Apocalypse Europe: The Smell Of Draghi's Eau De Napalm

Tyler Durden's picture

As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre".

Jefferies' David Zervos, I love the smell of napalm in the morning  

On the battlefields it’s not the heads of state, but the generals, colonels and majors that execute. These leaders have mandates - with the most important one being the dual mandate of the US Fed - "maximum employment and price stability". And now, the European fallout has become a clear and present danger to both the US recovery and the Fed's "potential" achievement of its dual mandate goals. The weak data last Friday (as well as many of the past couple months' soft economic releases around the globe) can easily be attributed to structural uncertainty emanating from Europe. And to be sure, the Fed has been warning us about this eventuality in nearly every FOMC statement for a year now - "strains in global financial markets pose significant downside risks to the economic outlook". Those risks are front and center, and there is only one key variable we need to look at to understand the level of the threat - the DXY. At 84, we are fast approaching the red zone!

Rather than discuss the evolution of the crisis response - and what that means for risk assets, the dollar and rates - I want to reprint an excerpt from our 12-Dec-2011 commentary entitled "Nurse Ratched bears down as the TBTF backlash boils". It was here that we put forth our roadmap for 2012 European crisis evolution and its impact on global markets. The views here still stand strong some 6 months later! Please read below -

From 21-Dec-2011:


The European Nurse/Patient relationship is coming to a boil. The medicine is not acceptable to the UK as austerity also comes along with an added pill of over bearing financial market regulation. But most importantly, the medicine isn't working for ALL the patients. Political boils are brewing all over the asylum! For those that forgot about Greece, take a look at the latest news on PASOK over the weekend - the referendum man is back - http://www.athensnews.gr/portal/8/51314. Uh oh!!


With that in mind, every investor must make contingency plans for that day in 2012 when a red line flashes across the bloomberg news screen - "Greece misses coupon payment, CDS triggers, Drachma to return".


It’s going to be a very messy day. The equity markets will drop 5 to 10 percent, libor will spike and some banks will fail or be nationalized. More sovereign exits may follow and the trading days will be tense. It will be important to be liquid and agile. And it will be crucial not to get caught up with big exposures to SIFI banks, as it increasingly looks like the US and European officials want to tear these institutions apart. See the latest Gretchen Morgenson article below -




The catalyst for TBTF/SIFI bank "unwinds" will likely be a Euro credit event. If there is one rule for 2012 it is - "move positions to exchanges". The world of bilateral OTC derivative trading is about to be purged. The good news however is that this credit event, and the ensuing SIFI bank run, will create a massive global coordinated liquidity response led by none other than the Colonel - QE3, CPFF, AMLF, TAF, TSLF, PDCF and TALF are all waiting in the wings. But this time the big banks will not get 800b in cash and a TLGP wrap - there will be losers. And for the rest us, a more stable world with all derivatives on exchanges will emerge.


The global central bank response to a fracturing of Europe and a breakdown of the SIFI bank oligarchy will be swift and aggressive, making short risk positions very difficult to cover. Further, policy will likely even preempt the Euro credit/ Sifi bank run event making short risk difficult to hold at all (much like it was in 2011). We will come out the other side with a massive risk rally and significant inflationary pressures brewing. One cannot afford to miss the exercise of the mother of all Bernanke puts! The key to 2012 is figuring out how to design a hedge for risk asset longs that brings you through the rubicon unscathed. Spoos + Blues maybe, Spoos + Agency MBS maybe, or maybe spoos + DXY does the trick. More on that later. Good luck trading.



I would change nothing in this analysis! All three of those trades have made it through to this point with strong return profiles. And those who tried to short risk early were smoked. Importantly, we must stay prepared for the eventuality of aggressive action by our central banks - most importantly the Fed. It’s not an easy trading environment, but with the right hedges to a long risk asset position, there are great trades to do! This has been our core trading theme for many quarters/years now and nothing in the recent developments changes that.

We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons. In the US we have bazookas, tomahawks and howitzers. In Europe, they can barely agree to fire a musket. This unfortunate set up for Europe means that they can become a serious negative externality on the world without any internal ability to fix the problem. Of course, then it becomes incumbent on the rest of the world to directly involve themselves in combating Europe’s turmoil (sadly we have seen this movie a few too many times in the last 100 years).

