Hope Springs Eternal

Via Peter Tchir or TF Market Advisors

It seems pretty clear that almost nothing from the big October 27th all-nighter is getting implemented.  The bank recap program is still a vague notion, EFSF can't find aggressive buyers of its more straightforward bonds, and the leveraging schemes seems to have died on the vine.  The IIF seems to be just beginning the process of negotiating what complex security they will create that pretends to be a 50% "haircut".  Direct investments from China and Russia also seem to be off the table.

We are back to the ECB and IMF.  Even the reports can barely be bothered to talk about how Spanish or Italian bond yields are improving.  We have seen the drill too often...

  1. ECB calls a couple of desks and asks for some large offers on Spitalian bonds
  2. ECB doesn't trade but says they will be back in a bit
  3. dealers try and buy some bonds and leak the rumor that the ECB is in buying
  4. ECB calls back and again asks for some large offers, but doesn't trade
  5. dealers buy more bonds, funds buy some bonds
  6. everyone now figures out the ECB is a buyer and no one wants to sell
  7. ECB calls back, the dealers offer bonds at an even higher price, and the ECB buys some bonds, but not as much as the dealer hoped for
  8. the dealer aggressively gets out with the story that ECB is BIG buyer today
  9. hedge funds notice that the banks aren't really buying anymore and try and sell some
  10. desks wait for the ECB to call again
  11. desks get calls from hedge funds look for bids
  12. desk call ECB, but find out they are done buying for the day
  13. dealer tries to find some clients who haven't figured out the ECB is done for the day
  14. and sell their excess inventory to them
  15. everyone goes back to waiting for a new ECB rumor, because the market is weak and
  16. everyone is caught long again.

It is getting scary that there is no way to tell if the market is really improving.  The ECB has corrupted the price discovery process so much that no rally is believed.

Protests in Greece and Italy continue.  I'm not sure that they are bigger or smaller than before the technocrats came into power, but they shouldn't be ignored.  The Spanish elections could be interesting as well, in any case, it will be hard to put a technocrat in charge of Spain so soon after an election.  I am sure the other leaders in Europe are watching the results closely.

Is the ECB going to lend money to the IMF?  Who knows, and who knows if it is lending trillions or if it is just lending the money the IMF has already committed to?  Don't forget, the European nations in the IMF and the US are not keen to actually go to the markets so they can borrow money to give to the IMF.  I suspect, if the ECB does finance the IMF, at least part of it will be to fund existing commitments that its members don't have the cash for.

The world seems to be splitting into two camps.  Those who generally called the deterioration in Europe and saw the flaws in the plans to "fix" it.  And those who didn't.  Of those analysts who saw the path, saw what was happening in Greece, saw how EFSF actually fanned contagion, how austerity wouldn't work, and wondered why Italy and Spain weren't being pressured to do anything, at least half of them adamantly oppose printing money.  These people who seem to have been right, are saying that printing and using the ECB is a bad idea.  Of those who got it wrong, let's say Sarkozy, they are all over using the ECB and printing.  The guys who have been wrong, wrong again, wrong some more, wrong once again, are the ones who are saying that ECB monetization is the best solution.  Why should we believe them?  It seems a bit like making the kid in the corner with the dunce hat the teacher.

There is a lot of hope that some sort of announcement will be made today.  Failing that, there is hope that a weekend meeting will be scheduled, so we have a reason to be long coming into the weekend.  I think we are getting close to seeing some sort of government action - new and bigger swap lines, an emergency rate cut or something, but I'm guessing it comes next week, and doesn't do much for the market.  I think we are a long way from getting the ECB to fully turn on the printing press, and continue to hope that some alternative path is found.  I really think that in the long run, some defaults will lead to a much better future, than printing will.

I guess we could be pleasantly surprised by the "super-committee" but somehow I doubt that too.  Who came up with the name "super-committee" anyways?  When we were kids, no one was allowed to create their own nickname.


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