David Einhorn Throws France Under The Bond Vigilante Bus

Tyler Durden's picture

David Einhorn, in addition to being a professional poker player, has a knack for simplifying things. A good example of this is his diagram of the Europe summit cycle, repeatedly presented on these pages in the past. He also happens to be a successful hedge fund manager. It is him in this last capacity that we focus on today, courtesy of his July 23 letter to investors. Largely uneventful, he describes in detail the performance of his various positions which lately have started taking on water: of note is his mention that he has cut his entire position in DELL "with a loss" saying "non-PC growth was smaller than we’d hoped and the PC deterioration was worse than we’d anticipated." Oh well - you win some, you lose some.

Far more important are his now traditional ruminations on Europe, and specifically the core, especially his observation that unlike last year, when France (no longer AAA at all rating agencies) and Germany were rarely seen in the same boat (on expectations of a French downgrAA+de which came and went), and when French yields would rise and those of Germany fell, this time both paradoxically trade in parallel. Yet while fringe blogs can lament the patently obvious and explain how France is not worthy of record low yields, sometimes it takes a more prominent figure to demonstrate to the market that the emperor is indeed naked. Sure enough France is wearing absolutely nothing at least according to David Einhorn.

To wit: "Under the new regime, France is now cozying up to its new anti-austerity, pro-money-printing allies, Italy and Spain. This makes sense when one considers that France's economy is more akin to that of its southern neighbors than it is to the German economy. Strangely, the French bond market hasn’t figured this out just yet." It will soon enough, and the result will be even more negative yields for the remaining core countries, as "75% tax for millionaires; 60 year old retirement age" France resumes its rightful place - blowing up together with the rest of the periphery.


On the first day of winter, lulled by the security of the European Central Bank’s Long Term Refinancing Option (LTRO), the bears went into hibernation. They stirred on the first day of spring and then, just one day into the second quarter, they woke up in earnest and the market’s relentless rise came to an abrupt end. April marked the beginning of a decline that continued steadily for the next two months. With many possible trouble spots coming back into view, the market can’t seem to focus on more than one crisis at a time. Once again, Europe’s woes took center stage.


In April, the LTRO “fix” began to wear off as bank customers in Europe’s periphery started contemplating what would happen to their savings if their nation left the Euro. Visions of bank statements not in Euros, but in ‘newly re-issued for the purpose of devaluation’ local currency, offered no twinges of nostalgia. National pride gave way to pragmatism as depositors in Spain, Italy and Greece began transferring money in droves from their respective local banks to less risky banks of other countries – particularly those with German names. The market took note of these incipient bank runs as peripheral sovereign bond spreads raced to new highs.


May brought the end of the “Merkozy” approach to the Euro crisis as the French voted out the austerity-loving Conservative and voted in Socialist President François Hollande. Under the new regime, France is now cozying up to its new anti-austerity, pro-money-printing allies, Italy and Spain. This makes sense when one considers that France's economy is more akin to that of its southern neighbors than it is to the German economy. Strangely, the French bond market hasn’t figured this out just yet.


By early June the market had given back all of its first quarter gains, and the crisis yet again came to a head. The European leaders took a cue from Groundhog Day and did as they always do: they announced yet another ‘Summit to Fix Everything’.


It is hard to blame the current European leaders for their inability to solve a crisis that has no real solution. Even the very best options range from awful to awful, so no one should be surprised when the political choice is “None of the above. Let’s put out a communiqué and hope that no one notices.” This remedy of, “Take one aspirin and call us in the morning – or, better yet, after our August vacation,” offered the market some welcomed pain relief, but the rally lasted about as long as it takes to metabolize an aspirin.


Some believe that Germany could alleviate the problem by simply whipping out its checkbook. Setting aside the likely German distaste for doing so, a simple analysis of Germany shows that its own fiscal situation isn’t so rosy, particularly if it is also headed toward recession. Were it to try to bail out its neighbors, there is the risk that they would all sink together. Germany already has its own fiscal commitments, and its economy is simply not big enough to bail out the rest of Europe.


Much to its chagrin, Germany doesn’t have the option of walking away either. The recent huge influx of deposits into “safe” German banks only serves to exacerbate the problem. The German banks don’t need the money, so they park it at the Bundesbank, which in turn lends it via the ECB back to the local banks that are losing deposits in Europe’s periphery.


