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UBS' Advice On What To Buy In Case Of Eurozone Breakup: "Precious Metals, Tinned Goods And Small Calibre Weapons"

Tyler Durden's picture




 

Three months ago, Zero Hedge presented the first of many narratives that started the thread of explaining the "unmitigated disaster" that would ensue should the Euro break up, which in the words of authors Stephane Deo and Larry Hatheway, would leads to such mutually assured destruction outcomes as complete bank failure and/or civil war or far worse. Because if there is one thing the banks have learned in the aftermath of Hank Paulson, is that scaremongering when bonuses are at stake is the only to get taxpayer money to fund exorbitant lifestyles. Unfortunately since the first UBS report, despite the best intentions of the status quo, the Eurozone's plight has only gotten far, far worse, reaching a Lehman-like crescendo when the house of cards threatened to collapse if not for a last minute Fed rescue. However, as Deutsche Bank and every other bank knows well, that measure was merely a short-term fix.

Today, Larry Hataway has released yet another sequel to the original piece, focusing on this so very critical week for Europe, which as Olli Rehn said, must find a solution by Friday or see the EU "disintegrate", in which the vivid imagery, loud warnings and level of destruction are even greater than before. In other words, Europe has 4 more days, something which S&P tried it best to remind Europe of, as the alternative is "or else." And here comes UBS to remind everyone that anything but a "fix" to a system that was broken from the very beginning, would be a catastrophe, captured probably the best in Hatheway's recommendations of assets to be bought as a hedge to a Euro collapse: "I suppose there might be some assets worthy of consideration—precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small calibre weapons." But even that is nothing compared to the kicker: "Break-up runs the risk of becoming one wretched scenario. Sadly, however, it can’t be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened." And there you have it: a reversion by Europe to the perfectly stable system from a decade ago, is now somehow supposed to result in World War. And with that the global banking cartel has official jumped the shark, just like the FT's latest rumor earlier today did the same by indicating that the well of European "bailout" ideas has officially run dry.

Here is how Hatheway frames the end of the world:

The unfolding Eurozone crisis is not something to be taken lightly. The consequences of policy action are material, not just for the 330-odd million residents of the Euro area, but assuredly for the world economy and financial system as well.

 

This week, Europe’s heads of state gather again to see if they can finally get on top of the problem. The challenges confronting the Eurozone are complex and defy easy solution. Sadly, that hasn’t prevented some observers from proposing some silly ideas. Indeed, it is distressing to see how many misconceived ‘remedies’ are put forward by seemingly reasonable people. In what follows we review some of the odder ones and explain why they don’t make sense.

Why a euro break up is the end of the world: Take 1 - base case

The Eurozone was flawed from the start. The wrong countries joined and the Euro area lacks the appropriate policy framework to deal with its imbalances, lack of growth, and internal inflexibility.

 

Correct.

 

So, the remedy must be to break it up, right?

 

Wrong.

 

The preferred outcome is to fix what is broken.

 

But before we go further, let’s make one point absolutely clear. Even if fixing the Eurozone is better (on any measure) than breaking it up, that does not imply that break-up can’t happen. Countries, like individuals, often make decisions they subsequently regret. When passion (populism or nationalism) dominates reason, stuff happens.

 

Back in September, my colleagues Paul Donovan and Stephane Deo and I outlined the costs of breaking up the Eurozone. The interested reader can refer to the relevant research for details (available on request). Suffice it to say that the combination of cascading cross-border defaults, collapsing banking systems, soaring risk premiums, and currency dislocations would result, according to our estimates, in losses approaching 20% of GDP for creditor countries and 40% of GDP for departing debtors.

 

On reflection this author, at least, feels the estimates are probably conservative—the true costs could well be higher. That’s because once Europe (and the world economy) finds itself in depression, policy probably couldn’t arrest the decline. Broken financial systems and ruined economies are the stuff of prolonged deflation or worse. And it is by now abundantly clear that even unconventional macro-policy cannot deliver results if the financial system is in tatters.

 

Our report received a lot of attention from clients and in the press. And to our knowledge, its findings have never really been disputed. So here’s the point. If most observers agree that a Eurozone breakup significantly increases the risk of widespread economic and financial mayhem, how can't be best? Reasonable people don’t play Russian roulette. So why are some economists suggesting that Europe should?

Why a euro break up is the end of the world: Take 2 - crank it up a notch

It’s only Greece, why worry?

 

Ok, the break-up crowd grudgingly admits. You’ve got a point—Italy can’t leave. But what about Greece? Surely it is so small its departure won’t matter?

