It was once reported that Alan Greenspan, the Maestro of solipsistic reasoning, once said, “if you understood what I said, I must have misspoke.” The markets think they understood the basics of the GRAND EUROPEAN PLAN, but after reading through the many releases, I am not sure how the bail concoction actually will be deployed.Merkel gets the headline of the Greek debt holders being forced to accept a 50% haircut, thus pacifying the Bavarian Burghers and their demand for the rapacious capitalist bankers to absorb a greater share of the losses. Sarkozy walked out on his BALCONY and shouted ONE TRILLION EUROS FOR THE EFSF, while the markets breathed a new sigh of relief.
As readers of NOTES are aware, the EUROPEAN DRAMA was important only in the sense that it called the question of a new SOLVENCY CRISIS FOR THE BANKS, THUS ALLOWING THE FED AND OTHER CENTRAL BANKS TO MAINTAIN THE VARIOUS QE PROGRAMS AND POSSIBLY ENHANCE THE AMOUNT OF LIQUIDITY. As EUROSPEAK assuaged the fears of the global rent seekers, the floodgates of liquidity reopened and money was thrown at all sorts of risk-on assets. The speeches of Dudley, Yellen and Tarullo provided the backdrop for the global rally.
In a zero interest rate environment and the FED more concerned about UNEMPLOYMENT and DEFLATION, it was time to party like it was 2006. The problems that confronted the markets in July still confront investors, but easy money and calmer nerves promote the animal instincts. It seemed that the LONG DOLLAR POSITIONS, especially in the the EURO were hoping for a buy the rumor, sell the fact rally but the FED Governors were able to be the underlying, bigger story.
The biggest loser in today’s market action may well be ISDA. The International Swaps Dealers Association, the designer of the contracts for over-the-counter swaps was deemed to be no more then a pawn for the EU Nations. The CDS contracts on Greek debt will probably be deemed worthless as ISDA is being pressured by the EUROCRATS to not declare the 50% haircut a default. If the European governments can apply so much pressure to void contracts, what value is there in the CDS market?
There are going to be many questions as we go forward from the EU proceedings. The biggest question will still be: WHO IS GUARANTEEING THE TRILLION EURO BAILOUT PACKAGE? Mick Jagger may provide the best answer: “WHY AFTER ALL IT IS YOU AND ME.”
***An idea that seems terribly flawed: The U.S. Treasury is floating an idea of issuing a new floating-rate note in order to appeal to investors who fear that the goverment will be unable to control its profligate ways. This idea is plain stupid for at this moment when 10- and 30-year yields are so low, why wouldn’t you want to lock up borrowing costs and extend out your present duration? This idiocy would be similar to a home buyer taking out an exploding ARM with mortgage rates at 3.5%.
In a Bloomberg article, Campbell Harvey, a DUKE UNIVERSITY finance professor said, “IF rates go up it could cause problems for the government because they will have to pay a higher interest rate.” It seems so obvious that with the FED playing havoc with the bond markets and artificially driving rates lower, a borrower would want to take advantage of the situation and fix their borrowing costs for as long as possible. It seems that it is not only in Notes From Underground where 2+2=5.