Fluff, Stuff, And Expectations
Via Mark E. Grant, author of Out of the Box,
A Flawed Strategy
“The experiences and behavior that some would label paranoid is a special strategy that nations invent in order to preserve their status quo. The problem of course is that when actual data confronts fantastic postulates that the real numbers triumph over the invention.”
For months the European Union, the IMF and the European Central Bank focused all of their attention on the giant firewall that was supposed to protect the core countries of Europe. We had the EFSF, the ESM (still not in existence) and promises of a giant amount of money to ward off speculators and to stop any contagion from the periphery nations. This is all that we heard about, this is where the markets’ attention was focused and it was on this premise that equities and bonds moved one way or another.
I submit to you that it was all a diversion and one that, once again, did not work. The actuality is that the EFSF is down to $65 billion in available capital after the first tranche of the bailout of Spain. The ESM is hung up in the German courts until September 12. The bailout money is going to Spain, not the Spanish banks, no matter how hard Mr. Rajoy & Co. try to deflect you from reality. Consequently I think it is reasonable to assert that all of the fluff about firewalls was just that, fluff, as the core of Europe was always going to get infected and so is infected and firewalls do nothing as in zero for the sick nations that lie within their confines.
I think the real problem is that the European Union has come to believe their own concocted nonsense. I think they honestly believe that it is some band of speculators, some Jesse James type of gang riding out of the American West that is trying to drive up European interest rates and destroy their beloved construct. While it is certainly true that all markets have speculators I think that the Europeans are widely missing the mark on several fronts. The first is that the finances and the real debt to GDP ratios of the countries in Europe are so dismal for the most part that real money investors do not want to be exposed to their credits. I can report to you absolutely that any number of major money managers have pulled back or severely cut their exposure in Europe and will just not fund many European sovereigns and banks. Europe has brought this upon themselves in my opinion. They gave the world phony bank stress tests, they give us phony debt to GDP ratios, many European banks do not carry their Real Estate portfolios/loans at realistic levels, they continue to provide phony data on any number of items and many institutions, recognizing the manipulation, just said, “Enough.”
The bonds of Germany, France, the Netherlands et al now trade at negative levels in the short end and I will demystify this for you. It is not that the credits are so great it is that a lot of European money is mandated to stay in Europe so that the money has been put in the safest places available within the mandate and hence negative yields. This will only last so long however as Germany, France, Italy and Spain are the largest economies in Europe and two of them, Spain and Italy, are in serious trouble so that money flees from them and there is not enough internal firepower in either of these countries to sustain bond yields. Then, of course, each and every troubled nation wants Germany, the richest of the European nations, to foot the bill but Germany, with an economy of $3.479 trillion can only do so much, even with all of the games and the hiding of what they can, to support the rest of Europe. I submit that Germany is becoming troubled economically and that they will be in a recession along with the rest of Europe by the fourth quarter of this year or the first quarter of the next as a result of their rescue attempts. German is responsible, as an example for 22% of the liabilities at the ECB which is now $880 billion and equates to approximately 27.5% of their GDP. Germany is bearing the cost of the Target2 financing which is now some $800 billion which equates to 25% of their GDP.
- German Gross Domestic Product (GDP): $3.479 trillion
- Official German Sovereign Debt: $2.618 trillion
- Percentage of Liabilities at the European Union: 27%
- Percentage of Liabilities at the ECB 22.00%
- Germany’s Percentage of the ECB Debt ($4 trillion) $880 billion
- German annual cost for the EU budget $46.36 billion
- German Guarantees for the Stabilization Funds $280.6 billion
- German Guarantees for the Macro Financial Assistance Fund $211.14 billion
- German Target-2 Liabilities $800 billion
- German Guarantee for the EIB Debt $157.29 billion
- Sovereign Guarantee for KFW $588 billion
- Total German Sovereign Debt & Guarantees $5.581 trillion
- Official debt to GDP Ratio 81.8%
- Actual German Debt to GDP Ratio 160.4%
The Next Two Days
All eyes will be on the Fed and the ECB during the next forty-eight hours. The actions of these two central banks will hold the entirety of the markets’ attention. I suspect both will disappoint as the expectations, especially for the ECB, to provide some kind of miracle will not be the manifest destiny hoped for by many. There is only so much anyone can do when you sit at almost zero interest rates. It will be interesting to see what these two institutions actually offer but I suspect that the current overblown expectations are nowhere close to the reality that we will be given.
“You want to be healed, now? Or would you prefer to bleed to death so I can try my hand at resurrection?”
-Terry Goodkind, The Sword of Truth
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