Once Again, Here Is The Full Playbook

Tyler Durden's picture

Two weeks of utter confusion by most market participants out there, when the complete deja vu scenario is so very clear. To help out those banging their heads over what is happening, here, once again, is the full playbook as it was laid out here for eveyone to read and prepare, because it explained to the dot precisely what will happen, and has been happening since May 19. And yes, that 1000 bps on XO is still about 25% away... Do the math.

From "Dear Angela, Dear Francois, Dear Mario" - From Citi, With No Love At All". The relevant sections have been bolded. Please at least read those.

The big banks are getting restless. Nowhere is this more evident than in the latest just released letter from Citi's European Credit Strategy, literally a letter to Europe's trio of leading politicians, which follows hot on the heels of yet another recent Citigroup missive from Willem Buiter, which was largely ignored in the noise, yet which made it all too clear that when all else fails, it is the Chairman's sworn duty to paradrop money. Because if anyone, it is the banks that know that if things aren't fixed (they aren't), it is up to the central banks to do something to prevent the vigilantes from forcing the politicians hands, as they did in the summer and fall of 2011 (which will not provide a long-term fix, but at least allow bankers to hope that the next collapse won't take place before bonus season). As Citi says, "Until the gravity of the situation is made clear, until the self-reinforcing mechanisms that already seem to be in motion are understood, we don't see how the solutions, the answers, and the certainty that market craves can be brought to the table." Which simply means that things are about to get much, much worse as it will be up to the markets to bring the world to the edge of collapse once again, just so Europe, with the help of the Fed of course, once again is forced to get over the political bickering and prop up risk assets, in yet another iteration of "this time it's different", even though it isn't. Sure enough: "Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. We can't escape the sense that it is probably politically easier to let the markets run loose for the time being to make it apparent that further intervention is needed. But 1000bp on Crossover is much closer than you imagine." In other words, Citi just gave the green light for the bottom to fall from the market just so Europe's increasingly impotent political elite does something, anything. Look for many more banks to sign off on the same letter.

From Citi:

Dear Angela, Dear Francois, Dear Mario

It seems that we are at a watershed once again. Judging by the movement we have seen in the credit market and in other risk assets over the last week, a chain of events that could lead to implosion has been unleashed, unless checked by policy action.

2012 started so well. The LTROs allayed market fears about a liquidity crisis in the European banking system and created additional demand for periphery sovereign debt during the first quarter.

However, we reckon it is now time to face the fact that the market does not believe Schäuble's firewall works. Most urgently, the market fears a Greek exit, or the reintroduction of capital controls to stem deposit outflows, might spark deposit flight from banks across a number of other countries. Playing down the importance of a Greek exit now is hardly reassuring, when Mario Draghi said the consequences for the Eurozone would be 'incalculable' only last December.

While the lack of an elected government in Greece complicates matters, the market sees a growing risk any new government will not be able to make the concessions demanded by the Troika quickly enough – or at all. Then what? If a hard line is to be taken on Greece, then we reckon the firewall must be reinforced at least with a pan-European deposit guarantee scheme of some form. The market knows that it is not easy to sell politically in Germany.

It doesn't help that the Spanish spread to Bunds has drifted to record levels again, while there is no clarity on where the funding necessary to  recapitalise the Spanish banking system will come from. It may be that LTRO-driven bank demand can sustain the auctions for now, but it seems likely to us that foreign investors will continue to pull out.

Add in the prospect of Moody's downgrading more banks across Europe and North America, the persistent negative bias in the economic data  relative to consensus, the upcoming Irish referendum, all the funding Italy still needs to do this year and the prospect of Portuguese PSI discussions in only a few months – and it is small wonder that market confidence is breaking down.

Through the LTROs and extremely low interest rates policymakers have ensured that financial markets are flush with cash. We don't recall a time where the liquidity situation and the technical position of the credit market has been much stronger than now. But that isn't enough. Quite simply, the uncertainty is killing any incentive to take risk. What goes in financial markets generally goes in the wider economy too. Companies are flush with cash, but we struggle to see them investing – especially in the countries where investment is sorely needed – while there is no visibility on the Euro project. Meanwhile, things grind to a halt.

We understand the political constraints key policymakers operate under. We know that many backbenchers and ECB board members are not fully onside. We can see in the election results and the opinion polls that a large part of the electorates are not onside either. There seems to be a dangerous perception in many places that enough has been done already.

However, don't be fooled by the apparent resilience of many corporate bonds (and equities). Aside from the sheer amount of cash funds have been left with, it is only the perception that the policy intervention will come eventually, triggering a very large short squeeze that is preventing more selling. Every day seems to bring headlines that challenge that perception. We could be close to the breaking point. Already in the last week there are clear signs in credit that the selloff is becoming more systemic. If you have come across our 'five phases of grief' framework – it appears we are moving straight from 'depression' back to 'anger'.

