As I opened the Venetian blinds this morning, and looked out my window from the 47th floor, I was shocked to see a hazy wet blur of large snowflakes gently descending upon the East River. The funny thing is, this sense of a totally unexpected & unwelcome surprise, was very much the same way I felt this past Thursday morning, as I awoke to a market up nearly 300 points on the news that the Europeans had incredulously finally come to a consensus as to how to contain the seemingly intractable sovereign debt crisis. Well, truthfully the later felt a bit worse…..
I mean let's get real here, things did look rather unstable the weekend prior to the "grand solution". Rome was ablaze, torched by street mobs gone mad, and the euro zone debt crisis remained utterly unresolved, with the entrenched disagreements between the various aficionados degenerating into bickering and down right name calling. Don't get me wrong, I wish them all the success in the world, however having been leveraged short during the week in anticipation of a complete meltdown, the timing of their sudden "break through" certainly was not appreciated. See EP 15.0 (Bail Outs & Bond Fires) http://slopeofhope.com/2011/10/bail-outs-bond-firesevil-plan-130.html .
Adding salt to the wound, and most infuriating to me, was that less than a month ago, I had actually expected them to finally get their act together when I wrote EP 9.0 (The Sting) http://slopeofhope.com/2011/09/the-stingevil-plan-90.html . At the time I was leveraged long, convinced that the Globalist would in fact announce a master plan orchestrated by Geithner at the IMF/FED/ECB/BOE/BOJ summit in Washington DC the fateful weekend of September 23rd. Well we all know what happened, they showed themselves once again incapable of agreeing on anything, and the following week the market continued its slide until it hit its eventual bottom on Oct 3rd. At which point I completely lost faith in their ability to stem the tide of this long standing and growing debt debacle. After all this had been going on for over a year, and they had had numerous occasions to come to grips with it, the fact that they still could not, spoke volumes to me.
What's the point of all this? Well, other than exposing the harsh reality of having been personally whipsawed to death by my fellow countrymen, it is to now try and understand where we really sit today, and what has actually changed in Europe? The equity market certainly is suggesting that something epic has been achieved. Putting an exclamation point on the accomplishment, the market in less then one month's time, has gone from circling the drain, starring into the abyss of S&P 1070, to lofty heights again, establishing a new launching pad at 1290. An all world record breaking 220 S&P points in an astounding 3 weeks time! The new euro stick save is being heralded by the market as the real deal that will surely put the global economy back on track. I for one, remain sceptical to say the least………
So why the Downhill Racer? The image seemed very appropriate in light of my current assessment of where we are. In my view, the market has acted like a chair lift gondola bubble on steroids over the past 3 weeks, throttled to max uber climbing speed, all in eager anticipation of the "Grande Royale with Cheeze" euro bazooka which has finally been delivered. So here we sit in the thin air of the Alps, having been abruptly deposited at the very top of the black diamond expert slope of the finest ski resort in Gstaad. And now, with great trepidation, we must insert our rigid plastic boots into the bindings of our skis, look down the ominous steep hill, in preparation for a terrifying joy ride back down the mountain. Yes my friends, the treacherous Olympic Downhill gates await our torrid decent.
Behold the Winter Olympic gates of hell……Evil Plan 17.0:
Gate 1 SPIV: The taken for granted expectation of an immediate cash injection from China into Europe's €1 trillion (£879bn) European financial stability facility (EFSF) was greatly diminished apparently, after Klaus Regling, the head of the bailout, left a meeting in Beijing without a firm offer of support. Keep in mind that, EU leaders are expected to establish a so-called special purpose investment vehicle, or SPIV, which is scheduled to be set up in the coming weeks, and is aimed at attracting significant investment from countries such as China and Brazil. Not a done deal in the slightest. And this today from Beijing state run news agency Xinhua; "amid such an unprecedented crisis in Europe, China can neither take up the role as a savior to the Europeans, nor provide a 'cure' for the European malaise," Xinhua added. "Obviously, it is up to the European countries themselves to tackle their financial problems."
Gate 2 Italian Bonds: On friday's weak bond auction, Italy paid more than 6% to sell 10 year bonds. The price Italy paid alarmed financial experts who say the country's borrowing costs are one key measure of success for the euro rescue package, which was designed to shore up confidence in the euro zone's third largest economy. Understand, that Italy is the euro zone's largest bond market. And this from The NY Times Oct 28th; "Italy was obliged to pay the highest rate in more than a decade to sell a new bond issue, a sign that investors remained wary of the country’s political paralysis and a debt load equal to 120 percent of yearly economic output. If Italy’s borrowing costs become unsustainable, the country is potentially a much greater threat than Greece to Europe and the world economy. The market’s skepticism showed in the auction results Friday. The Italian Treasury sold 3 billion euros of bonds due in 2022 at 6.06 percent, the highest rate since the creation of the euro. Italy also sold 3.1 billion euros of bonds due in 2014 to yield 4.93 percent, up from 4.68 percent at their last auction on Sept. 29."
