The "Believe In Germany Bailing The EU" Trade: Go Long Magic Wand Raw Materials & Harry Potter Paraphernalia

Reggie Middleton's picture

ZeroHedge, in its snarky, smart ass, Reggie Middleton-like manner made me chuckle this morning with this headline: Mario Draghi Sends Risk Reeling After Exposing Bitter European Truth

It was shaping up like the perfect overnight ramp following yesterday's Goldilocks election result... and then Mario Draghi opened his mouth.


And so finally, after months and months of explaining the fundamental dichotomy in Europe (see here), it is finally becoming transparent. And it is as follow: Germany, which is the economic dynamo of Europe, needs a weaker EURUSD to keep its export economy running. Period, end of Story. The problem is that the lower the EURUSD, the greater the implied and perceived EUR redenomination risk, which in turns send the periphery reeling, and will force first Spain, and then everyone else to eventually demand (not request) a bailout.

A quick search on the topic reveals much more of the same...

Draghi admits Germanys f234kedDraghi admits Germanys f234ked

I emphasize this point because this problem was woefully evident nearly a dull year ago. On Thursday, 12 January 2012, after railing on the US education system (How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery), I made clear to all Harry Potter aficionados (you know, those Euro-types who would rather believe magic over math) that biggest threat to the 2012 economy was sitting right beneath their noses couched as a savior more than a threat. Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You..., wherein I painstakingly took the tie to attempt to reassert the authority of math over magic. With the exclusion of central bank mysticism and the attrition of the belief that these bastards can create something out of nothing, or more to the point, can drive nearly everything towards nothing and then suddenly state that they have created something, I bring you my warning prescient warning on Germany and the macro-fundamental call to be aware of the bear Bund trade, to wit:

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.


As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).


Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.


That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).


Now, all of this excerpt above was written BEFORE Tropical Storm Sandy hit the east cost. Now, its a whole difference ball game in terms of combined ratios and operating losses. Exactly how are those operating losses are going to be paid once the truth becomes widespread, re: Germany vs the periphery?

First: See FIRE Burns From Hurricane Sandy - Fear The Insurance Companies, Twice Over - Just Ask the ECB, Greece, Spain & Portugal

Second: Go long magic wands and Harry Potter paraphenalia!!! Or... 

The damage to banks will probably be worse due to the higher level of leverage in European institutions. This is saying a lot since Italy's Generali is truly levered up the ASS! As excerpted from our professional series (subscribers see File Icon Bank Run Liquidity Candidate Forensic Opinion:).. (click here to continue reading)

Follow me:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Zero Govt's picture

The "Believe In Germany Bailing The EU" Trade: Go Long Magic Wand Raw Materials & Harry Potter Paraphernalia


'Sauerkraut Shortage Stuffs Strasbourg' 


(Fixing Long Headlines Inc.Corp.)

Tombstone's picture

Marvelous how socialism and welfare are funded by debt after debt after debt.....Someday all those mounting debts will have to be reckoned against assets or written off.  Either way, it will be one heck of a party.

supermaxedout's picture

I only wonder why unemployment is so low in Germany and why the Germans have the money to spend like hell. The tax revenues are still increasing (it just reached a new alltime high of 600 billion Euros in 2012)  and enormous amounts of money is invested in r+d and scientific projects.  Prognosis for 2013 is 0.8 % growth for Germany which is no recession (in 2012 it was also 0.8 p.a.) . Construction sector of all kinds is booming their order books are full for the next two years. China, Russia, India, Asia Pacific, South America do import German made goods in ever increasing amounts easily surpassing the reduced exports to South Europe and North Africa. The Dollar/Euro rate is glue fixed around 1.30 Dollar for 1 Euro since this the rate Euroland and China do get along best. In case Euro/Us Dollar rate is getting out of control Euro and Renmimbi  a direct exchange rate emulating the present currency situation is already agreed between China and Germany.  German Banks and Finance industry is already promoting Chinese Renmimbi Bonds while Bonds from Euroland countries (except Greek bonds) are already bought directly in China by Chinese Insurance companies and pension funds.

So things move on and the future looks not glorious but also not bad for Germany. And the time can anyhow not be turned back. The Euro is the common baby from old Center Europe, namely France, Germany, Italy, Spain, Netherlands, Austria, Portugal, Belgium ( and Poland is going to join them soon) and they will stick to it no matter what happens. Their economies are glued together and they need the Euro and Germany as well as Germany needs them and the Euro too.  These countries do stick together because of their common economic fate. Now politics of these countries has realized that only more Europe can save them and not lesser. And this is where the train is heading too, slowly but steady.

