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The "Neutron Bomb Of Capital Calculations" And A Kyle Bass Refresher

Tyler Durden's picture





 

In a double-whammy of downbeat dystopian discussions, GMO and Kyle Bass are active on the inevitability of Europe's demise. Perhaps that is too strong but the two are focused directly, in separate pieces, on the huge need for capital and the dire dearth of it available. GMO's central focus on the direct capital needs of the European banking system in the case of a recovery (but under Basel III) and under stress scenarios. Dismissing the EBA's efforts, and recognizing that the problem is capital/solvency (if there were more, the market would not be worrying about liquidity and deposit flight), their 'neutron bomb' scenario where sovereign debt is recognized as a 'risky asset' (which seems more than plausible to us), the capital needs are almost EUR300bn with Spanish and French banks dominant but Italian and German banks are close behind. As Kyle Bass notes "There is no savior large enough with a magic potion of capital to stave off this unfortunate conclusion to the global debt super cycle.".

GMO asks - What if banks were forced to treat sovereign loans as risky assets, rather than enjoying the current risk weighting of 0%?

If the capital standard is raised to 9%, the needs are unimaginable: 289 billion euros. Spanish banks still have the largest capital demand, 69 billion euros; but French needs exceed those of Italian banks, and German capital demands at 43 billion euros barely lag those of the Italian banks.

 

...equity investors can survive but will not be smiling. As of December 7, 2011, the needs are 98% of the market capitalization on average for the Italian banks, 60% for the French banks, and 48% and 70% for Spanish and German banks, respectively.

The Neutron Bomb of Capital Calculations

One obvious question is whether one should move to so extreme a scenario as provisioning against all sovereign debts, or even all European sovereign debt. Ever-expanding capital requirements can be the neutron bomb of banking regulation; the branches might still be standing, but the banks themselves would be barely recognizable if they were to survive the cataclysm. Once the Germans understand that they too are exposed, they presumably will be amenable to more reasonable approaches to the sovereign debt problems, such as more generous volumes and maturities at collateral facilities or even a direct use of the ECB to support sovereigns so as to avoid crushing the banking system.

 

The cataclysm plays out because the banks do have an alternative to raising capital – shrink the balance sheet. Deleveraging is already going on in a number of countries, with loan-to-deposit ratios dropping in recent months in Portugal, Spain, and Italy. This reduces the capital needs of banks, but fairly quickly starts to cut into the muscle of the financial system. The banks have little alternative but to keep holding sovereign debt in the short term, since it is the collateral for their borrowing needs. In countries such as Spain, a big chunk of private sector loans cannot be reduced because they involve property that will be inactive for years, perhaps a decade. So, once banks trim their healthiest borrowers and perhaps reduce their overseas exposures, they quickly run into the need to cut loans to small and medium enterprises, providing another negative impulse to European growth.

 

Perhaps more serious is the direct risk that Spain’s real estate problems pose to Spanish banks, which could expand to indirect risks for other banks. Recent conversations in Spain have led me to the conclusion that there are over 200 billion euros of property loans on raw land and developments, which will have little income-producing potential this decade. While Spanish banks have done some provisioning, there is much more to do, and the losses will be high.The incoming Spanish government is rumored to be interested in accelerating this resolution through a good bank/bad bank solution.

 

A few of the banks could probably cover their capital needs through further asset sales, but most of the losses would probably have to be backstopped by capital infusions by the Spanish sovereign, temporarily raising its own deficit.

And as if that was not enough doom and gloom, Kyle Bass was on BNN this morning discussing not just European endgames but the US and Japan in his eloquent manner:

Prepare For a European Default

click image for video (no embed available)

 

A negative disposition on financial markets has made Kyle Bass a wealthy man.

He made millions betting on the collapse of the U.S. housing market. And as European policymakers scramble to solve their sovereign debt crisis and avert a breakup of the euro zone, the founder of Hayman Capital Management says investors should prepare for the worst when it comes to Europe.

