Continuing our series of charts worth a thousand words (first one here), below courtesy of Credit Suisse's William Porter we present the Euro Area as if it were a giant CDO. It should answer most outstanding questions.
At bottom, centralization is the foundation for the collectivist fallacy; that there is a “greater good” that must be maintained by the establishment. This process makes the establishment indispensable in the minds of the public. The elites in power today have chosen environmental dogma as their version of the “greater good”, because the “end of the world as we know” can be used to rationalize almost any brand of despotic behavior, from food and water rationing as a method for social conditioning, to population control or even depletion in the name of “saving the planet”. Always beware the true motivations of any governing institution that seeks to assert itself as the purveyor of all that is “best” for the people. Such groups are rarely if ever what they seem…
While we would be among the last to point out stock charts as an indicator of much significance in the New Normal, when the only thing that matters is how many trillion in liquidity the central banks have pumped into the market in the last few months (thus confusing economists and journalists that the nominal market is in fact the economy - just as the Chairsatan desires), the following chart from Grant Williams (whose latest "Things That Make You Go Hmmm" can be found here), which shows that the gaping spread between the DJIA and the Dow Transports is now the widest it has been in years. Soaring oil prices may not have infected stocks yet (and by stocks we obviously mean IBM and Apple), but those who think Dow Theory is even remotely relevant (hint: it isn't) should probably be concerned.
A few days ago, before the latest breakout in crude sent Brent to all time highs in GBP and EUR (and Asian Tapis in USD just shy of all time highs), we said that "we hope our readers stocked up on gasoline. Because things are about to get uglier. And by that we mean more expensive. But courtesy of hedonic adjustments, more expensive means cheaper, at least to the US government." This was due to recent news out of Iran "where on one hand we learn that IAEA just pronounced Iran nuclear talks a failure (this is bad), and on the other Press TV reports that the Iran army just started a 4 day air defense exercise in a 190,000 square kilometer area in southern Iran (this is just as bad). The escalation "ball" is now in the Western court." We were not surprised to learn that the "Western court" has responded in precisely the way we had expected. The WSJ reports: "The Pentagon is beefing up U.S. sea- and land-based defenses in the Persian Gulf to counter any attempt by Iran to close the Strait of Hormuz. The U.S. military has notified Congress of plans to preposition new mine-detection and clearing equipment and expand surveillance capabilities in and around the strait... The military also wants to quickly modify weapons systems on ships so they could be used against Iranian fast-attack boats, as well as shore-launched cruise missiles" Which means the escalation slider was just shifted up by one more level, as Iran will next do just what every actor caught in an Always Defect regime as part of an iterated prisoners' dilemma always does - step up the rhetoric even more, as backing off at this point is impossible. Which means that crude will go that much more higher in the coming days, as now even the MSM is starting to grasp the obvious - from the Guardian: "The drumbeat of war with Iran grows steadily more intense. Each day brings more defiant rhetoric from Tehran, another failed UN nuclear inspection, reports of western military preparations, an assassination, a missile test, or a dire warning that, once again, the world is sliding towards catastrophe. If this all feels familiar, that's because it is. For Iran, read Iraq in the countdown to the 2003 invasion." And the most ironic thing is that the biggest loser out of all this, at least in the short-term is.... Greece.
The 1922 German hyperinflation experience was undoubtedly propelled by printing massive amounts of money. Yet, the Japanese money printing experience has had no impact whatsoever on inflation. Here we are in 2012, and the World’s four main central banks (USA, Britain, Europe and Japan) continue to print gobs of money. Will the outcome be 1922 Germany or 1990 Japan?...The bottom line is as follows – the combination of the bursting of property prices and the refusal of the big banks to write-off the corresponding bad debt is resulting in a big wave of deflation. We expect this to continue. Yet, we also are mindful enough to know that pockets of inflation will occur in various countries and within various industries. The real threat of hyper inflation will occur when a major currency collapses. Any country that leaves the Eurozone will undoubtedly see extreme inflation during their transition years. Outside of the Euro-zone, Britain remains at risk due to it being a key center of global finance and at risk should the World’s super-size banks implode once again.
