Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going “Click, Clack”! Fundamental Investing Is Back!

It is now time to start putting in some serious short positions across the board - globally - for all those who have not already done so. Anyone who has followed me on BoomBustBlog knows that I have clocked heavy four digit gains (250% to 450%), mostly unlevered, throughout the first leg of the financial crisis - see Sample Research & Performance. This was accomplished by keeping my eyes open and objective, and in doing so recognizing the enormous holes in economic value that were trading at ridiculously high risk adjusted prices. The result of which enabled me to publicly call the fall of nearly every major collapsed FIRE sector institution that did actually fall, and do so months in advance, including Bear Stearns, Merrill Lynch, WaMu, Countrywide, Lehman Brothers, General Growth Properties, etc. The near 100% equity run up at the height of the correction was easily seen by my and my staff, but I (and I put the blame squarely on myself and no one on my staff) severely underestimated the breadth and depth of this synthetically contrived, central bank centrally planned, bear market rally. This underestimation of the depths that our Federal Reserve would stoop to in mortgaging the future of this country, and this country's children of the next generation cost me 50% of the gains that I made over the previous two years. For this I was actually forced to apologize to my subscribers in a lengthy letter with tears dripping off of my virtual typewriter, reference 2009 Year End Note to BoomBustBlog Readers and Subscribers. I felt horrible about underestimating the self destructive staying power of the concerted efforts central bankers around the globe attempting to rescue a failed oligarchy, but despite this significant shortcoming, I still ran many circles around what the best Sell Side Wall Street had to offer, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Yesterday, I went through a quick timeline that illustrated what was once considered sensationalist now considered by most to be fact: The ECB, several national central banks, and a good portion of the private banking system are insolvent. This is the case regardless of what name you want to cut and paste on the state of insolvency. As excerpted from Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What!:

European Banks’ Capital Shortfall Means Greece Debt Default Not an Option: A failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.

Here’s a newsflash for all of you who are still not grounded in reality. The loss to the banks have already occurred it just hasn’t been officially recognized. You see, their bond and debt holdings are already devalued. The value is gone, vamoosed, disappeared. I have made this perfectly clear, both in my keynote speech at the ING valuation conference and here on BoomBustBlog.

Since the engineered global equity runup referenced in the first paragraph,  I have accurately called the European Sovereign Debt Crisis (as well as the mobile computing paradigm shift) and watched it metastisize into a catalyst for another global meltdown, but this time actually competing for the pole position price with China (whom I've warned about regarding the inflationary fireball cum real asset burst), Japan and the US, who did close to nothing to remedy the causes nor the real effects of the real asset/credit bubble it had just 2 years ago! See my thoughts on this triumvirate spiral of stagflation here at marker 20:55:

So despite disgorging half of my market collapse gains to the contrived bear market rally, and make no mistake about it because that’s exactly what it was, a bear market rally (just the bear market rally from hell), I still have my eye set on reality and that reality is telling me once again – Look out below! Even more importantly, the economic safety nets and capital cushions that we had in place in 2008 are gone – wasted in a vain attempt to ensure that the oligarchs who stewarded this collapse in the first place get to remain in their vaunted positions to do so once again. Go to 20:00 marker to see me elaborate on this topic.

Now, reference the seminal piece Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!

Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was  – where we happen to be now in many places of the developed world – sans rampant propaganda, misinformation and disinformation from less than disinterested sources.

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference  The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Simply sit back and look at the (supposed, none of these should truly be considered surprises) Black Swan Catalysts that we now face:

1. US Housing, you know, the the thing that kicked this all of to begin with - The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
2. US and/or European Commercial Real Estate - Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
3. MENA, the Middle East & North Africa – Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! Friday, January 28th, 2011  or First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Wednesday, February 2nd, 2011
4. Japan – Can Contagion Be Avoided Considering The Magnitude Of Japan’s Woes? Tuesday, March 15th, 201

The list can go on. The most likely catalyst is described as follows…

The advice coming from both the government agents (ex. central bankers) and those whom these government agents have pledged to rescue at the absolute cost to the average tax payer (the FIRE sector, particularly the banking cartel)  has been absolutely horrendous. First let’s take a look at the most respected of these agency protected players – Goldman Sachs. From my missive, Is Another Banking Crisis Inevitable? posted last month, I excerpt the following:

Today, Bloomberg reports that Goldman Sachs Turns Bullish on Europe Banks as Debt Risk Eases.The report goes on to state:

The U.S. bank that makes the most revenue from trading advised investors to take an “overweight” position on banks, raising its previous “neutral” recommendation, according to a group of equity strategists led Peter Oppenheimer. Investors should pay for the trade by lowering holdings of consumer shares, he wrote.