 

And its economy is so broken, wouldn’t Greece benefit from leaving the Euro? Wrong again. First, Greece is unlikely to be better off outside the Eurozone than in it. Forced conversion of bank deposits and strict capital controls would be required to prevent massive capital flight in the event a ‘new drachma’ is introduced. While Greek government debt might be redenominated into ‘new drachma’, private sector debt owed to non-Greek financial institutions would remain liable in euros, dollars, Swiss francs or whatever the currency of the original obligation. With the ‘new drachma’ depreciating in the currency markets (why else issue it?), the Greek private sector would experience large and rolling defaults. That’s because after more than a decade of current account deficits, Greek residents owe the rest of the world a lot. Specifically, since the euro was introduced, Greece has racked up external liabilities (cumulative current account deficits) of nearly $300bn, just over 100% of its GDP.

 

So the Greek financial sector would collapse, alongside much of the nonfinancial sector. Credit would evaporate and recession (more like  depression) would result. But that’s not all. Given a very open economy to trade, drachma weakness would result in rising import price inflation, eroding domestic purchasing power (hence deepening the downturn) and undermining the hopedfor competitiveness stemming from nominal depreciation.

 

So the tally is depression, widespread private sector bankruptcy, a ruined financial sector, and surging inflation, offset by modest gains in competitiveness.

 

That’s not a terribly persuasive case for exit.

 

But the biggest reason why the ‘it’s only Greece’ narrative is naive and dangerous is that it almost certainly would not be ‘only Greece’. Once one country leaves the Eurozone, residents in other at-risk member countries would plausibly conclude their country might be next to go. Logic dictates they would send their wealth abroad, resulting in a run on their domestic banks, precipitating a collapse of their financial sectors and economies.

 

The ‘it’s only Greece’ crowd conveniently fails to consider the risks to the rest of the Eurozone.

 

Stuff—in this case, contagion—happens.

Why a euro break up is the end of the world: Take 3 - bring up the cheating spouse analogy: that will get their attention

I promise, really, I’ll only cheat once

 

Recently, another bad idea has made the rounds. How about a weekend exit, where a country (say, Greece) leaves the Euro area, devalues and rejoins, all by breakfast on Sunday, primed to compete against the mighty Germans.

 

It is hard to know where to begin with the instantaneous exit and re-entry ‘remedy’. Leave aside the legal and practical challenges involved (Can a country exit and rejoin without treaty change? Is it legal to re-denominate private sector assets?). The notion is fundamentally flawed on its own.

 

To be sure, the new lower real exchange rate would boost competitiveness. But what about borrowing costs? Undoubtedly, they will soar and remain high for a long time. That’s because creditors (who just suffered a currency haircut over the exit/re-entry weekend) have memories.

 

Unsustainable sovereign credit risk premiums would be replaced by unsustainable currency risk premiums. This ‘remedy’ is, after all, no more than a return to a fixed-but-adjustable exchange rate system with all the credibility problems it embeds.

 

And currency risk premiums would appear not only in the ‘weekend divorce’ country. Others in a similar predicament would lose credibility and suffer rising bond yields—once again contagion effects.

 

In essence, the ‘weekend divorce’ only works if the jilted partner (the creditor) is gullible enough to believe that the other partner will only ‘cheat’ once.

 

I don’t know about you, but…

Why a euro break up is the end of the world: Take 4 - time for some carpet bombing imagery "inception"

What if Napoleon had a B-52 at Waterloo?

 

The last of our weird reasoning cases is the idea that banks, companies and even countries can somehow prepare for Eurozone break-up. In recent weeks various stories have appeared in the press about foreign exchange brokers, multinational companies, banks, and even countries mobilizing teams to figure out how to deal with new currencies, recalibrate cross-border accounting and invoicing systems,or estimate the costs and benefits(?) of break-up.

 

Talk about fantasy. That’s like asking Wellington to stress test his army against a scenario where Napoleon has a B-52 at Waterloo. You don’t re-position the troops—you retreat as quickly as possible across the channel, if not across the Atlantic.

 

Of course, we get it, contingency planning is prudent. But just what contingency are we planning for? In break-up new currencies will be introduced. But will they trade freely? Probably not. As we noted in our original piece on the costs of break-up, it is highly probable that capital controls would accompany exit. Spot, forward, futures, swaps, options and other currency derivative contracts might not even materialize, or perhaps only for limited current account transactions.

 

Companies preparing plans on how they might manage multi-currency cash flows in a post-Eurozone world might be advised instead to pay attention to the risk of not getting paid at all, never mind in which currency. Counterparty risk— bank-to-bank and company-to-company—would soar as defaults mount.