Yes, Greece had a smaller, shakier economy and doesn't have a central bank to print its own currency at will like Japan or the US. But even those countries with a printing press learn that, after a certain point, expanding the money supply only complicates the problem of too much debt by inflating key economic input costs and dangerously weakening the currency. The cold hard fact Greece is facing is that it's now at the point where extraordinary losses need to be taken. The problem is, no one wants to take them. And all the sturm und drang being exhibited by Brussels, the ECB, sovereign debt holders, and other world leaders is nothing more than a frantic game of hot potato. The one thing we can be confident of is that at some point, these losses will be taken. The market will eventually force it. And the second thing we can predict is: we don't know what will happen when they are. There is so much complexity in the counterparty exposure to Greece debt - as well as the much larger derivative exposure tied to this debt - that anything between "not much" and "worldwide financial conflagration" could be possible. And that's just Greece. As other larger countries begin to sink under the weight of their sovereign debts, the risks to the global financial system increasingly escalates. Which is why Ben Davies has a hard time finding a good home for investment capital other than gold.
You hear a lot about Kafkaesque stifling bureaucracy in Greece and other struggling European nations, but America's Status Quo is trying its best to destroy small enterprise with taxes and crushing bureaucracy. I am self-employed, and have been for most of my life. When I did take a paid position, it was in other small enterprises or local non-profit organizations. I mention this because there is an unbridgeable divide in any discussion of small business between those who have no experience in entrepreneural enterprise (i.e. they've worked for the government, NGOs/non-profits or Corporate America their entire careers) and those who have. There are all sorts of similar chasms that cannot be crossed and which quickly reveal a surreal disconnect from actual lived reality: for example, the difference between actually playing football--yes, with pads, a muddy field and guys trying to slam you to the ground--and being an armchair quarterback who's never been hit even once, never caught a pass or ever struggled to bring down a faster, bigger player. (And yes, I did play football in high school as a poor dumb skinny kid who mostly warmed the bench for good reason, but I lettered.) At the extreme of this disconnect, we have armchair generals screaming for war who have no experience of combat or war as it is actually experienced. You get the point: it's very easy for well-paid pundits who have never started a single real enterprise or met a single payroll to pontificate about "opportunity" and small business as the engine of growth, blah blah blah. It's also easy for those with no actual experience to reach all sorts of absurd conclusions about how easy it is to turn a small business into great wealth. (No, Bain Capital or other Wall Street outposts of financialization are not "small business.")
My advice is to put all of the headlines aside because they are not accurate. No deal has actually been struck and there is just the possibility of one at present. The PSI is also nowhere near certain. There has certainly been a proposal made with innumerable and probably impossible conditions to be met by Greece including a demand for a Constitutional change, which under the current Constitution, cannot even be voted on until 2013. I often wonder if Europe really wants to bail Greece out or if Germany is not forcing so many conditions that they are trying to have them exit the Euro on their own so the Germans are not seen as the Lord High Executioner; to quote Mr. Gilbert & Sullivan.
There are those who remember that back in February 2010, before the world realized just how broke Greece was, the public's deplorably short attention span was briefly focused on none other than Goldman Sachs, which as so often happens, was at the heart of the scheme enabling Greece to skirt by Maastricht regulations and mask the fact that its debt and deficits were both far worse than represented publicly. There are also some who remember that back in February 2010, it was none other than the Federal Reserve that tasked itself with uncovering whether Goldman did anything "illegal" by engaging in currency swaps to make the Greek economy appear rosier than it was: "We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece," Bernanke said in testimony before the Senate Banking Committee.... Greece in 2001 borrowed billions, with the aid of Goldman Sachs in a deal hidden from public view because it was treated as a currency trade rather than a loan....Goldman Sachs spokesman Michael DuVally declined to comment on the Fed's probe. "As a matter of policy we don't comment on legal or regulatory matters," DuVally said. Goldman Sachs had defended the transactions in a statement posted on its Website Sunday. The firm said they had a "minimal effect" on Greece's overall fiscal situation." Maybe, just maybe it is time, two years later, for the world to hear something, anything, from the Fed as to what its seemingly quite extensive investigation into Goldman's has yielded.
