"So What Can Go Wrong"

Tyler Durden's picture

Despite economic miss after miss, the momentum players in the market continue unfazed, dodectupling down on Bernanke Put Double Zero, pushing stocks to new highs simply on continued hopes that something in Europe may have changed with Merkel's so-called defeat last week, even as Merkel's key CSU coalition partners voiced an open threat earlier today to no longer support Eurozone aid if there is no conditionality - supposedly Mario Monti's biggest victory (ignoring that the German constitutional court is also faced with a barrage of demands to undo the ESM), and on hopes that tomorrow the ECB will announce something more drastic than the now widely expected 25 basis point cut. In other words a hope rally, even as bonds, and FX have now diverged dramatically with the hope gripping the global stock market. And hope is good, however if it becomes an investing "strategy" total loss is virtually guaranteed. That said, perhaps for the first time ever, bonds are wrong, and stocks are right, and all the bad news has been priced in (unlike all those other times when everyone said the same, and when everyone was certain they would sell first ahead of the herd). Which brings us to the question that Citi's Steven Englander has just asked himself: "So what can go wrong?" Here is his answer (in five parts).

  1. Finland and the Netherlands seem to be saying that they will not approve the use of EFSF or ESM funds in the secondary market. Finland also wants collateral on any loans to Spanish banks
  2. The line-up of countries seeking similar terms to Italy and Spain keeps growing
  3. IMF’s Lagarde says with respect to Greece “I am not in a negotiation or renegotiation mood at all
  4. Investors seem increasingly to be counting on ECB action beyond the policy/deposit rates to ease the soveregin debt market
  5. There is a gap between indicators of economic conditions and market appetite for risk. The average of US, China and euro zone economic surprises is at its lowest level ever, other than in the immediate aftermath of the Lehman bankruptcy (see Figure 1 below).  investors either believe additional stimulus will be coming or that positive sentiment is right and economic data are wrong. Additional stimulus means the Fed doing QE3, the ECB doing something more effective than cutting short-term rates and China taking a much more aggressive policy stance than it has so far. It is possible but there are hurdles, especially if the policy tools are not as potent as they were earlier in the rebound.

And while we have discussed four of the five topics above previously, #4 is still open, and will be fully answered early tomorrow when the US is sleeping during its national holiday. Here is what Englander thinks will happen:

ECB – What is enough?


The strong expectation in markets is that the ECB will do a refit cut and some reduction in deposit rates, but if this is all they do we think investors will walk away disappointed and sell the euro.


Our economists are expecting the ECB to cut the refi rate by 25 bps and move the deposit rate down to 10bps.The Bloomberg consensus has 46 forecasters expecting a refi move to 75bps, 5  to 50bps and 11 staying flat at 100bps. Of the forecasts time-stamped after the summit 30 expect a move to 75bps, 1 to 50bps and 6 for the ECB to stay flat. Money market rates have come down both since the Summit and over the last month but the moves have been modest, reflecting the low effective overnight EONIA rate (around 34bps) that have been in place for some months (Figure 1).  So while the BBG forecasts may point to a slightly more hawkish post-Summit distribution of outcomes, we would go with the market pricing that points to some further easing.


The tightening of euro zone GDP-weighted average CDS (SOVCDS) and run-up in euro zone bank stocks (SX&E) also point to a continuation of the post-Summit optimism (Figure 2). If anything, the EUR is lagging the tightening of CDS and the bank stock gains.


With effective rates trading well below the policy rate it is very difficult to gauge exactly what the market is expecting from the ECB. Clearly the cut to 75bps is a strong consensus view and there probably is some deposit rate cut also expected. In practice these would amount to little more than showing the flag – were the euro zone’s sovereign debt issues solvable via policy rate cuts, those would have been put in place long ago.

Finally for all those who say nothing bad can happen (in the now generic bipolar phase shift from two short weeks ago when the market could not catch a bid) all of a sudden, we leave you off with the following Englander quote referencing Coolidge, and his own post script.

Calvin Coolidge said  “If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.” and he was probably right but he didn’t give any advice on what to do about the tenth.

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The Monkey's picture

Bonds were wrong in the fall of 2010. If you were loaded up on the long end, you got your ass handed to you.

