Do You Know What A Blood Oath Is, Mr Ness? "Yes" Good, Cuz You Just Took One. (In Ben We Trust)

In Ben (Only) We Trust
This blog has pointed out that the market believes in one, and only one, decision-maker. That is Ben Bernanke. Period. Do not pass go. Do not collect $200. Today, dragging the seven dwarfs in tow, Ben "Snow White" Bernanke must've watched The Untouchables last night.

Here is what he said (actually Sean Connery is a Ben Bernanke doppleganger, don't you think?) to the rest of his monetary chief counterparts.



The rest is history. We can moan "they can't do that," "this is no solution," "this will devalue the dollar and bankrupt the U.S.," etc all we want, but that is not the point. The point is that Ben Bernanke fears one thing and one thing only: the liquidity trap zone. He will do anything to avoid it, even pulling out clips from movies 20 years old. The market has been lulled to sleep forgetting that fact. That all said, this clip has been played out before, and immediately preceded Bear Stearns, Countrywide, and AIG in quick succession. Forbes speculated today that something similar was noticed last night. Maybe, maybe not. Maybe this will prevent us from ever finding out. At this point, we know that the only one we trust, Ben Bernanke, still has the market's back.

In Ben (Only) We Trust.

"Hello. Emerging Markets?", It's Me, Ms Lagarde (Updated)

The Crowd Doth Protest Too Much, Methinks
Universal derision of the reports that the IMF is readying a 600B Euro rescue plan for Italy are all over the internet right now. The US has, historically, been the largest contributor to the IMF. Most of the protestations are related to the idea that the IMF, and the US, do not have that kind of money to help Italy. Yeah, true. But, there are others....

Possibility: Asia Would, and Should, Answer the IMF's Cash Call
Forget the past, and the fact that the IMF has helped basically every emerging market country in some shape or form over the past 30 years. The fact is that now, right now, Asia has more than enough foreign reserves, and national pension money to be on call in a revolving credit line, should the IMF require. GIC Singapore, and their counterparts in China, Korea, Taiwan, etc have more than enough money to collectively be on call for a revolver.
The key point here is that the IMF is not the ECB. The credibility of the ECB is waning by the nanosecond. However, the IMF is different, and if you believe that Asia doesn't consider that credibility, then you are being short-sighted when considering what can actually be done.
Last thing: if you know the Chinese mentality, they know this is a long game with many iterations. Even if they want to win over the long run, Eurozone depression isn't the best way to achieve that from the Chinese perspective either. While the concept of schadenfreude may exist in every culture, Confucian ethics don't focus on this in the least.

(Update) Don't Think The IMF Can "Get Away With This?" Think Again.
Oh please. TARP was &750 Billion. POMO who the hell knows how large. Bloomberg reports secret loans to banks resulted in $13B extra profits (i.e. extra handout). Now, experts are telling us that the IMF doesn't have the capacity/ability to muster up $750B?? You must have missed "current events" in Current Events class; we have just been through 4 continuous years of actions that would have been called "They cannot get away with this."

In short, the suggestion above may not occur, but to summarily dismiss the IMF would also be erroneous. The protestations to the IMF rumor are too violent. A couple of phone calls are all that are needed, and the IMF has the credibility to make those calls. For now.

Update (Nov 30): China Lowers Reserve Requirements
China lowered their reserve requirements by 50 bps in a move to head off a weakening global economy. The PBOC has joined the global PPT. This does make sense. Read the passage from the original post:

Last thing: if you know the Chinese mentality, they know this is a long game with many iterations. Even if they want to win over the long run, Eurozone depression isn't the best way to achieve that from the Chinese perspective either. While the concept of schadenfreude may exist in every culture, Confucian ethics don't focus on this in the least.

The Chinese are now intertwined in the global economy. Add that to their own domestic issues, such as the loan losses at banks and weakening real estate prices, it makes complete sense to address stimulating its own economy, and attempting to pull the global economy with it. So while direct loans to the Eurozone are not yet in order, this is China's first step. With their foreign exchange reserves, China has plenty of bullets to spare.