Since the European colonial state of southern Bavaria Sachs (formerly known as the insolvent Hellenic Republic) no longer even pretends to be anything less than a pass-thru funding colony of its creditors, said creditors (European banks and various insurance companies) are about to send out the first group of colonial scouts in the form of German tax collectors. Also, since as reported previously, Greece will literally have to collect taxes to fund the Second "bailout package", which is merely a front for on ongoing Greek bailout of European banks (recall that it is Greece who is partially funding the bailout Escrow Account), said tax collectors will assist their Greek counterparts (who will rather likely miss their quote of becoming 200% more efficient in 2012) in collecting money from Greek citizens to pay off German banks. If in the process a few (or all) bars of gold end up missing, so be it.
The authors identify two "externalities" to the triggers for default cascades: 1) variability of financial robustness of all of the interconnected financial entities; and 2) the average financial robustness of the interconnected entities. If all parties have similar financial robustness (variability is low), then increasing connectivity makes the system more robust. Stability is even likely through diversification if the individual parties are not very robust. It was only when the initial robustness was highly variable across agents (i.e., some agents are weak and others strong) that increasing interconnectedness tended to stimulate systemic defaults.... The lesson here is diversification is not always a good idea. If you diversify across financial entities with wide risk profiles (i.e., some are weak and some are strong) you actually increase the likelihood of a financial calamity. We don't have to confine ourselves to financial institutions. If we consider our agents to be sovereign, we expect the same problem. Creating a financial superpower out of a group of Germanys would be perfect--even a group of Greeces might be okay. But creating one out of Germanys and Greeces tends to encourage a financial catastrophe. Who could have predicted that? The authors suggest that the "fix" for this situation is to concentrate risk rather than diversify it. I wonder--in whose hands will the risk be concentrated? Perhaps if you hold gold, the risk won't find its way into yours.
Buffett Releases Annual Letter To Shareholders, Will Avoid Derivatives Going Foward, Continues Bashing GoldSubmitted by Tyler Durden on 02/25/2012 - 10:43
While mostly a regurgitation of old, very trite, and quite meandering thoughts, there are some tidbits of information in the latest just released 2011 Berkshire Letter to shareholders such as that Buffett has chosen a successor to the 81 year old increasingly more confused head (unclear who), that Buffett is on the prowl for large acquisitions, that he hopes IBM shares languish for the next five years (frankly we can't wait until Buffett opens a stake in Apple so he can control the two stocks that between them account for about half of the moves in the DJIA and the NASDAPPLE - after all "economies of scale" is all about how Nominal Buffett exudes 'success'), that he once again sees a housing bottom (he adds: "Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong" - this admission is far more than we will ever hear from James Cramer who has been calling a housing bottom since 2009), and "Housing will come back – you can be sure of that" - sure, just not in your lifetime, and probably not in ours either, but most importantly, is the discovery not that BRK's profit declined by 30% (to $3.08 billion from $4.38 billion) on a smaller gain on derivatives, but that since he actually will have to post collateral on new derivatives, "we will not be initiating any major derivatives positions." The reason: "We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength." So his warning that derivatives are WMDs years ago was only appropriate if there was money to be lost, such as is the case for 99.9999% of other investors? Ah, there goes the good old hypocritical, crony Warren we have all grown to known and love. And finally what would be a recent Buffett missive without the obligatory gold bashing section: after all, how will the Ponzi scheme inflate if people have realized it is a ... well, Ponzi, championed by none other than the person everyone once thought was actually an investing genius. Fast forward to Buffett's 2020 Letter (when Greek debt/GDP is precisely 120.5%) his main message will be: "I told you to run away from gold. I was dead wrong."
No. No way. If we have to go through one more year of endlessly repetitive and utterly worthless European bullshit, rumors, headlines, and other subterfuge whose only point is to extend and pretend the fact that Europe is utterly broke, just so the effete Greek citizens can pretend they give a rat's ass about their independence, when in reality they will gladly pay 80% of their salary to keep European banks solvent simply to retain the illusion that their retirement funds are still worth more than diddly squat, we are done.
In his most recent quarterly letter titled appropriately enough "The Longest Quarterly Letter Ever" GMO's Jeremy Grantham literally kills it. Well, maybe not literally but certainly metaphorically.
Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.