GetZeeGold's picture



.....and at least 2 junkers wished you hadn't brought that up.


disabledvet's picture

THX Norm Barrera 70. "There's more where that came from" in these really, really, really bad times we're in.

vast-dom's picture

Hey Ty it already went wrong. Very wrong. A long time ago. What we are experiencing is a once-in-a-genration centrally planned and global financial manipulation unlike anything ever before.  

disabledvet's picture

it's all about "the rapid pace of technological change." Social media is at "its" epicenter...right here, right now. I think of it more as a "Jazz combo" where outcomes simply are not on the table...but "the score" sure is. (just look at the string of comments here...now plug it all into a financial formula and PRESTO...i can make a trading play and immediately try and make you lose. Not that i am doing that of course!) facial recognition software, GPS location devices, biometric scanners, etc..etc...all tucked away discreetly in your cell phone "waiting for you to do something." human behavior being highly normative "it makes everything seem manipulated" as if "part of some plan" but in fact you and i are being "run from a code" while just being "simple old you and me." By doing this "in bulk" in theory i could predict an enormous number of outcomes....ESPECIALLY financial outcomes...with a certain degree of accuracy...and then "merely look to improve up on that." Hence "the business cycle" meets "tomorrow's news today." What the folks aren't seeing are the OFF Wall Steet trader bashes. This is where there is no intersection of law and commerce. Trust me this is where the true "big money" hangs out.

The Monkey's picture

Wait for an edge, i.e., either the bulls or bears are wiped out before setting up.

Or, you can just short without a stop, knowing you may incur severe losses before it turns around. The world has tipped into recession.

GetZeeGold's picture



We're supporting the markets with hot QE cash......what could go wrong?


Relax......we can always print more.


HardlyZero's picture

Fiat and finance allowed the largest debt super-cycle ever to occur.  There will be no more debt expansion.  We will only be allowed to service the existing debt at 5% or 6%.  If the interest rates go much higher, like to 20%, then there will be major cutbacks in business and government.

max2205's picture

Think it through then trade the opposite. Bipolar trading

The Monkey's picture

True. If it made sense, kids would do it.

That said, I saw a CNBC article where an asset manager was tying the near 50/50 stock and bond allocation to a contrarian bull call.

Maybe this guy missed reviewing asset allocation in Japan. What a fucking idiot.

cossack55's picture

Whats a Calvin Coolidge?

GetZeeGold's picture



A genius MF that stopped the 1920's depression dead in it's tracks.


q99x2's picture

Another rumor should be more than sufficient.

Skateboarder's picture

The charity negotiations for Greece are subject to Lagarde's mood...

hahahaha HAHAHAHAH

BanksterSlayer's picture

Just think if DSK has said something like that. Maybe Christine just needs about two pounds of swiss chocolate and wine, French of course.

GetZeeGold's picture



The EU is now fueled on estrogen power........expect water retention and much bitchiness.


overmedicatedundersexed's picture

downside protection seems only prudent..that's one big shoe swinging over the markets, ready to drop..the mixed messages from the MSM and .gov can make one go hmmm, what is it they are keeping off the net and MSM?

crop failure d/t heat? war w Iran, turkey, syria? china neg?EU dying?the big one is the fracturing of USA as obuma spreads his lincoln like suppresion of states rights and posts citizen against citizen, health care , immigration, HSA, TSA, now reports HSA considers those who value liberty as terrorists in waiting. rampant criminal activity from wall street to k street goes w/o arrests and trials.

I am staying short here, taking a loss, but it feels ok as I see Fear in the eyes of our leaders in gov and MSM.

the bet is they are not smart enough to keep all the plates spinning.

grid-b-gone's picture

The hope-laden 2 up leg is needed to setup the 3 of 3 down. Be careful in the S&P 1380-1420 range. If you bought the dip a few weeks ago, the next few days may be a good time to consider taking some profits.

The Monkey's picture

Agreed. Sell longs on the rip just in case of accident. Over 1400 were picking up pennies in front of the steamroller.

