Worldwide Markets Collapse Following Italian Bond Margin Hike

The much dreaded LCH margin hike came and went and while initially the market participants thought it was just a joke as nothing bad is ever allowed to happen anymore in these neverneverland markets, a few hours later the realization that this is all too real has finally dawned. The result is an epic bloodbath everywhere, but nowhere more so than in Europe, where one can kiss Italian bonds goodbye, and shortly French too, as the bond vigilantes demand that the ECB print now or else. Visually this is presented as follows: a 30 point drop in the ES, an unseen collapse in Italian bonds, and an explosion in the French-Bund spread. And since nobody can demonize CDS any more, we expect Europe to make selling sovereign bonds illegal next.

ES:

BTPs price:

France-Bund spread:

Commentary from Bloomberg:

• LCH Clearnet SA increased charge levied on clients to trade Italian government bonds {FIFW NSN LUE2U16S972B <go>}
• With Berlusconi expected to resign after approval of austerity measures, market left to wonder whether new government can alter trajectory of debt crisis
• Italian 10-yr spread to Germany +74bps to record 543bps, 2-yr spread +80bps to record 694bps
• Spanish French yield to Germany spreads significantly wider; with 2- and 10-yr spreads for both countries at records
• European equity bourses, U.S. futures all down significantly, 1.6% to 3.3%
• German bond yields down modestly, 2-6bps, while Treasury yields down 0.1 to 10bps, with 10-yr testing below 2.0%
• US$, yen outperforming significantly in generalized risk aversion

And some thoughts from RBS:

• LCH’s increase in initial margin calls on Italian govt bonds will likely hit Italian banks the hardest, Adam Cole, strategist at RBC, writes in note.
• Move will make using BTPs as collateral to raise cash in repo mkts more expensive
• LCH’s move anticipated for some time though still sufficient to push spreads to record levels, outright yields to new highs
• Berlusconi’s resignation diluted by lack of clarity
• Possibilities range from technocrat govt (most mkt positive) to new elections (most negative)

Bottom line: it turns out that pushing back reality indefinitely always comes back to bite you in the ass eventually.

Comments

[bill1102inf]

 But gold is already down. At 1800 its cheap compared to $18,000/oz that most of you believe in!!

[HD]

We are only down 200. I want a nice big negative 600 day to kick this global panic off right.

[writingsonthewall]

Who wants to play "Guess the name of the next European bailout fund"

I'll begin....

Collateral Repurchase Asset Purchase

With a name like that - the markets are sure to rally.

[HD]

My guess it will be any of the following:

                                              WTF Fund

                                              GTFO Fund

                                              FED BTFD Fund

[Maybe-Not]

50 shares of GM says were green by 1pm eastern

[overqualified]

Just wondering: could not everyone swap their debts like they were assets?  For example the FED could buy boatloads of european junk and the ECB the same amount of treasuries, until interest rates drop to zero. That may keep the party going for a while.

[ItsNotYouItsMe]

I thought about this some time ago, and tried to do research on it but strangely, there's not much precedent.  There's equity for debt swaps, but not much I can find on actual country-for-country debt forgiveness/swap.  I assume this may be the long term plan, and an ultimate headline grabber, but then I followed the logic:

1. US buys $2T in EU bonds, so they 'create' $2T with a few keystrokes on their computer and that money finds its way to various government check writers
2. EU check writers takes the balance of the money after commissions and uses it pay bills, salaries, etc.
3. ECB buys $2T in US bonds, so they 'create' $2T in the same way and deposit that in US banks which effectively goes to the US Treasury after commissions/fees.
4. US Treasury pays bills, salaries, etc.
5. About $4T just entred the monetary system/money supply with offsetting $4T in obligations.
6. Swap the debt wherein each country says, "don't worry about this $2T, we're good"
7. Debt is cancelled/retired at $0 due each country keeps the money they got from debt sale with no payments or principle due

So what happened above? 

The same net effect of what's going on now ... only another country printed the money and there's a hidden cost.  Plus, it's more transparent compared to just monetizing your own debt in various ways on and off balance sheet.  So other than the "headline grabber aspect" there's no difference in how the money got there except for the money supply impact. 

NOW ... the hidden cost of the above comes from the fact there is NO WAY to pull that money OUT of circulation in the future since the debt component is gone.  The money supply just increased and effectively reduced the value of the fiat used.  Double your money supply and you double prices (basically) ...

