Bond 'Parishioners' Are Leaving The Euro 'Church'
Via Mark Grant, author of Out of the Box,
I have been on Wall Street for thirty-eight years now. You may claim brains and brilliance and the best investment committee this side of Alpha Centauri but I can smell the napalm in the morning and my nostrils are jumping as if infused by pepper gas. It was in the spring of 2010 that I concluded that Spain was going to get put in “time out” and I put it in black and white. Yesterday as Moodys downgraded Spain by three notches to just above junk and likely today the Spanish banks will feel the pain and as the yield on the Spanish ten year is just under 7.00% the heat is on and the stove has been turned up to high. The Italian 10 year yield is 6.25% now and financial markets operate as a matter of faith and it is obvious that the parishioners are leaving the church.
A man named Pedro was walking along a steep cliff one day, when he accidentally got too close to the edge and fell. On the way down he grabbed a $125 billion branch, which temporarily stopped his fall. He looked down and to his horror saw that the canyon fell straight down for more than a thousand feet.
He couldn't hang onto the branch forever, and there was no way for him to climb up the steep wall of the cliff. So Pedro began yelling for help, hoping that someone passing by would hear him and lower a rope or something.
“HELP! HELP! Is anyone up there? HELP!"
The Spaniard yelled for a long time, but no one heard him. He was about to give up when he heard a voice. “Pedro, Pedro. Can you hear me?"
"Yes, yes! I can hear you. I'm down here!"
"I can see you, Pedro. Are you all right?"
"Yes, but who are you, and where are you?
"I am Heinz, Pedro. I am from Berlin."
"You are German? You mean, really German?”
"Heinz, please help me! I promise if, you'll get me down from here, I'll stop spending too much money. I'll act just like a German. I'll be financially responsible for the rest of my life."
"Easy on the promises, Pedro. Let's get you back up here safely; then we can talk."
"Now, here's what I want you to do. Listen carefully."
"I'll do anything, Heinz. Just tell me what to do."
"Okay. Let go of the branch.”
"I said, let go of the branch. Just trust me. Let go."
There was a long silence.
Finally Pedro yelled, "HELP! HELP! IS ANYONE ELSE UP THERE?"
With yields just off of Kelvin’s Absolute Zero some people are betting on the Fed’s easing or some new LTRO by the ECB but let me tell you something; when you are at zero interest rates then injections of liquidity are not going to accomplish what they might under other circumstances. Liquidity never cures solvency problems which is just exactly where we are now. All the talk of ringwalls, firewalls and bullet proof vests have not done one thing except to give the EU and the IMF fodder for a delusionary discussion. If the patient has cancer then protecting him by applying sunscreen has all of the value of lending someone $5.00 to buy a Ferrari; it is a nice gesture but it hardly gets the job done. The EU is making any number of nice gestures but they are not getting the job done and Germany is just not going to permit them to head into arenas that might accomplish something because Germany cannot and will not allow the German people to have the same standard of living as the people residing in Athens. There is the prevalent school of thought that Germany eventually will be forced to accede and I am 180 degrees from that position; it will not happen! In the end it will be Germany for the Germans and this is a history lesson that is stamped in iron across eons of our past.
There is talk of European bank deposit insurance; there is no mechanism in place for this, no banks have paid into anything and it would be months or perhaps scores of months before this could get approved even if everyone wanted to approve it which Germany has candidly stated it does not. There are rumblings about Eurobonds which Germany will not approve and it is nothing more than the weaker countries asking Germany for more money which Germany will not provide. There are demands for the EFSF and/or the ESM to provide money directly to banks but this cannot be accomplished under either charter and to change them would also take months. I state again, as I have in my last several commentaries, that if Germany does not want to pay then nothing will be done and Germany, as sure as I am on my boat in the Bahamas, is not going to lower its standard of living or see its borrowing costs rise to a European average without a political upheaval that would topple Ms. Merkel’s government. There should be no surprise that Greece and Spain and Portugal and Ireland keep asking for money and it should not shock anyone that many clever schemes have been postulated to try to get Germany’s money and it should also not surprise anyone that Germany mouths all kinds of nice and polite phrases to object but in the end Germany will keep rejecting any plot that will lessen their lifestyle. It is the pleading song of the beggars and the charity donation of the wealthy but that is all that it is ever going to be as Germany is not going to roll over to placate the other nations.
Sunday is my “Big Fat Greek Election.”
Toula: “Will you please stop playing with your food?”
Gus: “After Sunday we may not have any food to play with!”