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The SS
€uro is taking serious water. At the hastily called EU Summit Captains
meeting on the Brussels Bridge, it was agreed that the best course of action,
despite the worsening waves of bank runs, was to simply instruct the
orchestra to continuing playing the same old familiar tune and order the
rearrangement of the deck chairs.
However, all
the captains somberly recognized there were neither sufficient lifeboats nor
anyone willing to come to their rescue. As usual they were in complete disagreement
on what to do, they knew they had insufficient resources for anything
dramatic and they were well aware the public passengers had no tolerance for
any cold water austere attempts for the sake of survival.
The EU banks
runs have been steady and consistent. Deposits have been relentlessly fleeing
the peripheral countries and heading for the safety of deposit at German
banks, and to a lesser extent French banks.
Meanwhile the banks in turn were depositing money at the ECB for their own
safety.
 
Not all money
however is ending up at the ECB or anywhere in Europe for that matter. Needed
capital to restart growth is presently heading for the safety of the US
Dollar and US Treasuries.
The 10 Year US
Treasury Note hit a 120 year low when it touched 1.48%. Dramatically down
from a recent high of 2.30%, as the European situation worsened based on
troubling European election results. Investors are willing to accept real
negative returns for the sake of perceived safety. Even Germany last week
could float Bunds with a zero coupon.
A strengthening
dollar is not good for a US stock market denominated in US dollars. It now
takes fewer dollars to buy the same basket of stocks and US markets are down
9%.
How long will
this go on? The short answer is: "Until
the inevitable printing begins once again."
That moment
appears close, but we aren't quite there yet. More pain and more time are
required to give the money printers the cover they require, lest they ignite
the hyperinflation rocket prematurely.
ALL HOWEVER IS NOT AS IT APPEARS
As simple as
the above scenario appears on the surface, like the iceberg that has been
struck, there is significantly more below the surface. With the ship taking
water at countless points the best that the Captains can determine is to
place the inadequate bilge pumps near the most critical holes.
1- SOMETHING SMELLS IN THE US TREASURY MARKET
The JP Morgan
trading debacle gives us the best view of the what
is going on below the waterline. Still answering questions about the
mysterious disappearance of the $600B from MF Global, JP Morgan is now under
investigation for what is being represented as minimally a $2B Credit Default
Swap trading mistake. CEO Jamie Dimon doesn't react
the way he did, if this was all there is to it. The issue appears to be
centered in the Interest Rate Swap market. A market that JP Morgan holds a notional positions in of $57.5 TRILLION, of their $72
TRILLION total of Derivative Swaps. MF Global was apparently on the wrong side
of the Greek Debt trade. Is JP Morgan more egregiously on the wrong side of
the EU Debt trade?
The sudden
surge in March of the 10 year US Treasury surging to 2.30% caused serious
losses to someone in the Interest Rate Swaps market. Considering JP Morgan IS
the Swaps market there is a good likelihood they got hit. With the massive
fluctuations in Europe it stands to reason there would be equally if not
larger problems there also.
What needs to
be pointed out is that during these historic events the Euro has not tanked
and the US Dollar has only got stronger. Something doesn't compute somewhere
when we consider that sovereign debt supply is through the roof and there is
a dearth of buyers. The US Treasury is not moving up (in price) solely
because of European flight to safety. There is too much supply and European
banks are simply too illiquid. There is a huge Tens-of-$Trillions Swaps game
going on, JP Morgan is at the center of it and EU debt crisis is entangled in
it.
The Bank of
International Settlement (BIS )is reporting the
latest quarter ending December 31st, gross market values , which measure the
cost of replacing existing contracts, increased to
$27.3 Trillion. This was driven mainly by an increase in the market values of
Interest Rate Swap contracts. The rise in gross market values was the largest since the
second half of 2008.
Counterparty
risk is at the highest level
since 2008 at $3.9 Trillion.
Something is
breaking somewhere? I suspect the SS €uro bilge pumps
are not even close to handling these sorts of gushers?
2- EU BANK LOAN-TO-DEPOSIT RATIOS ARE THE ARCHILLES HEEL
To put the bank
runs in perspective, we need to be reminded that bank Loan-to-Deposit ratios
in Europe are blatantly obscene and are 3 times more
than the US banks. Many are over 100% and some over 200%.
I often
complain about the Chinese banking system as corrupt. They are paragons of
prudence at 65-70%, compared to the bandits in control of the established
European banking cartel.
3- INSUFFICIENT
"QUALITY" COLLATERAL AVAILABLE
Banks are now
out of quality collateral and the deposit runs are consequentially even more
devastating. Quality banks are getting dragged into the problem. Clients are
reporting that getting their hands on their segregated gold holdings at some
Swiss banks is suspiciously difficult and
delayed. Why segregated
gold?
The SS-€uro is now taking on serious water
and she barely has her Bow above water.
Though we have
reached our target support levels in the S&P 500 for sort attempt at a rally,
market crashes usually start from oversold conditions, as punished buyers
have already abandoned ship.
This is deep
global waters and there is a long ways down before the SS €uro
possibly settles.
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