– Europe: ‘It’s Like Asking A Bicycle Repairman To Fix A Jet Engine’ (ZeroHedge, May 25, 2012):
Get the feeling that in the past two weeks Bazooko’s Circus has come back with a bang? You are not alone.
Last thing I asked before I went traveling was “try not to break anything” while I’m away. I get back this morning and it looks like a bunch of teenagers have had a particularly messy drug-fuelled rave in the market’s front room. The day-on-day charts hide the roller-coaster ride we’ve seen on the back of the Euro. Bond markets are in lock-down awaiting what-ever-next “liquidity bomb” the authorities can find to drop. Aside from some minor bond crosses, there has been zip activity outside zero-coupon bunds, gilts and treasuries. There is more liquidity in the Atacama desert.
And the mood has changed. I’m concerned at Draghi’s increasingly open direction – his espousal of radical ideas and his suggestion Eurobonds are closer than we think looks like a head on collision between the ECB and Germany is on the tracks.
On the investment side, it’s not about trying to lighten up positions that might widen if the Euro crisis deepens. Now investors are looking to sell whole portfolios on redenomination risk. You might be confident that block of Cedulas pays back at par. You just don’t know what currency you might get 100 in. Two excellent notes by David Oakley and Gillian Tett in the FT are well worth a read on the scale and form of investor fears.
Yet it’s not all doom and gloom. Although there is entirely justifiable anger over what’s happening, there is also cautious optimism on the future. No matter how hard the Euro Elites, over-zealous regulators and other parasites of this modern financial age strive to wreck markets, there must be opportunities – and the upside is coming. What will drive it? The next rabbit the ECB pulls out the hat? Don’t know what, but it’s Boy Scout time – Be Prepared. The news and environment gets remorselessly worse… which means at some point the mother and grandmother of all rallies is on the cards! What might it be? More SMP, a renewed LTRO 3, growth policies linked to proper European QE?
Stories in the market suggest recent upside in Euro govies is largely technical on the back of the Swiss National Bank neutralising CHF sales. Makes sense – I can’t see any fundamental reasons for demand at this time. The Russians say Greece already has plan C – a parallel currency. That’ll work, they are already in some kind of bizarre parallel universe!
Its 5-years since the sub-prime crisis first became apparent, so it seems extraordinary we are mired in increasingly volatile markets. What makes this crisis so difficult to put back on track? At the moment it feels pretty bad. Greece, Spain, Italy, Hollande et Merkel, Eurobonds, deposit-guarantees, pick and choose your poison. Overhanging the negativity remains the “still can’t believe it” losses at JP Morgan. Get over it. You can’t ever underestimate the basic human capacity for delusional stupidity. It happens and will happen again and again and again. That’s why banks hold capital.
Yes, there was a time when banks held capital against their investments in assets they knew like corporates, mortgages and retail lending and do things they were good at. They made the mistake of getting over complex and the resulting crisis of 2007 gave regulators the chance to move up from repairing punctures to servicing Mach 2 jet fighter engines. And haven’t they done a good job.. billions of unreadable pages of finance-ocrat verbiage has made markets worse and less efficient. Regulatory compliance, risk-reporting and tick-test filing departments greatly outnumber bankers on the ground. Overnight then regulatory nonklematura drew up draconian new liquidity rules forcing banks to load up on sovereign debt, killed liquidity by a slavish insistence on dangerous irrelevances like Mifid, and destroyed market-making by declaring trading a dangerous speculative heresy. Killed what they didn’t understand. (Actually, as JPM just demonstrated… neither did they!) Brilliant: the ultimate regulatory success – nothing will go wrong because they’ve effectively closed the markets.
Since 2007 only one major investment bank has actually gone bust – Lehman – but today you can count the number of real fixed-income investment banking market participants on a single hand. The days when a veritable host of banks competed to top the Eurobond league tables, to advise and trade on behalf of investors, seems like a dim remembered vision of paradise lost. Great opportunity for brokers like us – but at the moment liquidity is pants.
And yet regulators and the Euro Elites are so insensitive to reality they have the temerity to declare “Markets are Malfunctioning.” Which is completely bottom over chest.
King Canute was a particularly successful Danish/English king. His fawning court tried to curry his favour by suggesting such was his power and fame he could command the sea. Canute famously sat on his throne as the tide came in, told the waves to stop and smiled as his feet inevitably got wet.
Canute understood the sea obeys no one. It reacts to immutable forces – the moon’s gravity, tides and currents. Markets are similar. They react to the tides of regulatory bollcocks, the gravity of politics, the currents of fiscal and monetary policies and growth. When markets mal-function it’s because of the environment – traders deciding to short the bejesus out of France are simply responding to the environmental inputs.
Sort out Europe and markets will work. But, of course, Merkel is absolutely right to reject joint and several Eurobonds until fiscal union becomes a fact. If they were launched today, it would simply be a massive trade down to the lowest common denominator. The German electorate won’t be fooled if German funding costs move from the current 0.07% to same level as Spain…