids. The welfare state depended on a healthy ratio of workers to dependents carrying on forever. But this only worked for a generation or two. Now they've got very low participation rates in the work force, and massive obligations to the ever increasing hoards of dependents. Oh, and I almost forgot, they imported a replacement population that doesn't mind overbreeding in cramped quarters on welfare, and which has been at war with the rest of the world for 13 centuries or so, non-stop. So, Europe is pretty fucked and getting worse. It's a fool's paradise.
I forgot to mention that Greece is one of the more trivial cases of this phenomenon. The implosion of their welfare state has been ineluctable for a long time already. The schedule got pulled forward in time a bit by the chain reaction of private debt crises becoming sovereign debt crises. Greece is just a canary in the overall gas and coal dust filled mine that is Europe today.
If the northern Euros want to boost fertility rates . . . I will do everything I can, particularly for the Scandinavian countries. My progeny may not all turn out blonde, but they will be prolific. I will be the Ghengis Khan of northern Europe! *rubs hands together gleefully* Who's with me!
I think it is a fallacy to say that "all US manufacturing migrated to China."
That is the point ... while the Northern Europeans were being relatively virtuous in terms of debt, their Southern cousins were making up for it in spades.
Better to list all properties of the USD and the Euro. What they have in common is not the causes for USD's success/Euro failure.
The American "leaders" are completely discredited in their economic policy. I don't know why they bother with these overseas trips.
The SNB will be there ,the FED will be there ,Japan will be there ,the ECB will also be there ,it is apparent at this point these guys will do whatever it takes to try to keep the house of cards /ponzi (whatever you wanna call it) going . I think China is the wild card but they may play along as well . If these central banks work in tandem to plug the debt holes simultaneously with QE together (they literally give away free money with no debt attached to govts to the banks or countries in trouble ) what happens ? IMO it will do nothing to drop values of paper currencies on the FX- the only thing you might see is the price of gold skyrocket because you cant create more of it . If they do it without public knowledge the price of gold might not even jump . Top kill for the debt crisis . I am not the smartest guy in the room but at this point there is nothing to lose being everything else tried has been a bad idea which has created greater problems . People might say this would cause inflation I would have to disagree as you are just filling "potholes of debt" with cash worldwide .Each paper currency is basically just trading against another paper currency -so if every currency or central bank does the same QE nobody's currency dies .
A couple of comments.
1. China may play along if it gets something valuable. Take Californa. Or Europe for that matter (they are on a shopping-spree with Greece AFAIK).
2. If every CB does QE simultaneously this will lead to global inflation (not sure about hyperinflation). But since it's inflation everywhere, it's in effect nowhere. Apart from the general populace which will sometime down the road will find out that their purchasing power has decreased considerably - all that paper money, after plugging the debt holes, will have to trickle to the general pool, but not the salaries (at least not proportionally).
a race to the bottom. Just wish Timmy would give me an advance so I could go buy something....anything, got this ichy pent up demand to spend money I don't have.
I am not so sure the purchasing power would decrease if everybody QE'ed . Fiat currency is all make believe any way, perceived values of it can be manipulated > the truth is it is worth nothing if someone believes it is worth nothing or vice versa where a fiat can be perceived as better than gold. So if the world decides to make believe that more dollars or yuan will be worth more they will be . It would be a revaluation of paper currencies worldwide(where the perceived value is maintained even though there is much more of them in existence. ) In all honestly the world would have to hold hands and sing kumbaya together and it appears that isnt going to happen but if it did it would be another 100 years of better technology and the worldwide human condition improving .
I think I may have lost my mind or reached satori I cant figure out which .
That would me the former. You wouldn't be in this money grubbing neighborhood with satori. You missed your plane.
Bring a sponge...
Timmy's "Top Kill" won't work.
RMolineaux,
I'll write you a CDS for that bet, and then sell off the risk through AIG with a synthetic underlying swap with GS. It will only cost you 2 basis points per million.
Deal?
A fleet of C-130 Hercules cargo planes accompany Timmy on his visit to Europe's financial leaders. The cargo planes are full of smoke and mirrors that Timmy will deliver to European banksters.
http://en.wikipedia.org/wiki/C-130_Hercules
Predictions:
Possibility of Greek default: 50%
Possibility of any larger country default: Less than 10%
Possibility of any country leaving the euro voluntarily: Zero. The only country that has any such motivation is Germany, and they are not known to act on exasperation.
Germany has zero motivation of leaving the euro - yet. They can live just fine with their trading surplus and a weaker euro will actually inrease that. The only concern is a growing yield on the bunds but so far that seems to be under control.
Move over Greece. Who's your daddy?
Greek politicians weren't alone in promising future benefits to voters. The average burden of debt, plus liability for pension and other social-service promises, averages 434% of GDP across the European Union. And the United States? By these calculations, the debt-plus-promises burden comes to 890% of GDP. (Credit to Jim Jubak. http://articles.moneycentral.msn.com/Investing/JubaksJournal/euro-crisis... )
Yes Timmy: Do it big!!??
Give me trillions or give me death!
Brother can you spare a trillion?
Sure, you want Zimbabwe or American? The ATM has both bills now. The Zims are very pretty. Here, have an extra hundred billion and get a beer on me.
will work for a trillion....er....wait...
Far more likely that the PRC will buy Euros, and that they floated to rumor to spook traders.
They are just as happy to own Europe 50 years from now as they are to own USA, which is what is going to happen. They're not concerned about next weekend, or next year for that matter.
Not happening Tex. My friend who was in Shenzen got mugged, they pushed him to the ground and took his shoes. Even though the CCP has managed to pull 300 million comrades out of their bleak dismal existance in nameless poverty, there's still over a billion restless natives waiting for their piece of the cake. The CCP knows all too well what happens when rural peasant-folk get upset, that's how they overthrew the previous guys in charge.
Right now there's over 200 protests everyday in China. That's why they're trying to grow the economy at breakneck speed. But when that real-estate bubble that they've got going there pops, and when exports to Europe and the US slow down even more than they already have, you're going to see some angry folk, and mind you China has a long history of civil wars and internal strife.
It just does not matter what counrty you talk about. The bottom line is there are too many people, period. To few resources that are to expensive for the massively over populated world. But like all things human, it will not stop. Not when religions are trying to out populate each other, governments depending on the birth/death model to fund the future, and capitalism's need for more buyers, and the unstoppable human DNA. Every single animal on this planet stops breading when the resources dwindle, except humans...they tend to have more childern when things get tough.
It is just the way it is. It won't change. But angry and hungry people know that the garbage is in alley, and everything else the well healed control.
So it is not just China. Both World Wars, our own Civil War, all wars are about resources. And just because you may own the resources now, does not mean that you will own them tomorrow.
BF,
I disagree, there are 6 Billion people plus/minus on the planet.
If you could build a 1200sq ft home for each, ALL would fit into just the state of Texas.
And that includes a bit of a yard.............
So, we cannot grow enough food, with the rest of the planet?.
BS, we just do not want to..........we have a planetary caste system.
YOu are an idiot. So, where will all the fresh water come from? Where will you put allthe shit and piss and garbage and everything else? Where will you grow all the trees for the lumber? What an idiot. So, we keep "growing" til lthe whole world looks like NY or Beijing? Or worse, Calcutta.