Black Monday 2: Economic Boogaloo

[Solfe]

I chose MRE's for that application because they have a long shelf life.

I tend to use items that have a short shelf life, so everything is in rotation. I keep the cars loaded with food and water that has to be replaced all of the time. On the upside, I could last 24-48 easily in any one of my cars. Paranoia on my part, I got stuck for 2 days in a snowstorm. Cold is much worse than hunger, at least in the short term.

Back to the discussion at hand, Euro break up. Maybe I am a fool, but I can't see that every happening completely. Each country could revert back to their own currency "easily" by busting out the presses, but Europe is pretty tightly stitched together. There would be a frightening period of financial woes as everyone struggles to adapt to the new situation.

How would that effect daily life for Phillipe and Emma Average?

Here is another foolish question. If the EU does start to fall apart, are any countries willing to stick with it and continue on? That is a very interesting question in my mind. There are 27 countries to start with, what if any 6, 9 or 12* decided to keep going? What would their role be in the situation?

(*small but significant random numbers, feel free to replace them with your own.)

[HenrikOlsen]

Here is another foolish question. If the EU does start to fall apart, are any countries willing to stick with it and continue on? That is a very interesting question in my mind. There are 27 countries to start with, what if any 6, 9 or 12* decided to keep going? What would their role be in the situation?

That would utterly depend on which countries it is.

[Taeolas]

If I recall correctly, there were some articles linked recently, or at least some musing, that the EU may shrink down to a core group, centered on Germany and/or France, and letting the weaker states drop out or at least drop to a lesser tier.

[Extravoice]

It may not be "Back Monday," but today is "Black Friday" in the US. The day after the Thanksgiving Holiday when people go insane as the Christmas shopping season begins. I haven't heard about anyone getting trampled to death this year, but some woman pepper sprayed the shopping competition. Good will toward men? I sometimes wonder if we are fit to be the dominant species on the planet.

Personally, you couldn't pay me to go near a shopping center today, and I set aside the day for annual maintenence items, such as vacuuming my clothes dryer duct and cleaning the gutters.

[peteshimmon]

And black means the ink in the ledgers
is black meaning profits, waa-hey!
Heck, why could not those accountant
wallahs have used green ink? Much
less confusing. In the green-gains,
in the red-losses.

Green ink was not invented back then?
Well it should have been!

[publius]

Yeah, you couldn't pay me to go to town today.

Italian yields blew out even higher today hitting levels higher than the last blow out last week or whenever it was (it's all running together). There was a disastrous Italian bill auction, and the 12m and 6m are now over 7% yield themselves, jumping 13%. However, that's still below the 8% peak they hit during the last blow out event.

I think they only ones buying Italian debt now are the ECB and the Italian banks (they know the debt is risky, but if they don't buy and let it blow up, they go down with sovereign ship)

[publius]

The narrative seems to have shifted from preventing a Euro breakup, to managing the breakup. I have no idea how they're going to do it, it seems mindbogglingly complicated. Do we even have the currency plates anymore? Or were they melted down 10 years ago?

There've been rumors going around for months that Germany was secretly printing new D-marks as a contingency. Those rumors were hotly denied. And there have been leaks coming out from the UK Treasury and others that they were all contingency planning for euro breakup and currency collapse. They would be stupid not to and that would be an example of the "normalcy bias" I was rambling about as well -- it's unthinkable the EU would break up, so we won't think about it. Of course, it being common knowledge that they were making such plans might make it self-fulfilling, so they would want to keep it secret.

At any rate, here's a good article from Jeremy Warner which goes along with your point:

http://www.telegraph.co.uk/finance/c...pproaches.html

There's been a sudden shift in thinking. Previously, everyone thought Germany would eventually relent and allow printing and/or Eurobonds, but now they've suddenly realized that Germany isn't going to relent and it's time to head for the exits.

Warner doesn't think it will be "orderly" and says the contingencies are for the biggest mass default in history.

