The European Crisis Cycle: Hope, Relief... And Always Disappointment
By now we can only hope (pun intended) that everyone has seen the David Einhorn chart showing the circularity of the European "summit-based" decisionmaking process - somewhat relevant since we have had 21 summits since 2008 and Europe has never been in a condition quite as bad as last week when a historic move by the ECB to lower the deposit rate to zero and the refi rate below the critical threshold of 1.00%... and nothing happened (that's not quite true: JPM, Goldman and Blackrock all made it quite clear European money markets are now officially dead).
Of course, the chart above can be applied not only to Europe in its current predicament, but to any Keynesian-based "resoution" which attempts to solve debt with more debt: initial improvement, only for the euphoria to fade once the realization that total leverage in the system has increased, actual cash flow has remained flat at best, or likely declined as none was used to generate incremental revenue, while the amount of eligible collateral for future use has decreased, until one day the debt-creation machinery grinds to a halt.
However, as the following empirical analysis from Credit Suisse shows, the "Einhorn" chart is not just a conversation piece at cocktail parties: there is an actual trade pattern which has made traders lots of money, and which makes Eurocrats the best friends of not only Belgian caterers, but short-sellers everywhere: go long into a summit when the clueless algos read headlines and send risk soaring, only to short the inevitable fizzles days if not hours later.
Once the chart above is updated for the most recent failed June 28-29 summit, we will make sure it is reflected empirically (primarily as a convenience for all those who think they can time the bottom in Spanish bonds just right... just like all those who said that Greek bonds yielding 100% was the absolute bottom, until they hit 1000% 3 months later of course).
So... all those hoping to make a quick buck shorting circular European stupidity have just one question: when is the next summit?
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