Posts Tagged ‘European banks’

Notes From Underground: Low Probability, High Impact Events

April 11, 2016

When Alan Greenspan was Fed Chairman he would regularly orate on the concept of low probability events that could create disruption in the global financial system. These events are not BLACK SWANS because by definition a black swan is unknowable nor foreseeable. So it is time to take a survey of what Greenie called low probability:

1. Paul Ryan being parachuted into the candidacy for the Republican Party. There is a possibility but is a potential problem, which could rip apart the GOP. What would the fallout be for financial markets if the U.S. was splintered into a three- or four-party system? The same could be said for the Democratic Party if there was a revolt by the left-wing in response to the super delegates. The issue for the Democrats will rise to the fore if Hilary Clinton were to lose New York. Bernie Sanders is a low probability bet but his impact would be great.

2. The probability of Russia attacking Turkey, which could result in the break-up of NATO. If Putin attempts to seek revenge against President Erdogan by providing support to the Kurds against Turkey, the U.S. and its NATO allies would be forced to decide if they were willing to risk war with Russia to honor its commitment to a friend. Imagine what happens to the political situation in Europe if NATO were demolished because of its failure to honor Article 5, which asserts that an attack on one is an attack on all.

3. The June 23rd vote by the U.K. on Brexit results in a vote to leave. Not sure this is a low probability event but it will certainly have a HIGH IMPACT. The greatest outcome will be that others in the EU will request a referendum for this was certainly articulated in the recent Dutch vote on the EU’s agreement with the Ukraine. The most volatile result of a Brexit would be the pursuit of a referendum by German voters. The myriad articles on German unhappiness with the ECB are a mere prelude to what a vote in favor of Brexit would result in for the rest of EU. If you want a good sense of the arrogance of the European elite, watch Mario Monti’s CNBC appearance from today. Mr. Monti decried the outbreak of democracy in Europe and was very critical of David Cameron for falling in the trap and calling a referendum.

The critical assessment by Monti is an infamia for Mr. Monti was appointed Prime Minister of Italy by a “coup” orchestrated by the Brussels elite. Berlusconi was forced from office by threats of Italian debt downgrade and the Brussels eurocrats’ rejection of the Italian budget. When Prime Minister Monti had to call elections in 2013 after the Berlusconi term expired, Monti and his allies received a mere 11% of the vote. So Mario Monti’s views of popular democracy are subject to further review.

4. A failure of a major European bank, something on the order of Deutsche Bank or a major French institution. The cracks in the Italian financial system are well known. It is the exposure of other EU domestic banks that can cause a blind side hit to the financial system. Part of this issue is the BIS view of how sovereign debt is rated. Currently, all EU sovereign debt carries a zero risk weighting. If this were to change, EU banks would be forced to raise a great amount of capital, a total that would dwarf the amount that was recently raised to support the purchase of non-performing loans from Italian financial institutions. The European nations are struggling even with zero interest rates. Imagine what the budget deficits of Spain, Italy and France would be if borrowing rates were to dramatically increase.

This is just the beginning of analyzing low probability, high impact events. The landscape of the global macro system are rife with such possibilities. Now a black swan in an uncertain event this focus will be on those with a probability of occurring. The floor is open to all suggestions.

Notes From Underground: Buy Apple, TWEET, TWEET (Or So a Little Birdie Told Me)

August 15, 2013


The tweet heard ’round the world makes those who claim GOLD is an irrational investment appear to be the true FOOLS. In 140 characters, one man’s opinion added $40 BILLION to the equity value of a corporation. This is insanity and makes the idea of a rational capital market structure very suspect. The number of outstanding shares of Apple Inc. is 908 MILLION, thus a rally of $45 puts on more than $40 billion dollars of equity. This makes the recent rally in GOLD a very rational rebuttal. One man did the work of what thousands of sell side analysts failed to do. (And they wonder why the retail investors have been sidelined). The HFTs are pissed because they didn’t get the news two seconds early. The efficient market hypothesis may be correct during a certain amount of time, but in today’s algo-driven market and tweetable investments it is difficult to refer to any market as rational in the traditional sense. Warren B., you got a lot of explaining to do. But until then, don’t denounce GOLD as a haven in the times of monetary insanity. Oh well, back to the tapering!


Notes From Underground: European Leaders Head to Washington for Meetings When Everyone Knows There Is No Sanity Clause

November 27, 2011

In one of the best Marx Brothers scenes is from A Night at the Opera, where Groucho and Chico are ripping up a contract and they finally come to the SANITY CLAUSE, in which Chico proclaims there is no SANITY CLAUSE. In tomorrow’s Financial Times, there is a story about France pushing for a Christmas gift from the ECB. The gift that the French are hoping for is a backstop for the European banks that are under severe stress because of the huge amount of EURO sovereign bonds on the banks’ balance sheets. In order for the ECB to act, there would have to be a SANITY CLAUSE invoked and the EUROCRATS would have to attain a measure of sanity. The day-to-day machinations of EUROPEAN politics has left the markets FATIGUED and in a very defensive mindset.


Notes From Underground: Pushing On A String “Yields” a YO-YO Market

August 23, 2011

The great economist and bon vivant, Joseph Schumpeter, described the failure of low interest rates to stimulate the animal spirits of businessmen as “PUSHING ON A STRING.” In paraphrasing this concept, high interest rates can stop an entrepreneur from borrowing but ultra-low rates cannot stimulate investment if there is no expected return higher than the cost of capital. Some pundits continue to insist that banks aren’t lending while many of the banks insist that there is no business or consumer demand. It is driving the Bernanke FED crazy that with interest rates at zero, capital investment is just not reaching levels high enough to add jobs.