David Rosenberg On The Insanity Of Fixing Excess Leverage With More Leverage, And The Relentless Euro Rumormill

Tyler Durden's picture

We though we were the only ones brought to the verge with the relentless lies out of a completely clueless Europe, which as we learned at last weekend's G20 meeting, has 3 more days to get is act together. Oh wait, they were lying too? Got it. Well, no, David Rosenberg has also had it pretty much up to here. More importantly, Rosenberg also, like us, but also like Citi's and RBS, to throw some more "credible" names, is convinced that this latest deux ex machina is D.O.A. To wit: "How cool is it that we live in a world where complicated financial engineering in a radically overleveraged system forms the cornerstone of the solution to these debt problems...Why are we so skeptical? Well, when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market. So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road." As we made it all too clear, far less diplomatically yesterday, "Are we the only ones dazed, confused, and tired beyond comprehension with this endless, ridiculous, pathetic, grovelling Groundhog Day bullshit? Stop risking civil and international war just to satisfy your bureaucratic vanity. THERE IS NO MONEY! YOU KNOW IT, WE KNOW IT, THE PEOPLE KNOW IT. ENOUGH!!!" So much for enough: 6 hours later we had the latest European rumormongering fiasco courtesy of The Guardian which has now devolved to the status of England's latest "paid for publication" tabloid.

From David Rosenberg of Gluskin Sheff

The Europeans are living in a world of denial that they can continue to give funding to Greece as it continuously refuses to meet its fiscal targets

Well, once again a leaked press report from a pro-EU newspaper (the Guardian) has cooked together a new strategy that leverages up the EFSF and insures bondholders against first losses on their sovereign bond holdings has the markets in a brand new giddy mood. Equities are rallying across the planet (check that — what is with China down now two days in a row?) and safe-havens like the U.S. dollar and high-quality bonds are selling off (and we ask, why in this pro-cyclical buying of stocks and selloff in Treasuries and bunds is copper of all things down three days running? The red metal is down 1.2% today!). Again, not even gold is rallying, and we admit that we are becoming a tad perturbed over how the yellow metal is trading of late.

It's an open question as to whether this is the deal breaker at this weekend's EU leaders' meeting but there is reason to be skeptical that nirvana has just been discovered with respect to this complex European debt crisis — involving governments, banks and all locked into a single currency zone. And nobody wants to pay the price for bad decisions made, so why not end up going through the back door by penalizing the taxpayers of the rich countries? In terms of commitments, Italy and Spain account for 30% (it's interesting that Italy is committing to a program that will be used to backstop Italian bonds, no?). As one of the co-managers of our hedge fund, Michael Isenberg put it, "It is a quasi-euro bond — without constitutional, legal, historic, linguistic, cultural or political backing — so it's weak." Yet, the market sees a headline: wow, 2 trillion euros in a new fund — that's QE — I better cover and get out of the way. So we have to recognize this and understand that we're playing in a game where rules change every day.

I remember people saying the agreement to expand the power and funding for the EFSF on July 21st was going to be the panacea — the Dow actually swung +185 points that day (the amount it rallied yesterday), only to be totally erased in the next three sessions. How cool is it that we live in a world where complicated financial engineering in a radically overleveraged system forms the cornerstone of the solution to these debt problems. I would not be surprised at all to see stories coming out in the next few days that contradict this plan. In fact, now we see German Finance Minister Schaeuble saying that the EFSF firepower will be expanded to 1, not 2, trillion euros. Go figure.

Both Dow Jones and Reuters have run with 'denial' articles from EU officials, but don't you see, it's always like this with the equity market crowd — react first, worry about the details and repercussions later. At this stage, the surprise is that we have another 'leak' on our hands with no credibility, like all the noise someone in the media created ahead of last weekend's finance minister meeting and we ended up with nothing but policy discord.

In fact, what is interesting is to go back and see how the markets reacted to each of the brave new plans unveiled during this crisis. The DAX, for example, surged 5.3% when the EFSF was first introduced back in May 9, 2010 and then rallied 1% on the July 21st agreement to expand the bailout fund; each rally faded. I have no reason to believe this one will be different.

Or just go back to the 'leak' late in the afternoon (these always happen about an hour before the close in New York — have you noticed that too?) on September 12th that China and other Asian sovereign wealth funds were going to line up and start to bailout out the Eurozone bond market. The very next day the DAX rallied 2% and over 3% the day after that and euphoria reigned ... for about a week.

All these leaks are doing is generating more market volatility, though as we are told, one of them is bound to come to fruition at some point. Better to be a spectator here than a participant.

Let's look at what else is happening that deserves attention that is not exactly validating this new announcement-led risk-on rally.

