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Sarkozy Will Get “Stuffed”
It appears that the markets are in for some action next week. The EU
leaders have pledged to put a package of measures on the table for the
market to absorb by Sunday evening.
There are no details of what may be coming as of yet. This is happening
so fast that I doubt they actually have a plan. What plans they will
come up with are all going to be short term fixes for the excessive
volatility we have seen.
We know from an article by Jon Hilsenrath at the WSJ that the US Fed has
opened existing swap lines to the ECB. This means that intervention in
the currency markets is coming. I wrote about this last week. My
thinking is the same today. If the ECB has a “Go it alone”
plan to intervene in the FX markets it will not work for long. Only
coordinated intervention including BOE and the US Fed will have anything
but a short-term impact. Therefore it is critical to see who is going
to be involved come Monday.
There a number of news leaks that suggest that a Euro 600 billion
emergency lending facility will be put in place to support Europe’s
1,000 banks that are in need of some “Fast Cash”. This is
terrible news. This just confirms that those same banks were facing a
liquidity crisis at week's end (AKA- A run on the bank). While E600b is a
big amount of money it is a drop in the bucket when it comes to the
total funding requirements in Europe. The question will quickly arise, “What
happens when the 600B is gone?” This is quite different from
the TARP approach where equity was thrown at the banks. That equity had a
10-15X’s leverage affect. This is just a new funding source. It does
nothing to address the quality of the assets being funded.
What is missing from the leaks from the EU is a plan to buy distressed
sovereign debt in the public market to absorb the excess supply and beef
up prices. We know there is pressure from the Banks to have this
happen. They are sitting on underwater sovereign bonds. These are public
securities with a massive float. I don’t think the ECB has the
resources to make much of a dent in the bond market. It is much bigger
than they are. If they drive the prices of sovereign debt higher it is
likely that they will get offers for more than they could possibly buy.
There may be some demand from global investors for Spanish debt at 6%;
there will be no private demand if the rate is artificially set at 4%.
The higher they drive up bonds the more sellers they will meet.
On the issue of buybacks one has to ask, “Where will they get the
money?” A credible buyback would have to start at Euro 500b. Is
Germany going to backstop that? I can’t believe that they will. If they
do, their debt cost will just rise and nothing will have been
accomplished. My worst fear is that in order to finance the buy ins they
look to the Federal Reserve Bank in NY to provide dollar based funding.
I don’t think that America has yet woken up to the fact that our share
of the Greek bailout is ~$20b (via the IMF quota). When we learn that
the Fed is funding Europe with big money there will be a backlash. The
Fed is already in hot water for their easy money policy. A $500b loan to
Europe by the Fed will not go over too well with the folks in America.
If something like this were agreed to over the weekend and we wake up on
Monday with a new bailout there will be a very sharp reaction. Several in D.C. (Grayson) will attempt to stop it. Bernanke understands this,
Geithner does as well (maybe). A new Marshall Plan for Europe is simply
not in the cards. If that is what is attempted it will fail miserably.
The most likely outcome will be that the US is rapidly sucked into the
European sovereign debt crisis.
There is some very clear anger being voiced from the leaders in Europe.
French President Sarkozy stuck his foot deeply in his (mouth) on Friday
night with these words:
“We will confront speculators
mercilessly. They will know once and for all what lies in store for
them.”
In my view this was a stupid move. He is saying, “Come on
speculators, I will take you all on and crush you!” He has not
one chance in a 1,000 to achieve that. His words prove that he has no
idea what he is talking about. This not a matter of evil speculators and
their evil tools (CDS). This is about massive fiscal imbalances that
everyone understands are unsustainable. Borrowing more to fix the
problem will be the end game for Europe.
It is likely that as a result of what will be forthcoming there
will be some very big swings in market prices on Monday. The Vol. will
be going up, not down. The initial result will, no doubt, be a backup in
many markets. The Euro will be higher, European sovereign bonds will
trade higher; maybe even equities could catch a bid. But the critical
question will be, “For how long?” Depending on the resolve
of those in charge this could last for a bit. At least a week and more
likely a month. But it is doomed to failure. Should we get to June and
the benefits of these emergency steps wane there will be yet another
crisis. The bonds will fall again as will the Euro. When that happens
there will be no second bailout. Sometime in the next two months we will
hear that great sucking noise again. And when it is heard there will be
no stopping it.
Get your seat belt on speculators. You are about to be attacked. This
will be a lifetime opportunity to make money. For investors, stay clear
of this. There is nothing but risk and downside. “Risk off” is
the right place to be if you don’t have a helmet on. I can’t wait.
»
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My thoughts as well Leo, I see nothing benign at all about these financial parasites.
These speculators that you want to crush are actually the mechanism of price discovery. You love it when specs push things higher. You hate it when the same crowd leans the other way.
The plan to come will just create volatility. Something we don't need more of at the moment.
What we have now is system where the private banks own the debts of the Government. The Government accepts that collateral and lends the banks the money on attractive terms. The banks can create money this way.
