Of Plain Fools And Wall Street Fools

Submitted by Mark J. Grant, author of Out of the Box,

"There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play."

                           -Jessie Livermore

I have called September 22 as the drop dead day. It is the date of the German elections. Nothing will be allowed to upset Ms. Merkel's march to victory. Nothing can stop what must be confronted after that date. September 22 may not be a day of infamy but it will certainly earmark the dividing line in the granite. There will be one set of policies now and a very different set in place after the German elections. It does not take much in the way of a Holmesian deduction to reach this conclusion.

As to Mr. Livermore's sage advice there is an extrapolation here worthy of note. When you know what is coming then, oftentimes, the best strategy is to prepare, execute on it and then wait. The media, of course, wants exciting new answers every hour and it plays into the "trade now" mentality but I would suggest this is most often a subset of the "Greater Fool Theory."

The list of problems that the European Union is going to have to confront after the German elections is a long one. The Spanish and Portuguese banks, the crumbling economies in Spain and Portugal, the economic deterioration in Italy as government debt reached an all-time high today of $2.77 trillion, the collapse of Cyprus and most noticeably, because of its size, the financial fantasy of Greece.

In a secret Bundesbank report, obtained by Der Spiegel today, the Bundesbank warns "there is no private buffer left that could protect the European taxpayer." I think this statement is quite clear and it will play out in one of four ways. Either Europe hands Greece more money and the charade continues or the nations of Europe write off part of the Greek debt or the ECB writes off part of their portfolio or Europe ends the game and Greece exits the Euro area. The force majeure may well be the IMF who refuses to lend unless European write-downs are taken and the rock will finally meet the hard place in Berlin.

According to Reuters, the Bundesbank, which declined comment about the Der Spiegel report, also described the risks associated with the existing aid package for Greece as "extremely high" and said the approval last month of a 5.8 billion euro ($7.7 billion) aid installment to Athens had been "politically motivated." There will be a rude awakening after the election," German opposition spokespersons said in a statement this morning, "By disputing the need for additional aid for Greece, the Chancellor is lying to people before the election."

The German finance ministry declined to comment on this report.

This morning Kathimerini, the Greek newspaper, reported that in 2012, the amount of non-performing Greek bank loans had increased by some 50% from December 2011, when the official number was 16% and stood at 24% last month.  The non-performing bank loans now total $73.4 billion just as the IMF and the EU report to us that everything is fine. I am sorry but the numbers dispute these statements. In fact the non-performing loans now exceeds the total funds set aside for the recapitalization of the Greek banks, which is $66.75 billion.

The bottom line is this; Greece cannot pay back their sovereign loans without the aid of Zeus and Athena bringing newly created money into the Parthenon. The Greek banking system is bankrupt and only being held together by the charity of Europe. At some point relatively soon, because there is no way out, the Greek situation will come to a head and possibly with explosive results. Just follow Jessie Livermore's advice and wait.

In the world these days, and any days in my almost forty year stint on Wall Street, the markets often believe the rhetoric. This would be political rhetoric, corporate rhetoric or the prayers and hopes of the talking heads. This is especially true in the equity markets.

It was the sadly departed Loews Chairman, Larry Tisch, who told me early on in my career, "forget what they tell you; just look at the numbers." I then point to what the Federal Reserve Bank is doing. As of July 31, 2013 they have parked $1,157 billion in foreign banks as compared with $1,112 billion in U.S. banks. To me this is a telling sign. The European banks are in trouble and the Fed is propping them up. One of the consequences of tapering, when it comes, may well be less available cash for this task and then the cracks in the European banks may well blow into gaping holes.

"The game does not change and neither does human nature."

             -Jessie Livermore, Reminiscences