There are more and more "professionals" in the mainstream media stating that they expect European defaults. What is interesting is that as there is at least a minority of pundits that are facing this inevitable event. European (and American) equity markets are still chuggling the global liquidity elixir awash in the markets and moving ever higher. From Bloomberg: Shrinking Euro Union Seen by Creditors Who Cried for Argentina
Nine months before Argentina stopped paying its obligations in 2001, Jonathan Binder sold all his holdings of the nation’s bonds, protecting clients from the biggest sovereign default. Now he’s betting Greece, Portugal and Spain will restructure debts and leave the euro.
Binder, the former Standard Asset Management banker who is chief investment officer at Consilium Investment Management in Fort Lauderdale, Florida, has been buying credit-default swaps the past year to protect against default by those three nations as well as Italy and Belgium. He’s also shorting, or betting against, subordinated bonds of banks in the European Union.
“You will probably see at least one restructuring before the end of the next year,” said Binder, whose Emerging Market Absolute Return Fund gained 17.6 percent this year, compared with an average return of 10 percent for those investing in developing nations, according to Barclay Hedge, a Fairfield, Iowa-based firm that tracks hedge funds.
He’s got plenty of company. Mohamed El-Erian, whose emerging-market fund at Pacific Investment Management Co. beat its peers in 2001 by avoiding Argentina, expects countries to exit the 16-nation euro zone. Gramercy, a $2.2 billion investment firm in Greenwich, Connecticut, is buying swaps in Europe to hedge holdings of emerging-market bonds, said Chief Investment Officer Robert Koenigsberger, who dumped Argentine notes more than a year before its default.
No disrespect intended to these fine gentlemen and distinguished investors, but the default of several of these states is simple math. You cannot take 8 from 10 10 from 8 and come up with a positive number. It really does boil down to being just that simple in the grand scheme of things. I actually released a complete road map of Portugal's default yesterday (see The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog), and today I will walk those who are not adept in the area through it with simple graphs and plain vanilla explanations.
You don't need a "wikileaks.org" site to reveal much of the BS that is going on in the world today. A lot of revelation can be made simply by having motivated, knowledgeable experts scour through publicly available records. I'm about to make said point by showing that the proclamations of the ECB, IMF, the Portuguese government and all of those other governments that claim that Portugal will not default on their loans is simply total, unmitigated, uncut bullshit nonsense.
If you recall, I made a similar claim regarding the Irish government and posted proof of such, see Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… November 30th, 2010.
For those who wish to skip my market commentary and feel you may already understand how to interpret the output of the restructuring model, go straight to the haircut analysis by simply clicking this link and scroll to the bottom until you see the live spreadsheet. For the rest, let's start by looking at it from the German's perspective as reported in Bloomberg: Germany Snubs Pleas to Boost Aid, Sell Joint Bonds
Germany rejected calls to increase the European Union’s 750 billion-euro ($1 trillion) aid fund or introduce joint bond sales, signaling its refusal to bear extra costs to stamp out the debt crisis. With European finance ministers gathered in Brussels today for their monthly meeting, German Chancellor Angela Merkel rebuffed pleas from Belgium and central bankers to boost the emergency fund to save countries such as Portugal and Spain from falling prey to speculation. “Right now I see no need to expand the fund,” Merkel told reporters in Berlin. She said EU treaties bar joint bond sales, which might force up Germany’s borrowing costs, the lowest in the euro area. European political discord pushed down bonds in Spain and Italy today, reversing gains made last week after purchases by the European Central Bank briefly eased concern about the spreading crisis. The ECB bought the most bonds in a week since June, according to a statement today. The yield on Spain’s 10-year notes climbed 9 basis points to 5.08 percent as of 5 p.m. in London. Italy’s yield rose 7 basis points to 4.47 percent. The euro halted a three-session rally, dipping 1 percent to $1.3283.
Britain's decision of not joining the euro was vindicated by the crisis in the euro zone, as the countries in the single monetary union have lost control of their monetary policy, UK Chancellor of the Exchequer George Osborne told CNBC.
The UK did not join the euro because that would have meant giving up decision over interest rates and removing exchange rate flexibility, Osborne said in an interview late Tuesday.