SmittyinLA's picture

Actually the NFIP (National Flood Insurance Ponzi) will eat most of the losses, NOT private insurance companies, homeowners policies typically exclude flood damages where most of the Sandy losses will be.

The rest of the losses are likely tree damage caused to public utilities, whom already have wildly padded budgets and will also receive FEMA grants to both rebuild and turn a profit and grow govt all at the same time.  

Sandy is a speed bump for the insurance industry.

Congress paying for it is another matter, CTRL "P".

BTW if you live in a "flood area" BUY THE INSURANCE, its subsidized like gasoline in Venezuela, the NFIP is a horrible deal for the taxpayers, take advantage of it. 



THE DORK OF CORK's picture


The PIigs should not give a shit about German mercantile dreams.........


They should care about OIL.


A lower euro dollar ratio will not reduce their hard currency will increase it.


Only national units of account with the state also running under   nation state Dirigisme principles can prevent them exporting this hard currency.

But  under the water international banks want us to export our capital to them so that they can survive to destroy us another day.


The Venetian bankers of the ECB wish to destroy us with the help of evil and /or naive German people who have made a pact with the devil.


Greek oil balance of trade (Jan  -  Aug millions of euros)

Y2010 : -6,191 million euro

Y2011 : -7,634 million euro

Y2012 : - 7,445 million euro


Trade balance excluding oil and ships (Jan - Aug millions of euros)

Y2010 : - 11,342 million euro

Y2011 : - 8,712 million euro

Y2012 : - 6,115 million euro.


The above is the depreciation of existing capital assets both of the mechanical and human variety by simply not importing replacements so as to sustain oil imports without any rational national response because the Eurozone is the enemy of the Nation state concept.



2 months of current account surplus now.............(but only by destroying its capital account)

Greece must remain in current account surplus so that others such as France ? UK and US can remain in deficit as it all balances out in the end.

I would like to see how the UK and US would get on if they were driven by force into current account surplus.


falak pema's picture

Reggie is shooting all barrels  as the meltdown now looms as much as fiscal cliff, its the asian slowdown fall out that everybody now fears. China slow and Japan grid, makes the world panic.

Meanwhile in US now the pains begin for certain as the political game is now clarified. Not so in Euro zone were all is murky as Mutti has to win an election and as well try and make the Euro soup more palatable. Chef Draghi is not on her page on that, whence too many cooks or crooks could spoil that frothy broth.


Treeplanter's picture

Bull market in hash pipes?

4exNinja's picture

By the way: In Europe, the best way to protect your money is to invest in prime real estate like London's Bond street or Paris' Champs Elysee. Was pretty incredible to see how resiliant price were during the crisis. The Dorchester Hotel at London's Park Lane for example dipped only for a single year before surpassing RevPAR again...and it's now over 15% above pre-crisis levels. 

Or you could buy Hong Kong dollars and start laughing once they quit pegging their currency to the doomed US$.

4exNinja's picture

Stupid people using debt financing like a crack addict uses crack!! The sad part is, if you look at leverage on an international basis you realise it isn't just Europe...and they haven't really deleveraged as much as they should. I see it at work every single day, banks/companies are holding on to their bad loans in the misguided hope that things will improve "soon(TM)". 

China's largest companies have LTV ratios of 80-95% for example. So the second that growth slows down, they'll be in trouble...BIG trouble. Just look at entire multi-million inhabitant ghost cities that were built to generate the image of "strong growth". Last month I visited a city that was built for 12m people, and I think I saw less than 50 during my week there. The largest shopping center there would be the largest in the world, but there are maybe 5-8 shops open, the rest is closed. 


Gold will obviously benefit from that, but I think in the medium to long run food is the better investment (because gold has no real value, it's all based on psychology). Global warming will have a horrible effect on crops, and food prices should bounce up a lot over the next few years. 

Panafrican Funktron Robot's picture

"(because gold has no real value, it's all based on psychology)"

Tell that to the manufacturers of virtually every electronic device on the planet.  

Whalley World's picture

Gold has no real value, just psychology eh?  Boy where did you go to school, Princeton? Harvard?