"As the dominoes fall, it's clear that the peripheral countries that are in the news so much -- the PIIGS as we like to call them [Portugal, Ireland, Italy, Greece and Spain) -- will have to restructure their obligations," he tells BNN. "I think that's coming much sooner than others would think and that is something you must prepare for in 2012."

"You see the deposits leaving the periphery at an annualized rate of more than 20 percent. This is the final precursor for a sovereign default and it's happening while we speak."

Bass believes that the excessive leverage at European banks will continue to haunt the region.

 

"Europe's banks have three times as much leverage from equity to assets that U.S. banks have," he says. "Spain, by looking at a snapshot on a piece of paper looks like they might have a manageable scenario, but when they recap their banks they won't have a manageable scenario and they have to recap their banks and so do the rest of Europe."

Bass says Germany -- considered the economic powerhouse of Europe -- is no better: "[Germany currently has an] 82 percent on balance sovereign-to-debt GDP today…in a post-recap world Germany will be north of 100 percent and will also be in a very difficult scenario."

This leads to only a bad and worse outcome for Europe, as the cataclysm plays out because the banks do have an alternative to raising capital – shrink the balance sheet. Deleveraging is already going on in a number of countries, with loan-to-deposit ratios dropping in recent months in Portugal, Spain, and Italy. This reduces the capital needs of banks, but fairly quickly starts to cut into the muscle of the financial system. The banks have little alternative but to keep holding sovereign debt in the short term, since it is the collateral for their borrowing needs. And as we have been so vociferously explaining recently, should they be forced to delver even more, and sell reduce these sovereign assets, then the daisy-chain effect of de-hypothecation on shadow banking will not end well for anyone.

Full GMO note:

 

 


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Tue, 12/13/2011 - 13:16 | Link to Comment HedgeAccordingly
HedgeAccordingly's picture

kyle bass loves nickels .. as much as merkel loves to grimmace 

Tue, 12/13/2011 - 13:38 | Link to Comment Ahmeexnal
Ahmeexnal's picture

Tension in the Falklands about to escalate:

http://www.telegraph.co.uk/finance/newsbysector/energy/8953029/Rockhoppe...

Rockhopper Petroleum has unveiled another oil discovery near the Falkland Islands, sending its shares up almost 10pc.

 

But Argentina isn't the UK's only worry.  Eurozone threatens to boycott UK 2012 London Olympics.

Tue, 12/13/2011 - 13:46 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

Why would anyone want to boycott the Olympics? I hear they give out physical gold & silver to the winners...

Tue, 12/13/2011 - 15:06 | Link to Comment redpill
redpill's picture

It drives me nuts in these interviews that they want to force him to describe entire nations'  economies in one sentence so they can rush off to commerical break.  They should either narrow the focus of the discussion or give him time to explain what are some very complex situations. 

Tue, 12/13/2011 - 15:28 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

I believe the typical "gold" medal is a gold-plated rubber disc.  They should change the prizes to paper, rock and scissors.  Except for the runners.  Instead of scissors they should get road apples.

Tue, 12/13/2011 - 15:48 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

I believe the typical "gold" medal is a gold-plated rubber disc.

Oh... so they manufacture them from the Comex stash then?

Wed, 12/14/2011 - 01:26 | Link to Comment StychoKiller
StychoKiller's picture

Rubber is more flexible than tungsten.

Tue, 12/13/2011 - 13:45 | Link to Comment slaughterer
slaughterer's picture

Kyle: three trivial questions about the man (since I find nothing to question in his macro view or investment thesis):

1.)  What is that pin he always wears?

2.) Why do most of his answers begin with "So..."

3.) Why do you do interviews with MSM, where they inevitably just want brief views before the commercials?

Tue, 12/13/2011 - 13:48 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

"the pin" looks to me like a Texas Ranger badge to me...

