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Mark Grant's Wake Up Call: Italy Has $211 Billion In Notional Exposure To Derivatives, And Other Trivia
From Mark Grant, author of "Out of the Box and Onto Wall Street"
Out of the Box: It's Me baby With Your Wake Up Call
Alarm clock starts ringing
Who could that be singing
It’s me baby, with your wake-up call!-Toby Keith, “How do you like me now”
Today is March 21, the day after the day that was enshrined in our memories as the payment on the Greek bonds was due. A red letter day that was crossed out by the EU bailout and not even a mention of it today in the Press. The end of the Ides of March or perhaps the beginning of something more ominous; et tu Brutus?
Italy
It was nothing more than a footnote in the Morgan Stanley financials; a $3.4 billion pay-out by Italy to settle a derivatives contract made in 1994. Say goodbye to 50% of the tax hikes imposed by the Monti government because that is what was wiped out by this payment. It is also interesting to note that that Mario Draghi, currently President of the European Central Bank, was the Director-General of the Italian Treasury when this derivative was formulated. Then comes the bomb, only mentioned in a brief article yesterday on Bloomberg, and not noted anywhere in the Press this morning. Marco Rossi Doria, an undersecretary in Monti’s administration, tasked with responding to a parliamentary interrogation on derivatives, admitted that the Italian Treasury had $211 billion in "notional" exposure to derivatives, which is around eleven percent (11%) of Italy’s total GDP. This new exposure, coupled with the work I did a few days ago and noted in my commentary of March 17, now brings Italy’s actual debt to GDP ratio to a whopping 144.3%.
The Unsustainable Path
I call the ball early; that is what I do. I do not sling around Gloom and Doom nor do I make any effort to make the next big call for self-aggrandizement. I stare at the facts, follow the deductive process down the road and present my conclusions. It is as simple and as complicated as that as I made my predictions on Greece, Portugal and Ireland. You may say what you like, attribute it to luck or my friendship with the Wizard but my predictions are in black and white and, once made, there for anyone to evaluate. So this morning I state, with a great deal of certainty, that regardless of the markets currently ignoring anything and everything, that we are on an unsustainable path that is going to whack us all on the backsides some quarters out. You cannot continue to play charades with the truth and present false data as accurate numbers without the Truth eventually springing out of Pandora’s Box and pulling on your ear lobes. Please note the increasing size of Target-2, the amount of loans made by the ECB, the decrease in the quality of collateral at the European Central Bank, the real debt to GDP ratios of Italy, Spain, Portugal, Belgium et al and it becomes readily apparent that the pyramid scheme constructed by Europe cannot and will not hold past some indeterminate point in time. Ponzi bonds and Ponzi schemes always work for a while but then the cat comes charging out of the bag, claws out, fangs bared and one bloody mess will be the final outcome.
“For that reason, when a prince conquers and holds his state, the means will always be considered honest. He will be praised by everybody; because the masses always accept what a thing seems to be and what they can get from it. And in this world there is only the mass, for the few find a place there only when the ground is taken from under the feet of the many.”
-Machiavelli
The Ways Out
There are only so many ways out of the mess we are facing. The EU/ECB could cut back on the loans but this would lead to carnage and the collapse of any number of European banking institutions so I discount this option. They can hope and pray for growth but Europe is in a recession that is barely supported by Germany’s Target-2 and pockmarked by the imposition of austerity measures so that this road is a dead end. That then leaves Inflation as the only realistic choice left and when you eliminate the improbable you are left with the correct answer; I think this will be the path trod by those on the Continent out of necessity. Now with TIPS at negative yields out to about 2026 you must seek other avenues. I point specifically to whatever Corporate bonds tied to Inflation that you can find and while it is early in the game and the deals are small and perhaps not as liquid as you might like; they are still the best option now in my opinion. Accumulate what you can because when the tyranny of Inflation begins you will be glad that you placed some money in this sector as your bullet maturities will be sitting in the tub soaking in a blood bath.
“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”
-Sherlock Holmes
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Counter-party risk, you say?
The answer is gold, muppetz.
I'll take three of the 4 oz gold muppetz please.
$21,600 please, sir
at least tyler read this before posting it, today!
the thing about the 21st is that it got "adjusted" due to the CDS and the non-greek cases; apparently mark doesn't pay any attention to Y/C's comments to "666" L0L!!! maybe mark doesn't even "read" zH
if he does, he may have ADDZ or sumpin...
Since the USSA is nearly certain to confiscate everyone's gold AGAIN, wouldn't silver be a better idea? Seriously, I have read about the gold confiscation in 1933 and it seems a sure thing to repeat in the not too distant future. You could store your physical gold offshore, but.....ummmmm, do you really think you can get it back in a time of emergency. I dont. Plus the non-complianace penalties were quite severe. I would love to hear other people's honest opinions on this.