  1. First, Spain's credit rating was cut by Moody's for the third time in the past 13 months to Al from Aa2 (note the two-notch downgrade and the 'negative' outlook was retained). This is actually big news because what it shows is that Spain's vulnerability to market stress and event risk remains acute, and leaving the 'negative' outlook is a sign that there is no confidence in the country's economic, fiscal or political prospects. Indeed, have a look at Spain Hit by Downgrade, Falling Home Prices on page A8 of the WSJ — home prices are deflating now for three quarters in a row and at an accelerating pace.
  2. Second, and this is buried in the small print because the big print is all about the Guardian's "extra extra!" but Standard & Poor's, to little fanfare, downgraded 24 Italian banks and financial institutions last night (and people are buying the euro at levels that are 20 points above where the IMF pegs 'fair-value'. What a bizarre world this is). Have a look at Martin Wolf's column on page 11 of the FT—There Is No Sunlit Future For The Euro.
  3. Third, there has been no relief so far in the Eurozone bond market, with Italian yields still backing up (now just lbps shy of 5.9%) even though apparently this new plan is intended largely to bring down debt-service costs in countries like that (Spain as well).
  4. Fourth, France-German spreads have not reacted anything close to what the global stock market has as they remain near historically wide levels of 107 basis points (see Ratings Firm Warns on French Debt on page A8 of the WSJ as well). The spread of the problems to France is relatively new and as such makes 'leaks' necessary to buy time and adds extra pressure for a quick solution; a French downgrade would deal a huge blow as it would mean that the EFSF would lose one-third of its AAA-rated firepower.
  5. Fifth, there is no sign of meaningful improvement in the fiscal situation and in the next two days Greece is going to be experiencing the most intense protests against austerity since the deficit-reduction plans were unveiled. In other words, the Greeks have had it with years of economic implosion and, as such, the risk of outright default is high and rising from a political standpoint. Will bailout money continue to flow in if the fiscal targets are deliberately abandoned?

Why are we so skeptical? Well, when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market.

The Europeans are living in a world of denial that they can continue to give funding to Greece as it continuously refuses to meet its fiscal targets. Ditto for Portugal. How will France be able to avoid a downgrade? And how do the banks not take a big haircut in all this? It's not as if the countries have refrained from tough measures — they simply aren't tough enough. In the meantime, creating a vicious cycle of deflationary and recessionary pressures that makes it impossible to maintain the fiscal austerity and hence the quality of credit continues to erode, alongside that, the quality of the assets in the European banking system.

The reason why EU kingmakers are in a rush is because even with all the ECB support, Italian bond yields are heading back to 6%, a level consistent with high and rising default risks. France and Belgium are now tarred with Dexia support. The dangerous game of not allowing a Greek default has continued because of the fear of triggering a CDS, and we have Tim Geithner convincing the Europeans that allowing Greece to default outright and have the bondholders take the pain invoke a "Lehman moment" (it's not even clear that things would have turned out to be better if Lehman had been propped up ... it's not as if allowing WaMu to fail produced any long-lasting effects on anything and that was a biggie too).

So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road. Unfortunately, post-Lehman the concept of cramming down debt holders to arrive at a more sound financial position has been thrown out the window. Causing pain to bond-holders or equity holders is a sin right now, believe it or not. There will be a price to be paid down the road for failing to allow bad risky decisions to be penalized. Instead we paper over our issues with QE and financial engineering that may make things worse down the road.

It is truly hard to believe that a Greek default could produce any worse results than what we have already seen from all these bailout attempts. This too-big, or too-important to fail strategy has got to come to an end if we are ever to fully emerge from this increasingly unstable global debt cycle.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
FunkyMonkeyBoy's picture

Too much common sense in this article. Articles of this type no longer have a place in this brave new world.

Unprepared's picture


On The Insanity Of Warning of Excess Leverage Addiction With More Common-sense Talk

Hard1's picture

but...but...but...I can always pay my debts with new (larger) ones...can't I?

tickhound's picture

no problem...

with some voluntary compliance, working retirement, debt reduction through credit expansion, and every other feel good pain.... it all ends up in that sanitary landfill called growth.

redpill's picture

To paraphrase and summarize the article:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Surly Bear's picture

John Law called...he said you're pretty much fucked.

Crisismode's picture

Let's hear it for "a final and total catastrophe of the currency system involved."

 

The sooner the Euro is revealed for the Naked Emperor that it is, the better.

nantucket's picture

aha, another reader of Von Mises.  That may be his most prescient quote.

glenlloyd's picture

Debt is nothing more than a palatable way of saying someone else has a claim to your future earnings.

