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The Lull

Tyler Durden's picture




 

From Mark J. Grant, author of 'Out of the Box and onto Wall Street'

The Longer View

Saturdays are good days for mulling about. We are not rushing from meeting to meeting and facing the aggravation of lawyers and auditors and the countless personal problems of ruffled employees; we can take some time to actually ponder what we face. There is no substitute for thinking, assessing the facts and making some decisions based upon our collective deductive abilities. So then let us begin.

"Yes, I have a turn both for observation and for deduction. The theories which I have expressed there, and which appear to you to be so chimerical are really extremely practical -- so practical that I depend upon them for my bread and cheese."

 

-Sherlock Holmes

The LTRO

More than $1.3 Trillion handed to the European banks at a low interest rate to be used how they like. The maturity is three years for most of it so that it has to be paid back and there is the rub of course. Liquidity issues for the banks and then the sovereigns fixed in the short term but not so fast I tell you. As the European banks deleverage, as mandated by the Basel III rules, their balance sheets will deteriorate as a result. The debt to assets and the debt to cash ratios of the European banks will significantly worsen so that I predict a continuing stream of downgrades which are quite unavoidable two to three quarters out along with an increase in counterparty risk. The money that has been used in the short term to buoy the sovereign debt prices of countries such as Italy and Spain will begin to dry up and this will be especially notable for debt five to ten years out as the banks are fearful of using short term money to buy longer term assets so that the knee jerk reaction accompanying the surreptitious printing of money by the ECB will come to a halt and reverse as the structural problems of Portugal, Italy and Spain do not disappear by the use of liquidity. It is always the case that solvency is helped by liquidity in the briefest of terms but the band aid never cures the patient of its ills.  As Spain misses its deficit goals and they demand the relaxation of the rules Austria replies with negative vehemence so that it will either be a change of rules or forced austerity or a large fine by the EU for not complying. No pleasant possibilities but one or the other will be the conclusion and then not just in Spain but likely in Italy as standards of living decline and social unrest continues. As it dawns on us that Europe’s Quantitative Easing has ended then the course reverses direction as easy money dries up. You may recall that when QE ended in America that the stock market dropped approximately 50% in value so that as America ends its easing and Europe ends it easing the stock markets will not be such a great place to park money and this, coupled with a deepening recession in Europe, will play havoc with the world’s equity markets in the next few quarters I think. The collective “WE” has a mindset these days that does not want to worry about China, 2012 as the first year when Japan has to depend upon outsiders to finance its debt, the escalating price of oil, the end of QE in both America and Europe, the threat of Iran attacking our battleships, the recession in Europe or the structural problems of many of the nations on the Continent; we have been lulled into a state of lethargy by all of the printing of money but long experience in the financial markets has taught me that easy money has its consequences and that the rubber band when stretched past the constraints of elasticity snaps back and always with force.

 

“Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments.”

 

-Plato

Greece

By March 9 we will all see who signs up for the Greek bond swap and who does not. I expect consequences here that vary from bad to far worse. If not enough participants sign up then the deal fails and the Bull droppings hit the fan while the Bear cranks the engine as Greece does not receive any new funding. If the deal ekes by then the “Collective Action Clause” will surely be triggered which means a new assessment by the ISDA, a defining moment for the CDS market, and law suits instigated around the globe. It appears that the law firm of Bingham McCutchen is leading the early charge and if you are a hold-out from the Greek bond swap you may wish to get in touch with them. Then if the “CAC” is utilized there will also be more ratings downgrades and “Default” will be the operative word which will force selling at many institutions. Currently the ECB will no longer accept Greek bonds as collateral and they have thrown a lifeline to the Greek banks but a failed deal will cause further large write downs at the French and German banks and no such lifeline has been extended to them and if one were it would cause consternation and quite negative knee-jerk reactions for their bonds. Then I have the suspicion, given recent comments from various German officials, that everything is not as it seems as Germany may be trying to force Greece from the EU and if more austerity measures are demanded as the Greek economy reported out even worse financials, then the Greek “bend over and take it” position may become unsustainable.  This game is not over or close to being over; in fact, the real show has just gotten underway.