How long will that last? Not long is the answer. You show me a country where this works.
"The plan to come will just create volatility. Something we don't need more of at the moment."
Well.... I guess that depends on what outcome you're hoping for out of this whole fracas.
Weeell. Sometimes speculators are the mechanism of price discovery. Normally, even. Sometimes - the Magnetar trade, bank CDS up to summer 2007 - it seems they're the mechanism of more or less the opposite of price discovery. (Which is why pointing out that there's someone at the other end of every trade isn't enough to prove that there shouldn't be regulatory restraints on deals like Magnetar and Abacus - unless some net benefit like price discovery is being produced then Peter gambling against Paul is economically useless or worse.)
Now in this case I agree it's clear that the speculators are indeed serving as the army of price discovery. So of course it's now that they're hated, denounced and maybe regulated against by politicians. (See also: 'rating agencies'.) Broken markets to the left of us, destructive governments to the right: the human condition.
2 kinds of speculators:
1. Either gets or creates inside information.[E.g., gets advance copy of corporate media announcement or fabricates/disseminates false information.]
The former is rampant as embargoed data to MainStreetMedia. The latter is often in the guise of a magazine article. There are endless variations limited only by imagination and circumstances.
2. Trades without inside information. E.g., ordinary due diligence, opinions of alleged experts or touts, hot tips, impulsive feelings, etc.
Bruce is dead right....if the French President speak is just a populist stunt, well it was badly advised. If he really believes what he says, that Europe is being just "attacked" by speculators and teeth baring is what is needed....the s**t in the brain of European politicos has reached unsustainable levels, and with that fecal matter in the brains you can absolutely be sure the result will be a harebrained plan that will solve absolutely nuthin, nada , niente, rien....
Good Luck Sarko...the markets will serve you your cojones pan fried with herbs...and you will have to eat them on TV.
I don't know how the rest of the world trades, but when I have a market that's gone my way for 80%, I get itchier and itchier. I call it the "We never let 40 points get away, ever" trading strategy. When it goes against me, I have to sell sometimes, because the paramount thing is to avoid the Big Loss.
I feel the same way about these Euro banks. It wasn't like these problems weren't manifest for months. They woke up every day with a chance to sell this sovereign debt and keep their sheets clean. Fuck 'em if they don't know how to manage positions.
Exactly Bruce. Without dead flesh, their are no maggots. Its the presence of the dead flesh, which attracts the maggots, which saves the animal with the dead flesh a painful death from infection....Maggots have an important function.
Speculators & shorts are much more like apex predators taking out the weak.
Kill off all the predators, and you get a population explosion.
...Followed by a population crash due to famine and/or disease.
The circle of life, Simba, the circle of life.
Exactly. I hate these crybabies who think trees can grow to the sky.
What Sarkozy fails to realize is that at this point buying European sovereign debt amounts to speculation. I assume he wants those speculators to stick around.
If European governments are spending more than they're taking in, it will inevitably end in tears unless they rectify the situation. There is just no way around that. Speculators can hasten the day of reckoning maybe and perhaps "unfairly" drive up their cost of capital but the governments can only successfully fight back if there is any there there.
You don't see any speculators trying to bring Switzerland to its knees.
Precisely. back to basics and sound logic gets one a rational perspective.
Or Singapore for that matter. Soverigns have a loan servicing/cash flow problem just like BSC and LEH. If they want to win this there's only one way: announce even larger public sector cuts by raising future pension ages to at least 65 and a freeze on all public sector wages until the gdp/debt ratio rebalances. Then bondholders won't demand such high interest to protect against default. Or just default and get it out of they way. Just don't expect to borrow in the future.
Exactly... I'd have to ask: Is there *anyone* who's bought euro debt the last, oh 18 months, who didn't get his ass handed to him?
I see it as analagous to all the preferreds and secondaries the US banks were issuing in late 2008. Everybody that took those for months and months just got killed.
Gotta have a reasonable expectation of making some money on the long side before these can go higher.
Everyone who hocked Euro sovereign debt off to the overblown pawnshop is still laughing.
Fed and ECB may be able to take some symbolic moves but I think they are out of tools for any long term action. Banks will be liquidated of funds starting in Greece and spreading round the world. The fiat system is screwed.
that said, one could point out the killing they'd make ... speculating...
hell, the FED already owns a bankrupt Red Roof Inn, why not diversify into some foreign, say ... greek, CDSs, perhaps.
:^)
My namesake said this would happen. Man the barricades. Off with their heads. Liberté, égalité, fraternité
This is another bailout of the banks in the name of soveriegn debt. The banks are in need of a serious haircut. I say reduce sovereign debt by making the banks take a 50 % haircut or face default. They made bad loans period and thats what happens. If this doesn't happen then what prevents them from making more bad loans?
Rolling over debt would work if you had the potential to pay it off, but this almost never happens. Instead it leads to further fiscal irresponsibility.
LOL...they can't take 50% haircuts.
The shit ain't worth 50%.
The banks are so levered themselves that a 50% haircut wipes them and their grandchildren completely out.