Squeeze every single point out of the bulls though before going short.

trebuchet's picture

Lulz, i bailed on the PMI contraction print........ 

last year if i recall that was the trigger for the july sell-off................................

......or was it something else?




Mark123's picture

This world is becoming like "Waiting for Godot"....waiting endlessly and in vain for the arrival of sanity.....


I hated that play in high school....I like this banker's world even less.

Skateboarder's picture

Or like "Rosencrantz and Guildenstern are Dead." Sure must feel nice to be a banker and always toss heads...

fonzannoon's picture

i can see Merkel cracking, or Ben unleashing massive qe and the dow running to 17,000. people on here will scream inflation and the media will scream who gives a shit look how great stocks were as an inflation hedge. the people who don't have enough in stocks will be screwed and left behind.

Ropingdown's picture

Merkel can't crack all on her own. The Constitutional Court and legislature have to go along.  Perhap these could be called the PPT also, with a slightly different first P than we expect.

trebuchet's picture

Merkel cracking and Ben unleashing massive QE just for the sake of it???   PIIGS will fly first

fonzannoon's picture

the nfp and gdp are damn close to going negative

The Monkey's picture

They are already lightly negative, as you will find put a year from now. Not a big problem if recovery was immediate, but not happening.

Life lessons are a bitch.

HardlyZero's picture

Because of LIBOR scandal all interest rates will now rise (naturally) to reflect the real inflation rate.

Then there will be no more printing because there will be no way to pay for the existing $1000T debt.

Or if there is more (new) printing...then we will have (inflation)2  or ...pretty soon (inflation)inflation....or massive hyper-inflation.

Plymster's picture

Ben seemed pretty hesitant to print at the last FOMC meeting.  People were haranguing him about the Fed not doing enough to keep the recovery going.  Stocks are higher now than they were then, and market data is coming in even worse.

I think the world's printers are done (but I could be wrong).  And the Lieborgate scandal is hitting the same time everyone fled the industry.  I think (hope) the endgame is finally upon us after 4 long years of assfuckery.

Nachdenken's picture

hey are already airborne - on debt and deficit.

CrashisOptimistic's picture

FYI Spain bonds were down a few basis points today in yield after being up Monday.  Remains 6.3ish%, down only about 0.5% in yield from the big event last week.  

Is a 6.3% borrowing cost really going to be all that more tolerable than 6.85% for a fiscal budget?

disabledvet's picture

if you need to borrow 100 billion...next week...the answer is "yes." the question of course is "we'll never know, will we?" and of course the answer as well is "yes." or is it (insert evil laugh here)"yyyyyyyyes."

HardlyZero's picture

$100B next week at 6%...yes.

$100B next year at 16%...no.

Yen Cross's picture

 What can go wrong?  You asked and I delivered!   " Meteor Shit" circa 1982...

Snakeeyes's picture

Calvin Coolege was better than Herbert Hoover and FDR.

stocktivity's picture

Then Calvin should be on the head of a dime...not FDR.

chump666's picture

A snap back rally due to the EU insanity i.e Rompuy's last week, the nut-case even said he hoped the market would like what the EU summit scribbled down. On top of the EU stock market rally, fudged government stats have coming flowing up, on cue, like start of the year rally when there was a plethora of positive PMIs. Market has broken the June 20th highs, ECB will cut and print, stocks will start to become overbought. Asia is the one too watch for selling prior to Europe and American markets, was the cue for the last correction, will be again - maybe a crash this time, if something goes off in India/China/HK or middle east. USD is now selling, Asian's will buy on dips. Should cap stocks. We could be looking at the last gasp rally for 2012, ranges looking tight and volume is still low.

And then there is the oil price that the Germans and French just love...once the ECB lose control of the EUR while trying to print and hold down the PIIGS 10yrs.

Yen Cross's picture

Chump this shit started when China posted slightly better PPi #'s. The HSBC Flash (real) #'s sucked ass,but of course the "Peoples Republic of Junk Stats" ,  beefed it up officially!

chump666's picture

You are on the money Yen, you are a good trader...

Yeah Jan 1st 2012 when China fudged the PMI, set markets alight IMO. Then Asia corrected, sent Europe/US markets down.  We are in that fudge cycle phase again, but it's the last gasp.

