Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!!Submitted by Reggie Middleton on 07/13/2011 12:31 -0400
I have found what looks like the next TWO (That's right! Two as in number 2) Lehman Brothers and Bear Stearns sitting right there smack in the middle of plain site in Europe. The meltdown should occur just as it did here in the US, save the world 2nd largest hedge fund probably will not have the resources to pull that funny little, furry financial creature from the family Leporidae out of their hat like the world's largest hedge fund did in 2008.
Beggars Can't Be Choosers After All: G-Pap Comes Crawling Back To Europe Begging For Second Aid Program... StatSubmitted by Tyler Durden on 07/13/2011 12:03 -0400
Remember insolvent Greece: the country that "was resolved" causing a 600 surge in the Dow in the last week of June (a ramp whose main purpose was to get pension fund performance up to snuff for the end of their fiscal year end). The same country whose PM sent out a blusterous letter full of sound and fury on Monday bashing Europe just after it had agreed to bail out the insolvent Mediterranean country for another month. Something tells us he won't be writing such letters any time soon. According to FT Deustchland, G-Pap said the country needs a decision soon on a second aid program. Papandreou said he’s “open” to the idea of a bond buyback program financed through the European Financial Stability Facility as it could reduce the debt burden and interest payments. In fact, G-Pap forgot to add that he is open to anything that will allow him to rule a hollow shell of a country which will probably soon be used a reverse merger shell by some Chinese company which is banned from listing anywhere in the free world, except for the Athens stock exchange of course.
The year was 2002, and while the majority of Americans were completely obsessed with the so called “War On Terror” and other devices of distraction, something much more real and decidedly prophetic was going on in our southern hemisphere. Argentina was in the midst of total collapse, driven by banker fraud and extreme currency devaluation in tandem with government mismanagement and corruption. First, cities exploded with rioting and violence as Argentinian police and military attempted to crush all dissent. Soon after, displaced refugees from population centers along with roving bands of thieves flooded into the countryside, wiping out isolated farms, murdering families, and hunting down any small group of survivors weaker than themselves and flush with supplies. The authorities (and I use the term loosely) were too busy trying to suppress civil protests to bother protecting those who were caught unprepared. This behavior is part and parcel of economic destabilization, regardless of the time or place in which it occurs.
So far, every iteration of the trite, overused and cliched "X is not Y" has meant to generate confidence, when all it really does is inspire laughter. Today we get Nomura's stimulus advocate Richard Koo giving a different spin on the "Greece is not Argentina" perspective.
Despite a sovereign downgrade of Ireland to "junk" by Moody's late last night, risk-appetite was observed in the market, led by out performance in Italian asset-classes after Moody's said that Italy is not in the same situation as Ireland due to its market access. This supported EUR across the board as well as the European equities, which together with comments from PIMCO that it is using the latest sell off in Italian bonds to increase its own holdings, weighed on bunds. Bunds came under further pressure following speculation that official names were checking European bond prices, and the peripheral Eurozone 10-year government bond yield spreads narrowed across the board. Weakness in the USD-Index provided strength to EUR/USD, GBP/USD and commodity-linked currencies, however, some weakness was observed in GBP/USD following the release of jobless claims change data from the UK, which showed the biggest jump in two years in June.
Despite empirical evidence that someone big stepped an and bought the bejeezus out of Italian bonds yesterday ahead of the Bill auction, and despite Willem Buiter's warning that tomorrow's critical BTP auction will fail absent ECB intervention, some of our transatlantic colleagues were panning long-winded essays that it is supremely irrational for the ECB to even think it can control the Italian bond market because of X, Y and Z. We, on the other contend, that precisely because it is supremely irrational is why the ECB will do it. And now we have evidence that if nothing else (and we will know for sure next week if the ECB bought the bonds after the weekly SMP details are released over the weekend, as else it would show that the PBOC is actively buying Italy bonds in the secondary market). And in the absence of actual buying, yoday we get another view at just how the ECB thinks it can manipulate markets. From Dow Jones: "Moody's junking Ireland is of particular concern "as many market participants have more hope for the Irish recovery story relative to Greece and Portugal," says ING rates strategist Padhraic Garvey. "Moody's have a different view." Garvey also says that the ECB asked for prices of sovereign bonds Tuesday but "there was no evidence that the ECB actually bought peripheral paper." Translation- the ECB sends out a OWIC (Offers Wanted in Competition), and dealers are supposed to soil themselves knowing full well that even if Trichet does or does not bid, other dealers may. Game theory 101.
Italy has now become the new victim as worries of a debt crisis contagion, as it is euro zone's third largest economy and the next weak link in the region. Italy's predicament could also be partly attributed to the political power struggle. If the Italian sings a good political opera, the United States gets an Emmy for its political soap.
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Why would anyone think that a monetary system whereby poor states spend and get bailed out by rich (i.e., successful) states would ever work? The euro is a failed concept and will tear Europe's monetary system apart.
Who would have thought a few years ago that Moody's would be one of the biggest supporters of the gold bulls..."Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. The main driver of today's downgrade is the growing likelihood that participation of existing investors may be required as a pre-condition for any future rounds of official financing, should Ireland be unable to borrow at sustainable rates in the capital markets after the end of the current EU/IMF support programme at year-end 2013. Private sector creditor participation could be in the form of a debt re-profiling -- i.e., the rolling-over or swapping of a portion of debt for longer-maturity bonds with coupons below current market rates -- in proportion to the size of the creditors' holdings of debt that are coming due."
Banks versus nations and people...
In simple terms, what I’m trying to say is that we are about to witness another “2008” only on a sovereign scale. The EU will be first, but China, Japan, and even the US will be defaulting in the future. The implications these actions have for asset classes will be HUGE as all assets move relative to sovereign bonds which used to be considered the primary low risk asset class in the world.
Economou said there isn’t enough investor interest in the assets for sale as “credit default swaps and spreads are the kinds of thing they have their eyes on.” Concrete assets are “riskier,” he said. Methinks Mr. Economou (what irony is there in a name???) may be missing the forest for the trees!
It looks like SOVX completely broke down for periods of time yesterday where bid/offer widened, and in spite of that, the index moved on no trades. For a brief period this morning, that looked like it affected MAIN as well. So far U.S. credit markets have been far more stable and the technicals seem better, though I'm not sure how true that would have been if people were trading IG when Main went to 127 bid earlier. Main is back to 120. That is a very large swing. This heightened volatility needs to subside soon, or we will see weakness in the market as investors (particularly hedge funds) are forced to shrink their positions because they do not (cannot) tolerate the P&L volatility from these sorts of moves. Main traded in a 10 bp range (95.75 to 105.75) from March 20th until June 8th. Almost 3 months and the entire range was 10 bps, and most of the time it traded in a tighter band. Today it has traded in a 7 bp range. That level of volatility is unsustainable, but even if we continue at the pace of the past couple of weeks, investors will have to scale back their positions as the only way to manage their P&L. We may continue the bounce, but without real evidence of some new plan, I think the upside is credit is very limited short term.
Keep your eye on the ball and don't be fooled by all the ugly macro smoke...