Gate 3 Silvio: The daunting task of spearheading Italy's turn around effort, and brewing social unrest lay in the dubious hands of a phsycopath named Silvio. The New York Times describes him as follows; "You know Mr. Berlusconi. He is the billionaire prime minister of Italy who not only owns much of the Italian media but also provides them with ample material through his escapades. By his count, Mr. Berlusconi has survived 577 police interrogations and 2,500 court appearances related to innumerable legal and political scandals, not to mention enough suspected sexual adventures to top Hugh Hefner……….On his 75-year-old shoulders rests the task of shoring up Italy’s finances so that the European Central Bank buys more Italian sovereign debt, to gain French and German support for a larger bailout fund to protect Italy’s banks, and to keep Italy from becoming another Greece and plunging the world into an even more devastating financial crisis." In August, Mr. Berlusconi promised ambitious reforms to get the European Central Bank to buy Italian debt. Among them were raising the retirement age, raising taxes on the wealthy and opening up the professions to more competition. By last Sunday, as European leaders prepared for a critical meeting on the debt crisis scheduled for Wednesday, Mr. Berlusconi had accomplished none of that.
Gate 4 EFSF: According to London newspaper The Telegraph, and I paraphrase; hours after the all night summit, concerns were led by Germany's powerful central bank, which expressed fears that a plan to leverage the 440billion euro zone rescue fund to amass a fire power of 1 trillion euros, resembled the risky finance methods that triggered the financial crisis of 2008. Furthermore, Jens Weiderman, president of the Bundesbank and member of the ECB, sounded the alarm over the plan to leverage the fund by a factor of 4-5 times without any new money placed in the fund. "He warned that the scheme could be hit by market turbulence, with taxpayers left holding the bill for risky investments in Italian and Spanish bonds." And from the Wall Street Journal; "The firepower of this fund…is not enough to calm fears," said Silvio Peruzzo, an economist at RBS Global Banking & Markets in London. Some investors also are skeptical of the plan to use the EFSF to insure against losses on government debt. Under the agreement, the EFSF would absorb the first 10% of losses on debt issued with the insurance. Investors figure that if losses amount to 50%, which was the case with Greece, that wouldn't provide enough protection. "If you had the 10%, it wouldn't help much," said Western Asset's Mr. Walsh."
Gate 5 CDS Spreads: According to Fitch Solutions CDS spreads widened throughout Europe last week; "Denmark led the sell-off with spreads 35% wider, likely due in part to concerns surrounding Danish banks. Spreads also widened significantly for Italy (19%), Belgium (16%) and Spain (15%). Also, the CDS market has been grossly impaired this week, by an unjustifiable ruling form the International Swaps and Derivatives Association (ISDA) which unilaterally decreed that the imposed 50% haircut on Greek debt does not constitute a general default. And as clearly stated by Reuters; "An implosion of the sovereign CDS market could lead investors to buy fewer government bonds because they feel they cannot protect themselves, and risks pushing up borrowing costs for governments, especially in the euro zone."
Gate 6 Bundestag: The natives remain restless in Germany. From the New York Times; "In Germany, the Constitutional Court highlighted the complexity of European politics on Friday by issuing an injunction against a new panel in the German Parliament, the Bundestag, that is supposed to oversee the euro area rescue fund and accelerate decision-making. Germany is the largest contributor to the fund." and from Sunday's Telegraph; "The question of who will lend to the EFSF, on whose collateral, and who will ultimately repay the loans, was barely addressed last week. Such tricky questions will apparently be answered at the next European summit in December. Meanwhile, the fundamental disagreement between France and Germany regarding who should take the biggest losses – euro zone governments or private creditors – remains unresolved. Since Thursday's announcement, though, Germany's powerful constitutional court has issued an injunction requiring the country's full Parliament to approve any EFSF bond-buying."
Gate 7 Ireland & Portugal: The other PIIGS, particularly the most underwater Irish & Portuguese will now want the equivalent forbearance deal Greece just received, namely the same 50% restructuring of their outstanding debt obligations. There are unintended consequences to changing the rules mid-stream, its called moral hazard. This from BTD Blog; "The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time."
The following chart showing the steep rise in Italian rates after the brief post bazooka relief says it all:
Clearly the chart shows that as of last Friday, Global bond markets, by character more sober and smarter than the excitable equity traders, were voting against the euro bazooka deal. This is alarming. For it is only by selling more bonds that the euro zone's indebted governments can roll-over their enormous liabilities and keep the show on the road.
Kenneth Rogoff in this bloomberg interview 10/27/11 remains most unimpressed with the euro fix:
So you see my trusting little slope-a-dopes, the Euro Bazooka which shot the gondola up the mountain/market like a bat out of hell, could just as easily wipe out like the downhill skier below, or melt away like the snowfall of this morning.