As we look ahead to policy responses, it is the Fed that will continue to be forced to do the heavy lifting. If the ECB had strong leaders, that were willing to take some legal risk with the mandate, we would be in a much safer place. But based on Mario's pathetic (whiny) speech to the EU parliament a few days back, it is difficult to have high hopes on this front.

The Bernanke Fed however has not let us down since the crisis turned in early 2009. So why should we expect him to sit idly by and watch Europe destroy all his hard work? He won't! And while the Greek people look set to pull the rip cord in the middle of this month, we can rest assured that as EMU fractures, losses are realized and the Euro leadership vacuum fails to contain the fallout, the Bernanke Fed will not abandon the US recovery effort. Good luck trading.

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TrainWreck1's picture

The European Nurse/Patient relationship is coming to a boil.

Who will stand up and lance this boil?

TrainWreck1's picture

Good thing we have antitrust laws!

Otherwise there would just be one big bank! Hey, wait a minute, you don't suppose...

Ahmeexnal's picture

L.A. (and most of North America's west coast) bombarded by Fukushima radiation:



Right after Chernobyl blew its top, Edward Teller said on the ABC Evening News in late April 1986, “The chances of a real calamity at a nuclear power station are infinitesimally small. But should it happen, the consequences are impossible to imagine.” The plume from the burning graphite at Chernobyl initially traveled in a northwest direction toward Sweden, Finland and Eastern Europe, exposing the public to levels up to 100 times the normal background radiation.

Hope Burwell wrote, “On my first trip to Chernobyl in November 2000, I spent three days touring schools in Cherikov and the even more contaminated areas of the Mogilev district. Then we traveled to children’s hospitals in Minsk. What I saw there still shows up in nightmares: children with eyes in the sides of their heads, and children with no eyes at all, children with fingers that look like toes and children whose genitals are so poorly formed one can’t determine their sex. Those nightmares are audible with infant wails like the cries of wounded wild animals.”

CHERNOBABIES coming to your spouse's womb....

Unbezahlbar's picture

We are avoiding buying any fruits an dveggies from Cali until the IAEA sends their atomic scientists to LA and says, "All Clear."

Archduke's picture

nice.  though there should be more emphasis on Midtown Investment Banks.

For example, Salomon Brothers should be in there joiing CitiCorp / CitiGroup.


SokPOTUS's picture

Well...the cover pic to this article is a Muppet with a Bazooka.  That would be what I would call a 'good start'.


Panafrican Funktron Robot's picture


Just so everyone gets the image to go with the writing.  He's like a nearly dead John Belushi.  Except way the fuck less awesome.

SilverTree's picture

I like the smell of draghi's eau de napalm in the morning, its like victory.

CrimsonAvenger's picture

Better than smelling Berlusconi's Eau de Bunga Bunga.

brewing's picture

i like the taste of bath salts in the back of my throat...

john_connor's picture

sounds like the familiar strategy of stay long because Bernanke will save the world.  meh.

duo's picture

but, but, Graham Summers said the CB's weren't going to do anymore QE because it's becoming less effective every time it's used.  Who to believe?


transaccountin's picture

The Bernanke Fed however has not let us down since the crisis turned in early 2009. So why should we expect him to sit idly by and watch Europe destroy all his hard work? He won't!


Another house prices wont go down moment in making.

SheepDog-One's picture

The Bernank will surely SAVE us, he is The One!! Free moneeez!!

resurger's picture

i wish i can FF>> to the 19 & 20 and see what he has to say .... but i have a feeling its LSAP ASAP

francis_sawyer's picture

Muppets (with bazookas & RPG launchers) bitchez!

mayhem_korner's picture



I think Bazooka Bert was one of the cards in my gramma's Old Maid game...

mayhem_korner's picture



Can't we just remove the word "austerity" from the dialogue.  Things will simply move along better without such distractions.

l1b3rty's picture

Test Run for Apocalypse Everywhere


Jayda1850's picture

Can WB7 do a piece with bernanke as col. kurtz? The horror, the horror, the horror!

Bastiat's picture

A friend of mine did a Banzai7-style photoshop of Paulson's face, with on Colonel Klinck's pic, monacle and all -- it was perfect!  In fact, if I can find it, I'll e-mail it to Banzai himself.  It was up to his standards--that good!

carbonmutant's picture

The Markets are preparing to rally on the G7 Fiscal Plan tomorrow... regardless of its comedic script...