Yen Cross's picture

 Chump aud flows smacked me hard in May. I took a refresher course in ECON. 101

  I think aud will be .9400 to usd by years end. It should be in the 80's , but it has some safe haven B.S.( status) in a country of 23 million!

   Like the Swiss sans the Watches and Chocolate. In any case enjoy, http://en.wikipedia.org/wiki/Purchasing_power_parity

  Every time the aud strengthens the Aussies get killed on labor costs! They are net exporters, and their #2 business is tourism.

Dead in the water from the high F/X rates!

CCanuck's picture

Do you think the same about CDN $, similar pop, and resource export based economy?

I do not know much about FX, trying to learn sumthin on the boards.

Thanks in advance.


Yen Cross's picture

 Do you mean cad/usd? If so, I think cad is oversold, just like its southern neighbor. I trade cad/usd in a similar way to gbp/usd.

   I like to trade them against the euro, indirectly. When you divide the crosses, many currencies should be much lower, in relation to the (DXY).

chump666's picture

What I know about Australia is this, their government is obsessed with safe haven flows to support and underwrite their housing bubble, Canada is the same.  So their bonds/AUD are bid.  Risky short that killed me a year or so back.  So far their stats have been fudged from GDP through to employment and now retail (just released).  Then only thing they can't BS on is the national account deficit, if they do a rating agency will come sniffing around.  It will be huge.  The AUD (futures) trades almost point for point with the S&P500.  Good correlation.  But yeah an over bought currency like the AUD would be killing their economy (retail, manufacturing, tourism, debt laden miners etc etc) , but it's offset with bond selling and gov RMBS buyups etc.

Australia will get slammed when China drops it's guts.

Yen Cross's picture

 Hey Chump?----?   We Should mine the " HELL" out of Australia! Then we can tax it!

   Chump I can't find any solid correlation between " AUD and wti/brent , xau, xag, natgas, spx, euro/selloff ect..."

 That buggar runs until it's done. I say it's about done. Ask the EBS dealers?

   There is a nice shooting star on the 4-hour chart. aud/usd      Aud/10y     Looks a bit yoked to me? I think you can figure it out.


chump666's picture

Like the USTs, Aust 10yr yield looks collapsed on safe haven flows, which would indicate that the OIS bond swap market is pricing rate cuts in Aus, but the AUD is bid.  Smells like a manipulated spread via government i,e fudged stats to keep bonds bid.  Problem is they are keeping the AUD bid at the same time.  Correlation is out of whack for those two, either way both the 10yr and AUD are bubbles.  They will blow at the same time.  Till then.

AUD gauge is good for topped markets, just blew out the June 20th top (All markets). Stock rally has some more legs

Oil. 95-100 for a topped range (stocks) on companies/countries worrying about oil inflation.

Gold is perfect on USD selling and war/tensions.  i am thinking that Iran could do somthing pretty tense soon, get Israel fired up.  Turkey/Syria go to war (very possible).  That happens, stocks/EZ bonds wil be sold to hell, gold/USD/USTs will be bought.

Interesting times.

Yen Cross's picture

Well that was certainly "enlightening"   Shall I start with SWAPs?  The whack a mole "OIS" is Dr. Feel Good.

 XAU is perfectly oversold to the 38.2% Fibi.  Crude is in everlasting " CONTANGO" ,I'll target 75. ( lack of demand and refining) factored in.

   Last week Short Term "Federal Notes", had higher yields, and horrible "bid/cover" ratios.    I love Rick Santelli ! The man has BALLS!

     War tensions. Iran will continue to sell cheap light/sweet to China. Russia is opposed, but worried about sovereign issues.

   The markets are heavily overbought! June was/is last JULY!

chump666's picture

Santelli and Cashin, f*ck yes, old school traders. 

Good luck with your trades Yen, you are right market is overbought, USD bids are coming through. 

Big fan of Sake, although I drink Vodka with my sushi.


Yen Cross's picture

 With Zero/Hedge!

   I lost a pilar of my family today!   I love you Grandmother, I was blessed with your  unconditional " smart ass" comemnts.

      Say hello to Grandpa!