"And, you know, I feel that our view has been vindicated by recent events, and I'm very pleased the UK's not part of the euro," he said.
Whaaaattt????!!!! That's not the way I remembered it. As I recall, a man with a proprietary investment style very similar to my own (see "The Great Global Macro Experiment, Revisited") George Soros warned the UK officials not to join the Euro and they ignored his advice.
[caption id="" align="alignnone" width="680" caption="From a Global Macro perspective, it is actually quite profitable taking the opposing side of Central Bank trades. They are inevitably always wrong! If one were to look at the track record of my public calls via BoomBustBlog over the last 4 years, this assertion is proven true without a shadow of a doubt."][/caption]
He then levered up against the pound as the UK tried to manipulate its currency to fit within the EMU's mandated band. The man reportedly made $1 billion off of that trade (which was a lot of money for a trade back in the '90s) and was labeled a villain. Methinks they should erect a shrine in homage of Soros in Trafalgar Square instead. It appears quite obvious that Soros was right and the UK government was wrong. Here's how Wikipedia puts it:
In January of 2009 (reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga I became highly suspicious of the spillover effects of bubble credit and excessive reliance on construction that the European nations had and absorbed from the private sector banks. At first this was focused on Spain, but then my team of analysts and I widened our scope to all of Europe, and found that there was a contagion waiting to manifest. This was a full year and a half before most even admitted there was a pandemic problem (and to this day, there are still some naysayers). Here's a quick time line and link fest of all of the misunderstandings, misinformation, disinformation and outright lies that have led us up to this point...
Around February 7, 2010, many sell side analysts and geo-political pundits stated that there was no European sovereign debt "crisis", not to mention a "pan-European" crisis. I responded with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, , not a localized not a, not localized one. Of course, this was absolute blasphemy within the circles of those smart guys who knew what they were talking about. I then went on with What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect and followed up with:
The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
More and more "experts" on the matter explained how the situation is overblown- Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
Summary: This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European, or possibly global, financial and economic contagion. It contains a lot of applied concepts that veer outside of the realm of finance and economics and into human nature and psychology - alas, that is what I consider reality. For those that wish to skip to the pure financial aspects of why I believe Ireland is destined to default (and how they are hiding debt with the complicity of other parties), scroll down to "Real World Examples of the Social Science Concepts Above". To get the full gist of what is going on, continue reading below. I will continue this post within 24 to 48 hours with our calculation of Irish sovereign debt haircuts and some likely contagion effects.
Ireland did not rule out the possibility of turning to the European Union for help, while an Irish newspaper reported that the Prime Minister may approach Brussels as early as Tuesday.
The Irish Independent said Finance Minister Brian Lenihan may ask his European counterparts in Brussels on Tuesday if it would be possible to funnel funds into Irish banks which he has already promised to pump up to 50 billion euros ($68.38 billion) into.
"There is no question about Irish sovereign debt - the question remains about the funding of the banks. The banks are having trouble getting money," the newspaper quoted the source as saying.
"We have to find out - could you go to the fund and get money for the banking sector? Lenihan at ECOFIN presents an opportunity to discuss it. It would be the banks that would have to pay it back - not the state."
The total amount of outstanding European Central Bank loans owed by Irish banks rose to 130 billion euros as of Oct 29 from 119 billion on September 24, data published on the Irish central bank's website showed on Friday.
As if BoomBustBlog subscribers didn't see this coming a mile and a year away - Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! I will be reviewing and adding to my extensive work on the Pan European Sovereign Debt Crisis this week since that situation is about to explode. I will also reveal the likely haircuts to be taken on Irish debt as well with the publication of our Irish haircut model. Remember how nasty those Portuguese haircuts looked - Introducing the Not So Stylish Portuguese Haircut Analysis???
You think those are ugly? You ain’t seen nothing yet!
In the meantime I suggest that paying Subscribers review our Irish analysis and related contagion material:
I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.
Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves).
Reggie Middleton with Max Keiser on the Keiser Report and RTT Television
Go to 12:20 in the video to see the portion with Reggie Middleton
The topics in this interview stem from the post Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
On the difference between accounting earnings and economic earnings...
