A Butterfly In Japan And A Banker In Belgium

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

A Butterfly In Japan And A Banker In Belgium

Chaos theory states than in complex systems, a butterfly flapping its wings in Japan can cause tornadoes in California.  Whether or not that is true, a Banker in Belgium buying Greek bonds can impact the lives of factory workers in Germany.  Europe continues to head down the path of making the system more complex than ever and ensuring that no bad lending, investing, or borrowing decision is ever punished.

I am still dubious that anything will be resolved.  I don't know how any variation of the plan makes Greece solvent or reduces 21% unemployment in Spain.  All the variations seem to rely on the good countries putting so much money into banks and sovereigns that they cannot let them ever default.  The risk will be pushed upstream until all the losses are at the sovereign level and they will eventually just print money.  No other conclusion seems likely.  If Germany and France want to lend money to Greece so they can make payments to banks, they can do it, but at some point it will go from a banking problem to a German/French problem.  Then the printing presses will have to be turned on.

I still have some hope that the insanity will be nipped in the bud, that some country will see they are going too far and risking the futures of too many, to protect too few right now.  In meantime soft commodities seem interesting as people will still have to eat.

It is a bit strange that stocks are rallying on the European solution, yet Italian and Spanish bond yields are rising.  I guess that is part of the "risk on" trade, yet aren't high yields in those countries a problem? 

In the meantime at least we have earnings to save us.  Well AA missed but so far the market is treating that as an isolated event.  The fact that they beat on sales but missed on earnings should be getting more attention in my opinion.  I would continue to look at the weak end of high yield for signs of how the real economy is doing.  At a high level, the market can move in risk-on and risk-off mode, but with all the global government intervention it is hard to figure out what is really going on beneath the surface.  For individual companies that are distressed, there is less that can be done to cover up the true story. 

I took a look at the price changes in cash pay high yield bonds from Sept. 1 until Oct. 7.  Companies whose bonds had the biggest price declines were Clearwire, Eastman Kodak, Travelport, General Maritime, Powerlong, Hidili, Minerva, Evergrande, and Wind Acquisition.  Until now, I haven't looked at these specific credits closely, but now I think it is worthwhile digging deeper for signs of what is really going on.  All of those bonds dropped by at least 25 points in just over a month.  Most if not all rebounded yesterday (or at least were quoted higher even if they didn't trade), but drops of that size are not just a function of liquidity and is worth watching.  If these bonds can stage significant rallies, than the economy is likely better than I believe.  If these bonds remain weak, it is a good indication that real problems exist and looking at the stock market as a proxy for the economy continues to be misleading in this era of extreme government intervention.

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cossack55's picture

Love chaos. Embrace entropy. Live anarchy. Happy trails.

LawsofPhysics's picture

Damn straight.  The kleptocrats have known for a long time that fear is the only tool that is required to keep sheep in line.  The only reason banks don't collapse are because sheep really believe that they are too big to fail.  They are afraid of what will happen, they are afraid to be truly independent in their thoughts and theirs actions.  Thousands of years of history and nothing has changed folks.  Nature makes no promises regading your survival, why anyone belives similar promises coming from a politician is beyond me, yet they do.  Embrace the collapse and a new begining.  It comes one way or another, now pass the popcorn cossack.

DormRoom's picture

all this QE has pushed up commodity prices, so that input costs are rising, impeding earnings growth.  Any type of EFSF plan does not solve the imbalances between Europe North-South.    China-US trade war, pushing the USD lower, will destabilize the yen, and force more BOJ intervention, tipping Japan into recession, and possiblity of sovereign default.  Triffin dilemma is still unresolved between US-China.


@ best developed economies head into stagflation.  worse case scenario: hyper stagflation, and all stores of wealth are wiped out as near everyone loses their jobs.


see what's happening in Britain as a prelude.  Highest unemployment in 17 years, and 5% CPI inflation.  And this is before the Fed considers QE3

GeneMarchbanks's picture

Put away the pipe. Chaos theory, really?! You're clutching at anything & everything now.