Note his comments at the end about CDS. They ruled the Greek haircuts were "voluntary" meaning the CDS wouldn't be triggered. That had to effect of telling investors that CDS were worthless. Of course in practicality they are worthless anyway, and triggering such a credit event is what they were desperately trying to avoid. Our idiot banks in the US have written wads of CDS on Euro sovereigns, and it would be Armaggeddon indeed if they were triggered.

Of course, the "biggest mass default in history" will do it as well.

[publius]

I was just looking at yields. Greek 1y went over 300% which is the 1/4 of face value mark. Greece has also started direct talks with the bondholders and is demanding such a 25% recovery rate, a 75% haircut.

And the Italian yield curve inverted again. 2y: 7.66% (off a high of 7.92%!), 3yr 7.72%, 5y 7.74% and 10yr 7.26%.
The short end of the bills: 3m: 4.93% 6m: 7.06% 12m: 7.02%

[publius]

More on Brit contigency planning for euro collapse:

http://www.telegraph.co.uk/news/poli...ice-warns.html

Note the contingency planning is that collapse is just a matter of time. They're preparing for riots and social breakdown, and what do with Brit citizens inside the EUzone unable to access cash or the bank accounts.

And also note the final "worst case" part about a 50% drop in GDP for euro member states. Economic output drops in half. That is collapse territory, not mere depression.

And if(when) that happens, that will sweep over here and consume our own idiot banks like wildfire.

[publius]

There's been another kerfluffle about another little mystery on Helicopter's balance sheet this week. Before 2008, if you'd told me that in a few years I'd be watching the Fed's balance sheet like a hawk and trying to learn every little detail about it, I would have laughed. At any rate, behold the latest H.4.1:

Go to Table 1 and look at "Other" under Deposits with FRBs other than reserves (these are the "checking" accounts of everybody else besides the banks. Uncle's account is here, as well as Foreign Official). "Other" is everything that is not explicitly listed as a seprate item.

There has been a huge jump in the Other category, with the ending balance at $115B. The weekly average jumped $45B, but look at last week's H.4.1:

http://www.federalreserve.gov/releas...111117/h41.htm

It ended at just $27B on Nov. 16th. The week before that it was $51B.



Now, just what does Other include. Well, it includes the checking accounts of Fannie and Freddie (who are privileged enough to have deposit accounts directly at the NY Fed). But that's not it. It also includes things like the IMF and other international NGOs and similiar. I hear the Euro bailout fund would also have an account at the Fed.

[PraedSt]

Zerohedge has an article pointing out that the total amount of over-the-counter derivatives rose by $100 trillion in the first half of this year. Gulp.
http://www.zerohedge.com/news/707568...107-trillion-6

Their analysis: "So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows."

I do recall that there was a backlog in recording OTC contracts. This might simply be result of the backlog clearing. Or maybe not.

[boppa]

Usually dont post, but I hate to say- when looking at the total debts (private, government and industrial) the US looks to be breaching 400% where Italy is `only' at 360%

so why is there this sudden `flocking' to `safe' US dollars in the last few weeks?

(another case of `too big to fail' ??? .....)

IMHO- its betting on whose sandcastle is going to be washed away first- you might be right for a few seconds, but in the end- everybody loses?????

[publius]

That's standard behavior, flocking to "safety" (safety being a very relative term). The stampede is just to get out of the euro, which happens to be the ugliest ugly girl at the dance as it were. Right now, the dollar is the prettiest ugly girl.

Where did you get that 400% figure? Here's the latest from Fred:



Now Japan may be at 400% total. Their public debt ratio is at a mind boggling 200%.

[publius]

The latest rumors are something about a massive IMF loan bailout for Italy with a figure of $600B (whatever that it is euro) being floated around. No details just that figure.

They've got to do something, even if it's just talk, to try to stop the bleeding. Another "sticksave", some attempt to kick the can a few more weeks (days, even) down the road. If they don't do pull some rabbit out of their hat, Italy is gone. Remember last week's disastrous Italian bill auction (and other disastrous auctions, including Germany). Italy has to roll over and/or make coupon payments of about E30B in the next month or so, and if Bondzilla tells them hell no to new debt, they default right then and there. And then the euro dies right then and there and all the contigencies are realized.

