If the extreme volatility of the last few weeks
hasn’t already raised suspicion in your mind that something of great
proportions is going on behind the scenes then it might be time to start
paying greater attention if you are invested in the stock market or precious
The major stock indexes have seen wicked swings of
late. Gold has rocketed to new highs only to be taken back down hundreds of
dollars in mere days. Investors are uncertain and so too are the
professionals. These are not healthy markets. One look at the spike in
volatility will reassure you that there is currently a lot of fear priced
into these markets.
The situation in Europe is far from over. What we
thought was a bailout of Greece turned out to be nothing more than an event
to save banks. The yields on Greek debt will show you that absolutely nothing
has been done to resolve that situation. Yields are now back
to where they were just days before the supposed ‘bailout’ was
announced. America is on the brink of bankruptcy and there is no lack of
direction from political leaders (not that they would know what to do anyways
given that we are in uncharted territory). President Obama’s approval
rating is at the lowest point of his presidency. Markets rally on bad news
and sell off on good news. Sometimes we get two or three percentage point
moves for no reason at all and just because they have to, financial news
networks will tell you that the markets moved because of some very obscure
event just so that they have something to talk about.
The markets have become a place where wicked swings
occur not on what the facts are but what “might” be said by
central bank leaders. The hopes of recovery have been dashed as the true
economic picture comes to light and the world starts to wake up with the knowledge
that nothing that central bank leaders have done since the start of the
recession in 2008 has worked.
Let’s face it even the professionals
don’t know what to do in a time like this. The market loves to follow
the big players…a copy cat game in which the market piles into what the
“professionals” are doing. I mean they are supposed to know
what’s going on right? Had you followed or
been invested with John Paulson’s hedge fund you would find yourself
underwater by 40% this year. So much for “the guru” knowing his stuff.
These are not healthy conditions. To steal a theme
from The Lord Of The Rings, something is stirring deep inside of Mordor. An
evil shadow that seems to be getting larger every day. Thank goodness
I’m not the only one who sees this and that I am not the only one with
In case you missed it, The Telegraph today published a piece that reminds us that something bad is
brewing. The concern according to bankers interviewed by The Telegraph is so
great that the piece speculates that bankers warn a market crash 'could hit
within weeks'. Sure we’ve all read about these things over the last 3
years but never has there been so much uncertainty and fear grasping the
markets. It seems everyone is on edge when discussing the markets but this
time, the anxiety is tangible and the stench of an underlying rot is finally
becoming too great to gloss over.
Bank shares around the world have been struggling to
keep their heads above water of late. If you follow the markets as I do then
you very well know about the attacks on Italian financial institutions by
short sellers. The selling go bad that short selling halts had to be put in
place. It didn’t stop the bleeding though. Simply put, banks around the
world, some more so than others, are exposed to too much bad debt and are
finding it impossible to find cash. No money coming in because of bad debt =
the inability to led money. The end result is
a liquidity crisis.
Bank shares did come back a bit today. Ignorant and
irresponsible individuals like CNBC’s Jim Cramer will tell you that
Warren Buffet’s bail out of Bank of America represents a turning point
going far enough to say that “Buffett's
bailout marks the beginning of a massive multiday short-covering rally in the
financials." However he isn’t telling viewers the
big picture. He failed to mention that (as I wrote in my previous piece) that the terms of the deal are so bad for Bank of America and common
stockholders of BAC that the bailout screams of desperation. When an
institution as big as Bank of America requires a bailout we don’t cheer.
It actually drives home the point that The Telegraph tried to make. There is
a real lack of liquidity in the system. The audacity to cheer a bank
obtaining a bailout is asinine. Instead of warning investors that such an
event actually speaks to the problems haunting major financial firms across
the world, he instead tries to spin it as a positive for the industry.
The Telegraph piece paints an entirely different picture but you didn’t hear
that being discussed by Cramer or the knuckle heads on CNBC, The Telegraph
reminds us that insurance on the debt of several major European banks has now hit historic levels..levels even higher than those recorded
during the financial crisis that rocked the global community in 2008.
Credit default swaps on the bonds of Royal Bank of
Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others,
flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were
trading at 343.54 basis points, meaning the annual cost to insure £10m
of the state-backed lender's bonds against default is now £343,540.
The cost of insuring RBS bonds is now higher than
before the taxpayer was forced to step in and rescue the bank in October
2008, and shows the recent dramatic downturn in sentiment among credit
investors towards banks.
"The problem is a shortage of
liquidity – that is what is causing the problems with the banks. It
feels exactly as it felt in 2008," said one senior London-based bank executive.
"I think we are heading for a market
shock in September or October that will match anything we have ever seen
before," said a senior credit banker at a major
Remember that Bank of America face fears that it
might need raise as much as $200 billion … why should the injection of
$5 billion be cheered? What Cramer didn’t tell viewers was that
notwithstanding Buffet’s bailout, the rebound in the share price was
not reflected in the credit markets, where
its CDS reached a 12-month high of 384.42 basis points.
Be careful out there.