Eurozone Rumormill in Full Swing: Expect Fireworks

Updated Nov 28
This Weekend, The Sunday Headlines Begin on Saturday

NYT: Banks Build Contingency for Breakup of Euro
Bloomberg: Europe's Single Currency May Unravel Before Action, UBS Says
Bloomberg: Euro in Longest Losing Stretch in 18 Months
The Telegraph: Prepare for riots in euro collapse, Foreign Office warns
Reuters: Greece may miss 2012 selloff target due to Euro crisis

The problem with the extreme pessimism is that it presumes that everyone is completely stupid. That in itself is a wrongly placed assumption. If someone takes Merkozy for total idiots, I am pretty sure that is wrong. I am quite confident they are not, and they are not stone deaf either. They will respond, the question is speed, force, and whether the market is convinced or not. The lack of details given so far has been stunning. That the market has bought any of the "fixes" without the details is amazing, but the crowd is getting more pessimistic with each passing announcement.

Nevertheless, here are the "solutions":
Yahoo! Finance: Germany, France plan quick, new Stability Pact: report
Reuters: Euro zone integration may pave way for ECB bond action-officials
Economic Times (India): IMF readies 600-billion-euro rescue plan for Italy: Report

Within the next 24 hours, I suspect both lists are gonna get even longer.
The naysayers are out in force; you know what that usually means....
A bounce is probably in order.

Post-Mortem Monday (Update 1, Nov 28)
Rumors of IMF rescue plan were roundly denied, and the Franco-German stability pact remained sketchy at best. A euroland-within-euroland debt issue was also denied. Last, and not least, the notion of further leveraging of the EFSF was also denied. Whew, that is a heckaofalot of denials. So while the rally seemed tenuous and on low volume, the fact is that it didn't disintegrate when all of the denials arrived.

The market tell is, and will be, $DB, $CS, $ING; these three are Euro financial ADRs and yet are not within a PIIGS bloc. So, they represent the exposure to the Eurozone debt problem, and the liquidity problems all in one fell swoop. Add in some Euro exposure (due to their original denomination), and voila, you can tell whether the market move intraday is going to hold up. Today, $ING was up 12% out of the blocks, and didn't give much back. KISS, and that is as simple as it gets.

Market sent us everyone a message: the market is leaning short and punished those that stayed short. After the close today, Fitch kept the U.S. ratings but moved the outlook to Negative. Market reaction? Nada. We could be moving into a mode where bad-news fatigue is setting in again, and all bad news is good. 'Tis the season, after all.

Merkel vs Eurozone: Ms Lagarde (IMF) Enters

Structural Flaws of the Euro Exposed

The Euro experiment cannot continue in its current form, period. Fiscal harmony only works when the net export and fiscal equations are also harmonized. Since it is too late for that to be established, we are now back to old-school economics. Countries need to have individualized foreign exchange capabilities. Greece, Italy, and Spain need to devalue their domestic currencies dramatically to pay for their debts. Oops, there is no such thing as a domestic currency. We can dance around the different topics, but absent debt write-off, and simultaneous governmental intervention to prevent an all-out European banking crisis, the Euro experiment is entering its final stages.

Liquidity? Nope. Solvency is the Problem.
The headline is that European bank liquidity has dissolved. The actual problem is that the cause of this is that solvency of European banks is the question. The Merkozy debate is really about how to solve the solvency issue because without a solution, a liquidity solution is nowhere to be found. We will be able to figure out who the survivors will be at a later date; for those currently long European bank equities, the answer is that no one will be left unscathed.

Germany is Pathetic For Many Reasons
Without the PIIGS, you could say that the Euro or Mark vs the USD should be much, much higher. If that were the case, then the German economy would be in a world of hurt. If anything, Germany has benefited from the weak Euro the most; Siemens, BMW, et al have all made money that would have gone to their global competition if the Euro didn't have these problems. For Germany to now turn around and behave in a holier-than-thou way is pathetic at best. Chancellor Merkel is playing a dangerous game, because responding to internal German politics will result in a much weaker German economy in the medium term, and potentially in the very short term if the European economy implodes. However, Chancellor Merkel holds all the cards at the moment, and whether she is bluffing or just stupid is irrelevant. She holds all the cards and needs to get all the concessions she can, while she can. However, Germany, and thus Europe, cannot solve this problem by itself.