Mercury's picture

It's more like a globe-spanning Rube Goldberg contraption designed to prevent risk from ever being accurately priced by market forces.

baten's picture

As a sidenote - have you heard anything related to Roubini Global Economics being bankrupt?

Mercury's picture

I hear it's principals are doing just fine.

Cursive's picture

I still have some hope that the insanity will be nipped in the bud, that some country will see they are going too far and risking the futures of too many, to protect too few right now.

We're on the verge of a Euro collapse and he still thinks this?

SheepDog-One's picture

I dont have any hope of a sudden Springtime for Sanity at all...thats why I stockpile ammunition. These markets can do whatever they want I dont really care.

TradingJoe's picture

Market will turn o a dime at 1220 latest! We all know about the manipulation yet we seem to forget it every time we see it!  Given all what has been going on since 2007-08 we should be trading with the ants now, yet we are HERE! THAT should tell it ALL!

CapitalistRock's picture

Dollar surge again today. Strange.

SheepDog-One's picture

Dollar surge? Or you mean stocks surge due to dollar plunge?

Mike2756's picture

What are the odds that this is a bull trap up here?

disabledvet's picture

Why equities are rising anywhere still needs to be explained (it probably already has been among the large Wall Street trading houses--or what's left of them.) What we do know is that the EU flying apart is a massive competitive advantage for the US and China. Monetizing this advantage however is a whole 'nother game entirely as Europe itself represents a huge market for these two nations' wares. The only thing that seems certain is that once the EU nations start "flying off the wheel" it would be hugely inflationary for them as they would have to go back to their worthless currencies that they had before. The cut to living standards would be as enormous as it would be instantaneous. It sounds like total chaos to me.

ArkansasAngie's picture

The reason ... Fed goodwill.

The dollar is down.  If the market matches the fall in the dollar back to August levels ... well ... BTFD.


No way ... no how.

ArkansasAngie's picture

Making lemonade ... since I'm not in the MARKET, I am forced to invest my money elsewhere.  As a result I'm in my local market.  I'm bying income producing real estate.  I'm investing in local start ups.

They may get your gold but it will be a while before they come get my apartment complex.

LawsofPhysics's picture

There it is!  Dumped paper gold last November for some rentals and more farm land.  Yeah, I was never good at picking tops, so be it.  You better be investing in income-generating assets that your neighbors, customers, and community in general will have a vested interest in protecting.  NOBODY is going be able to fight the government monsters that will be forthcoming by themselves.

Know your neighbors, got physical?  You better.

wombats's picture

Can a butterfly in Japan cause a bank run on JPM or BofA?  I sure hope so.

Zgangsta's picture

Whatever happens, it's all bullish for stocks.

nmewn's picture

Who's up for another crony capitalist expose'?

"How did a failing California solar company, buffeted by short sellers and shareholder lawsuits, receive a $1.2 billion federal loan guarantee for a photovoltaic electricity ranch project—three weeks after it announced it was building new manufacturing plant in Mexicali, Mexico, to build the panels for the project.
The company, SunPower (SPWR-NASDAQ), now carries $820 million in debt, an amount $20 million greater than its market capitalization.  If SunPower was a bank, the feds would shut it down.  Instead, it received a lifeline twice the size of the money sent down the Solyndra drain.
Two men with insight into the process are SunPower rooter Rep. George R. Miller III, (D.-Calif.), the senior Democrat on the House Education and Workforce Committee and the co-chairman of the Democratic Steering and Policy Committee, and his SunPower lobbyist son, George Miller IV."


Yamaha's picture

That's why they call this the new normal. Same Government corruption.

nmewn's picture

They don't even bother setting up related shell companies anymore...its now just open theft straight from the Treasury into their pockets.

