Via Mark Grant, author of Out of the Box,
"Circumstantial evidence is a very tricky thing. It may seem to point very straight to one thing, but if you shift your own point of view a little, you may find it pointing in an equally uncompromising manner to something entirely different."
-Sherlock Holmes
The article referenced the tremendous shrinkage in lending of the banks of Europe. It pointed specifically to the French banks and how they were setting up for all funding to be at the local level and to stop funding from the parent banks in France. The article concentrated on the notion that the French banks were setting up for some kind of break-up in the Eurozone. To me, though, there was ever more than met the eye at first thinking, meaning what happens after reading. It is relatively simple to read some headline or story and absorb it; much more complicated and useful to think through the meaning of what is presented. Here, past the obvious, was a rather large indicator for the Emerging Markets and their bonds as these entities are primarily funded by the European banks so that lending here, one may realistically surmise, is shrinking dramatically so that first the Emerging Markets will shrink as funding dries up and then their bonds will spike in yield and their equities fall as their main basis of support is pulled. I think now that whatever play anyone got in the Emerging Markets is now done and I would be pulling in my horns from these markets. As Europe bounces off various walls and as the American banks will have little to do with these areas; the play is over and I suggest a thoughtful retreat.
Answers
Amid all of the talk of Union and the greater good and the trumpeting of the three Musketeer’s “One for all and all for one;” we are about to get some concrete answers to help illuminate our path ahead. Greece has come nowhere close to their agreements in the Memorandum of Understanding with the European Union and the IMF and we are about to be able to view the whites of their eyes. Will Germany agree to more funding or not; this is the primary question and one that is about to be addressed. I do not believe there is a rational person on the planet that thinks that Greece can repay its debts; today, tomorrow or at any point in the future so is it to be another $50 billion as requested by the Greeks, debt forgiveness and a huge cutback in expectations or is it to finally be the end of the road and an end to the charade? The response will center on the ECB and their absorption of $238 billion in direct Greek sovereign debt coupled with their exposure to God only knows how much in securitizations moved from the European banks onto their balance sheet. Did you think that the decrease in the exposure of the European banks to Greece was sold into the marketplace? Ah no my friends, it was just repackaged and moved onto the balance sheet of the ECB and so hidden from us which was a clever ploy I suppose in the short term but one that is turning out to be quite painful as losses surely mount and as various credits stop payment. The calculators must be running night and day in Berlin as the Germans try to figure out just how much pain they are able to bear but debt paid by even more debt almost always proves to be a scheme that fails in the end. The plan is almost certainly foundering so that the only real question now is “when is the end” and the answer to that; we may soon be given.
“Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong these are the features which constitute the endless repetition of history.”
-Winston Churchill
The Great Game
The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. The indefensible schemes that have been foisted upon us reflect errors in judgment that are not just wrong headed in conceptualization but just plain dumb. The trivialized minds in Brussels and Berlin have vastly underestimated the intelligence of the people that matter, the institutional investors that are required to fund their programs and pick your language, “Nein, Non, No” is the growing response that is echoed down the hallways of finance from one institution to the next, from one nation to the next.
“Out of the Box” is not the Financial Times or the Wall Street Journal but then it does not need to be for me to assess the reaction of those that matter which are the world’s large institutional investors. The savants in Brussels and Berlin think that it is the hedge funds or other speculators that are causing the yields to rise for Italy, Spain and the rest but they are 100% wrong. It is the real money institutions that are fleeing and moving fast. The debt at the ECB can be expanded and the local institutions can be pressured by their sovereigns but, in the end, there is not enough money in these institutions to fund the European experiment. I can report to you with certainty that many large institutional investors will no longer play, will not fund, as they have been consistently lied to and abused by the European Union and her various branches. The first European bank stress tests were a sham as manipulated by incorrect data and the second one was falsified by its methodology and the projected 120% debt to GDP ratio for Greece was little more than the antics of a fool while the baloney about the $125 billion for the Spanish banks that would not affect the country of Spain is a fairytale with the same substance as Snow White and her dwarfs. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Day by day and month by month the bills accumulate and there is not enough capital left in Europe to pay them unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics. If it were just economics I could have given you the date of the end long ago but fiscal and monetary policies have long ago given way to machinations of the political system in Europe but the lies and deceit only have a lifespan that is so long and so the trend, regardless of the daily fluctuations, is set in place. Down goes the Euro, up goes the Dollar, up go Treasury prices, down go European bond prices, down goes the equity markets, the recession worsens, the contagion spreads until the counting houses are out of money and the printing presses only print paper and some German in some political party rises that says, “Enough!”
At the end of a battle during World War II a Soviet General was quoted; "We gained 22,000 square miles of territory which is just enough to bury our dead.”