Friday, 10 June 2011 13:16

Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going "Click, Clack"! BoomBustBloggers Instructed To Line Up Bearish Positions Again!

Note: Please be sure to check the twitter feed in the upper right hand corner of this site for real time updates, as well as the comment section below.

It is now time to start putting in some serious short positions across the board - globally - for all those who have not already done so. Anyone who has followed me on BoomBustBlog knows that I have clocked heavy four digit gains (250% to 450%), mostly unlevered, throughout the first leg of the financial crisis - see Sample Research & Performance. This was accomplished by keeping my eyes open and objective, and in doing so recognizing the enormous holes in economic value that were trading at ridiculously high risk adjusted prices. The result of which enabled me to publicly call the fall of nearly every major collapsed FIRE sector institution that did actually fall, and do so months in advance, including Bear Stearns, Merrill Lynch, WaMu, Countrywide, Lehman Brothers, General Growth Properties, etc. The near 100% equity run up at the height of the correction was easily seen by my and my staff, but I (and I put the blame squarely on myself and no one on my staff) severely underestimated the breadth and depth of this synthetically contrived, central bank centrally planned, bear market rally. This underestimation of the depths that our Federal Reserve would stoop to in mortgaging the future of this country, and this country's children of the next generation cost me 50% of the gains that I made over the previous two years. For this I was actually forced to apologize to my subscribers in a lengthy letter with tears dripping off of my virtual typewriter, reference 2009 Year End Note to BoomBustBlog Readers and Subscribers. I felt horrible about underestimating the self destructive staying power of the concerted efforts central bankers around the globe attempting to rescue a failed oligarchy, but despite this significant shortcoming, I still ran many circles around what the best Sell Side Wall Street had to offer, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Yesterday, I went through a quick timeline that illustrated what was once considered sensationalist now considered by most to be fact: The ECB, several national central banks, and a good portion of the private banking system are insolvent. This is the case regardless of what name you want to cut and paste on the state of insolvency. As excerpted from :

European Banks’ Capital Shortfall Means Greece Debt Default Not an OptionA failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.

Here’s a newsflash for all of you who are still not grounded in reality. The loss to the banks have already occurred it just hasn’t been officially recognized. You see, their bond and debt holdings are already devalued. The value is gone, vamoosed, disappeared. I have made this perfectly clear, both in my keynote speech at the ING valuation conference and here on BoomBustBlog.


Since the engineered global equity runup referenced in the first paragraph,  I have accurately called the European Sovereign Debt Crisis (as well as the mobile computing paradigm shift) and watched it metastisize into a catalyst for another global meltdown, but this time actually competing for the pole position price with China (whom I've warned about regarding the inflationary fireball cum real asset burst), Japan and the US, who did close to nothing to remedy the causes nor the real effects of the real asset/credit bubble it had just 2 years ago! See my thoughts on this triumvirate spiral of stagflation here at marker 20:55:

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So despite disgorging half of my market collapse gains to the contrived bear market rally, and make no mistake about it because that's exactly what it was, a bear market rally (just the bear market rally from hell), I still have my eye set on reality and that reality is telling me once again - Look out below! Even more importantly, the economic safety nets and capital cushions that we had in place in 2008 are gone - wasted in a vain attempt to ensure that the oligarchs who stewarded this collapse in the first place get to remain in their vaunted positions to do so once again. Go to 20:00 marker to see me elaborate on this topic.

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Now, reference the seminal piece Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!

Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was  – where we happen to be now in many places of the developed world – sans rampant propaganda, misinformation and disinformation from less than disinterested sources.

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Simply sit back and look at the (supposed, none of these should truly be considered surprises) Black Swan Catalysts that we now face:

  1. US Housing, you know, the the thing that kicked this all of to begin with - The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
  2. US and/or European Commercial Real Estate - Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  3. MENA, the Middle East & North Africa – Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! Friday, January 28th, 2011  or First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Wednesday, February 2nd, 2011
  4. Japan – Can Contagion Be Avoided Considering The Magnitude Of Japan’s Woes? Tuesday, March 15th, 201

The list can go on. The most likely catalyst is described as follows…

The advice coming from both the government agents (ex. central bankers) and those whom these government agents have pledged to rescue at the absolute cost to the average tax payer (the FIRE sector, particularly the banking cartel)  has been absolutely horrendous. First let’s take a look at the most respected of these agency protected players – Goldman Sachs. From my missive, Is Another Banking Crisis Inevitable? posted last month, I excerpt the following:

Today, Bloomberg reports that Goldman Sachs Turns Bullish on Europe Banks as Debt Risk Eases.The report goes on to state:

The U.S. bank that makes the most revenue from trading advised investors to take an “overweight” position on banks, raising its previous “neutral” recommendation, according to a group of equity strategists led Peter Oppenheimer. Investors should pay for the trade by lowering holdings of consumer shares, he wrote.

“For financials the narrowing of sovereign spreads in peripheral eurozone, which our economists expect to continue, is a clear positive,” London-based Oppenheimer wrote in the report dated Feb. 3. “Banks are one of the least expensive sectors in the market and the trade-off between their growth prospects and earnings in the next few years looks especially attractive.”

Unfortunately, the risks of this particular trade were not articulated, and I feel that the risks are material. Far be it for me to disagree with the “U.S. bank that makes the most revenue from trading”, but they have been wrong before – many times before. ReferenceIs It Now Common Knowledge That Goldman’s Investment Advice Sucks??? or Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?for more on this topic.

So where is the risk?

The impact of the Asset Securitization cum Sovereign Debt Crisis to bank balance sheets should become the market and media focus. The full cost of cleaning up the balance sheets of financial institutions particularly against the backdrop of adverse macro shocks emulating from sovereign defaults is not fully known. Structural weaknesses in sovereign balance sheets could easily spill over to the financial system due to the fact that most banks are stuffed to the gills with sovereign debt – highly leveraged, and marked as risk free assets at par. This can have broad, adverse consequences for growth in the medium term.

The central bankers of the world have made truly fundamental investing with a global macro outlook very difficult if not impossible due to the fact they have virtually destroyed the cost of risk and eliminated organic price discovery.

As excerpted from the subscriber document: File Icon The Inevitability of Another Bank Crisis

I will spend next week going through FIRE sector company exposures for paying subscribers. That is exposure to each other, real assets, bogus valuation on balance sheet holdings and sovereign debt. It's time to pin down the individual shorts and rank the by risk and we need to do so before risk premiums start to ratchet up to high. We will start with US, CEE and EU FIRE sector participants. In the meantime, I suggest subscribers review the following documents for notes on the specific banks that we will be doing a refresh on, for they are the one's that are literally "trapped" unless they dumped all risk to the ECB. If they did, then the pressure is spread around which dampens their banking business and puts us back where we started, bearish:

Just to demonstrate how much worse things have gotten as compared to this time last year...

Last modified on Monday, 11 July 2011 13:33