[publius]

Here's a good one:

http://www.ft.com/intl/cms/s/0/82b15...#axzz1ewfQdSEf

The head of Greece's statistics agency is being charged with fudging numbers *and to the downside*, not up. He is charged with making things look worse than they were, not better. And the reason was apparently to get more IMF help.

[publius]

How desperate are things getting? This desperate, from AEP:

http://www.telegraph.co.uk/finance/c...-disaster.html

If the ECB won't helicopter, they're screaming for Helicopter himself to do the helicoptering. Again, AEP is a money printer at heart, and he thinks this will work. He quotes some character from Jeffries there, demaning this be done. Jeffries is up to its own eyeballs in Euro sovereign cum junk debt, so he's about as far from an impartial source as possible.

Politically here, the headline "Fed prints another $2T to save Europe" would be the end of the Fed. It wouldn't be immediate, but the political fallout would be the Fed's head on a pike ultimately. The Fed does have the legal authority to buy foreign sovereign debt, although I don't think it ever has (it might have accepted it as collateral for discount window loans and repos, though).

The problem is the Fed creates dollars, not euros. The Fed can certainly buy if someone is willing to accept dollars, but if someone needs euros, it can't be done directly. The ramifications of all that forex indirection, I don't know. And I doubt the cheerleaders for this have thought it out either.

[publius]

And the massive IMF loan for Italy rumor has just been denied.

[publius]

According to this guy,

http://www.ft.com/intl/cms/s/0/d9a29...#axzz1ewpKcCAe

the EU has 10 days. If they don't agree to massive ECB printing, Eurobonds, and fiscal union by the next meeting, the euro is gone and we have that "biggest massive default in history".

[publius]

And now, according to Dow Jones wire via ZeroHedge, ICAP (big London broker/dealer) is now testing Drachma trades. But it says it's just a precaution.

They are preparing for Euro breakup and the reintroduction of old currencies.

[PraedSt]

Zerohedge comes up funny headlines. "Multi-Trillion Bank Bailout Leads to Multi-Billion Bank Profit Bloomberg Finds"
http://www.zerohedge.com/news/multi-...loomberg-finds

As for the Euro, I'm skeptical about increased fiscal union. It can be rammed through of course, I just don't think electorates will react well to it.

[Ronald Brak]

Here we've manged to have massive droughts, massive floods, massive fires, cane toads, rabbits, carp, a couple of world wars and the Spanish Flu. But none of these things resulted in even the temporary collapse of our society. The EU's financial woes are not a good thing, but still nowhere as damaging to us as rabbits, and so I find it impossible to feel any sense of danger for my own comfortable position here at the Aust end of the world. While a very real chance of a decline in commodity prices and European tourists is, in general, not a good thing for us, I think I can safely speak for us all when I say that very few of us feel the need to run outside and shoot people in the face over it. And looking on the bright side, a fall in commodity prices will do plenty of other people some good. So I shall watch the stock market's gyrations with an air of detachment and pay no mind at all to bond markets. Maybe I'll buy a Euro on eBay for old times sake. I have a US dollar and a Malaysian coin I can try to exchange for it.

[boppa]

Here we've manged to have massive droughts, massive floods, massive fires, cane toads, rabbits, carp, a couple of world wars and the Spanish Flu. But none of these things resulted in even the temporary collapse of our society. The EU's financial woes are not a good thing, but still nowhere as damaging to us as rabbits, and so I find it impossible to feel any sense of danger for my own comfortable position here at the Aust end of the world. While a very real chance of a decline in commodity prices and European tourists is, in general, not a good thing for us, I think I can safely speak for us all when I say that very few of us feel the need to run outside and shoot people in the face over it. And looking on the bright side, a fall in commodity prices will do plenty of other people some good. So I shall watch the stock market's gyrations with an air of detachment and pay no mind at all to bond markets. Maybe I'll buy a Euro on eBay for old times sake. I have a US dollar and a Malaysian coin I can try to exchange for it.