Tue, 12/13/2011 - 15:06 | Link to Comment Winston Smith 2009
Winston Smith 2009's picture

"Why do most of his answers begin with "So..."

Because so many of the questions asked so clearly display the ignorant conventional "wisdom" position being taken by the questioner.

In the above interview, I love it where he says the pending default of Japan should be obvious to a kindergärtner, shortly after the interviewer had shown his skepticism of that mathematical fact.  Kyle uses simple math and easily available figures to show what any idiot unimpeded by hopium use should be able to see:  the positions in Europe, Japan and, eventually, the US are untenable and, in fact, both Europe and Japan are in a far worse, totally hopeless position while the US is not (YET).

Tue, 12/13/2011 - 13:20 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

T.I.N.A

Tue, 12/13/2011 - 13:52 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

W.W.W.T.D.?

Kenny says, "Ireland will do whatever is required to ratify the EU pact."

Wolfe Tone said, " Our independence must be had at all hazards."

 

Tue, 12/13/2011 - 15:49 | Link to Comment CPL
CPL's picture

Mutually

Assured

Destruction

 

An old phrase with a renewed interest.

Tue, 12/13/2011 - 17:52 | Link to Comment falak pema
falak pema's picture

Ireland : Either you get shafted by the Brits and their RE banks who got you into this mess or else you now eat humble pie served by Angela M; its damned if you do and damned if you don't. So if the Euro explodes what happens to Ireland?

Tue, 12/13/2011 - 13:17 | Link to Comment Ahmeexnal
Ahmeexnal's picture

This explains why many euro-peon young are already leaving the sinking ship.

Tue, 12/13/2011 - 13:21 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Oh, yeah, where to?

Tue, 12/13/2011 - 13:40 | Link to Comment Ahmeexnal
Ahmeexnal's picture

US, Canada, LatAm, India, Africa, SE Asia.

Tue, 12/13/2011 - 13:49 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

LOL.

Last year I met an American girl at an internet cafe. She had just come from contracts teaching english in South Korea and China. She left for the same work in Budapest because the conditions were 'so horrible'. Masters in Anthropology. For those of us who actually travel, there is no haven. Stories like this repeat ad infinitum,

Migration patterns stay stable unless there are major changes( natural disaster, war etc)

Tue, 12/13/2011 - 14:05 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

For those of us who actually travel, there is no haven.

I respectfully disagree.  For those who actually want to work, there is a haven in the countryside.  I have been to farms on four continents, including Europe, and found young people building prosperous and rewarding lives away from the city.

 

 

Tue, 12/13/2011 - 14:12 | Link to Comment topcallingtroll
topcallingtroll's picture

I always found the conditions pleasant, life joyful, and more girls wanting to date el americano than I had time for.

Go to south or central america and teach english. You dont need a fuckin work permit. A tourist visa is fine.

Tue, 12/13/2011 - 14:50 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

h_h,

You are absolutely correct. Let me clarify, there is no safe haven country. What needs to be addressed is that major metro areas are entering a world of hurt. Each major city and country is different. Some lack basic resources like water while others have massive property inflation problems.

Seeking asylum in some 'magic' free country is absurd.

Tue, 12/13/2011 - 14:36 | Link to Comment El Viejo
El Viejo's picture

Not only the young peons are jumping ship:

http://www.finalternatives.com/node/19008

 

Tue, 12/13/2011 - 13:18 | Link to Comment Spitzer
Spitzer's picture

Kyle Bass is down on Japan. Timing....timing timing.

Tue, 12/13/2011 - 15:51 | Link to Comment CPL
CPL's picture

Japan is cancer cancer cancerous.  We will all see that in the coming years just like Europe.

 

Name anyone planning on relocating for the business environment.