... accountants have not been – and currently are not, trained in the economic realities of corporate valuation. They are trained to tabulate business operations data. There is a marked and distinct difference. That difference is as stark as night and day for investors, yet despite this stark difference, Wall Street still reports corporate performance metrics strictly in accounting terms, and the media (both mainstream and the more specialized financial media) simply follow suit. Hence we hear much about easily manipulable and manageable accounting earnings, revenues, operating margins, earnings per share, etc. These measures are highly flawed in a variety of ways, with the primary flaw being that they do not account for the efforts both required and undertaken to achieve them. Basically, they measure JUST HALF (and coincidentally, the positive half may I add) of the risk/reward equation that should be at the root of every investors move. Long story short, they do not account for, nor do they EVEN RESPECT, the cost of capital. This concept ties in closely with Chairman Bernanke’s current course of action as well as the ZIRP discussion later on this missive demonstrates (capital offered at zero cost causes reckless abandonment of risk management principles which eventually causes crashes – yes, more crashes). Acknowledgment of the cost of capital enforces a certain discipline on both corporate management and investors/traders. Without respect for such, it is much too easy to create and portray a scenario that is all too rosy, since we are only looking at rewards but never bother to glance at the risks taken to achieve said rewards. I reviewed this concept in detail as it relates to bonuses and compensation on Wall Street in The Solution to the Goldman (and by Extension, the Securities Industry) Compensation Dilemma.
I have received a lot of feedback concerning my article posted yesterday, A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually
Pick up your own "Fiery Swords of Truth" and aggressively seek out the facts. Don't be afraid to ask questions under the pretense you don't understand. Chances are, if it is so complex that you can't understand it, it is either wrong or many other people, including the creators and proponents, don't understand it either!!!
Have, and How It Could All Go Boom! (a must read precursor to this piece) in which I picked up the fiery sword of Truth and attacked all misinformation within reach. A decent amount of derivatives traders, salesman and financial engineers chimed in. Of course, being the simpleton that I am, I am at a loss how anybody can argue that the hedging and netting system actually works with the utter failure of the monolines, Lehman (wherein contracts were unwound and rewritten, but why would they have to be if everybody was netted???) and Bear Stearns (where the government had to step in to be the counterparty of last result), all of which allegedly netted out much of their risk - RIIGHHHT??? Nonetheless, I will go through some of the responses I received via email, all of which were cogent, intelligent and polite - but most of which took a swing at my thesis. Okay, I'm swinging back - and I'm swinging back with the "Fiery Sword of Truth" as well!
Here's the first one:
Hi reggie, love the independance of the blog. Couldnt help but wonder though, as to if the big 5 were really cross exposed to that degree. Surely hedge funds, private banks, real world commodity producers etc are other swap counter parties that you fail to include in your calculations. 1.7 trillion of unlevered hedge fund assets arent included anywhere for a start. How about other smaller banks too, that dont show up in the comparison, maybe there is more diversification than you think.
Now that the Robo-Signing scandals have achieved full notoriety through the media, it is time to address the real issues facing investors in bank stocks. We also believe that the media is staring at the wrong target. Each major media outlet is copying what is popular or what the next outlet broke as a story versus where the true economic risks actually lie - which is essentially the real story and where the meat actually is. This is what is truly at stake - the United States is now at risk of losing its hegemony of the financial capital of the world! Why? Because when we had the chance to put the injured banks to sleep and redirect resources to into new productivity, we instead allowed politics to shovel tax payer capital into zombie institutions as they turned around and paid it right back out as bonuses. As a result, significant capital has been destroyed, the original problem has metastized, and the banks are still in zombie status, but with share prices that are multiples of the actual values of the entities that they allegedly represent - a perfect storm for a market crash that will make 2008 look like a bull rally! For those who feel I am being sensationalist, I refer you to my track record in making such claims.
The Japanese tried to hide massive NPAs in its banking system after a credit fueled bubble burst by sweeping them under a rug for political reasons. Here's a newsflash - it didn't work, it hasn't worked for 20 years, and despite that Japan is embarking on QE v3.3 because it simply doesn't believe that it is not working. Here are the steps the US is consciously taking it its bid to enter a 20 year deflationary spiral like Japan, and may I add that these steps were clearly delineated on BoomBustBlog ONE YEAR ago (Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009), so no one can say this is a surprise.