We've pushed the claim to such an enormous size and out to such an extent that nothing can be done to correct it.

There really is only one way that this will end, Mises was right.

ElvisDog's picture

Ah, the unspoken premise of Keynesism - debts never have to repaid, only rolled over into bigger debts. You have learned your lessons well, padawan.

Taterboy's picture

This Rosenberg guy sounds real smart but if he was REALLY smart he'd tell us who's going to win Dancing With The Stars! You know, important stuff.

nantucket's picture

yeah, certain of my relatives know every detail of that show, or the kardashians, or the bachelor, etc., but have no effin clue who their state senators are, or their congressman, or what the fed does, or why it matters.   and they bitch and moan about the current situation.  you can't make this stuff up.

Deadpool's picture

quick get me a liar loan with a cash out so I can buy Appl on this dip! ;0)

The Axe's picture

All true but computers do not give a rats ass....SP pushing against the high end of the range, computers say buy.....buy...buy....

candyman's picture

more accurately,  young kids using computers like PS3's, Fundamentals are not taught in college anymore...it's taken me years to change my investing habits and I fucking hate it.

Manthong's picture

"Groundhog Day bullshit"

Says it all..  Here, there and everywhere in the market and goverment.

Problem is that Groundhog's Day will likely suddenly be interrupted by Halloween.

slaughterer's picture

Surprised Rosie did not comment about the recent accounting tricks showing up in US bank earnings.   I guess the focus of the report was just Europe.   

kengland's picture

It's not going to collapse on your request or Rosies. They have debt money and that is what the majority of the system works with. There's another few years of this EASY.

 

 

Element's picture

Yes, the bank collapses have barely begun yet. There are at least 25,000 bank collapses to come over the next few years. This game can drag on and on ... except the unemployment is already getting very serious, GDP is slumping, and the political situation is just going to explode.

And that is what will prematurely destabilize the financial house of cards.

You can play these games all you want to but when the family budgets runs-out just two days after payday, it's still going to be game over, because extend and pretend must end once enough people run out of money to pay their bills, and NET spend.

 

Rule #1 : Banks go broke because their customers went broke.

Rule #2 : If you're a Bank, do not DELIBERATELY make your customers go broke.

 

They kinda screwed-up #2 ... which is related to #3 and #4:

 

Rule #3 : Countries go broke because their workers went broke.

Rule #4 : If you're a Govt, do not DELIBERATELY make your workers go broke.

 

Oh, you're a Govt, and you believe you neveh-evah made your workers go broke? Well then, what about the derivatives you allowed to fester like a cancer on society, what about the public assets stripping you insisted on until everyone paid more and more for everything, and the bubbles you allowed to grow and burst, and the banks you deregulated, and the protection you removed, and the cronies you pandered to, and the bonuses you winked at, and the illegality you fostered, and the destructive legislation you enacted, and the parasitism you thrived on, and the yoking of the producers to the taxman's trough, and the way you made sure the bankers could endlessly screw the prole, in a hundred difference scams and schemes, and the industrial relations laws that were redesigned to bias exploitative practices, and the jacking of interest rates to 'regulate' growth and inflation, and the constant currency debasement, and the wage arbitrage, and the foreclosure debacle, and the police state oppression of any protest against all of these injustices?

And now you want to "create jobs" ... right?

Rrriiiiiiggghhht! ... sure you do.

Yes, the blowback is all still just starting, so this will go on for years - EASY.

Vagabond's picture

The real problem is the fact that we have a debt based world reserve currency which requires continually increasingly more debt to perpetuate itself.  There is no wonder that the world is leveraging up, what else can you do when the people have caught on to your money printing schemes?  How else do you perpetuate the ponzi?  You can't just liquidate all the bad debts.  They are the basis for so much more.  Without the debt there is no money, and with the debt we will have to learn to live with serious inflation as we try to service the debt, until we can't.  So here we are.  It is time for a new monetary system that is not set up to rob the common people until there is nothing left but to cannabilize itself.

The Big Ching-aso's picture

On a positive note, a Costco hot dog is still $1.50.

Element's picture

yes, but is it really dog still ... or are they substituting?

semperfi's picture

The bailouts will continue until morale improves, or the shooting starts - whichever occurs first. 

NEOSERF's picture

The more money heaped on Greece every quarter makes them look less like Greece in size and more like Spain.  Also, as you point out, if the Euro printing presses aren't going like mad right now, and foreign investment is withdrawing, then ECB, EFSF, levering etc, is really all just playing with a shrinking pot of taxpayer money.  Don't see how this can end well over there..and this is the US future in about 5 years once the EU has come out of their depression debt-free and are going to start demanding higher yields of the US once we start banning short sales, CDS etc...