 

Bank risk management teams would be similarly advised not to ask how far new currencies might depreciate or how high risk premiums might rise, but whether the bank would survive a collapse of the payments system, a run on deposits, and widespread default on assets.

Why a euro break up is the end of the world: Take 5, epilogue, or how "you damn dirty apes blew it all to hell"... and by it we mean our bonuses

Simply put, linear thinking doesn’t work in a non-linear world. And break-up is likely to produce a very non-linear set of outcomes.

Which brings me, lastly, to the question I sometimes get about what is the ‘right’ asset allocation in the event of break-up.

 

I suppose there might be some assets worthy of consideration—precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small calibre weapons.

 

Break-up runs the risk of becoming one wretched scenario. Sadly, however, it can’t be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened.

 

But it is very hard to see break-up as a solution. Let’s hope Europe’s politicians and policymakers agree and take action this week to fix what is broken before itall really breaks up.

At this point we have to say that we find it supremely ironic that a man warning against the futility of linear forecasts does just that for 4 pages, and all based on the flawed premise that returning the system that actually worked, would be tantamount to the apocalypse. Yet as Hatheway says, let's hope that "Europe's politicians agree"... although agree with what is not quite clear - to fund the existence of an obvious fiscal and monetary experimental failure at the expense of trillions more in diluted or outright confiscated funds, just so the continent's (and world's) bankers, who outside of writing trite essays have no utility in the real world, get another massive outlier of a bonus? That actually sounds about right.

As for us, we will bet on the fact that as in every historical event in the past 20 centuries, the powder keg that is Europe, with its tens of religions, hundreds of mutually exclusive cultures, and millennia of hatred, almost without fail took the decision that led to massive game theory fail, and an outcome that resulted in bloodshed. Which is why the only take home message for us here is to do precisely what Hatheway warns to do as a euro breakup Plan Z: buy gold, spam and guns.

Everything else we leave to the only market makers left in town - the world's central banks.

 

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Thu, 12/08/2011 - 09:50 | 1958027 bombimbom
bombimbom's picture

I never claimed that Europe has never been plagued with hatred, conflicts etc. etc. I just said that it is past. history. and that's also thanks to the EU. of course I can say that mostly for western europe.

Being the place that has shaped the (western) world as we know it since the roman empire, Europe has countless wonderful and nasty things in its curriculum.

I think religion should remain something pertaining to the private sphere of the individuals. the general attitude being that of acceptance and tolerance of all religions.

 

Wed, 12/07/2011 - 07:48 | 1954165 bombimbom
bombimbom's picture

and just to help understanding the european mindset: europeans are largely exempt from US obsession with guns.

Wed, 12/07/2011 - 08:42 | 1954254 Ghordius
Ghordius's picture

...ehmm... my wife keeps telling me I'm a bit obsessed

as if half a dozen hunting rifles count as an obsession...

Wed, 12/07/2011 - 09:08 | 1954311 bombimbom
bombimbom's picture

ah ok... apart from hunting fans. :)

Wed, 12/07/2011 - 09:29 | 1954379 Calmyourself
Calmyourself's picture

Sanctimonious fool, guns are tools..  Being a hoplophobe is no virtue, just another litmus test..

Thu, 12/08/2011 - 10:13 | 1958116 bombimbom
bombimbom's picture

you know, I feel such a little need of possessing guns in order to defend myself from my fellow countrymen that I had to look at what "hoplophobe" meant. now i know. it's not like I fear firearms, I am simply not interested.

europeans are strange guys, man. we usually think of having guns when we want to use them not on paranoid hypotheticals. so if I decide to take an active part in a revolution or if I decide that I want to kill all my workmates in a cathartic moment I will get me one. so till that moment comes I will only stay away from armed gangs in my town. that should be an easy task because there's no armed gangs around.

p.s. I don't know why but I feel the argument could get back to the positives of living in a healthy reduced-conflict environment thanks to welfare.

Wed, 12/07/2011 - 08:17 | 1954199 Dr. Horrible
Dr. Horrible's picture

Cigarrettes and beer make good sense in a barter system

 

Wed, 12/07/2011 - 11:27 | 1954826 Chump
Chump's picture

Liquor will be far more valuable than warm cans of beer.

Wed, 12/07/2011 - 13:13 | 1955253 Lester
Lester's picture

Think again!

