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Desperate Maladies Require Desperate Measures

Tyler Durden's picture




 

Via Mark J. Grant, author of Out of the Box,

Acts of Desperation
 
“Government has no other end, but the preservation of property.”
 
 
                      -John Locke

 
One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. If the rumors are to be believed and Draghi is going to propose unlimited bond buying in the short end of the curve for the nations of Europe in maturities up to three years then it must be said that Mario Draghi, personally, has re-written the treaties for the European Union which specifically forbids what he is apparently about to undertake. In my mind, this is an act of desperation that makes me quite nervous because my thinking extends out past the announcement that will be made later today as I consider its consequences, ramifications and where the focus will shift which will be to the recession in Europe and to the fundamental financial health of the nations in the European Union and then to the fundamental financial health of the European Central Bank itself.
 
It was in January of 2010 when the yield on the Greek ten year was a 4.38% that I first stated that Greece was going bankrupt. It was several months later that I added Portugal, Ireland and Spain to the list. Three have gone and Spain is about to go and now I would add Italy to my list. The firewalls that were supposed to protect the Continent have failed miserably as exemplified by the current financial condition of both Spain and Italy. Now, in what I consider to be an act of desperation, the ECB is not only violating its mandate but putting the economics of the Continent in a perilous state and the markets are totally focused on the next few hours and not at all upon the consequences of the ECB’s decision. I am not surprised by this but I am reminded of the moments before the Lehman disaster when the relative calm did not predict the firestorm which was to ravage the world. The echoes remain; “WE SHOULD HAVE KNOWN,” and I am fearful that we may have another of these moments as people consider the consequences of the ECB’s actions incorrectly.
 
Unlimited bond buying in the short end of the curve means that not only will the yield curve steepen significantly but that all of the financing will take place in the “ECB Funding” part of the curve. This then means that a tremendous amount of debt accrues to the front-end of the yield curve and must be rolled regularly while the amounts will be increasing not only because of the placement of the maturities but because Spain and Italy, as examples, need to borrow ever larger amounts of money to finance themselves as they sink into worsening recessions. Since the ECB apparently is proposing to sterilize their purchases then the money supply will not be expanding and so as the debt load increases the primary funding, the national debt auctions, will have an increasing difficulty finding buyers.
 
The ECB’s actions also means that their balance sheet will be expanding. The ECB is already at $4 trillion, almost twice the size of the America’s Fed, and it is about grow much larger. This also has consequences. Regardless of market perception, there is no such thing as “Free Money” and the liabilities of the ECB are borne by the various central banks of Europe and by the nations that own them. As the ECB expands its balance sheet “without limit” the credit quality and the risk profile of the various owners of the ECB correspondingly declines. Peter always pays Paul in the real world and the expansion at Europe’s Central Bank is off-set with a deterioration of the national credit quality of the nations so that the entire construct sets itself up for the possibility of being downgraded by the nemeses of Europe, the ratings agencies, because they cannot control them. A “AA” Germany and/or a “AA” Europe Union is quite a different animal than a “AAA” one no matter the rhetoric of Brussels and Berlin
 
Conditionality
 
While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what the Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. If the EU refuses to fund Greece, Spain, Italy et al then under the current apparent plan, the ECB would do/could do nothing but sit and flail in the wind. I suppose that the ECB could step-up and buy all of the debt of Europe and declare the nations of Europe a “Debt Free Zone” and perhaps the markets would rally on a $100 trillion ECB but then Germany, being accountable for 22% of the ECB would have a liability of $22 trillion with an economy of $3.55 trillion but the number would never get counted in Europe because it is a contingent liability except that those who fund are not quite that dumb and some have gotten the punch-line earlier than others and are not funding now. The “condition” of all of this promised ECB funding may prevent it being actualized and this seems to be something that almost no one is taking into account.
 
