Monday, November 14, 2011

11/14/11 Italy and rearranging deck chairs


One of the cooler things that my Grandmother gave me a few years before she passed away at the age of 97 in 1997 was a book about the sinking of the Titanic. It was published shortly after the ship went down. It's an old hard covered book that is still in decent shape (and no I am not going to be auctioning it off.)

In the later movies, we all remember the poignant scene where the band on deck strikes up Nearer My God to Thee as the ship is about to do it's backwards swan dive. Let's think of the euro instead as the ship that even God could not sink (an unwise statement someone made before the Titanic left for its incompleted trip to NY). The supposed unsinkable euro has been mortally wounded by an iceberg that includes such problems as overly burdensome sovereign debt loads (eg. 120% debt to GDP ratio for Italia); under capitalized banks; unsustainable cradle to grave social programs; derivatives; a wide chasm of the haves (Germany) and the have nots (Greece, Italy, etc) screwed up trade imbalances, etc.

When you really think about this, pan European rates were fairly uniform. That was a major flaw. It's one thing for Germany to be operating at a low interest rate environment, but quite another for the shaky countries to be enjoying the same low rates. Those shaky countries rode the wave of low rates to consume ever more (eg products from Germany) instead of repairing structural problems while at the same time creating glaring current account deficit problems. So now as rates have normalized (eg another Italian auction featuring all time euro high rates for Italy) it is easy to understand why there is such a shock to the system and why the euro is on borrowed time. Now austerity is mandated for the hobbled (a further shock). The party is over. As some said somewhere, the carpet smells like beer, the fridge is busted, the toilet is clogged and there's puke on the driveway (some party).

It is not just the dollars and cents of debt, but also the reality that weaker countries like Italy, or Greece, can't operate on the same playing field as Germany, France (which has a lot of questions surrounding it). The formation of the EU, as it becomes more apparent every day as we attempt to do some on the fly forensics, was flawed from the get go by allowing sovereign nations to operate as sovereigns with their own governments and idiosyncrasies while being unified under a common currency. It's back to the old drawing board. It would be as if our 50 states were autonomous and had only the dollar in common.

As for the Goldman bred Mario Monti taking the reigns in Italy? Ha. Think neatly rearranging the deck chairs on the Titanic before she goes down. This is beyond even the cunning skills of a person who is directly connected to the banking cabal that calls the shots and is desperately trying to buy more time.

Don't believe my skepticism? Here's some armchair commentary from strategists at a big European bank.

“Advance praise for Monti’s
technocratic government could be wiped out by economic/market
realities Italy faces in coming months, Commerzbank strategists
Marcel Bross and Christoph Reiger write in client note.
• Maintain underweight recommendation on EU peripherals, suggest investors use “potential Monti-relief” towards 6.22-6.50% in 10-yr on-the-run BTP to further reduce exposure
• Recession looms for Italy: while planned reforms are important steps, they come too late; experience from other peripherals shows “crippling impact of austerity on faltering economies
• Recent price action will make it more difficult to find buyers: those who hoped for ‘‘implicit ECB cap’’ and bought BTPS at 5%-6% have found there is none
• ‘‘Instead, the vicious circle of thinner liquidity and higher volatility catapulted yields to somewhere between 7% and 8% where liquidity disappeared completely before aggressive ECB buying (and Monti hopes) turned the tide, for now”
• It is hard to imagine those same investors will buy again at artificially low yields of ~6%-6.5% given concern yields could soar even higher next time
• Expect banks to continue unloading peripheral holdings
• Supply will need to increase to EU30b-EU35b/month in bills and bonds
• Estimates ECB has already bought more than double the supply of BTPs and CCTs-eu since the start of SMP2 -- “evidently not enough to keep yields anchored at sustainable levels”
• Upcoming SMP data should confirm aggressive buying
• “Given the ‘temporary and limited’ mandate of the SMP and with the Bundesbank opposing the ECB as lender of last resort, we see an increased risk that BTP yields will rise again”
• Large-scale ECB buying program would be most effective crisis response; however, “appears unlikely any time soon”
• Using IMF to monetize peripheral debt would counter numerous technical, legal and political hurdles
• The most likely scenario ahead is the one that is the “worst for the market”: continued piecemeal approach from EU leaders, “hoping that the questionable EFSF revamp will do the trick”

Markets will be flummoxed by this perhaps with a bias to the upside for U.S. Stocks as there is still the realization that the big artillery of full blown QE is being kept on standby on both sides of the Atlantic, but it shall come. Your friendly central bankers will feign defeat and will telegraph they are out of bullets, but they still actually have some ammo left to prop things up. The timing is hard to predict, but it may require going to the brink again and we could end up being the banker of last resort for Europe. Another reason, say some in support of the US market, is that it's a lot better place to go than the bond market, or other toasted markets in general. And there is some truth to that. 

With an election coming in 2012 and everything so interlocked globally, as the dominoes begin to fall in Europe in earnest, measures will be taken to keep too many of them from falling. By the indicators I see, it looks like full metal recession/depression in Europe by early 2012 even if we are soon fooled by some decent euro GDP figures for Q3. The PTB just can't have tcontagion spread across the pond ahead of November 2012. One day drastic measure will come.

This is more psychological (what will impact the investing crowd, how to fool the masses) and political (how will regime change be prevented in Washington) gambit than just pure dollars and cents and economics. In a perverse way, this probably sets stocks up for further gains in the medium term with the requisite bumps and belches in the short term. The doom and gloomer hunkering down for a meltdown are the worst timers ever and will get it wrong in this round too. I remember Prechter of Elliot wave hoo ha telling me in one of his publications years back (still at Mom's house) how the Grand Super Cycle 200 year bull would end in 1992. You can't make this stuff up. The doomers fail to realize that the practitioners of preserving the paper ponzi system are good at what they do. They are professionals (in my best Lon g-eye-land hair dressers accent). Eventually they will have their comeuppance, but things are only starting to get interesting. From the closing of the gold window in 1971 (we were already down to a 25% gold standard) to today, is just a speck of time in the grand scheme of things. The want of doom to happen yesterday has left many in the poor house. After all, who are the billionaire doom and gloomers?
For the smart money, including individuals, this should be a time of preparation (eg. laying in supplied of hard assets like gold and silver) while at the same time going about life in a normal way (to the extent that there is any normalcy -- what is that any more? lol).
After last week's latest rally spark for stocks, no surprise that we're on the weak side today. A dearly departed soul who went by the name of Karen, did the best job singing about Rainy Days and Mondays.

Gold is marking time at just below $1800. Remember gold is up 25% this year. How well has the cream of the stock crop S&P 500 performed? It is down .2%. lol. Another stupendous year thus far for gold! Even the cajoled and hammered from the highs of the year silver, is up 10% YTD.

Oh, the Spanish 10 year has crossed the 6% level. Who remembers that really bad 70's movie called It's Alive about the monster killer baby? At the end the doctor gets a phone call because another one shows up somewhere else on the rampage. This is the B movie that is playing out in Europe. Now the Lady of Spain is no longer to be adored. Just wait till we see this in Portugal, France, etc.

As the sarge in Hill Street Blues would say, Be careful out there folks.  

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