Dear IMF: Require Sales of Gold to Help Solve
The IMF is required to solve this multi-faceted Prisoner's Dilemma exercise. The IMF purchases out the individual country, after securing all the gold reserves of that country. Period. Absent that, let the ECB flail around. Although it was widely criticized, the IMF put itself in this position when dealing with the Asian currency crisis. Some believe that the IMF created more problems than it solved. That is Monday-morning quarterbacking at is worst. Individual countries dramatically devalued their currency, took the austerity measures under IMF auspices, the population worked its collective ass off, the debts were repaid early, and growth resumed. That is the ONLY blueprint that now remains. Delaying acceptance of this is making it worse. Much, much worse.

Update (Nov 27): Sacre bleu! Ms Lagarde and IMF Right on Cue

The is no shortcut around a problem the size of Italy. This blog has suggested that the PIIGS be required to put up their family silverware (gold to be precise) to partially collateralize further rescue efforts. It has taken a month and a half (of time that we did not have) for these developments suggested here. The naysayers will look at the IMF plan/rumor and start throwing bombs at it; to which I say that TARP and POMO did what they were supposed to do, which is to avoid imminent depression, and allow the banking system heal. From that point, the economy could find a path back from the brink.

The objectives of TARP and POMO were achieved; the U.S. avoided instantaneous depression. That the banking system didn't use the steep yield curve along with much harsher government measures attached to TARP, is on someone else. Not the programs themselves. When you apply that analogy here, the IMF shouldn't be ignored.

75% Agree to Greece Bailout: Welcome to Multi-Party Prisoners' Dilemma

Only 75%? Are You Kidding Me?
According to CNBC (take that with a grain of salt), 75% of private sector banks have agreed to the Greek bailout. Many people have heard of the simulation called the Prisoners' Dilemma. For those who haven't, an explanation is here. If you Google "prisoners dilemma," you will find many academic papers describing it, as well as simulations that predict the most favorable outcomes.
The problem with that analysis is that it presumes multiple interactions, where you have the experiment over and over. However, in the case of Greece bailout, this is not necessarily the case.

What Does This Mean?
To agree means taking a haircut, maturity extension, etc of existing Greek debt. If anything, what you probably have is that 25%, who dissented, have not properly marked their Greek debt holdings to market. Acceptance of the Greek bailout will crystallize these losses. The French banks (Soc Gen, BNP) have seen their equity prices decline, and their credit ratings cut as a result of the instability caused due to suspicions that they have too much Greek debt. Who knows if this is true, but it is clear that the banking system has restricted funding to French banks due this suspicion. It is now also clear that the ECB and the Federal Reserve, along with other central banks, have basically turned the faucet to "full on" in order to provide the financial system with dollar liquidity. Also clear: these central banks knew full well that the acceptance rate was much lower than the 90% required for the bailout.

Dissent also implies that these banks believe that their survival is at stake, or that they believe that the ECB et al will cave, and provide the bailout in any case. If the bailout is not granted, then the dissenting banks must believe that they will not survive. Otherwise, they would have agreed to the terms as they were originally set. In short, this is mutually agreed destruction from the Cold War days, because if a bank fails (or 25% of them do), then the systematic risk would be catastrophic. However, each dissenting bank must believe that either a) they will perish anyway, or b) the Troika will bailout Greece in any case.

Variations
The reason that this case is so interesting is that it is difficult to ascertain just who is playing. Let's presume that the 25% represent one side. The question is, just who is on the other? The Troika? The other 75% of the banks? Both at the same time? That is why this situation doesn't exactly fit the Prisoners' Dilemma scenario, but it is instructive because the 25% of banks that dissented may, themselves, not agree on who is the other side of this.