A Frightening Possibility
 
To me, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and China and so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit. The financial markets rest upon two tenets which are the focus of the market and the perception of those funding. The Great Depression is largely thought to have been sparked by the failure of an Austrian bank. We have watched Dexia, Bankia and several Austrian banks go by the wayside already and so far the markets have ignored the pattern of warning. Spain is going to be forced to the till and if funding is cut off and then if Italy arrives in the same line and various nations refuse to fund then we have arrived at the place where the rock meets the hard place and where hopes and prayers run dry.
 
Take what solace you may now because it may become hard to find in the not too distant future.
 
“It is the bright day that brings forth the adder, and that craves wary walking.”
 
                  -William Shakespeare, Julius Caesar

 

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Thu, 09/06/2012 - 10:20 | 2768036 CDSMonkey
CDSMonkey's picture

One of the primary purposes of a pundit, any pundit, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation after being wrong so horribly.

Thu, 09/06/2012 - 10:24 | 2768042 GetZeeGold
GetZeeGold's picture

 

 

So do we push on it or pull on it?

 

Thu, 09/06/2012 - 10:30 | 2768072 MillionDollarBonus_
MillionDollarBonus_'s picture

 

.

 

Thu, 09/06/2012 - 10:29 | 2768082 Vincent Vega
Vincent Vega's picture

You can't push a string. But that's exactly what they are trying to do.

Thu, 09/06/2012 - 10:50 | 2768162 bank guy in Brussels
bank guy in Brussels's picture

Yes, pundit Mark Grant is upset the can might be kicked a few more months ... so this latest 'Out of the Box' has what he calls his 'Frightening' Euro-Doomer dom ... wishing to believe his own series of Doomer calls, as Mark got sucked into the rhetoric of the euro-farce

Grant goes on a limb to call Mario Draghi and the ECB as being 'illegal' in their actions ... when there are so many friggin' loopholes in the way ECB and EU treaties and statutes are written ... and there is near-unanimous ECB board approval for Draghi, northern countries included, even Germany's Merkel quietly supporting him

Mark Grant ... soon to be appearing with the other Euro-Doomer All-Stars ... Graham Summers of Phoenix Capital, and Reggie 'Boom Bust Eurocalypse' Middleton

Yes, euro-zone might start fragmenting, maybe even this fall ... but these superficial Doomer Doom calls are not on-target ... Ambrose Evans-Pritchard in the UK Telegraph has a much better handle on the euro-zone

Thu, 09/06/2012 - 11:41 | 2768420 deez nutz
deez nutz's picture

One of the primary purposes of a pundit, any pundit, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation after being wrong so horribly.

"shock the monkey, shock the monkey tonight!"

Thu, 09/06/2012 - 11:43 | 2768426 deez nutz
deez nutz's picture

One of the primary purposes of a pundit, any pundit, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation after being wrong so horribly.

"shock the monkey, shock the monkey tonight!"

Thu, 09/06/2012 - 10:24 | 2768044 Jlmadyson
Jlmadyson's picture

Someone tell me how the balance sheet doesn't magically expand tenfold.

Haha yea, BS.

There is one great thing that came out of this today.

Oil baby!

To the moon!

Central bankers have consequences.

Thu, 09/06/2012 - 10:21 | 2768050 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

As Johnny Knoxville once said before his friend did something stupid for the almighty dollar:

It's the last act of a desperate man.

Thu, 09/06/2012 - 10:38 | 2768117 Sofa King Confused
Sofa King Confused's picture

This is the perfect excuse for Germany to drop out of the EU.

Thu, 09/06/2012 - 10:23 | 2768051 Cognitive Dissonance
Cognitive Dissonance's picture

Desperate men do desperate things.

Who breaks first, the desperate powers-that-be..............or thee?

<.........hold...........Hold.............HOLD............HOLD...........>

Thu, 09/06/2012 - 10:28 | 2768078 Vincent Vega
Vincent Vega's picture

Braveheart?

Thu, 09/06/2012 - 10:36 | 2768091 Cognitive Dissonance
Thu, 09/06/2012 - 10:38 | 2768113 Vincent Vega
Vincent Vega's picture

I was thinking of the scene where they have made the long spears to use against the cavalry. Love that scene.