Essentially, the bank runs also shift the credit risk of peripheral banks from the local depositors to the Germans. While the Germans kick and scream about not wanting to take on credit risk through Eurobonds, they are already taking on similar risk through the banking system.


The whole thing is such a mess – who can blame them for heading for vacation? Besides, this allows the politicians to position themselves to give the appearance of personal sacrifice, should they need to interrupt their Olympics cheering to make emergency phone calls.

Full letter:


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john_connor's picture

The black hole vortex is growing by the second...

boogerbently's picture

They have NO excuse, over there. They have had 4 years to watch us.

Bailing out the weak links and printing money doesn't work.

That WHOLE area is hoping Germany will bail them ALL out.

Germany needs to say no. Let the chips fall where they will.

If you "bailout" all your customers, that makes you the seller AND the buyer.....what good is that.

That's like us buying our own debt  ?!?!?

AAA21's picture


The best solution for Germany is simple: GO BACK TO THE DEUTSCHE MARK WHILE KEEPING THE EURO!

Keep all your Debt in Euro - Issue new debt in DM.  Convert the money of German citizens ONLY to DM, leave everything else in Euros.  You'll have to bail out your banks, but with your super valued DM, that will be no problem!

All those lazy Greeks and Spaniards that moved their money to Germany will get in back - IN DEVALUED EUROs!  Which now will probably be worth between 0.60 - 0.80 USD each (LOL - no need to worry about TARGET2 Balances!).

Yes, you'll get an economic contraction, but you can print as many DMs as needed to keep things afloat.  In the meantime, Hollande and the PIIGS club can print worthless Euros to their heart's content.


Precious's picture

Champagne, bitches.

bob_dabolina's picture

If Jerry Brown was running France they would have had a high speed rail built by now and everything would be fixed.

knukles's picture

La France has had hi-speed rail (Tee-trains, La Grande Vitesse Poopettes, etc.) for generations. 
Don't wish for what....

magpie's picture

Heck, they even had their own internet at least for a while.

bob_dabolina's picture

They also need to ban large sugary drinks. That will fix it.

magpie's picture

Smoking in public and fat in cheese too

bob_dabolina's picture

And socialize healthcare too. Oh...

magpie's picture

Funny, even as a non-American who isn't fond of caricature i always associated the USA as the All-you-can-eat-country. Now no longer.

But how will Mayor Bloomberg stop me from ordering a second sugary drink ?

knukles's picture

Hell, he's gonna give you a SNAP card to pay for it and then pass some additional nuisance regulations about using too fucking many small cups.

(wondering if heaven's this fucked up while I'm rummaging about in the bottom of my Cheetos bag for the prize)

Nobody For President's picture

Hey knuks - don't knock the TayJayVe- Paris to Marseille trip was fast, smooth, relatively cheap (compared to a car, say, and Euro high priced gas) - and fun to boot. I wish Cal did have a high speed rail as good from Bay Area to LAish, much less Bay Area to New York, but probably never happen in my lifetime.

buzzsaw99's picture

Insider trader scumbag.

Mark123's picture

Germany made lots of money selling industrial machinery/infrastructure equipment to Asia....plus selling high end cars to Asians (they love the labels).  That was paid for with real money - no crappy vendor financing for Asia.  Now Asia sits on the brink and my guess is it implodes - way too much speculation there and like Japan (but now the entire BRIC world) they have run out of leverage to build more factories, railways, empty condos etc.


On top of that, Germany made "money" by creating the greatest vendor financing scheme in Europe, and that is over for sure.


So how exactly is Germany supposed to save Europe, that will save Asia/BRICs, that will save USA????????????? 

AnAnonymous's picture

Consume, consume, consume.

The US citizen solution to an overconsumption issue is to eliminate non consumers.

Who to save US citizens? Non consumers.

Living frugally, within one's mean is like walking around a shooting stand with a negro mask... US citizens wont miss you. Target practising...

HoofHearted's picture

No matter how long you keep up your garbage, WB7 is NOT giving you a place on his ZH comments chart.

Peter K's picture

What I think is missed in the analysis of the French bond market and the present Euro currency crisis is a history lesson. The last time the Euroland experienced a currency crisis, it was the ERMII. When the ERM couldn't be maintained, the Germans supported the French while dumping the Italians. And this is what is driving the French (and Belgian) debt. The assumption that the Germans woun't let the French crash out of the European project.