“Greece is reneging on programs to spur its economic competitiveness that it signed with Germany since July, calling into question its willingness and capacity to revitalize its economy.”

 

-German Economy Minister Philipp Roesler

 

Portugal and Possibly Spain

Portugal cannot make it; that is my honest assessment. They will be back at the till soon which will provide us a new adventure and a new focus for our attention. The numbers are not big but how the EU handles will be and we will all get to see if Greece was a one-off situation or not. Spain has already fallen behind and they have regional debts, not reported on the Spanish balance sheet, that are slowly coming out into the open air and I think their financial condition is far worse than is generally realized so that I expect real trouble to be forthcoming in this country. Any notion that Europe is out of the woods is a flight of not only fancy but fantasy and I place zero credence in this notion. We are currently in the Quantitative Easing lull; nothing more.

Don Quixote: Dost not see? A monstrous giant of infamous repute whom I intend to encounter.
Sancho Panza: It's a windmill.
Don Quixote: A giant. Canst thou not see the four great arms whirling at his back?
Sancho Panza: A giant?
Don Quixote: Exactly.

 

France

April 22 marks the date of the French elections. Unless Joan of Arc reappears the socialist candidate, Francois Hollande, will be the winner either in the first election or the May 6 runoff election. He is not any friend to the banking institutions, wants to lower the retirement age, increase governmental spending, impose a tax bracket as high as 75% and is culturally and financially in direct opposition to the German positions. As spring unfolds there is going to be a quite serious rift that will take place between these two countries and the position of Germany is going to be quite isolated with the very real possibility of unintended consequences as a result of what is demanded by the European Union and what Germany refuses to do. We may well see a full blown German revolt.

 

“Chateau and hut, stone face and dangling figure, the red stain on the stone floor, and the pure water in the village well--thousands of acres of land--a whole province of France--all France itself--lay under the night sky, concentrated into a faint hairbreadth line.”

 

-Charles Dickens, A Tale of Two Cities

The IMF & Europe

They apparently have only offered $13Bn to help Greece in Bailout II. They said they might offer more if the firewalls are expanded. Germany has stated they will not expand them. If the German position holds then the EU bailout is $17Bn short and the additional money has been approved by no one. With both the ECB and the EIB exempting themselves from the Greek “CAC” one wonders if the IMF will not be next. Subordination to two institutions is bad enough; I fear there will be three. The laws for European bonds are clearly not the same as for American bonds and this should be carefully noted and spreads for all the bonds in Europe will be adjusted accordingly over time and as the injection of liquidity dies on the vine. There is no brandishing of any sword that is necessary to now correctly identify that private bond holders are now second class citizens in Europe.

 

The Lull

We are in “The Lull” which has been caused by the injection of capital by the Fed and by the ECB. This is exactly, exactly, what took place I remind you during the weeks after the subprime mess exploded. Massive injections of capital, run-ups in equities, compression in bonds, higher prices for commodities and then the reversal of course took place. When easing ends then the course back tracks and I predict a re-do of this in the coming months. It will not take some trigger event, though there may well be one, to cause this; just the easy money being placed and no more manufactured money to follow.

“As the well runs dry the throat parches and dehydration begins.”

-The Wizard

 

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Sat, 03/03/2012 - 14:47 | 2219909 slewie the pi-rat
slewie the pi-rat's picture

'As the European banks deleverage, as mandated by the Basel III rules, their balance sheets will deteriorate as a result.'

i don't understand this assertion.  Basel III - Wikipedia:

Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.[4]

as a matter of fact there is a plethora of bullshit here, overall

check out this nonsense: It will not take some trigger event, though there may well be one, to cause this; just the easy money being placed and no more manufactured money to follow.

yeah.  in a piiigs ass, mark!  we have had coordinated centralBankstering since at least last year's jacksonHole;  tyler:  put this guy on socialPro until he sobers up!

Sat, 03/03/2012 - 19:39 | 2220183 Manthong
Manthong's picture

The post has nice coverage of the issue but seems to assume that the rules apply - which is no longer the case.

All of the rules and standards are now ignored by sovereigns and large players.

Rules only apply to us and the small players.. the big event will happen when enough of the underlying understands this, bails on the system and then some off-the-wall thing triggers a cascade that destroys the equilibrium. 