Thu, 09/06/2012 - 11:15 | 2768321 Cognitive Dissonance
Cognitive Dissonance's picture

Yes, the reference was to Braveheart.

I was just being a smart ass. :)

Thu, 09/06/2012 - 11:20 | 2768349 Vincent Vega
Vincent Vega's picture

Smart ass!   :-)

Thu, 09/06/2012 - 10:23 | 2768055 khakuda
khakuda's picture

Nice piece

Thu, 09/06/2012 - 12:11 | 2768537 Biggvs
Biggvs's picture

Agreed! Though the last one read like the drunken musings of an English lit student.

Thu, 09/06/2012 - 10:24 | 2768061 Xibalba
Xibalba's picture

Judge Says 10 Rare Gold Coins Worth $80 Million Belong to Uncle Sam: http://abcnews.go.com/Business/judge-10-rare-gold-coins-worth-80-million/story?id=17159793#.UEioiiJ_Ia4

Thu, 09/06/2012 - 10:26 | 2768069 holdbuysell
holdbuysell's picture

"Since the ECB apparently is proposing to sterilize their purchases then the money supply will not be expanding..."

"The ECB’s actions also means that their balance sheet will be expanding."

Mark, perhaps I don't understand the definition of sterilized purchases, as I thought sterilized meant no net effect on the CB's balance sheet.

Help?

Thu, 09/06/2012 - 10:32 | 2768086 Winston Churchill
Winston Churchill's picture

When all else fails,LIE.

Thu, 09/06/2012 - 10:37 | 2768110 Cognitive Dissonance
Cognitive Dissonance's picture

When all else fails, LIE some more.

Fixed for ya. :)

Thu, 09/06/2012 - 10:48 | 2768156 SmoothCoolSmoke
SmoothCoolSmoke's picture

When the Langbords gave the coins to the Philadelphia Mint for authentification, the government seized them without compensating the family.

 

OOPS!

Thu, 09/06/2012 - 11:12 | 2768302 willien1derland
willien1derland's picture

I am Jean-Claude Juncker & I approve this message...

Thu, 09/06/2012 - 11:13 | 2768306 willien1derland
willien1derland's picture

Duplicate Post

Thu, 09/06/2012 - 10:39 | 2768120 machineh
machineh's picture

'Sterilization' is rhetoric. Balance sheets are real money (ignoring central banks' phony cost-based accounting).

If the ECB's balance sheet is expanding, it ain't sterilized, no matter what they say.

Once again the central bankers hump us while whispering in our ear, 'This isn't happening.'

Thu, 09/06/2012 - 10:28 | 2768073 Dr. Engali
Dr. Engali's picture

Ben needs to print a few more Benny bucks to push through S&P 1425

Thu, 09/06/2012 - 10:41 | 2768131 Sofa King Confused
Sofa King Confused's picture

All going according to plan......Ben is next with QE ?.....coordinated printing worldwide.

Thu, 09/06/2012 - 10:42 | 2768133 SmoothCoolSmoke
SmoothCoolSmoke's picture

Appearently...he don't.

Thu, 09/06/2012 - 10:45 | 2768148 slaughterer
slaughterer's picture

Look at your screen: we are already through 1425.  Next target 1465-1480.

Thu, 09/06/2012 - 10:57 | 2768201 HarryM
HarryM's picture

I believe this will be the case

If the market can move to 1425 in the current environment, 1500 should be no problem

Thu, 09/06/2012 - 11:34 | 2768391 catacl1sm
catacl1sm's picture

Done! 1427 @ 11:34 AM

Thu, 09/06/2012 - 10:32 | 2768089 Bokkenrijder
Bokkenrijder's picture

"Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece."

Bullshit! On the 12th of September (i.e. NEXT WEEK!) there are national elections in The Netherlands, so take everything coming out of the mouths of Dutch officials with a extra large pinch of salt!