Tue, 12/13/2011 - 13:28 | Link to Comment DormRoom
DormRoom's picture

The entire debt-leverage pyramid is based on collateral, ostensibly safe 'AAA', which have been shown to be anything but.  So you have a mountain of leverage, based on mathematical models, where the invariants (riskless collateral) have suddenly changed. They were never suppose to change. So the model breaks down.  Worse, the world is running out of safe collateral, as risk re-pricing cascades though the market, in a viciuos feedback loop.

 

you cannot unsee. 

 

Central Banks cannot stop the collapse of shadow banking, without hyperinflation in the real economy.  zee Germans know this.

Tue, 12/13/2011 - 13:37 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

Sisyphus bitchez!

Tue, 12/13/2011 - 14:17 | Link to Comment topcallingtroll
topcallingtroll's picture

Yes central bankers can.
Stagflation is the middle way, the muddle through.
I would be ok with that if they would also get religion and solve the moral hazard and financial feudalism we are facing.

Tue, 12/13/2011 - 13:45 | Link to Comment MsCreant
MsCreant's picture

Interesting post, but why not hyperdeflation? Asset values going down in a negative feedback loop. No one willing to put money into it. Prices have to go down more...

Tue, 12/13/2011 - 14:06 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

"Asset values going down in a negative feedback loop..."

The way I see it, asset prices ARE deflating...

- 401K - down

- House value - down

- Your paper cash - down (which is why it takes more of it to buy PM's & gasoline & food & heat)

The price that it takes the same cash (asset), to buy another asset (home or equity), may not appear to change that much in the process if you consider cash an asset & since they're in the process of deflating together...

Bankers will tell you that gold & silver are 'barbarous relics' (NOT assets)... So that argument... YOU'RE TOLD... is irrelevant... (& oh by the way, that means that since that means there is no INFLATION, then they can continue to do the only thing they know how to do... PRINT MONEY [whether that means 'big bazookas' when times get rough, or just by PRINTING THE COUPON, when people say 'enuf'])...

Disclaimer: THEY created this POTEMKIN VILLAGE... I'm just the IDIOT who lives in it...

Tue, 12/13/2011 - 14:41 | Link to Comment DormRoom
DormRoom's picture

yes, it's a binary outcome. hyperinflation or hyperdeflation.

 

Tue, 12/13/2011 - 13:21 | Link to Comment Iliketurtles
Iliketurtles's picture

maybe I read this wrong but I consider this not just bullish but very bullish.

Tue, 12/13/2011 - 13:24 | Link to Comment LookingWithAmazement
LookingWithAmazement's picture

European banks and governments will succeed in funding. Mark my words. Fed and ECB provide unlimited money otherwise banks will be nationalized. No crisis. Merry Christmas and a happy, recession-free 2012.

Tue, 12/13/2011 - 13:31 | Link to Comment Ghordius
Ghordius's picture

the problem is more that the banks in Europe are resisting recapitalization and will probably have to be forced to, up to the point of full nationalization if "necessary".

but yes, for this the ECB will print as much "as necessary", I agree

Tue, 12/13/2011 - 13:32 | Link to Comment SheepDog-One
SheepDog-One's picture

LOL

Tue, 12/13/2011 - 13:32 | Link to Comment Iliketurtles
Iliketurtles's picture

hey sport back to reality. What will this new funding do to Oil Prices? Every politician will be voted out of office and any whiff of banker bailouts will result in anarchy. the citizens of both US and Europe are no longer willing to accept a bailout like the ones in the past.

the extend and pretend is coming to an end and sooner than you think

Tue, 12/13/2011 - 13:37 | Link to Comment Ghordius
Ghordius's picture

nationalization of banks is not perceived as bailout

and in Europe it's not perceived as "bad"

throw out a few top managers and the deal is done

I'm talking about the small and mid-sized commercial banks, not the TBTF megabanks, btw

Tue, 12/13/2011 - 15:55 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

the citizens of both US and Europe are no longer willing to accept a bailout like the ones in the past.

the extend and pretend is coming to an end and sooner than you think

---

Get back to me on the day that they tie the SNAP benefits & Social Security checks to the "bailout" wagon...

