Postponement, Draghi, And Accounting

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

The last year in the financial markets may be defined by several words which include “postponement, Draghi and accounting.” These are the underpinnings of what occurred in the last twelve months and they are the bedrock for what is likely to take place in 2013. We begin the New Year from where the old one left off and the future will be defined by how the utilization of these three words gets enacted.
I do not like to make things complicated. In fact, I try my very best to make things simple. During my career on Wall Street I have been confronted numerous times with economists, much to my chagrin, who try to make things more complicated in an effort to prove their vast intelligence I would guess but, in the end, most institutional investors, very bright people themselves, are alienated by this exercise as I am. If you can understand where you are standing and what is going on around you then the next steps are not that complicated and the winning strategy of last year is often the losing strategy of the next which is why it is so critically important to gauge your current surroundings correctly.
The world has done everything humanly possible to put off any tough financial decisions and that is especially true in Europe and in America. The leaders on both Continents just cannot take the heat and so everything possible has been pushed forward in the hopes that economies will improve and that growth will cure the ills brought on by the lack of any real leadership. Unfortunately this has not been the case and so the central banks of the world have picked up the slack which has been an interesting exercise but one fraught with consequences. With all of the central banks on the planet engaging in this exercise and no place to invest off-world the possibilities for the use of capital were constrained and hence our very low yields.

The Fed is pumping $95 billion a month into various markets and the combined actions of all of these central banks means that eighty percent of all new supply is soaked up by these institutions leaving a small window for private capital. It was in the spring of last year that I suggested buying long maturities of whatever credits you could stand and this strategy has been a winning one that continues because there is no place else to go; the compression has been unrelenting. You cannot fight city hall and you cannot fight the worlds’ central banks and so regardless of other fundamentals that would function in normal times the ability to print money and then use it in various known and only guessed at ways wins the battle.
The centerpiece of the success of lower yields in all of the countries in Europe rests squarely upon Draghi’s “Save the World” plan where the ECB will backstop everything. This speech was the single most important one of 2012 by any stretch of imagination and its ramifications define the economic landscape in Europe from then until now. Mr. Draghi’s promise, attached to the condition of the entire European Union backing the concept, has not been put to the test but I fear it will during this year. It will then depend upon various individual nations and whether they will go along with using their citizen’s money to pay for the debts of other nations. Any rise in nationalism may thwart Mr. Draghi’s promise but this will all play out as one nation after another hits the wall which they will because there is no longer enough free capital in many nations to prevent it. A careful examination of the numbers and the possibilities limit what can be done in 2013 and the countries in question are Greece, Portugal, Cyprus, Spain and Italy. In each of these nations the government has raided public sector funds, pension funds, any monies that will not impact the national debt to GDP ratios and while 2012 allowed them latitude; 2013 will not because each of these nations has about exhausted what was available. I predict that 2013 will put the Draghi promise to the test and there will be considerable rancor during the process. The other side of the coin here is social unrest that I believe will surface in the spring so that the present general belief that things have improved in Europe is nothing more than a hope which is fashioned by political design. In other words; don’t count on it.
The debt to GDP ratios for each nation in Europe are nothing more than gimmickry. They lack any semblance of truth. It is not a matter of they could be legitimately counted one way or another because the not counting of liabilities, contingent, actual and those belonging to various branches of the government do not change the fact that they must be paid for in the end. If Bankia’s debt at the ECB are accepted because they are guaranteed by the government of Spain and then Bankia cannot pay them who do you think will be forced to pick-up the bill? This example is happening in Greece, Portugal and now Spain so that the shifting and cover-up of liabilities will come to the fore as the debts must be paid and the capital of the sovereigns, without question, will diminish. Phony accounting does not change the facts; it just tries to fool investors as the primacy of its goal.