You no fun R.B

I even know where theres a mint xc falcon coupe with a 351 in it...

You mean I don't get to go all Mad Max in it???

Bummer

[Ronald Brak]

You no fun R.B

I even know where theres a mint xc falcon coupe with a 351 in it...

You mean I don't get to go all Mad Max in it???

Bummer

I'm already a maggot living off the corpse of the old world, so a world wide collapse of civilisation won't do me any good. On the other hand, I fully intend to get around to playing Fallout 3 at some point and I'm sure there's someone out there who has made a financial collapse mod for it with bowler hatted bankers instead of raiders and super mutant hedge fund managers.

[Space Chimp]

It isn't like there weren't lone voices warning against the witches' brew of bad economics, bad finance, & bad politics that was the Euro. But the reply was damn the icebergs, full speed ahead. Now the watertight compartments are compromised, the ship is sinking, and the crew and passengers are flailing about trying to find lifeboats. Next year is the centennial of the Titanic. Maybe we were overdue for another humbling.

[Delvo]

There's been an ad playing on the radio around here lately including a hypothetical news broadcast from the future, full of what the people who made it expect to sound like good news. One of the good-future-news items in it is that house prices are going up significantly.

My amazement that that attitude (of high house prices being inherently good) so often comes from people who think high prices are inherently bad in every other type of product or service, but who don't seem to notice how they're reversing themselves for just this one kind of product for no reason, is second only to my dismay that there are still apparently so many people who haven't learned that bloated house prices were a large part of the problem and letting them fall is the solution. As long as there are still people thinking that way, a real solution to the economic problem won't be politically viable.

[Extravoice]

Many people consider a house as an "investment" rather than a "purchase". While they don't expect most other items they purchase to increase in value, they expect their house (and associated real-estate) to do so. I'll leave it to people who understand economics better than I to determine if that is a reasonable expectation in the long term.

There are a large number of people whose house is now worth less than they signed-up to pay for it, and feel that increasing prices will set things back to "where they belong", rather than the collapse in prices having done so.

[peteshimmon]

There are many pro's and con's with house
buying. Firstly lets recognise the market
is the best mechanism for distributing
goods. Then there is upkeep for an asset
that will deteriorate unless looked after.
And when changing locations as a career
may demand, selling and buying is easier.

But against this is the price spiral because
demand is always positive even in depressed
times. Local Authority building can always
offset this though miserable types may grumble.

Some properties belonging to people whom age
has graced are seen to be in a state everywhere.
There could be a case for buying these up if
empty and renovating on the basis that land
has to be used positivly all the time. But
this is slightly political I suppose

[profloater]

I guess it is too late for eurobonds although Soros (wasit?) suggested a neat fudge with quasi independent bond holders so that the ECB could legally buy sovereign bonds through them to bring down all those bond rates. Otherwise it does look as though germany has been planning for this collapse all along and we will end up with a northern Euro and a Southern Euro, rather than all the old currencies back and fighting each other. Devalued currencies is the only way out but surely Germany does not want a super high value Northern Euro killing all the exports? Who is the king maker here? Are the so called technocrats from Goldman Sachs all idealogues at heart and about to discover a big dose of reality? Is this the final proof of the cock-up theory that really no one knows what they are doing?

[publius]

Is this the final proof of the cock-up theory that really no one knows what they are doing?

What they're doing is just trying to hold things together for a few more weeks, if not mere days, and not thinking about the long term.

We had a nice little rally here, a little sugar high today, so all is well for a few hours.

The Italian 2yr went on a conniption fit today, swinging 100bps -- one whole percentage point -- in one day. It peaked at 8.12% before closing at 7.11%. That's another one of those 6 sigma events.

And they've appointed Louis Freeh, former FBI head, to head the investigation into MF Global.

[publius]

Italy has a bond auction tomorrow I just learned.... So does Belgium, short term bills, actually. Then France and Spain on Dec 1, some others following, followed by more Italian auctions on Dec. 12, Dec 14, 28 and 29th. Greece has a big coupon payment due sometime around the 30th. Spain and Portugal have several more auctions in Dec. as well.