Thu, 09/06/2012 - 10:35 | 2768101 muppet_master
muppet_master's picture

QEorganizer to draghi: do like bQE

do like bQE..he follows my PRINTING ORDERS...

spx pumped up 1.4% to 1424....been short spx since 3 weeks...rode to 1427....avg SHORT price = 1415...YAWN !!!! if pumped to 1430 will ADD to shorts !!

spx pumped 1.4% and OIL pumped 1.8% = nice going odummernomics !!! the HYPOCRITE IN THIEF: "but, but, i caaaaaaAAARE about the middle class" freaking liar !!

yesterday @ 1405 I prepared myself for a dead cat bounce...WHILE still keeping my shorts...i bought some deep out of the money calls.

also is EUR like @ 1.27??? NO !!! its actually FLAt...to 1.2603

Thu, 09/06/2012 - 10:40 | 2768125 SmoothCoolSmoke
SmoothCoolSmoke's picture

All well and good.... and the SP up TWENTY since 8:53 am. 

Thu, 09/06/2012 - 10:43 | 2768140 mammoth mo
mammoth mo's picture

Ctrl P - Ctrl P - Ctrl P

Lie and say why Control P is needed.  Then

Ctrl P - Ctrl P - Ctrl P

Lie and say why Control P is needed.  Then

Ctrl P - Ctrl P - Ctrl P

Lie and say why Control P is needed.  Then

Ctrl P - Ctrl P - Ctrl P

Lie and say why Control P is needed.  Then

Ctrl P - Ctrl P - Ctrl P

Thu, 09/06/2012 - 10:51 | 2768164 RougeUnderwriter
RougeUnderwriter's picture

Rearrange that furniture all you want, but the titanic is still heading for the Iceberg. Women, Children and bankers first!

 

Thu, 09/06/2012 - 11:01 | 2768220 TheInfoman
TheInfoman's picture

You forgot politicians and defense contractors.

Thu, 09/06/2012 - 10:52 | 2768172 blueridgeviews
blueridgeviews's picture

Most companies has "good will" as an asset when it goes bankrupt. Good will is the only thing America has to pay for it's suicidal spending. 

When the Good Will is no linger good, look out!

I suspect Draghi is emptying the Euro's good will with this latest move.

Thu, 09/06/2012 - 10:53 | 2768174 HarryM
HarryM's picture

So... "The world will end tomorrow"... yet again?

Thu, 09/06/2012 - 10:55 | 2768189 JohnF
JohnF's picture

It will all end in tears. There is no real alternative ending.

Thu, 09/06/2012 - 11:16 | 2768326 EyesWise Shut
EyesWise Shut's picture

"Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece."

Well, there was only one dissenter at today's ECB council. So much for Austria's and the Netherlands' "austrian"-stance. And I am absolutely sure that the German court will legitimize the ESM. ("And all this was already priced in anyway" /sarc off)

Bigger forces than yours/mine at work, if you want to make money in this market: BUY

Thu, 09/06/2012 - 12:08 | 2768527 Tank_
Tank_'s picture

If EU members vote no, they will just keep voting and eventually the chair we declare that in his opinion, the motion passes.

Thu, 09/06/2012 - 12:25 | 2768583 slaughterer
slaughterer's picture

Good article, but what is the trade?

Thu, 09/06/2012 - 12:33 | 2768606 falak pema
falak pema's picture


Desperate Maladies Require Desperate Measures...

 

US supreme court says "superpacks" can contribute unlimited amounts to the "independent" candidates.

This election is not about hype; its about super mega gadzillion $ negative hype!

What a shit spectacle this has become. American politics is the biggest expression of funny money spending to ensure potus stays "bought and packaged" to serve the "happy few".

Thu, 09/06/2012 - 12:32 | 2768607 recidivist
recidivist's picture

I suppose that the ECB could step-up and buy all of the debt of Europe and declare the nations of Europe a “Debt Free Zone” and perhaps the markets would rally on a $100 trillion ECB but then Germany, being accountable for 22% of the ECB would have a liability of $22 trillion with an economy of $3.55 trillion but the number would never get counted in Europe because it is a contingent liability except that those who fund are not quite that dumb and some have gotten the punch-line earlier than others and are not funding now. 

Holy run-on sentence, Batman!

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