Europe Weighs a Policy Bazooka
Global capitalism hangs in the balance.
As I made my way to MVHQ this morning, I couldn't help notice the Blue Oyster Cult ditty on the radio. "Time is the essence, time is the season..." Indeed it is, for as we've long said in the 'Ville, the fatal flaw of politics is... it's too political (which takes time) while financial markets are whipsaw quick in real-time.
I am, of course, talking about the "Ring of Fire" that is making its way through global financial circles. While the theme should feel familiar to ye faithful -- it would be a massive injection of drugs that would conceivably stave off contagion rather than comprehensive medicine that would debilitate the disease -- it could dispel the notion of European Disunion, at least for the foreseeable future.
The below excerpt was shared by the Brussels-based think tank BRUEGEL and the Peterson Institute for International Economics, which hosted a conference on Resolving the European Debt Crisis close to Paris. And I quote:
The conference assembled about four dozen policy experts and practitioners, mainly from Europe and the United States. Support for the conference was provided by Tudor Investment Corporation and Black Rock Investment Management.
On the second day, a simulation game took place among the conference participants in what amounted to a stress-test for European debt policy. As the simulation unfolded, a powerful solution to fend-off speculative attacks was found. The game was directed by Andrew Gracie of Crisis Management Analytics. Gracie is a former member of the Bank of England's Financial Stability Group with a strong track record in running simulated games for central banks globally.
No sitting officials participated and the game was held under the Chatham House rule. Participants played the roles of the governments of France, Germany, Greece, Ireland, Italy, Portugal, and Spain; decision-makers for the ECB, IMF, and United States; and decision-makers in commercial banks in the countries involved and non-bank financial market actors.
In addition, in response to successive rounds of the game as it unfolded, other participants provided expertise in the areas of credit ratings, legal and accounting issues, and political repercussions. As the simulation unfolded, a solution to fend-off speculative attacks was found.
Further analysis and insight was provided by the PEPIS Roundtable:
In the war game the EU/IMF decided to expand the European Financial Stability Facility (EFSF) to between $3 trillion (£1.9tn; 2.2tn Euros) and $5 trillion (£3.2tn; 3.7tn Euros). This was done by leveraging the 440bn Euros supplied under the EFSF legislation going through European parliaments this week, plus match funding from the IMF. And by the ECB issuing "collateralized finance".
That is, by pledging around 700bn Euros, they borrowed up to $5tn and then lent it to European banks and countries, starting with Greece. They got the money by mortgaging the assets of Europe basically, because $5tn is a lot. They mortgaged the EFSF money, and then the ECB borrowed money against the future tax revenues of Europe.
There were two interesting outcomes:
1. They saved the euro. Greece, Ireland et al stayed inside, now protected forever - certainly for the lifetime of the participants, who were mainly on the upside of 35 - by the wedge of money conjured from thin air.
2. It didn't solve the structural problems facing the periphery - but simply gave them more time to sort it out.
An account of the game reports: "The large new lending facility was seen by some players as free money for errant countries without sufficient conditionality."
This Breughel document is doing the rounds in Washington DC, and contains an uncanny blueprint for what might now be about to happen.
And what might be about to happen is that the Central Banks will start the printing pressing rolling and devaluing currencies throughout the globe. This will result in inflation and higher food and energy prices throughout the world. This will result in more global unrest resulting in more war, death, and destruction resulting in increased profits for the Bilderberg/CFR/RIIA Military Industrial complex.
Taking a Deep Breath and a Step Back
Remember, for purposes of mapping forward strategy, the path we take is more important than the destination we arrive at.
We mapped the "On the one side is debt destruction and or broad reorganization -- a bitter pill and an eventual outside-in global recovery -- and on the other is more drugs, percolating societal acrimony, and an unfortunate needle that points to war" long ago. More recently, we also handicapped the global economic recovery.
The risk, as we've long offered, is that the second option becomes a political grenade. Between internal elections and cross-border posturing, there is the potential that this is beaten to death before it ever sees the light of day... or more likely, that it will take something truly sinister -- something extremely scary -- before policymakers "back into" this particular policy.
Judging from the price action last week -- not only in the equity indices but in the perceived commodity safe-havens -- we're caught in the crossfire between this game-changing Bazooka and the reality that without a sweeping "solution", confidence will erode faster than Antonio Cromardie's playmaking skills (sorry, but as a life-long Raider fan, it's been a very long decade and wins like hit home).
Perception is reality in the marketplace, however, and it's also a forward-looking discounting mechanism. If the mainstream mindset wraps its keppe around this game-changing European reform, the tape could have legs... and a lot less bulls to participate in the move higher, if and when.
Lots to digest and we will, together, in real-time over on our Buzz & Banter (two-week money back guarantee!).
Some Random Thoughts
We've been house hunting and my only persistent feedback has been to lock in mortgage rates sooner rather than later. Societe Generale's Albert Edwards seemingly agrees. After a rate "dip" he sees hyper-inflation pushing bond yields into double-digits (he also sees the S&P tumbling roughly 60%).
This is a big level for Apple (AAPL). Textbook technical analysis dictates that stocks that break out retest the level from which they broke out. For Apple, that level is in and around $400.
Ditto the "S&P vs. German DAX," as DAX 5500 was our global line in the sand, which correlated to S&P 1100 in August. The stateside tape has clearly out-performed since then, although the DAX remains well below 1100 as I type. That leaves a window of downside risk for US equities, all else being equal.
Click to enlarge
On September 9th, I wrote: Yes, I'm seeing through to the other side. The trillion dollar question is: what happens between now and then? While my crystal ball is in the shop, my sense is that we'll see continued dollar strength and subsequent pain for asset classes (and no, I'm not ruling out a re-test toward the 2009 lows). That remains in play, with an obvious caveat being the European Bazooka.
And finally, on September 7th, I penned Is the Gold Bubble About to Pop (followed by The Gold Scold on September 8th, when I was publically undressed for daring to question the parabolic frolic). The yellow metal has since melted almost $400 dollars -- 20% -- toward the 200-day at 1527 this morning, before it bounced off that technical level.
Take me at my word, I don't feel vindicated or validated -- I had, and have, no position in the metal. Rather, my hope is that the column provoked thought such that Minyans were better prepared for the vicious downdraft, and protected themselves in kind. For that's how we roll in the 'Ville: together.
As always, I hope this finds you well.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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