In normal circumstances this would not be enough for any longer duration of time to prevent a return to higher yields but when the central banks act in concert with this scheme and hand out money like manna from heaven then the plan succeeds as demonstrated by what took place last year. I caution you however, one year’s winning strategy can be the next year’s disaster and as Spain, Greece and Portugal line up again for more and more money the political considerations may change the course of events. All that stands between the two vicious sirens of the running out of money and the demands for more of it is an untested promise made by Mr. Draghi which will be put to the test in 2013 I believe. Those of you that represent the large battleships of the investment world will be strained and perhaps constrained by your size in moving assets. You will have to be way out in front to prosper in my view and the shift will likely be painful. Longer dated floating rate notes and bonds tied to inflation may well hedge some of the aggravation as newly printed capital to bail-out the sovereigns curtails any inflow of money into the equity markets.
The central banks, phony accounting and a promise by the ECB may well have saved 2012 from an implosion but 2013 brings a new set of circumstances that are far less appealing than last year. Stay safe!

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buzzsaw99's picture

He MUST get paid by the word. This piece says NOTHING.

edit: damn i read it again and my eyes glazed over. i hate that.

knukles's picture

Exactingly my sentiments.
Finished reading and wondered just WTF it was I'd read...
Blah blah blah ...
When ya gots nothin to say, just mumble shit...

ball-and-chain's picture

I don't get it, either.

But maybe I'm not smart enough.

William Faulker confuses me, too.

fonzannoon's picture

Oh thank god. I have not slept in days. I tried everything. But nighttime Mark Grant should do it.

magpie's picture

Draghi you scum where is your trillion euro coin

gratefultraveller's picture

OT. Anybody else noticed how jittery the silver spot prices is since begin of the week? Looks sort of nervous...

Cognitive Dissonance's picture

I was telling Mrs. Cog earlier last week and again this week that it looks like the algos have Silver firmly in their grasp. Zoom down to one hour or 10 minute charts and you can clearly see the 5 cent blips up and down, down and up.

<Skynet is alive and Occupying Silver.>

Never One Roach's picture

Springtime in gay Paris:


Naomi Campbell Beaten & Robbed In Paris


Naomi Campbell suffered a leg injury when she was violently attacked and robbed on a Paris street, multiple sources exclusively tell Page Six.



knukles's picture

Probably tried to pry the silver from her cold dead teeth.


(she used to date Mike Tyson so probably used to being batted around)

gratefultraveller's picture

Are you are aware of the time monks ( forecast of the price of silver to start rising a few weeks after a problem related to [firefighters pension fund], and that that temporal marker was "triggered" by that bankrupt californian city paying it's employees huge bonuses but not paying CALPERS last month?

The 5 cent range is even visible on the 3-day Kitco graph. If the algos have the price in their grasp than "they" are really flirting with desaster - already the silver price is an accident waiting to happen. Looks like chinese plates to me - one day there are just simply going to many variables for them to control, and all hell breaks lose.

Ah yes, now I remember - Clif High from hph mentioned something about the silverprice keeping climbing quite steeply for the next few years...

Cognitive Dissonance's picture

I follow HPH and Cliff High pretty closely. Sure wish I could get a closer look at that data. Since that will never happen I have resigned myself to keeping an open mind and a sense of humor when reading HPH reports. And especially while listening to Cliff's interviews. It's not what he says that I have problems with, but his sometimes glaring contradictions that are troubling.

If nothing else it's always good to listen to new perspectives on old issues.

tip e. canoe's picture

i'm with you cog, clif's a treasure not for his predictions but for his perspectives.   and yeah, i wish i could look at that data as well...i believe it would be much more accurate if it was released open-source style so that several monkey minds could analyze it vs. just a few.

don't know if you listened to the interview on new year's day but they talk about the timeline being off (when it is off) about a year or so...pretty interesting.    always thought the whole concept of putting it "out there" into memespace introduces a positive feedback loop that has some sort of unknown qualitative effect.

the entire concept is damn intriguing, that's for sure.

CrashisOptimistic's picture

Well it says more than nothing, but what it says can't mean anything.  

I suspect what has happened is what we should have known would.  Money doesn't exist in nature.  It was invented by mankind.  Gold has no value outside the minds of man.  It's not like food calories or oil joules.  It's not real.

That which is not real can be redefined or swept aside by edict.  These measurements of debt/GDP and deficit growth and whatever all measure something that is not physically real.  To declare that people are going to die because debt/GDP is some number makes no sense.  If people are going to die because of an imaginary number, then governments will decree a different number.

