Running Off the String of One Trick Pony Dogmas
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Posted 31 May 2012 - 12:50 AM
“It is in the uncompromisingness with which dogma is held and not in the dogma or want of dogma that the danger lies.” -Samuel ButlerSomething about the current scene doesn’t add up. All the common proposals/dogmas, viewed here, are just more one trick pony “bank recapitalization” wasteful schemes using public money, that not only leave the debt burdens in place, but adds to them. If this is what they try to utilize, fade it.Over the weekend, the markets were lathered up over a tightening in the Greek polls that went more towards the bailout, bankster parties. Then Tuesday was new poll showed a dead heat, and the market tanked. Overlooked in all this was an opinion poll commissioned by German state TV ZDF published on Friday showing that 79% of respondents rejected eurobonds as a solution to the crisis. Support for euro membership appears to be waning as 50% of respondents (up from 43% in February) say they believed Germany’s euro membership carried more disadvantages than advantages.To quote Monty Python, now its time for something completely different. I do think Germany blinks, but not in the way generally imagined. I am thinking that the election of Hollande may shift the now dead dogma towards more humanism, or the novel concept of humanitarian help. Therefore I am suspecting that a surprise lays in store. It is that Germany, and the rest of the EU, could come up with a so called “Marshall Plan–style package” for Greece. Very little of the bailout money so far has gone to the Greek people, it has gone to the banksters. That is the core of the resentment and now the voting for neo-Nazis and Communists. Germany has an historical understanding of this. Instead this will be nipped in the bud, as a 20 bn plus euro billion package (the equivalent of 10% of Greece’s shrunken GDP) going as aid to support the health, safety and welfare of actual human beings and create good will. This is not the solution, but with Greek society at least fed and fueled, a proper solution, an orderly debt restructuring, bank closures, and a controlled, structured devaluation from the Euro can be implemented. This modest in the scheme of things Marshall Plan trump card will likely be pulled before the June 17th Greek election.Too big to fail contingency efforts under way: The BoE, the FSA and FDIC in the US are working on “resolution plans” if any of seven cross-border banks collapse and are focusing on ‘bail-in’ measures to force bondholders and equity holders to take losses. The pilot project builds on “living wills” drafted by banks themselves, but goes much farther, with a step-by-step analysis of how each successive move by governments would play out legally and practically on both sides of the Atlantic. Umh?Despite all the mutual assured destruction (MAD) threat about the rational end game to all this, there is a necessary solution. First is a proper debt restructuring that re-sets total debt levels of all sectors to borderline sustainable levels: arguably 200% of GDP or lower. This first chart from last month’s IMF report shows 2010 debt levels. As Mark Grant as pointed out (on sovereign debt) and as I have posted, these debt levels are really much higher.The only way to effective deleveraging the system is the aforementioned bank bail ins, combined with debt write-offs and Marshall Plan relief. None of those should violate German sensibilities. The first chart below shows the gross debt across sectors. The second chart illustrates the absurd one trick pony thinking of the official sector as banking gradually deleverages from out-of-control levels to still out-of-control levels. This is conducted over two years as their sovereigns collapse on a weekly basis and deposits flee because of the obfuscation. And the reason, that the sovereigns are collapsing? Well, they have backstopped this process that ain’t working!In addition the huge losses taken by the central banks and official sector needs to be recognized and written off [Official Sector Losses] . This will also work to greatly shrink the bloated, excessive banking system that continues to drag every sovereign in the world into the tar pit. It will also strike at the heart of the corrupted central banking regime that is taking the world into a devastating depression.This brings us to the subject of Spain. Europe should have learned its lesson on Greece where failing to deal with a proper restructuring increased the over all cost. Spain’s GDP is exceeded by the assets of its two biggest banks. The preferred shares of Banco Santander (STD) still trades at 10% yield. Do people really think this won’t be part of a haircut, and that Europe will protect these holders? Spain’s banks are likely to have property-related losses in the €216-€260B range, says the IIF, which used the experience of Ireland’s banks as a benchmark. The lenders have thus far reserved about €110B. These banks need to be nationalized and liquidated FDIC style. Forget about recapitalizing them, shrink the sector. Spain and Portugal are the most overbanked countries in Europe.Ireland is inexplicably on the back burner right now, apparently manipulated on life support by the Anglo banking cartel and their captured governments. The government of Ireland is on the hook for up to $560 billion in bank guarantees, obviously ludicrous for a country that size. So far, NAMA, set up as a government-backed, bad Ponzi bank to pick crappy loans, has acquired assets of about (U.S.)$100 billion, of which 20% is performing. Worse, these loans were typically discounted by about 40%, requiring the government to further plug holes for the difference. Even so audits indicate [Controller Says Nama Overpaid] they badly overpaid banks, whodathunk. In addition loans to these banks from Ireland’s CB has ballooned to over $250 billion, all for a country with less than a $200-billion GDP. Meanwhile, Ireland’s borrowing cost (with ECB involvement) is over 8%, higher than Spain. Incidentally, Ireland collects 34 billion Euros in tax revenues versus 30 billion Euros in interest expenses. Lots of luck with that, Ireland is finished.Source: EC Stability ReportNext Spanish (and Portuguese) debt needs a haircut of 40% (and 60% respectively) and a two-year suspension of debt repayments. That would save Spain roughly €70 billion in the next two years, and €15 billion in the subsequent years. Done my way prepare for a 1921-1922 type Depression (already underway) Done on the current path prepare for the worst global Depression in a century.The final component of this debt reset is the currency devaluation. At minimum at this stage I am talking about Spain, Greece, Portugal, and Ireland. What’s left of the core, could stay with the Euro which could try and work through its Italian problem. The example of Argentina illustrates what happens when this card is played. Within months business confidence bottomed as did equity markets. Over the next three years, Argentina’s equity market skied 400% in USD terms.In terms of actionables I would guess (for Europe) that for Greece and Spain we are at the one or three months mark prior comparable to when Argentina went through it’s final cliff dive prior to devaluation. Once the devaluation occurs the actionable should be to wait a short while and jump on the first major rally and retest (if any). There does not appear to be anything to be gained by frontrunning devaluations before they happen. I think Spain is the best candidate for this rational approach. This article by Matthew Lynn describes six good reasons why. If they go this route I will jump all over Spain, in part because I love the country anyway, and second it will be their liberation.The other actionable would be to play the Greek “Marshall Plan” in advance via buying Swiss Francs. The commercial longs versus specs are unprecedented, setting up squeeze potential. I have averaged in and am now the equivalent of 5% of my capital using forex (which trades in $10,000 blocks). I will buy 1% more at each .50 interval. Switzerland has a modest debt to GDP of 50%, and is only blowing harmful bubbles by pegging to the Euro. Real estate in Germany is getting bubbly and the Wizards there don’t like it, one more reasons for nations to go with their own currencies.The plan would also reverse the ridiculous Bund and Treasury flight Bubble. I have increased my 5 year Treasury future short at these levels. I will add more Friday if they trade at still lower yields on the Friday job report. Avoid short selling stocks if McClellan Oscillator trades over 200. I will follow up with other actionables on Friday or over the weekend, pending the reaction to the Friday job report.
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