They won't confiscate it. People won't comply. They will simply tax the shit out of gold sales and create a giant black market. I hear guys like you talking but you underestimate a pissed off population on the verge of anarchy. I have 20k of each and plans to get my gold across the Canadian border at the first whiff of trouble.
Good luck to you my friend and I see your point. However, I think you give too much credit to the pissed off population. The population was, if anything, MORE independent in 1933 and they handed over their gold with relatively few complaints and the mass majority readily complied. I too once thought the masses were on the verge of revolt, but my historical research indicates the the masses will tolerate severe oppression for HUNDREDS of years before they revolt AS LONG AS THEY ARE FED. The real trouble starts when the food runs out.
"The real trouble starts when the food runs out."
I heard the other day:
"We are only ever 9 missed meals away from chaos".
Wow - never hear that before, but it makes a whole lotta sense....
They've already taken steps; the government can subsidize fuel for agriculture and transport of food, nat gas for ammonia nitrate production, etc. If there is a fuel shortage, food production and distribution will not be affected. They can even take control of factories that produce tractors and farm implements, if needed.
Unless the US can somehow manage to tax gold WORLDWIDE, or somehow lock down the borders (lol), then taxing physical gold ownership simply ain't gonna happen.
This is why Europe DOESN'T TAX GOLD.
Besides which, Americans don't hold enough to make it worthwhile.
Central banks will continue to print their way out of any trouble. It has been working the past decade, and that's why it will continue. Equity Markets will continue to inflate with even more printing... Collapse is inevitable... but not any time soon.
Confiscation Anatomy.
http://fofoa.blogspot.com/2010/08/confiscation-anatomy-part-2.html
When they took it last time we were on the gold standard. We arnt any more so that lowers the chances...it does not eliminate them however. Trust no one in Washington except Ron Paul and possibly Rand but even then keep a close eye on them.
I think the reasoning will be to obscure the true devaluation in the currency and to force citizens to keep using the worthless paper. The whole ponzi is basically based on the sheeple perceiving value in the currency. Plus it will boost the USSA's gold reserves in spite of the fact that the bernank keeps claiming that gold is not "money".
How can they take your gold when you were philanthropic and gave it away to the downtrodden proletarians hoping to improve their lives?
"You cannot continue to play charades with the truth and present false data as accurate numbers without the Truth eventually springing out of Pandora’s Box and pulling on your ear lobes"
You cannot continue to play charades with the truth and present false data as accurate numbers without the Truth eventually springing out of Pandora’s Box and exploding your nut-sacks with a kick from an NFL punter wearing steel-toed boots.
Fixed it...
Much better! +1
The Ways Out : easy. Make derivatives illegal.
How is that the way out?
It would preclude any new Derivs, but how do you propose to unwind existing Ds($700T) in an orderly manner?
the same way you stop playing Monopoly - you box them and everybody get's back to real work ;-)
the same way Nixon stopped the conversion to gold of the USD?
Tell Gorman, Dimon, Blankfein, etc. to shove that piece of paper up their ass... Then they can spout about doing God's Work.
I can hear the ad now, "Jamie Dimon, the Jesus of our times".
hurray, I'm not alone +1
you forgot to mention: again. CDSs and other bets were illegal
When are those exposures due? What type?
When 99,99% of the population hear the word 'derivative' they switch their minds to 'Durchzug' mode = they stop listening an thinking and asking.
Better they keep their mouth shut than to have everyone find out they are idiots.
Hey Doubleguns, you seen these?
http://www.gizmag.com/arsenal-firearms-double-barrel-pistol/21806/
:)
My father sent that to me a couple days ago. Interesting but I am concerned what happens if you get a delayed round in one chamber (since they are supposed to fire at the exact same time) and the second round goes off when the breach is open. That would be a catastrophic event right in your face and your hand. I think I will pass!!!
Thanks Fred for passing it along.
Virtually the whole world pulled into a rigged casino in order to perpetuate the game of fiat-debt financing to avoid deflationary collapse. Now it is up to the house to determine who will pay, how much, and when.
Seems to me Greece is a "grand experiment" and precursor to what is coming for most western nations on the current course.
Strangely enough... The word "casino" means "big ol mess" in Italian...
I think the "who" is already determined. It will be us (the US and European taxpayers). How much and when is still up in the air, but my guess would be everything and forever. But that's just me, I'm a glass half full kind of guy.
I am short pasta and vino.
these days, when even one person is for something, i see it as a contraian investment opportunity.
long the red stuff.
Lost cause.............
Is this going to finally explode the banking system? ... Let's get on with it!