Don't look to finance for the vehicle of destruction.  Look to oil.  



CrashisOptimistic's picture


Oil is priced in joules.  If you expend XXXXXXX joules to build the 5 story tall drilling rig and then another XXXXXXX joules to build an engine to drive it across the water and then another XXXXXXXXX joules to get people aboard and trained and XXXXXXXX joules for whatever else has to be done to get the rig on site, and then YYYYYYYYY joules to drill and lay pipe to transport the oil somewhere else . . . . 

Then you better damn well get more than the sum of all that out of the ground.  This is why things are unravelling.  The ratio is going to hell.  We burn far more than in the past to get a barrel out.  This is a drain on all human activity.

Economics is just handwaving bullshit, including that associated with gold.  That's just trappings laid around the physics.  

It's physics that will start killing people.  Not debt/GDP numbers.

dunce's picture

Good point about energy costs rising in real terms (joules) but there is another growing problem and that is the supply demand relationship of world foo supplies. The USA is the largest food exporter to a growing world population. Obamas economics and energy policies are going to drive food costs up and production down with serious implications. a few years ago there was grain shortages around the world that led to political upheavals, the next crisis will be much worse with no predictable control and outcome. There are just too many factors to consider. the only thing anyone can be sure of is that in some places the riots will be bloody. Riots do not produce food or energy but that has never stopped people in certain countries where riots are standard political reactions.

Snakeeyes's picture

Europe is experiencing signs of deflation (Spain) like Japan. Is the US next?

sangell's picture

Was wondering where Mr. Grant's Zerohedge post was today. Enjoy his writing

tom a taxpayer's picture

It seems like last year's bumper crop of Europe demise predictions were stronger and more certain than this toned-down prediction. Maybe the European charlatans made a Faustian bargain with the devil, and their "livin' da vida loco" has another year or two to run.

Yen Cross's picture

 Sleep is for pussies/pussys!  I'm going for a walk to the Beach,(jump into the pacific) to get my blood flowing. Then I'm going to come home and take a shower.

  I want to be clear when Draghi drops his next "tape bomb"!

SmoothCoolSmoke's picture

I'm sure there will be a vote somewhere, soon, by somebody,that wil screw the Banksters, if all goes well........ which it NEVER does.

Mr. Grant.....take a sabatical.

Seasmoke's picture

only 355 more days until 2014........thats mere childs play !

cnhedge2's picture

will fed keep qe3 long enough time? this is a million dollar question.

Yen Cross's picture

 Well, at least my stale aud/usd longs T/P [1.0515]

    At least I have some more free margin. Risk reward? ( It ain't yen crosses)...

TahoeBilly2012's picture

It's all a plan, but you could never prove it.

Yen Cross's picture

Ask me Mr.Hand ,

 Signed, Jeff Spicoli

IamtheREALmario's picture

The lazy print. The incompetent turn to violence.

The lazy and incompetent first print then turn to war... while the fearful and corrupt hide in their shame.

There are so many "good" ways to solve these problems. We just lack the "good" leaders to do it. We are stuck with lazy, incompetent, fearful and corrupt schmucks. Welcome to planet earth.

Super Broccoli's picture

Spain is bankrupt, will run huge deficits even if they keep on cutting every expense, had been found buying his own bonds with retirement funds who's now 90% spend, has 26% unemployement (official ... i wonder what the real numbers are !), is living civil unrest on a daily basis (even if you won't see it anywhere due to recent spanish censoring laws) YET, the 10 year spanish bond yield is at 4,986% !!! Hadn't been that low for almost a year ... yeah market sure !


smacker's picture

An excellent article....A blunt summary would be to say that governments, central banks and commercial banks themselves -- through greed, corruption, criminal fraud, political agendas and incompetence on a breathtaking scale -- have wrecked the economies of their nations. They are now adding to the wreckage by current policies of creating a façade to hide the fact that they're doing nothing of any use to resolve the crises of their making. In fact, as we enter 2013, most elements of the crises are worsening.

From Germany With Love's picture

What does it say about our times if central bankers are the most important people in the public realm, holding the most important of speeches?