“For financials the narrowing of sovereign spreads in peripheral eurozone, which our economists expect to continue, is a clear positive,” London-based Oppenheimer wrote in the report dated Feb. 3. “Banks are one of the least expensive sectors in the market and the trade-off between their growth prospects and earnings in the next few years looks especially attractive.”

Unfortunately, the risks of this particular trade were not articulated, and I feel that the risks are material. Far be it for me to disagree with the “U.S. bank that makes the most revenue from trading”, but they have been wrong before – many times before. ReferenceIs It Now Common Knowledge That Goldman’s Investment Advice Sucks??? or Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? for more on this topic.

So where is the risk?

The impact of the Asset Securitization cum Sovereign Debt Crisis to bank balance sheets should become the market and media focus. The full cost of cleaning up the balance sheets of financial institutions particularly against the backdrop of adverse macro shocks emulating from sovereign defaults is not fully known. Structural weaknesses in sovereign balance sheets could easily spill over to the financial system due to the fact that most banks are stuffed to the gills with sovereign debt – highly leveraged, and marked as risk free assets at par. This can have broad, adverse consequences for growth in the medium term.

The central bankers of the world have made truly fundamental investing with a global macro outlook very difficult if not impossible due to the fact they have virtually destroyed the cost of risk and eliminated organic price discovery.

As excerpted from the subscriber document:  The Inevitability of Another Bank Crisis

I will spend next week going through FIRE sector company exposures for paying subscribers. That is exposure to each other, real assets, bogus valuation on balance sheet holdings and sovereign debt. It's time to pin down the individual shorts and rank the by risk and we need to do so before risk premiums start to ratchet up to high. We will start with US, CEE and EU FIRE sector participants. In the meantime, I suggest subscribers review the following documents for notes on the specific banks that we will be doing a refresh on, for they are the one's that are literally "trapped" unless they dumped all risk to the ECB. If they did, then the pressure is spread around which dampens their banking business and puts us back where we started, bearish:

• Euro Bank Soveregn Debt Exposure Final -Retail
•  Euro Bank Soveregn Debt Exposure Final – Pro & Institutional

Just to demonstrate how much worse things have gotten as compared to this time last year...

Comments

[Zero Govt]

Reggie, my Direxilon (DRV) ETF short real estate is up 10% in 3 weeks ;)

i'm short 2 US Indexes too, a legacy i'm trying to extricate myself from after listening to clueless Elliott Wave 'idioticians' advise ...the Index shorts are just starting to balance with the latest sell-off (another 5% drop would help nicely)

shame we have to use JP Morgan and Goldman Sucks vehicles (ETF's) to short the shambolic markets they created ...it's a mad world!!

[Gimp]

Good stuff Reggie. Appreciate all the hardwork you put into your posts. Thxs.

Will be subscribing soon..

[Fat Ass]

Thank God Reggie is off iPads, and talking about something he knows about. Go, Reggers!

[IQ 101]

The EU was a FAIL from conception.

A Scotsman gets on an aeroplane and flys to Greece for a vacation because it is a different planet and he needs a break,but he will never be a Greek.

100+ years of economic mental masturbation will not overcome several thousand years of

cultural indoctrination, thank God, Diversity is a key word of the leftys, but in truth, the blessing of diversity will save humanity because you can not corral parrots and dragonflies together, the Keynes crowd do not get that because they are a bunch of Specialist educated, elitist,beard scratching,(assuming) superior intellect Nazi douchebags.

The pain, murder,poverty and war that lies at the feet of these scum is beyond human reckoning.

[apberusdisvet]

The globalists need another false flag attack on America to distract the sheeple.  It's coming folks.  The question is which part of the country will they sacrifice?  My guess would be either Arizona or Texas.  If Arizona, it will be under the guise of a smuggled nuke that inadventantly went off.

[TSA gropee]

And why praytell would Arizona be a likely target, rather than say Chicago, LA, SFO?

[richard in norway]

nice work reggie

[JW n FL]

Listen.. Dick! Reggie does Fan-Fucking-Tastic! Work Product! not nice work..

get it right next time or maybe we will let Germany keep you next time!