Perhaps a "real man" will barter away something you really need for a bottle of Austin Nichol's 101, but not many.   The whole "barter for smokes & booze" idea is fraught with pitfalls.  The folk that have stuff which they guy offering booze for needs, likely have booze of their own.  They weren't stupid.  They got what  You Need.  They sure don't need booze.   Be just about like Jack And The Beanstalk trading a cow for magic beans...

Maybe you own a still and can cook mash or rum if you live in So. Louisiana sugar-cane country, maybe then you got something.  Empty bottles probably gonna be worth more in the long run...

100 Proof Vodka and 180p EverClear are another matter.  These you can make Herbal Tinctures with.  Kurt Saxon wrote in The Survivor about using a stove top distiller when he was on the bum in San Francisco to distill cheap wine into stronger  spirits.   If you live where you have access to fruit or grain excesses, maybe a home still, wine-making and beer-making setup would be an option?  Might see if you have a wine/beer makers supply shop in your area?  Worth a visit if you're determined to keep yourself and your neighbors liquored up...

About the last thing you're gonna need in that first year or two of The Aftermath is to be boozed up or drunk; unless your life and that of your family don't mean shit to you....

Wed, 12/07/2011 - 15:59 | 1955838 Chump
Chump's picture

"About the last thing you're gonna need in that first year or two of The Aftermath is to be boozed up or drunk; unless your life and that of your family don't mean shit to you...."

True words.  I'll still trade you some liquor for some gauze, or maybe some 30-06 rounds.  You never know, and I still say liquor will be more valuable than warm beer, which was my original point.  ;)

Wed, 12/07/2011 - 08:42 | 1954257 DanDaley
DanDaley's picture

They're just trying to help Belgum's FN move some product.  

Wed, 12/07/2011 - 08:48 | 1954272 Gunga
Gunga's picture

I have had my eye on some farm land in the boondocks with a little 100 year old farmhouse on it. I want to delay the tax hit for closing my 401k until next year but this kind of article makes me wonder if  the financial house of cards will hold together even one more month. When this fucker comes unglued it's going to be ugly. Gun up and hunker down seems to be the advice to riding this thing out. 

Wed, 12/07/2011 - 08:50 | 1954279 WTF2
WTF2's picture

came across this today....
KNDU reports, "Gun dealers flooded the FBI with background check requests from shoppers, smashing the single day record with a 32% increase from last year." USA Today has more: "Deputy Assistant FBI Director Jerry Pender said the checks, required by federal law, surged to 129,166 during the day, far surpassing the previous high of 97,848 on Black Friday of 2008." And in reality, the number is likely far greater: "The actual number of firearms sold last Friday is likely higher because multiple firearms can be included in a transaction by a single buyer

SWHC  RGR  TASR

Wed, 12/07/2011 - 08:54 | 1954287 Waterfallsparkles
Waterfallsparkles's picture

I do not think the World will come to an end if Greece removes themselves from the Euro.  NOW, the Banks may think it is the end of the World but I am not afraid that my World will end.

Wed, 12/07/2011 - 11:16 | 1954788 Chump
Chump's picture

At this point we have to say that we find it supremely ironic that a man warning against the futility of linear forecasts does just that for 4 pages, and all based on the flawed premise that returning the system that actually worked, would be tantamount to the apocalypse.

 

Not, not the apocalypse, but it's not like "returning the system that actually worked" is just going to be seamless.  Call it a "transitory apocalypse," or "Hell-lite," maybe.

Wed, 12/07/2011 - 11:56 | 1954914 fredquimby
fredquimby's picture
  1. Do not attend a gunfight with a handgun, the caliber of which does not start with a ".4."

 

Doh. I just picked up my new .357 magnum from the 'smith to go try this eve, thinking that would be ample caliberage for attending a powwow? Merde alors.

 

Wed, 12/07/2011 - 11:59 | 1954934 Peter K
Peter K's picture

Military does not issue 357's. Standard issue is .45 automatic.

Or at least I hope it still is.

Talk years ago to go to a 9mm. Hope that went the way of the metric system:)

Wed, 12/07/2011 - 13:39 | 1955376 AldoHux_IV
AldoHux_IV's picture

War is already upon is, and I don't want to frame it as the 99% vs 1%, but more as those central planners and their minions who seek to control monetary and fiscal regimes around the world.

Make no mistakes about it the war has been ongoing and many more will unfortunately suffer as a result.

Sun, 03/11/2012 - 08:10 | 2244584 Gelir
Gelir's picture

Interesting blog. It would be great if you can provide more details about it. Thanks you. Sohbet Chat Thanks for admin.nice sharing.very nice..
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