• If there's only ten people on the planet and they each have $10 what's the most any one of them can pay for an apple?  Yes, $10.
• If those ten people are now given $20 each (increase the money supply), what's the most the apple can cost per person?  Yes, $20.
• So increase the money supply (on a small scale like this or a large scale like the globe) and prices will adjust eventually through inflation.

It's a VERY simplififed manner of conceptualizing inflation, but it rings true.  Further, the VELOCITY of money is key.  How fast it moves through the system.  High unemployment, even with a huge money supply, will keep prices somewhat stable.  As you get to full employment, prices rise quickly beause more people are spending faster, effectively, "chasing goods."

HENCE in todays world, until the many trillions of dollars can be reigned in by debt payments and debt retirement, we MUST stay at higher unemployment levels¹.

ULTIMATELY...

Any benefit gained from increasing the money supply with no means of reducing that money supply will be met with an equal 'cost' of inflation causing a net zero effect to the effort.  Again, double the money supply and prices double so there's no real long run benefit.

That's all I can figure ... and it's basically what Zimbabwe² did by just flat out printing money to pay bills.  Didn't work and, ultimately, they abandoned currency all together after several complete resets of the currency.

¹ There are countless economic books and real-world examples of money supply vs prices, but some good reading is http://internationalecon.com/Finance/Fch40/F40-14.php as it goes into details on these concepts. Scroll to the bottom of the page and see the "Conclusions" section for net results while the page itself, of course, details the premises for those conclusions.

² This article does a good job explaining it in short order, http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe, scroll down to the "Money In Circulation" section and it is self explanatory the impact of money supply on prices.  Of course, many other aspects were at work there but the money supply vs price level law is evident.

[ItsNotYouItsMe]

I could see the Sham-Wow guy doing a promo, yelling into his headset microphone from inside a room full of computers at The Fed ...

"Hey, Congress ... market got ya down?  Voters and special interests getting upset?  Are you under threat of losing your jobs? Elections coming up?  Pork barrel spending and earmarks just not working out the way you hoped?  Tax revenues dropping with housing prices?  Are your pensions or retirement accounts dropping in value?  Are those stupid constituents of yours just giving you hell?  Well, no problem, no worries ... have we got a solution for all that and MORE! "

[camera angle changes and slowly backs away as he walks towards it for hundreds of feet down a narrow hallway flanked by racks of computers floor to ceiling and he's raising his hands to them like Vana White and pours even more energy into his delivery] 

"Just Monetize everything, everywhere in the world with the USD and BANG, problem solved, it's GONE!  Just let us handle it and don't worry yourselves with anything, we are on it!  Don't oversee us, don't audit us, don't ask any questions and we'll handle it better than BP handles a spill, better than Enron handled derivatives and, yes, even better than Madoff could shuffle money!  Act now and we'll throw in a few trillion for Europe!  Operators are standing by for your support!"

The Fed must be getting super upset right now after printing tens of trillions of USD's (if there was $9T off balance¹ sheet transactions found just between Sept 2008² and July 2009³, it must be up to $20T+ OBS by now), they just can't kill it! 

It's days like this they strengthen their resolve ... of course, they are holding that LAST bullet in their jacket pocket ... ban the shorts (or better yet, just change margin/equity requirements to 500% for shorts and only 25% for longs!)

¹http://www.youtube.com/watch?v=bAYvv2xT8yI&feature=related

²http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNDaPlDwNZak

³http://www.youtube.com/watch?v=GYNVNhB-m0o

[web bot]

The Germans are already printed their own currency; French are probably doing the same.

The appetite is coming to an end to bail out Europe... then watch what is going to wash up on our shores...

[RiverRoad]

What's dragging this farce out so long is that what they're really  working on is their own exits.

[web bot]

Very, very well said.

[ItsNotYouItsMe]

I'm glad someone said such an excellent fact ... I didn't think there as EVER any doubt about this, myself ...

• It takes TIME to pass special laws and/or bury them deep inside legitimate legislation that exempts them from loss. 
• It takes TIME to shift that burden of losses off to the public via new debt and long term obligations.
• It takes TIME to slowly coerce a population into complete submission. 
• It takes TIME to sell off all your shares before letting everything goes to hell. 
• It takes TIME to sucker all the sideline investors into the market to new highs so you can sell at the top before announcing failure and default.

Question is ... how much time until the slow, orderly exodus behind closed doors is complete ... hmmmmmmmmmmm

[web bot]

Great sham wow comment there buddy! lol

[YesWeKahn]

Buying is legal, selling is illegal. This sounds like a new way of trade. Only the creative european and the SEC can come up with it.