[richard in norway]

lol

but i ain't norwegian, i just live here, agree totally about the quality of reggie work but i like to be understated

[tradewithdave]

Reggie, What of banks attacking this via $5,000 gold? I hear you on earnings, but isn't the plan to invert the balance sheet aka the reset switch?

Dave Harrison
www.tradewithdave.com

[THE DORK OF CORK]

Something tells me Europe is about to get insanely feudal.

www.youtube.com/watch?v=7D4Ud8-jric

[IQ 101]

I top your Knights who say Ni with, 'The Aquaduct'.

 http://www.youtube.com/watch?v=ExWfh6sGyso

[THE DORK OF CORK]

I can't beat that intelligent primate.

[JW n FL]

seldom is anyone ever heard from again after hearing the secret word!

[JW n FL]

you should stop suckering me Bro! really!

[mkkby]

Sorry, but none of this is very convincing.  Everyone and his grandmother has been recomending short RIMM for a long time.  Reggie is an AAPL bear and a Goog bull.  I get the aapl margin compression story, but how does goog make one thin dime?  Oh yeah, advertising.  But where is it?   The stock peaked 4 years ago and is just in a huge trading range.

As for real estate... very old news.  Where's the beef here?

The fact is, nobody knows how to invest in a world where gov will manipulate markets randomly and HFT makes stops dangerous.  Right, Reggie?

[JW n FL]

1. dont mess with the token black guy!

2. buy the other tablet companies that Reggie has had on full blast going back how long now?

3. everyone has an agenda.

[Ag1761]

Hi Reggie, nice post - where would you sit UK in that list?

[g]

Thanks Reggie, well done.

[Noah Vail]

Read a book on US economic history and the main thing you learn is that it makes no damn difference what kind of money we have, bankers and government ALWAYS behave the same. Were gold coins the money, they'd dillute the alloy, then reduce the size and finally start clipping the corners. That will never change until human nature changes.

[Lord Koos]

But with gold it is immediately apparent to the average person what is happening.

[newbee]

Thanks again Reggie for the straight forward presentation w/o the pontification bs that accompanies some other articles.  Great stuff I can "get" and understand your point of view - makes lots of sense as well.

[hugovanderbubble]

SUper,

Excellent work as always Reggie.

Hope things are fine over there,

Here in Spain i need help to change this government and politicians...

Regards,

Hugo,

[JollyRoger]

After it was revealed the true extent of foreign institutions utilizing the Fed's discount window over the past few years, what are the chances the Federal Reserve will end up shouldering the majority of another European bail out?

[IQ 101]

What will the Federal Reserve shoulder?

Nothing.

They collect their paychecks/bonuses/bennys and go home,

No skin off of their noses if the US proles have to pick up the tab for the ECB,IMF,World Bank, U.N. and so on.

The Federal Reservers show up to work,screw everything up and go home to the chicks with dicks. Small ,weak shoulders, the shoulders of theives.

[proLiberty]

As much as Reggie has earned my respect, his circle of economic life is only true on Planet Keynes where fiat money and fractional-reserve banking amplify and leverage the expansion of credit into a moment of rationalization, resulting in a return to sustainable values and a great leveraged contraction of the fiat money, followed by another period of expansion of credit credit.  This boom-bust cycle would not exist to any great extent were there no leverage on the supply of money through central banks nor fractional-reserve private banks.

Yes, we live on Planet Keynes and it is being turned into a Prison Planet as subjects are forbidden to leave, lest they take their future assets and incomes out of the grasp of the tax and spend money-grubbers.

[richard in norway]

what are you talking about, no one has been taking keynes advise since the  sixties and even then it was only the bits they liked

the basis of keynes ideas was that in bust times you flooded the system with money but in boom times you take money out to stop bubbles. but he also said that exchange and capital controls were important and reserve requirements should be high especially during periods of strong growth, all the rules and regulations that could have prevented this crisis were removed in the eighties and all of them were based on keynes work

i can garantee you that kenyes is spining in his grave appalled by how his theorys have been misused and misapplied

krugman is not a keynesian he might say he is but hes just an arsehole and qe is not something Keynes would have approved of but the idea of dropping money from a helicopter might have appealed to him

[Dr. Acula]

"no one has been taking keynes advise since the  sixties and even then it was only the bits they liked"

Keynes' pseudoscience was thoroughly debunked by Hazlitt.