Until the gravity of the situation is made clear, until the self-reinforcing mechanisms that already seem to be in motion are understood, we don't see how the solutions, the answers, and the certainty that market craves can be brought to the table. Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. This would not be the first time that markets have had to bark to get a credible policy response. We can't escape the sense that it is probably politically easier to let the markets run loose for the time being to make it apparent that further intervention is needed. But 1000bp on Crossover is much closer than you imagine.

Moreover, every bark comes with a loss of credibility – a loss of faith in the institutional capacity of the European Union to address the fundamental imbalances. Reining in the market eventually may end up taking a bigger effort than policymakers are bargaining for.

The market needs to know what policymakers are committed to and it needs to see actions that validate those commitments. Inaction is just a carte blanche for investors to sit on the sidelines and wait for things to deteriorate further.

Yours sincerely,

Citi Credit Strategy

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FreeNewEnergy's picture

Ah, yeah, and your comments are always insightful? meaningful?


monopoly's picture

So, what we are saying here is unless we print, unless the inmates pour more fuel on the fire it will go out. But what they are not getting,(at least till after bonus time) is that this fire will turn into a holocaust so dire that it will take years to put it out. Why not take the pain now, as we should have in 08, 09, and pay the piper in full and maybe then "real green shoots". All these politicians, central bankers and Wall Street scum are doing is delaying the day of reckoning. THE GAME IS NOT CANCELLED!. PLAY ON.

The Alarmist's picture

And here I thought XO was short-hand for love and kisses ....

monopoly's picture

Excellent post Zero Hedge. Excellent!

gwar5's picture

The chain letter sounded like a actionable threat -- "Attack dogs?"  I guess this is what happens when politicians ignore menacing phone calls at 3 a.m.  I don't know about the politicians, but PETA will not be amused.


Zombie Investor's picture

How pathetic is this:

[Leaks of a teleconference call on Wednesday reveal that France's François Hollande, Italy's Mario Monti and US president Barack Obama launched a three-pronged attack, pressing Ms Merkel to drop Germany's veto on the use of EU rescue funds for banks.

The trio repeated their demands three times with mounting tension. Each time she answered no, first in English, and then in German for precision, according to details obtained by Italy's La Repubblica.]

Obama begging Merkel to bailout the PIIGS to save his presidency.  I remember when Bush was telling the EU to accept Turkey as member and Chirac, rightly so, told him to stay out of the EU's business.  Someone needs to tell Obama to fuck off, the U.S is not a member of the EU.


Eireann go Brach's picture

Obama believes that everyone should suffer so he can stay president!

Davalicious's picture

Obama believes that we should suffer for him

To have him in office is to suffer

Therefore we must have him in office


I think that is the logic O'bumbler is following.

sumo's picture

Merkel to Obama: "What part of 'Nein' don't you understand, braun Clown?"

potlatch's picture

is there need for that?  or, did that actually give you an actual chuckle?  really?  sad, ya know.

sumo's picture

Obama to Merkel: "Bitch, you better get with the Hopey Changey program. Don't come crying to me when TARGET2 rips you a new one, you dig?

potlatch's picture

if you think Obama is "trying to save his presidency"  (and trust me, if you wish to substitute "Bush" in there, please do, I am helping you here) there is little hope for ability to understand the minor role electoral processes play in any real decision making at the national level.  Obama is executing a plan that has been in play since 2000.  It's Bush's plan.  Tell me how it isn't.


The NSC does not feel this is a good time for people to be "trying to save their presidency" trust me.  And I highly doubt Obama is such a stooge, that he is not completely on board whatever is in our pipeline.


This is not about Obama okthnxkbai

FreeNewEnergy's picture

Nice trolling today, eh, Zombie? How easily even the elite SH readers and commenters are fooled whenever the magic Oblahblah is mentioned.

Not buying your story without a link, dude. Tell that to der feurher, das Romney, muthafucka.

Look, just pull the levers on election day, you know, via remote. You've already won a brand new police state, WTF else do you want?

eddiebe's picture

Wolf! Wolf!! Wolf!!! no really I mean it this time Wolf! WOOOOOOLFF!!!

LeonardoFibonacci's picture

Too late, he got you! ?%*&%!=/"1|#, guess what you dead!

tenpanhandle's picture

Aaaarrrgh!!  Aaarrgh!  aargh, snap, crackle, pop.................woof.....end of transmission.