Olympia's picture

The end of the world is near... The ten plagues of Pharaoh “have been brought upon” the USA.

From the Wall Street Crash of 1929 to the Global Financial Crisis of 2007



It is the absolute tragedy for the USA. The former illegal immigrants had become the masters of their land; the ultimate masters. The people who wanted to collaborate with the Jews to become “Pharaohs” had the same bad luck. The greedy “locust” of the Asiatic desert swapped the USA and left absolutely nothing standing. The formerly rich people of the New World have been drained of their money to such a degree that they have passed the point of poverty and are headed towards starvation. The Americans now experience desperation and trust in God. Poor and hungry people gather around the fire to warm and cast their eyes up to heaven as their last hope. These are the former planet leaders...

Authored by Panagiotis Traianou

Bunga Bunga's picture

If the ECB refuses to act as a lender of last resort, we will use our own mint to print euros.


Black Forest's picture

If the ECB refuses to act as my toilet paper producer of last resort, I will use The Telegraph.


Vegetius's picture

Well its good to know that the US model worked so well for Bernanke that the solution is so obvious -

In the US we have bazookas, tomahawks and howitzers. In Europe, they can barely agree to fire a musket.

Going on the results from the bazookas fired so far, how well is that shit going?

This is not a USA v EUROPE, this is global financial corruption and the blame game only helps those that created the mess. Its about time people started to focus on the real criminals the money printers and their Economist lickspittles 

davinci7_gis's picture

Everyone pile into MBS, Treasuries and what have you now...but keep your finger on the sell trigger when these babies skyrocket...and use your profits to buy gold and silver.... cause it's going to get NASTY!  

q99x2's picture

I think the Rockefeller/Rothschild merger means something different this time. This whole thing in Europe has to be cutting into their stolen wealth by now.

Catullus's picture

And for the rest us, a more stable world with all derivatives on exchanges will emerge.

I still don't understand why this is the case. A derivative is just an agreement to pay based on another event. That you standardize this agreement and make it exchangeable means very little. It's like saying that all contracts should be standardized and that a master central exchange planner should be able to record them and the government should regulate all agreements. The thinking leads to "there should never be any bilateral agreements whatsoever". That all your agreements are on an exchange doesn't make them any less risky.

Cangoroo's picture

Time is workng for the Euro. Finally debtors and payables created by Taget 2 will be matched, cleared and wiped off the balance sheet. Because Target 2 is a gigantic balance sheet this is no major problem and guess what will be the result? A nice clean balance sheet. This is a political hoax and about power.

Black Forest's picture

This is a very theoretical point of view. In other words, I do not agree. Elections and miltary coups overshadow balance sheets.

magpie's picture

One thing that is certain is that the fraud and uh legal malleability percolate through the system.

andrewp111's picture

TARGET2 breaks down when a member exits. That leaves a gaping hole in the system that will never be settled.

hazek's picture

What is this psychopathic bullshit asking for more money printing and more "aggressive central bank actions"?

cfosnock's picture

This is the anwser have the Fed bailout European banks

kito's picture

In the US we have bazookas, tomahawks and howitzers....

oh, you mean the ones that misfire and blow up the ones shooting them? what kind of analysis is this? 

If the ECB had strong leaders, that were willing to take some legal risk with the mandate, we would be in a much safer place....

safer place? really? this retard of an author wants the world to unleash another printfest and somehow everyone will be better off/  how? this article is garbage. there is no effective response other than to allow nature to take its course and allow the destruction to happen. protect the bank depositers and let the fire spread to all banks, let them burn and die out. then new seeds will sprout. its the law of the universe. destruction and creation. you cant have one without the other. 

Ghordius's picture

+1 "If the ECB had strong leaders, that were willing to take some legal risk with the mandate"

mmhhh... how do you traduce this to my little european mind?

willing to break the law? willing to do something criminal?

delacroix's picture

methinks jeffries is underwater

VisualCSharp's picture

Yep, the trial balloons for that very thing have been floating for quite some time, now. Any day now...

Sandmann's picture

The US needs a President willing to ovethrow the Constitution and dismiss Congress and the Supreme Court and rule without elections - "willing to take some legal risk with the mandate"

andrewp111's picture

Those EU turkeys violated their Treaties before the ink was even dry. Law means nothing when there is no higher authority that can enforce it.  Their problem is moving to a US of Europe before the German People are ready will lead to a messy divorce.