Nigel Farage needs no introduction: the famous Euroskeptic is one of very few men who has had the temerity to question, often in an abnormally high decibel fashion, the stupidity of the Eurozone leaders from day one. Now that he has been proven correct, he has every right to gloat, which he does to everyone's delightful amusement in the European parliament. The look on the unelected von Rompuy's face, especially as he watches his decade-long bureaucratic nirvana crash and burn every single day, is quite priceless.
If over the past several days the market has seemed as if it is acting more irrational than normal, there is a simple explanation for this: the volumes across all products have collapsed. This includes equities, bonds, single name CDS and index CDS. In essence the market has virtually ground to a halt as the chart below demonstrates. Why? There are two explanations: one is that this gradual shut down of the market is in fact an unintended and delayed consequence of the MF Global bankruptcy, which has seen material liquidity withdrawn from the non-TBTF, which in turn is impacting overall market stability and functioning. The other theory, espoused by BofA's Hans Mikkelsen in tonight's Situation Room publication is that this is nothing short of a boycott by the market on the ECB, and thus the global capital market system, in an attempt to force the European central bank to resolve the helpless situation in which Europe finds itself, where on one side Germany is staunchly against printing more currency for fears of hyperinflation, and instead demands changes to the Eurozone treaty whereby everyone hands over sovereignty to an uber Eurozone headed naturally by Germany, and on the other we have France et al. pushing for immediate monetization but without transfer of sovereignty to Merkel. Obviously the risk is that should Merkel, who has all the levereage, be pushed too far she may simply balk and say "nein, nein, nein" in the process killing the EUR with one statement. Of course Germany will lose from this chain of events as well, which is why as we have claimed for nearly a year, the fundamental equation for Europe is whether the opportunity cost of constantly bailing out European countries and/or taking on the risk of hyperinflation is worth the benefit gained by German exporters from not having a strong Deutsche Mark. We don't know the answer. But apparently BofA does: "We are all waiting for the catalyst to a better or worse market - to us this means that the markets are now waiting for the ECB to step in." And naturally, just like with Deutsche Bank which put together the case for intervention, the outcome is one where the ECB will do everything in its power to resume the Risk On posture. So under what conditions will the ECB step in? Well, BofA conveniently gives us the answer to that as well. Let's dig in.
Presenting, with little comment, Whitney Tilson's disappointing underperformance for October (and YTD):
It is just us, or does it seem manager performance is increasingly negatively correlated with the frequency of appearances on CNBC?Our fund rose 7.0% in October vs. 10.9% for the S&P 500, 9.7% for the Dow and 11.2% for the Nasdaq. Year to date, it’s down 24.5% vs. +1.3% for the S&P 500, 5.5% for the Dow and 1.9% for the Nasdaq.
Do You Know The Difference?...
We have highlighted the crisis-level situation that short-term liquidity markets find themselves in across Europe at length with banks using every gimmick and instrument they can in order to avoid transparency and insolvency. Whether it's cross-currency basis swaps, FRA/OIS spreads, or simply ECB emergency funds and Fed swap lines, its clear they are running out of 'lenders'. With the interbank repo market as good as closed to most of the Italian banking system, NY Times DealBook has discovered an unusual source of funding via the London Stock Exchange's Italian clearinghouse Cassa Di Compensazione E Garanzia SpA (CC&G). Acting as the middle-man for short-term (3-day) collateralized loans, CC&G basically acts as a depositor for the Italian banks (which make up more than half the 15 European financials that are using this source). While arguably they are not explicitly lending money, merely term-depositing cash, the distinction provides cover in the case of a credit event but there is still (obviously) significant risk of loss given the forms of collateral and potential rapidity of cash-calls. In our ever-so-humble opinion, this should be added near the top of the list of crisis canaries-in-the-coal-mine as the cracks of desperation appear more and more across the largest and most-levered financial firms in the world.
European Bailout Fund For Greek Money Laundering And Fraud
'It's going to happen again' - Financial meltdown committee head
Gold Versus U.S. Dollar as Safe Havens Diverge
For those who have been waiting for an opportune dip in the precious metals market, this could be it. (As of Thursday, November 17, 2011.)