What should have been learnt is that there is NOBODY institution out there, no banks, no sovereigns, nobody who is not so levered that a little bit of deflation won't wipe them completely out.
People are acting like the banks are sitting on top of loans that have just kinda gone sour and now they face a "loss" on that or something. No; they face an existential crisis as does debt in the aggregate.
What should have been learnt is that there is NOBODY institution out there, no banks, no sovereigns, nobody who is not so levered that a little bit of deflation won't wipe them completely out.
Thats an even better scenario than I hoped for.
Me too.
The banks will have to nationalized, the equity will go to zero.
Great post, Bruce.
I think you're absolutely right here... ECB doesn't see the shocking speed with which this will happen. I believe we're sitting at a nodal point in history this weekend, and Trichet holds the fate of fiat in his hands. If he makes a weak play, we are all fuckered.
I don't think the liquidity flood of 2008 can be duplicated without immolating their currency.
im not sure it is $20Bn for US. US quota is 17% and IMFs oart to greece is $30Bn so it is more like $5Bn that they US will lend to Greece,
It's 130 Billion (IMF), give of take a Trillion..........
They will raise it another 100B. They will have to choice. As regards to Sarkozy, this will come back to bite his ass off, when France begins to burn and everyone wonders what happened to his marvelous top secret plan. The French, especially the lower working class, have shown that they know how to riot, as we have seen in the recent past. Get ready to rumble.
What happens when the 600B is gone?”
it was never there.. the 600 b. was horse manure ,
with out a horse or manure
Watch out also for farmers & truckers. Either can paralyze the country by blocking key roads and intersections. They have done this before and can mobilize on 1 days notice.
And it will get ugly; milk will run in the streets.
I have a friend who likes to say the streets will run blue with blood.
The wine and cooking cream will be spared however.
That's udderly ridiculous...
(Somebody had to do it.)
only the cream-of-the-crop here at ZH
Tactics like that really burn my cheese.
BK, another excellent post with critical reasoning. Thank you for your analysis. Nic Lenoir already apologized for him & his actions.
If Sarkozy thinks he's going to take on the markets, he's incredibly naive & uninformed. Such is the state of politicians globally that have allowed all these debt problems to amass. They will awake someday to find themselves powerless.
They will awake someday to find themselves powerless...
they were powerless before and are always in a deep sleep . .
+1
I have NO faith in any pol, including ZH fave G-son from FL.
The polsters and banksters are in need of a flush. Bring on the plumbers.
by the way Bruce - thanks, for the second time in my life I plan to turn on CNBC this Sunday due to your alert...last time was to watch CNBC was on certain Fall 2008 Sunday...I hope we are wrong...
from the archives Sunday night March 16 2008 (CNBC Asia)
CNBC Asia Sunday March 16 2008 Bear Stearns Announcement 7pm EST
CNBC Aussie Sunday March 16 2008 Bear Stearns Announcement 6pm EST
if you are a glutton for punishment the attached link features all sorts of CNBS propaganda on Bear Stearns from that era and how the economy will live happily ever after
http://search.cnbc.com/main.do?keywords=stearns&sort=date&minimumrelevan...
another Sunday a la Lehman brothers is my guess.
But this seems likely worse because it seems they have finally run out of chumps to sucker into their ponzi scheme, the taxpayers were the last chumps in..no one will want anyone's debt, I'm afraid paper assets of any type will be suspect.
By the way, Grayson in in house, not Senate...wish he was a Senator, the Audit the Fed amendment in the Senate might have a chance.
The banskters have real problem on their hands with the House already having passed the financial reform bill and the bill going to the floor in the Senate..if Europe and our stock market melts down in meantime..god only knows what other amendments might end up in that bill, maybe white collar crimes will become Federal capital crimes....
I have been amazed over the last 10 years of their ability to keep kicking the can down the road and somehow avoiding complete collapse, maybe they will again, but this seems like the end of the road.
I think this is a Bear Stearns moment and not a Lehman moment, but be patient as Lehman2 (squared) will soon be upon us and there will be nothing that anyone can do to prevent it.
It's still early for me.... I'll fix the Grayson.bk
another Sunday evening à la Bear Stearns
Since they clearly don't know what they're doing over there they might declare a bank holiday and keep markets closed for a day or two.
Mercury,
They are at least as good at it as THE OBAMA TEAM.
Talk about not knowing....Lord.
Got GOLD ?
Noticed several PUSHERS, limiting weekend purchases on Gold, and PM's now.
Can you elaborate on that DosZap? Thanks in advance.
In Austria, there was advice that spread like wildfire, from at least one accountant, to take cash out of banks now. A large bank CEO, after checking with his holding company, said the fear was groundless.
Has there ever been a Bank CEO who said "Yep, you're right. By gosh, we don't have enough cash"? Other than Jimmy Stuart in "It's a Wonderful Life", of course.
"The last duty of a central banker is to tell the public the truth." - Alan Blinder, former Vice Chairman of the Federal Reserve