The banking system already exploded and ceases to function. We are waiting for the political and monetary systems, which continue to run up the electric bill putting voltage through the banking system's corpse, to explode.
>>>
There are only so many ways out of the mess we are facing.
<<<
One way out not mentioned above is a simple breakup of the EZ.
So your options will be:
Germany,Netherlands: quality bonds and equity;
Italy, France: quality equity;
Greece, Spain: chaos and a possible military government.
Watson
I concur, what type of derivatives are these? Could it be like the Greeks who hid the debt off balance sheet?
Who fucking cares? So what?
Only The Strong Survive
Spooner/Steen/Prince/Welnick/Cotten/Anderson/Waybill/Styles
When you're always chasing rainbows
and you might not know which way the wind blows
You say your lucky day is comin'
Until that day you're just slummin'
So you wait and you wait but the signal don't change
Watching TV daily there is no sign
You read your horoscope
But ahh, it would appear there is no hope
So what?
Who cares?
Gotta put a handle
on your fear
A man comes
And a man goes
And he always leaves alone
Only the strong survive
You better wake up from that fantasy
It's time to open your eyes
Don't be afraid to see what you might see
The years roll by and the boy feels cheated
He fights back hard, his youth's retreated
He lets his hair grow, gets a sports car
But he knows that won't go so far
It's too bad
It's real sad
You lost the best thing
You ever had
You had some hope
And you had the youth
But now you'll never
know the truth
Only the strong survive
You better wake up from that fantasy
I think it's time to open your eyes
Don't be afraid to see what you might see
Only the strong survive
Don't ever let it get you down
Oh, I can't sympathize
If you expect to stick around
So what?
Who cares?
Better put a handle
On your fear
A man comes
And a man goes
And he always leaves alone
Only the strong survive
You better wake up from that fantasy
I think it's time you opened your eyes
Don't be afraid to see what you might see
Only the strong survive
Don't ever let it get you down
I think it's time to open your eyes
If you expect to stick around
Only the strong survive
You better wake up from that fantasy
I think it's time that you opened your eyes
Don't be afraid to see what you might see
Looks like I picked the wrong week to quit working.
I should have followed this gentleman in the past.
Crudely putting it, this is a BAC style market, 100% in 11 weeks where the "impossible has been eliminated".
It is my conviction that we are heading for a 1987 crash, 2000-3000 dow pts in one or 2 days. The question is when, not if, again and this is so good "...once the impossible has been eliminated......"
Thats fucking True! I have noticed that the MSM is now attacking all the Hedging instruments that we were discussing ...
Patience is the Key!!!
The cracks are already showing & this bullshit wont last for long
Resurger
I was 15 yrs young in 1987 and living in communism in eastern europe. I've read a lot about 1987 and I agree with Charles Bidermann that it feels like 1987 (according to him). Blogger Oldman expressed the same thing here on ZH.
No offense to you age wise, but have lived through 1987 crash? Anything to tell us?
If not, I apologize in advance.
Jim Cramer saying this morning that U.S. Banks should take over Europe, and that U.S. Banks aren't in bed with the government the way the European banks are.
Jimmy! Jimmy Boy! It isn't April Fool's Day yet.
Race to the bottom of the shit pile.
I agree that inflation is the Politically safe way to try to get out of this mess....the bankers make money..the politicians get their donations and can blame other people for the rising prices....but buying into inflation protected corporate bonds...way way bad advice.....the Corporation might now be there...and we know now that Corporate bond law has been thrown out by the politicians....GM bondholders were first..then the Greek Bondholders saw the game change...funny no mention of gold or silver ...very funny...
In the case of Italy, why would one add the derivative notional amount exposure to the debt?
If anything one would add the negative mark-to-market. This race to make things as scary as possible is ridiculous. Italy has enough problems without any need of unfounded dramatization.
Europeans want to have a Japanese dream. For Japanese, it was lost decades. For Europeans, it would be decades extended. LTRO is their sleeping pill. However, Europeans insist on keep their kimono on no matter when. Because once they opened the kimono, there is only a skeleton.
Oh, buy coroporate bonds..wow, and here I was worried for nothing.....
another great post ZH .. thank you
Never forget .. that FannieMae & FreddieMc were regularly touted as great dividend payers and implicitly backed by you, the taxpayer (ne better logic ..... every tax paying dummy is on the hook for the finsystem goose ...). And Bernie Madoff 'guaranteed' a set return ... which he could not/would not explain ....
Maybe it is all as simple ss PRChina is in midst of it's 'leadership' transition, so as vulnerable to extreme volatility, they are helping to keep Humpty Dumpty together until the new team is fully in the saddle .....
This guy Mark Grant, total BS. He knows not what he speaks of.
The wizard? What is he talking about. He is no more a wizard than Harry Potter.