Tue, 12/13/2011 - 13:34 | Link to Comment agent default
agent default's picture

QE to hell will not save or change anything.  Unless TBTF are broken up, OTC derivatives are eliminated and some form of sound money is introduced, forget it.  Unlimited money will, eventualy, just cause a default with unlimited zeros at the end.

Tue, 12/13/2011 - 13:37 | Link to Comment SheepDog-One
SheepDog-One's picture

Imaginary money cant solve anything, of course.

Tue, 12/13/2011 - 13:38 | Link to Comment Ghordius
Ghordius's picture

imaginary numbers are the driver of life and growth

imaginary money is the driver of...

Tue, 12/13/2011 - 13:52 | Link to Comment Ahmeexnal
Ahmeexnal's picture

thousand year empires?

Wed, 12/14/2011 - 10:09 | Link to Comment LongSoupLine
LongSoupLine's picture

1) abusive fleecing of the middle class.

2) increased wealth to select few.

3) increased physical PM value.

Tue, 12/13/2011 - 16:40 | Link to Comment delacroix
delacroix's picture

the FUNDS are unicorn farts, there aren't even any skittles left

Tue, 12/13/2011 - 13:29 | Link to Comment Ratscam
Ratscam's picture

any trade recommendations other than precious metals?

Tue, 12/13/2011 - 13:41 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

hooch, popcorn, & some cubans

Tue, 12/13/2011 - 16:00 | Link to Comment CPL
CPL's picture

Ah, the grain and agriculture trade versus the usual PM commodities of Ag, Pb and Silver.

Tue, 12/13/2011 - 19:08 | Link to Comment FEDbuster
FEDbuster's picture

For the grain trade, take delivery of 35 lb. lots of oatmeal in mylar sealed bags in five gal. buckets.  Alternative metals trade, brass, lead and copper jacket.

Wed, 12/14/2011 - 10:19 | Link to Comment LongSoupLine
LongSoupLine's picture

or just buy cases of MRE's and save tons of money on the back end when the collapse occurs.

Tue, 12/13/2011 - 13:49 | Link to Comment toadold
toadold's picture

Heh, IMHO given how compromised market information is these days I wouldn't trade in anything. Go long on precious metals and learn a skilled trade that would let you work for cash and barter. 

Tue, 12/13/2011 - 14:09 | Link to Comment Ratscam
Ratscam's picture

true, true
when looking at MFing Global and the behavior of the CME we will get ROYALY fucked! I'm thinking of closing my trading accounts by Q2/12 to go direct, conservative, little debt, international and direct ownership stocks, as well as precious metals and income producing real estate with no leverage at all.

Tue, 12/13/2011 - 13:30 | Link to Comment Archimedes
Archimedes's picture

I don't know why but every time I hear the word "vociferously" I think of Don King!

Tue, 12/13/2011 - 13:31 | Link to Comment My Taint
My Taint's picture

Sometimes I feel ZeroHedge is Red Tube for Kyle Bass...I love him too....Not like that.

Tue, 12/13/2011 - 14:02 | Link to Comment urbanelf
urbanelf's picture

We all love him... not like that.  Not in a gay way.  More like in a manly Viking, muscely oiled warriors working out together kind of way.

Tue, 12/13/2011 - 14:22 | Link to Comment topcallingtroll
topcallingtroll's picture

Shaved chest and pits?
Maybe a little leather.
Manly vikings loved leather.
They also danced to Village People in between raids.

Tue, 12/13/2011 - 14:29 | Link to Comment Melin
Melin's picture

Man-love got you junked.

Tue, 12/13/2011 - 16:00 | Link to Comment CPL
CPL's picture

Like techno viking?