Dear Timmy, Ever Hear of the Glass Houses and Stones Thingy?
One thing that Europeans seems to unilaterally agree upon: Mr Geithner's opinion was not, is not, and won't be welcomed. Now that has implications for the entire system, especially since the US has more than shouldered its share of the burden (failure?) of keeping the system afloat. Untold billions have been lent to the US branches of foreign banks, so in a way, it is peculiar indeed that Mr Geithner is receiving the cold shoulder from the Europeans. Perhaps, there is yet another dimension to this particular instance of the Prisoners' Dilemma, with very nationalistic overtones. Yikes indeed.

The PPT Weighs In

The Fed and the ECB Support 50% of the Equation
In a joint announcement, The Federal Reserve and the ECB basically announced the "massive force" measure needed to protect liquidity problems striking European banks.  3 month liquidity, all at one price, for basically as much as you need, is their offer.  More than the largest, well-known stories, Societe Generale and BNP, this helps those that have no other alternative sources of liquidity.

Now For the Hard Part
The question, of course, is solvency.  The question is still bank balance sheets, and what losses can be taken, if moved from unrealized to realized.  This presumes that not all unrealized losses are properly marked to market, which is almost certainly a problem.

Until Then, It's Safe
Don't fight the Fed, etc: apply all of the rules here.  Get outta the way, ride the longs, which mean: DB, CS, ING, STD if you must.  These are swings, but for now, it will be fine.  XLF?  No, except that shorts will have to cover but that will be secondary to the European bank ADRs mentioned here.

Dramatically, the S&P 500 Recovers, and The Chinese Excuse

Technicals Are Driving The Boat If Fundies Don't Interfere
Today, the market looked into the abyss yet again overnight, with the S&P mini trading in the 1120s.  However, by the US regular trading hours, every lunge lower was parried away, and technicals starting taking over as the downward channels held and bounced.

Ludicrous Rumour Triggers Follow-Through
After meandering, there was a blurb in the FT that Italy was reaching out to China.  Where there are a few problems with that.  First, the Chinese have said aloud that they wouldn't if the ECB wasn't.  Actually, that isn't that convincing either, since the ECB is buying Italian bonds.  However, second, you need to ask yourself:  why would the Chinese sink more of their foreign reserves in Euro-denominated Italian bonds when it has loudly criticized the U.S. and its budget difficulties?  Does this make any sense whatsoever?  As as a wise man once said, "Just because we don't understand Mandarin doesn't make the Chinese stupid."  We attach all sorts of illogic simply because we don't understand the Chinese, their culture, their customs, or pretty much anything else either.  We simply shrug our shoulders and attribute any 'ole reason to the Chinese. Inane.

Next Up: 10B Eur of Italian Bonds for Sale
Now THIS bears watching.  Given that the main buyers of Euro-denominated bonds are European banks, which are riddled with Greek issues, and proposed regulatory restraints, the question must be: who exactly will be buying these bonds?  That, we will see soon enough.

More News From Europe (Hint: None Good)

It's Sunday, Markets Will Open Soon
Unlike 2008, when the Fed actually tried to do something, the silence of their European counterparts in 2011 is deafening and troubling.

Bloomberg: Greek ‘Orderly’ Default Can’t Be Ruled Out, Roesler Tells Welt
Reuters:  Euro seen under pressure on lack of G7 support

Are Gold-backed EUR bonds Inevitable?
Perhaps the only answer is to require the PIIGs to sell their family silver gold or use it to partially collateralize EUR-denominated bonds (and no tranching, please).  Is there any other solution that actually works?  Stabilize the EUR, keeps the unity, and thereby stabilizing global equity markets.  Not sure why this hasn't been floated more strongly.  Guess we will see. 

Euros For Nothing, Greek Islands for Free

Maybe Europe Should Outlaw Weekends Altogether
The G7 is meetings, and the blurbs are coming out, slowly.  Highlights isn't really the right word, but...
Reuters:  Marseille lays bare G7 differences and lack of policy room
Guardian:  Greece on verge of default as doubt grows over €8bn bailout

Of course, BHO is golfing, so it cannot be all that bad.
Soon, we will be able to afford to travel to Europe again (at least southern Europe).

I doubt this is what The Vapors meant by "Turning Japanese."