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Thursday, December 08, 2011

I'm Really Awed Into Silence

There are no words to express what I think about what is happening in Europe. Admittedly it gives the US a temporary boost, but at what a cost!
This is epic. The Dragon feels like he got this letter after his Sarkozy date. The only feasible way of replying is with a blunt email linking to Robert Palmer's "I Didn't Mean To Turn You On", which Draghi pretty much did:
Still, ECB President Mario Draghi signaled no intention to expand the bank’s 207 billion-euro bond-purchasing program and said it would be “complex” to engineer a way for national central banks to recycle funds through the IMF.

“One cannot channel money in a way to circumvent the treaty provisions,” Draghi told a Frankfurt press conference. “If the IMF were to use this money exclusively to buy bonds in the euro area, we think it’s not compatible with the treaty.”
So now they are getting the central banks of the countries to give the IMF money, and sending creepy letters to China about funding:
Dear China,

You have not replied to my last 47 attempts to contact you regarding the 700 billion Euro loan we discussed. I have tried to contact you by phone, via Federal Express, various Ambassadors, a US destroyer with a party of EU diplomats concealed on the aft deck, and E-cards with pictures of big-eyed European Finance Ministers holding their hands out. I am very disappointed in you - I felt that we were developing such a beautiful relationship when you started buying Greek bonds. It is obvious that we have so much in common - you have money and we need money.

But I am getting mixed signals from your top officials. For example, when you said you would not hesitate to start a third world war over Iran, you really meant that you liked me more than the US, right? And that you wanted to buy my bonds and bear my babies, right? Now to suddenly begin playing hard to get is very misleading and dishonest, and I suggest that you should apologize to me for your behavior and immediately wire me the 700 billion Euros, which, if you prefer, you may send to the IMF marked #EuroRescue.

It is impolite and immature to behave in this way, and after you apologize I will show you that I forgive you by accepting your money, for which, may I remind you, I am willing to offer many fine and creditworthy sovereign bonds. If you do not want to send me the money, I would gain utility if you came to Brussels immediately to discuss it and explain your decision to a roomful of adorable big-eyed European Finance Ministers. That would be the mature and developed way to handle this situation.
Etc. It's all beginning to seem more than a bit desperate. It is not as if there are not concrete measures - the European leaders are promising that they won't hand losses to private bondholders. Link:
In a climbdown by Germany, the permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel had championed “private sector involvement” as a way of lessening the bailout burden on taxpayers.

To put it more bluntly: our first approach to private sector involvement, which had a very negative effect on the debt markets, is now over,” EU President Herman Van Rompuy said.
Yes, that might have been a downer on the first date, but now Europe says it will never happen again. However, without iron-clad guarantees, China will buy very little more European funny money, and will continue building up its fleet to try to corral more fossil fuel resources in the South China Sea, and is quite content to leave Europe navel-gazing while China gazes at naval bases, and India discusses trade barriers with Australia's Defense Minister, who just happened to wander over there.

It is not that nothing is being done in Europe. The IMF has been talking about buying European bonds for a while, and will certainly do so. The ECB cut interest rates and will cut again, and is providing an unlimited flow of money to banks for three years. It will now accept used socks and underwear as collateral. Of course all this is a violation of treaties, but the fiscal portions of these treaties have been abrogated by non-enforcement for some time, so how is this different? I guess the real theory here is that the IMF will impose conditions to buy bonds, but how can some of these countries meet them?

In the end it's about how much money, and who guarantees it all. 267 billion Euros is not very much money when you look at the funding needs of Spain and Italy, and then there's Ireland, Portugal and Greece. And Italy is not solvent. There is no way it can pay all it owes. There seems just about no hope that it can pay down its debt, with the yield curve it's got, the spreads it has to pay, and a slumping economy.

For the rest of the world, all of this does have implications. For example, India's yield curve just inverted again, not that it hasn't been doing this in and out stuff since the summer, but then Brazil was there also. You have a flight to safety of impressive and depressive proportions, and this surely must mean a world shortage of money. The European banks lend around the world, and compensatory lending will pick up in areas around the world. However that really increases correlation, and should have a kickback down the road.