Most of this comment thread is OT.. 

but on topic, how do you say "lull" in Japanese?

Sat, 03/03/2012 - 14:47 | 2219911 blueridgeviews
blueridgeviews's picture

First Americans have to pay for their neighbors abortions (planned Parenthood) now these parasites want their neighbors to pay for their contraception? Balls!

Sat, 03/03/2012 - 14:53 | 2219924 I am Jobe
I am Jobe's picture

That whiny azzz Law Student. Fuck this shit. I am not going to pay for inbreeding and bitxhezzz. Let them take care of their kids.

Sat, 03/03/2012 - 14:52 | 2219921 I am Jobe
I am Jobe's picture

EXCLUSIVE - Iran starts paying Indian exporters in rupees
http://in.finance.yahoo.com/news/exclusive-iran-starts-paying-indian-160...

Sat, 03/03/2012 - 14:59 | 2219933 Yen Cross
Yen Cross's picture

When does the this "shit rope" end? Iran exports almost 140K bbl ( PER DAY) to Spain! That's great for embargos on 25% unemployment. The thin VENEER is about to crack!

Sat, 03/03/2012 - 16:33 | 2220144 slewie the pi-rat
slewie the pi-rat's picture

hey, Y/C

remember the last tanker to leave libya as the revo got under way?  it went to china

now, under this new arrangement, china will get oil from iran

spain will get libyan, i would think

i'm about blue in the face trying to explain to people for 3 months now, that the macro-political situ is really more stable than in at least a decade

don't crack that veneer!  see ya!

 

Sat, 03/03/2012 - 18:18 | 2220345 Yen Cross
Yen Cross's picture

I'm speechless Slewie. You pretty much summed it up. As I quoted earlier, " I nominate Slewie for the opening ceremonies" of the 1st Z/H summit!

Sat, 03/03/2012 - 17:52 | 2219945 chinaboy
chinaboy's picture

LTRO1 -> LTRO2 -> ... LTRO N -> Fall of Frankfurt

Sat, 03/03/2012 - 15:54 | 2220049 fiddy pence haf...
fiddy pence haff pound's picture

Tea Party is a political movement that is doing good.

Russia Today is bad because it's from the Russkies.

 

Ok. Once we get rid of the idiots who espouse the above views,

we can discuss how the LTRO will affect us.

Wishing real hard and writing insulting comments towards oligarchs, who aren't

paying attention anyway, is not going to help anybody survive.

I think:

More electric cars, and more broke car owners, because of speculation on oil

caused by giving free money to a bunch of gambling assholes.

more people heating with wood and hooking up solar and wind for electricity.

Or we could stop using cars for 10 days and see if a massive drop in

consumption makes any banksters shit their hedging shorts.

other suggestions?

 

Sat, 03/03/2012 - 16:41 | 2220157 q99x2
q99x2's picture

I'll take the advice of the Wiz and set my shorts back. Dow at 12,977. Oh that's right markets are closed. That was yesterday. Or last week, or the week before that. Such is the lull.

Sat, 03/03/2012 - 21:21 | 2220632 selectricity
selectricity's picture

DB just put out a note on the lull in vol, interesting stuff with the implied to realized vol spread so wide, could be pointing to another spike in vol soon:

http://www.dailycollateral.com/2012/03/04/deutsche-bank-on-the-bear-mark...

Sun, 03/04/2012 - 04:34 | 2220907 oldman
oldman's picture

Tyler,

This site has gone from Fight Club to Little dick Club in just a few months.

Any ideas of how to return to Fight Club?

These comments are boring

Thanks         om

Sun, 03/04/2012 - 19:57 | 2222746 covert
covert's picture

great observations.

http://expose2.wordpress.com

 

Mon, 08/06/2012 - 14:42 | 2221847 larz
larz's picture

I have to agree with old man - on the Susan Lindauer piece Mike Quinsley? really?!??!?!?! God help us all

Sun, 03/04/2012 - 15:13 | 2222118 NoTTD
NoTTD's picture

Sitzenkreig.

Fri, 04/13/2012 - 04:23 | 2340907 yang46
yang46's picture

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