We're incorrectly following a theory that's incorrect in the first place.

[falak pema]

All economics is pseudo science, by definition, as its a human or social science, not natural science. As for Hazlitt...he sounds like Hayek or Friedman...so I could say Joan Robinson to you and it would be just as imperfect as science; but just  as seductive as human science logic based on approximate scientific data as for all other economic theories.

So Doctor your premise is phony...there are no "correct" theories.

[Reggie Middleton]

You've had boom bust cycles, even before fiat regimes. They just weren't as exaggerated or as capable of gross manipulations. Business cycles and investment cycles should be expected, but not massive bubbles and ridiculous crashed considered a part of the normal business cycle.

[NotApplicable]

In other words, without fiat distortion, economic actors can more clearly see what adjustments need to be made, minimizing any tendency toward boom or busts. (that ole invisible hand)

Funny how society could take care of itself, if it was only given the chance.

Excellent analysis as always, Reggie. Even better today is your delivery. Kudos.

[11b40]

Second that.....thanks, Reggie.

[falak pema]

How do you see the current stand off between ECB and Germany resolving itself about Greece? What will this tell us for Portugal/Ireland subsequently? I do not really understand which of the three calculations about EU banks above, (banking books (2) tables + trading book), generates as probable hair cut level for say french bank sector, and over what period?

[Reggie Middleton]

There really is no easy way out for Europe. If Greece doesn't get principal reduction it will crawl along economically for a very long time, dragging trading partners and sympathetic economies/markets along with it. If it does get haircuts (almost guaranteed), then it will cause other profligate states to jump on the bandwagon.

The calculations you see above are based on EU estimates and are (ahem) optimistic, to say the least. The real stuff is behind our paywall because we need to eat too.

The subscription document in article has the full explanation for the French bank situation.

[falak pema]

Based on your analysis for 2010  I see that the "haircut" write down estimated for french banks globally is 5% for base case : ie : 100 billion euros write down for  total of 2000 billion in claims. Is this reasoning correct?

[dcb]

always good analysis, just need to addd a good trader to your staff for exit and entry positions.

[Reggie Middleton]

That's actually next on tap.

[Cow]

I'm still waiting for Reggie to answer his follower regarding multifamily investments.  Invest or not, Reggie?

[Reggie Middleton]

I'll be addressing real estate next week, but don't take it as investment advice - take it as my opinion. The only thing that should be considered investable is, of course, behind the pay wall.

[nah]

Eurocalypse Bitchez!

[OneLessZombie]

Betting on the TEOTWAWKI may not be a logical state of mind.

[bank guy in Brussels]

As with the bear market rally in the US, don't underestimate Europeans' ability to extend and pretend ... yet a few tools are in the euro-toolbox, despite what your spreadsheet charts are showing.

[Reggie Middleton]

The Europeans have a lot less flexibility than we do in the states. This not saying we are not going to fall back into the hole, but the EU is in a slightly different, and worse hole.

[Noah Vail]

You are hardly the only one to grossly underestimate the wrecklessness of the Fed and USG. We just weren't paying attention to how horribly corrupt Washington had become. If we had, we'd known that they were capable of anything.

[hotkarlandthecl...]

What did the leg up do to those returns....still waiting for you to post.  Still riding the GOOG elevator down?

[Reggie Middleton]

I ignore you on purpose. The returns from that period are posted on the blog, from about 450% down to the low to mid 200% range, probably a lot better than trolls in comment forums and those that advice them, I presume.

You can start harping on GOOG as well, for the recommendation to buy was in the 400s and the sell point was about at the Google high for the year, $600 and change if I'm not mistaken with calls very underpriced. A very, very profitable trade. Of course you don't know that because you don't subscribe to my research do you? Well that would be the only way to know what my actual recommended valuation bands are. Chances are you are simply a troll that frequents comment sections anonomously with nothing constructive to add - even when you're ignored. 

So now that I have addressed your "trolling" please do not pop up again until you identify yourself and actually add something constructive to the conversation.

[JW n FL]

Fuck HIM! Reggie! he asks this dumbass question every time you post.. you have answered his stalking, troll, dumbass.. so FUCK! HIM!!

You are Loved dont sweat that shit!

[EscapeKey]

Too bad there's no "like" button.

[Fox-Scully]

Thanks Reggie