Rynak's picture

Summary: Bent over, or we'll crash you, also known as "do what we say, or the world will end!".

nmewn's picture

IB's have been doing this for years...OMG!!!...it's Armageddon!!!...I'm Jonesing!!! Give us our free heroin & syringes or we'll do something really really bad to you, we can't control ourselves!!!

Yeah, blackmail...lol...really?...fucking addicts can't even stand upright and yet hurl threats as they stumble around.

Piss on em, cold turkey style IMO.

But towards the end we know what happens, the politicos (the dealer an addict as well) will print one last time...it lasts for only that day and then the bitchez finally dies the next...overdose.

Good riddance to both.

Rynak's picture

Good rant. But let me add some modesty to it:

Of course, simply waiting for the ponzi to kill itself, will ultimatelly work out.... but at what possible cost?

Example #1: Even assuming a "clean" contained financial collapse (with "contained" i do not mean nicely controlled, so that it doesn't affect the real economy.... rather, i mean cotnained to "just" the economy and finacials, as opposed to going over into more permanently destructive means): Anyways. just waiting for the event to happen, does not allow any preparention... it puts one into the defensive possition of dealing with what "they" caused, with the remaining means decided by "them". This is why i am in favour of going into the offensive, and engaging in radical short term measures of preparation... unfortunatelly, with the current power structure in place, the chances of the "decisionmakers" doing this sufficiently, are low. Still, it is what IMO ideally should be done: Do not wait for the showdown - aggressively prepare, and then take the initiative.

Example #2: The thing about fiat is, that the numbers actually aren't worth shit, and can anytime in theory be made whatever you want, if only the measures are drastic enough. For example, if the EUR or even the DOLLAR becomes unsustainable, you can just switch to another new version of fiat. After all, at this point, balance sheets dont mean shit. All it is by now, is "we claim this is worth X, backed by our supposed..... power over belief". In that case, you can claim anything... add zeroes, remove zeroes, who gives a fuck, it is all just "i claim it to be so and enforce it with violence". This runs contrary to the "hyperinflation will reset everything"-assumption of a lot of people around here.... virtual reality to ZH: When all connection to reality has been broken, we can claim whatever shit we want. Yes, this in the long run will result in an economic breakdown far beyond of what NOW is considered the "doomsday scenario"... but do we want to go there?

And this brings me to scenario #3: Thermonuclear war anyone? We're not merely talking anymore about people possibly killing each other with sticks or guns or conventional bombs (and by the way, with current nuclear power design, you dont even need ICBMs for a thermonuclear war - you can just bomb reactors with conventional missiles and achieve the same, which is why IMO all the talk about WMDs is LOL... at this point, the only thing that matters is missile and vehicle range, not the payload-type). Do we want to just sit idly by, and potentially allow this scenario to happen, instead of developing plans to sidestep it?

Money 4 Nothing's picture

From what I gathered, he.. Soeros said 1 year ago that there will be an "controlled yet organised dismantelment of the market" or something to that effect about 1 year ago. A gradual decline of global markets if you will.

Rynak's picture

So according to what soros (supposedly) wants, that would be scenario #2: Overpower reality temporarily with plain force. There is no truth, there only is the simulacrum.

Well, at least that sounds more "recoverable" than option #3... unless it then leads to just this.

nmewn's picture

"...virtual reality to ZH: When all connection to reality has been broken, we can claim whatever shit we want. Yes, this in the long run will result in an economic breakdown far beyond of what NOW is considered the "doomsday scenario"... but do we want to go there?"

Yes, I do.

I want truth first and foremost, always. I'm not (knowing what we know) going to start a new business, hire new employees, invest in anything based on a lie.

It's as simple as that.

I withdraw (as is my right) to participate in a sham that ultimately harms the unknowing.

Rynak's picture

Umm, so, you'll willfully sit back while the suicide bomber (aka TBTF) loads up, even if he may take you out together with him?

Well, yeah, you'll get your "truth".... as for me, i'd rather survive to see this truth, or at least the next generation.

nmewn's picture

The suicide bomber (TBTF) has accomplices. We both know that and who they are. Without that support network in place the bomber can't do what he does. It takes time to weed them all out...the Summers, the Rubins, the Rumpoys etal.

We'll be just fine...have no fear.

FreeNewEnergy's picture

I'll take door #2, Monty.

Really, would somebody please bitch-slap Rynak just for mentioning #3... and then acting like a complete pussy. As if he can't survive thermo-nuclear holocaust. What a wuss.

I piss all over ICBMs and their multiple warheads. Bring it, bitchez!

monopoly's picture

And Obama blames Europe for the weak jobs report. And the administration blames Congress for their lack of progress for the slowing economy. And Obama blames Bush for what he inherited. 