Tue, 12/13/2011 - 13:32 | Link to Comment loveyajimbo
loveyajimbo's picture

How can it be bullish if the ECB refuses to print like a mad bernank?  And if they do, the only bulls will be riding gold, jawol?

 

Looks like a 2008 on steroids to me, massive deleveraging in store very soon...

 

In the stinky dollar for a while longer... holding my nose and my hose.

Tue, 12/13/2011 - 13:40 | Link to Comment Ghordius
Ghordius's picture

the ECB is already printing like mad

they just don't want to print like Bernanke, that's all

Tue, 12/13/2011 - 14:24 | Link to Comment topcallingtroll
topcallingtroll's picture

Scotty!
Engage the Bernanke drives!
Give me Bernanke factor 8 now!

Tue, 12/13/2011 - 13:41 | Link to Comment HarryM
HarryM's picture

Years ago I used to compete against my older sister in a video game.

Rather than spend the hours playing the game , I was able to hack the data file where the game stored the scores, and I would just slightly increase my score to stay ahead of her.

My sister would stay up till 3:00 AM beating my latest score, but in the end I of course remained undefeated.

As I watch the market , I'm starting to believe in Karma.

Tue, 12/13/2011 - 13:43 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

you need to see a priest...

Tue, 12/13/2011 - 14:08 | Link to Comment junkyardjack
junkyardjack's picture

God accepts cash and PMs for your sins

Tue, 12/13/2011 - 14:23 | Link to Comment kridkrid
kridkrid's picture

Great story.  Have you come clean to your sister?  How did she take it?

Tue, 12/13/2011 - 14:32 | Link to Comment HarryM
HarryM's picture

I came clean years later , she was actually relieved that she really didn't lose.

She is smarter than I am , so I always had to think outside the box to compete.

Tue, 12/13/2011 - 15:59 | Link to Comment Potemkin Villag...
Potemkin Village Idiot's picture

You realize... Don't you... That this makes you perfectly qualified to be a central bank chairman...

Tue, 12/13/2011 - 17:42 | Link to Comment Thisson
Thisson's picture

I call Shenanigans!! Your story is eerily similar to the plot of the movie Gattaca, starting Jude Law and Uma Thurman.

Tue, 12/13/2011 - 13:41 | Link to Comment slaughterer
slaughterer's picture

For retail: Long DXY, TLT for the collapse (with a good dose of FAZ, TZA, etc.).  Buy GLD, SLV when it looks like the CBs have to print.  Makes sense to me.    

Tue, 12/13/2011 - 13:56 | Link to Comment Village Smithy
Village Smithy's picture

Germany is shutting down the Ponzi. They have calculated that if they do not flush anymore funding down the Euro toilet, they will have enough resources to save their own banks. Once the big money world sees that Germany has decoupled they will assist in the effort and the German banks will be the last men standing. IMHO.

Tue, 12/13/2011 - 14:57 | Link to Comment player333
player333's picture

Dead on-survival of the fittest and the Germans 20/20 vision.

Tue, 12/13/2011 - 14:01 | Link to Comment slaughterer
slaughterer's picture

Well, after the defaults, instead of printing, we will probably have war.  

The only question is: Which country(ies) against which country(ies)?

Tue, 12/13/2011 - 14:49 | Link to Comment Geoff-UK
Geoff-UK's picture

If the U.S. citizenry is lucky, we don't go to war with anyone and let the rest of the world pound each other senseless, then we're left standing just like after WW2.

 

Unlikely scenario though, as the bankster cartels don't make as much money that way.  So, the USA is going to war even if the USA citizens just want to work and eat.

 

Given that, if we ARE going to war (and we are), let our government picks Venezuela as our war opponent.  Small enough to pound into submission pretty easily, big enough population to give sufficiently high body counts to satisfy the bloodthirsty crowd, and oil and gold.  Lots of oil and gold.

 

If the USA is extraordinarly unlucky--it's the Iran scenario.  I'm afraid we're about to be extraordinarily unlucky.

