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Sunday, August 7

7th Aug - waiting for the end

"We Stand Behind Our Armor"
Chart page now online! It has charts of 10-year government bond yields and CDS-charts.
  
Summary: Tel Aviv’s stock exchange today opened down 6%. Together with the Saudi Arabia’s yesterday’s drop, this should provide an idea of what happens to the markets next in line. No news yet on the European central banks’ coming conference call or the outcome of the G20 pow-wow.

Saturday night there was a mini riot in Northern London. Demonstrations in Israel were attended by over 300,000 people. Natives are getting restless. The probability of Europe getting its own version of Arab Spring is not zero anymore. I’ll just coin the word now. It will be Europe’s Fall. It will start with the general discontent towards austerity programs that we’ve already seen: demonstrations in Greece, Spain and soon Italy, followed by strikes.

Then the voters in core countries will understand that the PIIGS are not going to get their act together, and that the core’s leaders are about to indebt their countries by supporting the PIIGS, no matter what. Then it’s the core’s time to take it to the streets and market squares. After a mixture of solutions ranging from the riot police to premature elections, something will happen – Japanification of the core, eurofederalism or disintegration. But the current Europe will have fallen.

Market views: Mostly unchanged. I'd like to see the European open and actions from the eurocrats first, but what follows is my current gut feeling  Equities in Asia, Europe will probably open lower, as will the U.S. but from there I expect immediate U.S. pickup and bull run until FOMC on Tuesday. I had an old saying in my days that the real idea of markets is to hurt as many people as possible, as much as possible.

Nice two day rally would be just what would kill all the dimwits yelling “breakout from head & shoulders”, “U.S. is becoming a banana republic” or “at least the Chinese know how to handle their public finances”. After the two-day rally, sell again heavily. And keep the Brazil short. Do not touch it! Hire me instead.

On FX side, safe havens CHF and JPY will be popular, but reactions will be muted because of fear of further interventions. EUR/USD still in the same congestion of around 1.40-1.45 and I still expect a breakout to the downside. There is nothing in Europe worth buying, and the resilience of the USD and T-bond safe haven should not be underestimated. I would be happy to go short EUR/USD around recent 1.4270-levels, targeting again 1.41, and an eventual breakout much lower.

Joke of the day:Switzerland's banking sector has no interest in untaxed assets.” – Swiss President Micheline Calmy-Rey

Seriously… what has she been smoking?


EURO CRISIS
Mentions Der Spiegel’s article that speculated, based on nameless sources, that Germany’s government cannot afford and therefore will not bail out Italy and/or Spain.


“If France loses its AAA rating, the EFSF doesn’t work as structured.  Any charade that the EFSF isn’t Germany in drag (not a pretty image) would be shattered.  The German people would realize that no matter what their politicians are saying, they would be taking on the debt of the PIIGS and be solely responsible for supporting the Euro.”

Lessons for the Eurozone:  England did not solve its fiscal crises in the 17th century by defaulting or with complex write-downs or other clever mechanisms. These would have only bought time until the next crisis. Tackle the fundamental institutional and political problems that caused the crisis in the first place.

Nice primer on the euro crisis for American audience


FINANCIAL CRISIS
Cash has staying power and optionality. You can buy stuff with it. No wonder Soros is 75% in cash.
Cash is king – The Economist


“sovereign ratings have the potential to moderate euphoria among investors on emerging-market bonds, but that the rating agencies have failed to exploit that potential over the past decade.”

“We’re the only big country in the world that will still have taxpayers when a newly-issued 30 year bond matures. America’s working-age population is growing. Europe’s and Japan’s are disappearing.”

Why is fraud one of the great taboo topics of our modern economic history? - personal complicity of present and former government officials, regulators, consultants and the academics who advised them and those who either played the markets or took fees from those who did.



OPERATORS
German citizens have deposits of 200 billion CHF in Swiss banks, untaxed. Given how much money the Swiss banks have made over the years on this, 2b is not much. Funny how much one can earn by having a legislation that does not criminalize assistance of tax avoidance.


DIVERSION
Long feature article on Europe’s version of Hugh Hefner: "Presidente" Berlusconi  – except Mr. B should be leading a country.
Basta Bunga Bunga – The New Yorker

Sometimes, after an event, you know you knew it beforehand. You are wrong.
Hindsight's Not So Wonderful – The Psy-Fi Blog

Just like my thoughts on Lawrence Summers and his ilk, April 2007