Notice how it is NEVER Obama's fault. Always something or someone else. Reminds me of a 7 year old kid who is never wrong. And this is the leader of the "free world". Not endorsing Mitt here, just advising what a pathetic excuse for a President.

Money 4 Nothing's picture

Blame Bush for Obama... Gotta shift blame to someone...

DanDaley's picture

"Notice how it is NEVER Obama's fault. Always something or someone else."

It's called external locus of control..."my problems (or issues, if you're a p-c/progressive/liberal/fascist) were caused by someone/anyone other than me!"  You see this commonly in high-school students and adult failures at life.

FreeNewEnergy's picture

Excuse me, Mr. monopoly, sir, but aren't you supposed to be attending to Mr. Romney's testicles?

KingdomKum's picture

We few, we happy few, we band of silver holders  .  .  .  

grid-b-gone's picture

The downside risk of letting markets "run loose for the time being" is that, after several years of propping up, you now risk the unintended consequence of revealing where an honest market would settle.

Given that the next stimulus or round of intervention would be implemented before the honest market bottom is revealed, investors will know the true market lies somewhere below the current short-term correction that has been forming for weeks.

This action (or temporary non-intervention) makes the next propping action more expensive because investors will sell into the move as the still-unknown honest bottom will be revealed as somewhere below the short-term bottom being formed now.

This, plus weakening global GDP, ensures the next correction will be built on higher debt/GDP ratios and a lower level of worldwide commerce, making an even lower market pull-back more likely. 

Lower highs followed by lower lows establishes the trend.  

nmewn's picture

So, the Timid Timmy's and the Beneficent Ben's of the world are finally allowing prices to reach their natural level...read deflation...in spite of their solemn vow to fight it tooth & nail...which they can't long term.

Was there ever any doubt of what the outcome of printing money (and giving it to I-Banks) would be?

No...it was dead money at issue...our best & brightest said print/counterfeit to offset balance sheets, stellar move...lol.

But a strange thing happened on the way to the morgue, the body (the debt) didn't disappear, it still hasn't, it wasn't written off and no autopsy has been done. Drive around and look at the for sale/lease signs on unoccupied houses and store fronts.

Turn it back on you fucktards (clink clink clink) theres no other sound like it and I have my eye on a few things for later in life ;-)

potlatch's picture

what position would you say a modest property owner without household or business debt is in these days?


The maths look peaceful

LeonardoFibonacci's picture

No problem, Rockefeller & Rothschild will save the world, They belong to the powers that be!  The question is will they be safe when the masses come for "a pound of flesh" at their castle doorsteps.

Tuffmug's picture

And the EU finance ministers are busy planning which five star restaurants to frequent at the June summit

Non Passaran's picture

Mens sana in corpore sano.
Quality nutrition is essential to making sound policy decisions!

Money 4 Nothing's picture

Polishing the Brass on the Titanic come to mind. But.. what do I know?

q99x2's picture

If it ain't broke don't fix it. Why waste a maintenance fee. Accidents do happen. Citi is broken. To fix them would be to repudiate their debts and dissolve them. Economies would run a lot better without Citi, GS, JPM, Wells Fargo and BofA. Get rid of that trash and get rid of the crimminals that run them. Fraud only goes so far.

Rockefeller & Rothschild to be liquidated due to debt holdings.

GernB's picture

I think some underlying assumptions in the letter are just wrong. Markets did not recover in 2011 because the market had more confidence in leaders, it recovered because more money was dumped into the market and more money chasing securities drove the prices up. Once the upward trend had been established then the propaganda machine could sell the " market recovrey myth."

Corporations are hanging onto cash because they are terrified to invest in a rigged game that rallies on every central bank rumor and tanks on every bit of bad news. Corporations know the game is rigged and they are holding onto cash bracing for the next centrally botched disaster. Only the investment world is clamoring for more QE and not to bring stabiity, but so they can ride the inevitabe rally. Anyone with a brain knows the next intervention is not going to bring a sustainabe recoveery any more than the last three did.

Budd aka Sidewinder's picture

You can't play kick the can anymore when the can is a 55 gallon drum loaded with gunpowder.

Boilermaker's picture

I see the air brakes were applied on the futures plunge dead ass nuts at Dow 12,000.

Now they'll defend that retarded and insignificant 'psychological' barrier? Yea, that's a great fucking plan. The few retail idiots still in this POS really care about that.

cosmictrainwreck's picture

yeah, I saw that...was wondering where they'd put in the STOP. At the first BRAKES ON Dow actually jumped to "only" -76. And I guess it's the magic 1260 on SP. Can't wait to see next 10-12 hours......

Boilermaker's picture

They will astonish and amaze. That's the only guarantee in this shit fest.