You can sum up Caruana's recent speech as a plea to reduce correlations rather than increase them; every crunch has another plus side SOMEWHERE until aggregate correlations increase to between 0.7 and 0.8, and then the system is grossly unstable. Changing who owes what to whom does not alter the instability; the instability is a function of high debt or high base costs reducing income margins, which causes small real world changes to be magnified and have non-linear effects. The only cure is to write down debt. The entire European approach to this problem has been to create a shell game, but it cannot work.

Suppose China decided to lend a trillion Euros to the European Stability Mechanism (once the bond sale failed, we needed a different set of letters, so now we are talking the ESM - the EFSF is so last-week). Does it change anything about the system? The only way it does is if the debtors then default, and the default shock then occurs outside the system, thus reducing internal correlation. This implies that if China does buy in, it gets the bulk of the shock.

I will continue this, because it has huge implications and they go far outside Europe.



"...sending creepy letters to China..."

Scarlet AAA

Wear it proudly! ;)
267 billion Euros is not very much money when you look at the funding needs of Spain and Italy, and then there's Ireland, Portugal and Greece. And Italy is not solvent. There is no way it can pay all it owes. There seems just about no hope that it can pay down its debt, with the yield curve it's got, the spreads it has to pay, and a slumping economy.

All known three years ago. The worst part about kicking the can down the road is you eventually run out of road. So kicking the can was a stupid exercise to begin with.

The people who gambled and lost have to realize the losses or there will never be any improvement. Robbing from the productive to give to the unproductive will never
improve economies; when you reach a critical mass of unproductive your economy is finished.
What's kind of scary is that Mr. Market doesn't seem to know which way to go on this. He's just bipping and bopping with each news cycle, hanging on every word from every central banker.

When the most amazing predictive engine ever created won't venture a guess on the outcome....
I've spent much of the week reading about Ireland, and how it got into its mess. Apparently, the Irish decided to get rich selling houses to each other, and everyone else loaned them the money to do it. It wasn't like there was a queue of people outside the country lined up to buy houses in Galway.

Morgan Kelly is an economist who specialized in things like Little Ice Age econ, and admits he's no expert on the contemporary Irish economy. But he was noticing that guys who were his students a few years back were now on TV being quoted as experts. This worried him enough that he starting looking at things, and quickly realized that Ireland's bubble was going to pop, and soon, and it was going to be disastrous.

He gave a very interesting lecture at the Kilkenny Arts Festival (Ireland *is* interesting). No transcript exists that I know of, but the audio is here:


Having emerged as Ireland's leading prophet (he predicted just how bad things were, when the banks and government were saying nothing was wrong) he's now a bit of a folk hero.
All this was predicted when the Euro-zone was being put together. But all that was ignored and they went merrily ahead. AARRGGHH!! I suppose some pundits are chortling, "I TOLD you what would happen!"

Neil: "When the most amazing predictive engine ever created won't venture a guess on the outcome...."
Yes, Mr. Market has been exibiting all the symptoms of manic depressive syndrome on steroids. Shall we hope that the Chinee or somebody (oh no, not the Yankee dollah) will ride in and save the day, or is it really time to stock up on food, ammo, and silver coins in expectation of the final global swan dive? I went through this back in the 70s. Still have a bag of silver coins. Where is safety? Along with the dooms day predictors I read and hear pundits everyday who think the market is a steal. IBD's accumulation/distribution indicators have been signaling distribution since April. Everybody except the hedge funds and day traders are on the sidelines. Well, I'm out too. Very little that looks safe enough/appealing to buy at this point. If things are as bad as some say, even CDs may be a fool's game. AARRGGHH!!

Woprd Verification: uncerbad - Yep, uncertainty is bad!
Closer to home: (ECRI)Recession Call remains intact. Consumer Metrics Institute daily and monthly index are looking bad.
He gives me very little attention, expecting me to see him as different, making him stand out.
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So tell me what you think of my responses to David DeAngelo's little um uh...techniques for attracting a woman.
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