Abitdodgie's picture

I live in North Dakota ,just wait untill the food shortages start showing, that will get things going.

SheepDog-One's picture

Just cut food stamps $100 a month, the shit will totaly hit the fan!

The Big Ching-aso's picture

Countermove = beer stamps.    SHTF riots cancelled.

jdelano's picture

On Bloomberg just now, some asshole nattering on about how central banks like Japan and China are just DYING to jump into the euro as soon as they know what the plan is.  MY HEAD IS GOING TO FUCKING EXPLODE.  

ElvisDog's picture

It truly is frustrating when I read about "central banks printing money", because that is exactly what they don't do. They issue debt. The ECB is not giving Greece a bailout, they are rolling over their existing debt into a new, larger debt. Printing money would be the equivalent of the banks taking a haircut on their bonds, because the purchasing power of those bonds would diminish due to debasement of the currency. If we have learned one thing over the past three years, it's that banks will never voluntarily take a haircut. Therefore, they will not "print money".

Irish66's picture

#2 is priceless

yogy999's picture

I'm new to this web-sight and thus far I will say unequivocally that both the authorship and readership of this forum comprise some of the sharpest minds I have yet come across. What a refreshing place to visit 20 times a day. I don't know who a Tyler Durden is but he/she is by far and away the most knowledgeable, inspiring, and humorous author I have yet to come across in my 45 years on this earth. Thank you all very much in so many ways. :-)

Abitdodgie's picture

Good to have you aboard , but look out for trolls and people always wanting a fight.

NotApplicable's picture

Rumor has it that Tyler is actually a rogue server on the net that has gained self-awareness.

prains's picture

Rumor has it that Tyler is actually a rogue server on the net that has gained self-awareness.

 

Tyler "Mother" Durden

 

what's for dinner mom???

Unprepared's picture

Tyler Durden is just a "psudoname" used  by a bunch of schezophrenic bastards headed by no other than the white-bearded chairman. Legend has it that they were born to a chaste robot mother and only sleep 1 hour a week. They spend their nights policing the web.

Ricky Bobby's picture

Careful Yogy it soon becomes an addiction!

The Axe's picture

James Gorman....says Tyler is "surreal"    ha ha   you surreal   dude.....

slewie the pi-rat's picture

and remember!  you heard it here!

THE END of TBTF = M2M*

_________________________

*mark-to-market, you idiot!

SheepDog-One's picture

All 100% bullshit all the time now, right up until the second it all completely implodes...whether thats next day or next year no one knows but thats how it ends, in 1 second.

I'd advise just being completely clear of this demolition zone.

Traianus Augustus's picture

Never underestimate the elitist ability to look the other way in the face of total devastation.

ssp2s's picture

The Titanic metaphor is being replaced by the Johnstown Flood.

Dr. Gonzo's picture

It does kind of make you want to completely cash out of the market and say fuck you. I'll just buying physical gold with it. They do not want the market to go down at any cost. The market wants to go down so bad.

yogy999's picture

Dead on. I guess I do a bit of everything. Gold, silver, guns, canned goods, medical(baby boomer) REITS, land, and a good copper stash in order to build a reflux still when the time is right, (probably around now):-)

ElvisDog's picture

You're wasting your money thinking that land should be part of your survivalist stores. When have property rights ever been respected during times of widespread civil unrest? Did the Vandals respect Roman property rights in 476 A.D.?

Dick Darlington's picture

So the 110 billion bail out #1 and the coming 109 billion bail out #2 is NOT ENOUGH for Jabba the Hut. He want's more money from the EU's structural funds too! And all the eurofanatics are telling us that Greece is IMPORTANT AND INTEGRAL part of the death err eurozone. I would rather call it an incureable cancer.

 

10-19 13:14: Greek finance minister says need EUR 3.5bln per year from EU...
bbq on whitehouse lawn's picture

The sign above the Euro : Abandon all reason ye who enter here.

 

pmcgoohan's picture

The Guardian messed up the plan.

We were meant to meltup through the rest of the week, meltup again over the weekend, and then hit the moon on Monday when the plan was announced. But we found out too soon and the markets are now floundering. Yes up- but floundering. They've missed at least 5 days of free meltups with this leak.

I feel much more comfortable about my shorts now the plan is out there. A mystery plan in irrefutable, unarguable, it could be anything- maybe something great.

But it isnt- its this plan- thats it- that's all you get- no really- after all this- thats all you get

slaughterer's picture

pmc, tend to agree with your assessment of the Guardian.  They prematurely leaked the best possible plan--everything else to come will fall short, including the real plan.