Arnold Ziffel's picture

"H.P. said it would cut its ranks by 27,000 employees....Many of the jobs are in the United States."




Computer industry is facing stiff winds from tough competition, a saturated market (how many iPads can you own?) and rising unemployment rates.

AnAnonymous's picture

US citizen economics: those jobs are less and less jobs that belong to the consumptions areas the size of US citizen nations.

They are less and less valued enough to allow a worker with no inheritance to work them in a US citizen nation environment.

Wealth has been too much concentrated in US citizen nations to allow that.

Activity is going to be redeployed elsewhere.

akak's picture

Q: How many Chinese Citizenism citizens does it take to change a light bulb?

A: None --- they would rather sit in the dark and blame the lack of light on self-created bigoted fantasies such as 'US Citizenism'.

Conman's picture

Csico laying off 2% of workforce too.

edmondantes's picture

Not strange at all... French banks have to buy OATs are they are 0% risk weighted... the insanity of BIS capital rules means that as the rotten RWA go under banks have to buy more zero weighted assets to rebalance their balance sheet ... so that as a % of the enormous ultraleveraged whole the RWA are less as a proportion... effectively zero weighting taken to its ultimate logical conclusion means that banks in AAA countries can buy infinite amounts of zero weighted govt debt - the ponzi feeds on itself until we get to NIRP I think

Uncle Remus's picture

Was it a CITROËN bus by any chance?

THE DORK OF CORK's picture

What a load of crap.

Eindhorn is a rentier remember ?

Europe is blowing up precisely because they cannot print - therefore printing would involve transfering global demand back to Europe and away from the Cayman islands where all of it is wasted on junk.

Everybodys All American's picture

I'm all in on that trade idea.

THE DORK OF CORK's picture

Imagine a country with a 2 MBD oil ration.............

It has a certain productive capacity - (France has a potential high productive capacity because of its 1970s/80s investments.)

Now the majority of money claims are held outside the country.

The Exchequer and not the CB prints the money..........the value of the claims are diluted.....but the new digits are added to resident accounts ........

The wealth of the country did not disappear ........ where did it go ?............The country still exists.

....But the guys holding the claims out in the Caymen islands can no longer afford the air fare to their Pads.

The country still has its 2MBD oil ration and indeed some of that oil previously burned in those Pirate Islands may flow back.

Don't buy these guys product.

Its Poison.

Rylie's picture

Maybe someone can help me out here, how do you short France? Is there an EFT for that?

magpie's picture

I am only familiar with europewide short bond etfs. So its the short cac40 etf or a bet against the bank stocks themselves.

shovelhead's picture

Show me the money.

Oops. There ain't no money. Solly Cholly.

Better go see Back Door Bennie. he'll slip you a few bones.

AvenoSativo's picture

Francois Hollande has been staying guiltily low-key and silent (about Euro zone). France is a big hole that no one wants to look at (for now).


La Tribune just (24/07/2012, 18:24 Paris - 12:24EDT) reported that Moody's in a memo distributed Monday night says that they are going to review the AAA status of France and may downgrade France in September (around end of Q3).

WaEver's picture

There's the OAT future for Those wishing to play THE game

The Count's picture

Everybody talks about about France, Spain and Italy. What about the UK? Proudly combines the worst of Europe and the US! Now a nation of bumbling idiots and crooks. Examples? Needing to 'borrow' 700 FBI agents to help handle immigration during the olympics. Did they not have 4 years to plan for this? Ticket scandal? French fry scandal? HSBC money laudering machine scandal? Everybody loves the royals sham? This is all nothing new but somehows has been under the radar. UK, your grade: F



warezdog's picture

We are truly effed, the only benefit to all this is that when the smart money in Europe flees to the US for saftety is that PM's will get killed short term and little guys like myself can liquidate cash for silver and ride it out. I didn't think this would actually happen until next year but now I'm thinking this will happen before the years end. Time to start liquidating assets in preperation of buying the big dip.

Dien Bien Poo's picture

utter drivel. written by someone who does not understand France. France has an indutrial world class champion in pretty uch every industrial sector. Much more balanced economy that germanys and absolutely nothing like Italy or Spain. Einhorn is an ignorant ass.
name the Industry and i will name you a top 5 world French company. 

DrunkenMonkey's picture

Einhorn is clearly not a muppet (despite the dubious punt on DELL).