Really amazing.

falak pema's picture

A congressman in Washington can start the acrimonious stampede on Capitol Hill as the Oligarchs start mud slinging amongst themelves. 


You Won't Believe Who Newt Gingrich Wants To Throw In Jail For The Financial Crisis



Yamaha's picture

Yes, but if we throw Barney Frank in jail he will like it too much and will provide new sexual deceases in the prison system that we will all have to pay for in the future.

SheepDog-One's picture

Kill the Dollar.....Save the Futures.....Kill the Dollar...

Poor Grogman's picture

How about we use the Zero hedge logo as the basis for a new currency unit called the "zero" that way we could join in the printing party.
It could be "tied " to an ounce of gold and we could offer a fractional reserve banking service for those people overseas who wanted to use the new money.
The zero would soon become the new world currency and then the federal reserve and ECB could be replaced by zero hedge.

Everyone lives happily ever after.

See all you have to do is think it through a bit....

YHC-FTSE's picture

Of course at some point the banking problem will become a French/German problem. Not only that, but a Eurozone problem, then ultimately an EU problem bringing those outside the EZ (but EU member) the same pains as everyone else. As a UK tax payer, I'm already anticipating a shit storm in our banking sector, more unemployment, more taxes, more austerity, and more civil strife no matter how the talking heads on the msm dress up the rotting mutton that is today's economy.


You wrote some great articles on Dexia, and Belgium is a good indicator of where things are heading in Europe. Dexia has 566 Billion € of "assets", 155 billion € of public debt, while Belgium itself has 322 billion € of debt countered by 340 billion € GDP. Nationalising Dexia has, in one smooth stroke of the pen, made the Belgium debt to GDP ratio positively Japanese. 


And that, in a nutshell, is the European solution. To become Japan and surpass her in the Debt/GDP ratio while making the middlemen, bankers, and creditors wealthy beyond imagination. The Euro's strength sustained by the SDR compulsory purchases by IMF members (Just like the Yen, USD, & GBP), to offset the mad printing sprees. Meanwhile, the unemployed/retired get to suck at the teat of central government slowly succumbing to malnourishment by rising prices. Same old same old until another country falls off the cliff. Each time I expect a cascade failure of this complex system, it's saved by another bout of faux news and bandaids. 


Anyway, many thanks for the contributions you make here. Well appreciated.

LawsofPhysics's picture

"And that, in a nutshell, is the European solution. To become Japan and surpass her in the Debt/GDP ratio while making the middlemen, bankers, and creditors wealthy beyond imagination. "

The world's financial system is set up so that there can be no other outcome.  Unfortunately, there is only enough room for so many "Japan-like" economies.  How many?  Who knows, but all economies still require energy to run, no energy, no economy. While there are many energy solutions out there, all this mis-allocation of capital and people's time make it highly unlikely that the energy issues get addressed and things will begin uncoupling exponentially faster.  Too bad folks don't understand the exponential expression.

YHC-FTSE's picture

Yep. I've spent far too much time worrying about the economy accelerating towards disaster. We can all see the final outcome, but time seems to have slowed down at the moment of collision. 


There's a passage in a Douglas Adams book, probably the last in the series of the Hitchiker books, where he describes a bunch of morons (The first humans on earth) running around destroying their environment and getting rich by using leaves as their currency. Every time I look around, that's precisely what comes to mind.

adr's picture

It's earnings season so the dollar tanks. After earnings season you'll see the dollar go back up. You don't think there could be some last minute accounting changes to make some of that profit look better do you?

Corporate profits as they are reported are pure fiction. Some corporations choose to lie a bit less, usualy dividend paying ones, but others like non dividend paying tech and the BS momo stocks should have presented by mother goose written on the reports.

The stock market and many of the pie in the sky P/E crowd exist to generate income from the sale of insider granted stock. The IPO market is a joke.

It all just needs to end.

citrine's picture


Is there a way to see/find all of Peter's articles posted on ZH?