 

 

 

 

 

Tue, 12/13/2011 - 15:00 | Link to Comment player333
player333's picture

The West could to war with China and destroy all of their manufacturing base and then we would need to rebuilt ours-just a thought.

Tue, 12/13/2011 - 15:35 | Link to Comment skepticCarl
skepticCarl's picture

Not a very cogent one, however.

Tue, 12/13/2011 - 14:09 | Link to Comment oddjob
oddjob's picture

The first half of the interview.

http://watch.bnn.ca/#clip584881

Tue, 12/13/2011 - 14:23 | Link to Comment Piranhanoia
Piranhanoia's picture

The interviewers string pullers in the control room weren't happy about what he was saying.  I noted at least 2 obvious breaks to stop him completing what he was saying.  When the girl broke him up one time, she must have had screaming in her earpiece.

Tue, 12/13/2011 - 14:31 | Link to Comment sabra1
sabra1's picture

so, kyle was just about to mention how canadian real estate only goes up, and they cut him off! he was like, circum-sized!

Tue, 12/13/2011 - 14:43 | Link to Comment Whoa Dammit
Whoa Dammit's picture

Well DUH. After years of allowing financial institutions to create "investments" that are not backed by real assets or meaningful collateral of course there will be a capital crunch when the "investments" go bad.

Tue, 12/13/2011 - 15:01 | Link to Comment BennyBoy
BennyBoy's picture

European recession is starting and will hit the US. Commodity prices will drop.

Tue, 12/13/2011 - 15:30 | Link to Comment Winston Smith 2009
Tue, 12/13/2011 - 15:51 | Link to Comment AldoHux_IV
AldoHux_IV's picture

When you shift the risk from private to public, it is only logical that sovereign debt loses their risk free rate.

Tue, 12/13/2011 - 15:54 | Link to Comment pineyard
pineyard's picture

HEY ... I would remind the readers of the FACT .. that the US for DECADES have utilized approx 75 % of ALL CAPITAL IN THE WORLD AVAILABLE for Lending .... AND CONTINUE TO DEMAND AN EVER INCREASING PERCENTAGE OF THAT AVAILABILITY .

Currently the US NEEDS approx 300 BILLION USD ..just to stay afloat .. PER MONTH

Now somebody is telling me that an overall Capital injection of 300 Billion USD for the European Banks ..who LOST THEIR SHIRT ..in the US SUB-PRIME MARKET .... is TOO MUCH ..

COME ON FOLKS ... how far out do You want to go

And by the way .. that  Capital will be found .. from INSIDE EUROPE ... You will see.

Tue, 12/13/2011 - 17:33 | Link to Comment MsCreant
MsCreant's picture

I don't have it in front of me, but from what I understand, Europe was actually worse in terms of the real estate debacle. They all bought a lot of each others' real estate debt. With Spain at over 20% unemployment, Greece, Ireland, well you get the idea. US dodged that bullet. Mish and other bearish sites covered this a couple years back. Iceland went under because of bad real estate debt. They said fuck you to Euro creditors. Now there is an idea!!!

Let the chips fall already.

Tue, 12/13/2011 - 16:25 | Link to Comment cathrynm
cathrynm's picture

I have to admit, I'm still not exactly sure why monetization doesn't work.   It seems like there are guys who convinced that monetization will be fine, and others that it's a disaster, and everyone is confident in their views.   I believe conventional wisdom is that monetization doesn't cause inflation as long as the deleveraging continues.  I'm looking for an explanation of why this isn't true, from those that believe that monetization won't save the day.

Tue, 12/13/2011 - 17:04 | Link to Comment delacroix
delacroix's picture

the deleveraging(losses) that will be targeted, to be made whole, with the monetization, will not be your or my losses. however the tab, will be added to our collective liabilities. the "system" could survive, at the expense of the people in it.that's why it doesn't work. it doesn't balance losses, it transfers them.   TANSTAAFL

Tue, 12/13/2011 - 18:21 | Link to Comment onebir
onebir's picture

The FED buys bonds, creating $ in commercial bank accounts at the FED (aka reserves). But the banks are probably undercapitalised - ex "mark-to-unicorn" aka "regulatory forbearance" - are dubious of the credit quality of most borrowers and the FED is paying interest on excess reserves. I think it's 1% - only banks need apply. And households are feeling poor (having lost so much on housing and equities, lost their jobs, or fearing job losses) that they don't want to borrow. Similarly, firms don't feel much need to invest, even though it's cheap for them to borrow, because their end-markets are weak.

So the stimulatory effects of monetization are coming through devaluation of the $ & stronger exports. But other countries have been devaluing too, so this effect is diluted. These measures are probably feeding back into inflation. In theory, this is supposed to reduce debt to income ratios, and make corporates and households more willing to take on debt as their capacity to service it from income increases. (The published inflation figures aren't particularly high in developed countries, but are arguably understated in various ways, due to measurement changes over the years*.) But with labour markets weak, household incomes aren't rising, and even where people have jobs they're likely feeling poorer as inflation crimps discretionary income. So no recovery in consumption.

The stimulatory effect of $ devaluations has been offset by serial devaluations &/ weak demand in many trading partners. To keep their currencies weak,  foreign (non-US) central banks have kept their interest rates lower than they otherwise would, and have bought $, selling their own currencies. These get deposited back into their own banks. With low (relative to inflation & economic activity) interest rates, foreign banks in some countries (eg China) have been pretty successful in lending these out. So that's where the demand has gone (mostly feeding into inflation in commodity prices). 

I think this is why QE etc doesn't seem to have worked terrilbly well.

The inflation will probably feed through into US inflation more strongly over the next year. Signs of this may encourage investors to demand higher bond yields, which will could cause a bond market rout. So far safe haven demand & FED buying have have kept yields down. It's not clear they can do this forever, and higher yields could then scupper nascent recovery - assuming deterioration baked into US leading indicators & in the Eurozone even allows the US to get to this far. :s

*eg changing the basket of consumer goods to reflect consumers' substitution of cheaper for more expensive goods. Poorer consumers will be more likely to do this, so I think this change biases the inflation figures away from them. Quality (hedonic) adjustments may also do this.

Wed, 12/14/2011 - 02:19 | Link to Comment slackrabbit
slackrabbit's picture

What Kyle Bass means is that when your debt is too big,  monetising it has little effect and actually creates problems.

Everyone forgets that when your country prints money all your imports are now more expensive....this naturlly effects your countries prodution, even if it may be good for exports....remember allot of exported goods may rely on imported components...like oil/ energy etc

As such you see the QE1 and QE2 effect where printing not only stops have a beneficial effect, but actually starts causing problems...pity the Fed can't understand this basic premise. 

Finally once one country starts printing, everyone else joins in and so the effect is further nullified.

In short, eventually you must pay your dues

Wed, 12/14/2011 - 04:52 | Link to Comment onebir
onebir's picture

"Everyone forgets that when your country prints money all your imports are now more expensive....this naturlly effects your countries prodution, even if it may be good for exports....remember allot of exported goods may rely on imported components...like oil/ energy etc"

And if you're a big country, simultaneously boosting GDP with infrastructure projects (ie China) it feeds through into commodity prices, domestic prices and wages. China seems to have blown what could have been decades worth of labour cost advantage in the space of a few years.

Tue, 12/13/2011 - 22:13 | Link to Comment daxtonbrown
daxtonbrown's picture

This crap is all headed our way, obviously. Mea Culpa, Mea Culpa, Mea Maxima Culpa, that's what Bernanke should be humming if he weren't of another persuasion. It's all going kerblooey, I'm just trying to firewall enough of my assets off and Go Galt. http://www.futurnamics.com/goinggalt.php

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