I saw “Too Big to Fail” on HBO last night, which by the way is the best movie depicting the financial crisis to date. I particularly enjoyed Giamatti playing Bernanke; he was surreal. Anyway, seeing the movie reminded me of how stupid the government is and how intent they were/are in disallowing deflation.
Well here we are, 3 years removed from that event, and we are dealing with a bigger problem: sovereign debt. However, this one is easier to solve because governments do not need to worry about moral hazard, since the issue at hand is survival and not private sector bullshit. In other words, there is no way they will let Greece or Portugal fail. No fucking way. They will inflate persistently until it’s no longer an option. I contend, the only way it all falls apart is if the Chinese bubble bursts. They are perceived to be the white knight in all of this, with all of the growth and cash. When that perception is tainted or destroyed, there will be a run for the exits on an epic scale. Until that happens, western economies will extend the game as long as they can print money, sending commodities higher.
I don’t know when the sovereign debt issues will be resolved. But rest assured, they will paper over it and the market response will be “inflationary.” Do you really think they will let it all collapse, after all they did, because the Greeks can’t balance a budget? Remember, we are not talking about Greece here, but the banks. The European banks own a lot of the debt. If Greece defaults, the banks will need to raise capital or fail. If they fail, so do we. It’s a global economy, for better or for worse.
From a traders standpoint, the goal is to stay in the game and not get blown up waiting for resolution. Starting today, barring material news of disastrous consequences, I will begin a campaign of buying up beaten down basic material stocks. I will buy a basket of names, all with better than average fundies, in an effort to capture the coming inflation trade, which will happen as sure as I am sitting here.
To do this, I will need to make some wholesale changes.
Stay tuned.
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why not just load up into the commodity ETFs?
you can do that too.
Because margin changes are more likely to fuck you, there is less certainty about what is actually in there, the etf creator gets his cut no matter how good or bad they perform, and some etf’s have proven to be flat out fraudulent (like SLV).
that’s why i switched to futures.. i am NEVER going back to stocks!! plus 24hr access to the markets.
word, LOVE posts like this from you.
thanks for keeping us in your loop
I second that. The humor factor of this site is great, but it’s this kind of information that keeps me coming back.
Thanks.
I like it best when Senior Le Fly insults me. He so sexy… Sexy like a Honey-Badger.
The problem in Greece is the people would rather demonstrate in the streets than work. The Germans work their asses off and are tired of sending their capital south to support a nation of slackers. This will be a test of the EU.
A lot of my family back in Germany is very pissed with these continuous bailouts – they have had their retirement age raised to pay for them and they still retire 7-9 years after the Greeks. In addition to this they don’t really understand the reasoning for the bailout (i.e. German banks are nut deep in shitty Greek debt) and are very likely to continue to punish any party supporting the bailouts. The CDU recently lost an election in Baden-Württemberg which is considered to be CDU heartland. Nevertheless still agree completely with the fly that there is no politically viable alternative to a bailout as so much political capital has been expended on forming the EU.
One last thing to consider is that Europe’s Bank (i.e. Germany) has the most to gain from a weak Euro as they are the main exporters (although many of their exports are less correlated to exchange rate because they are ‘superior goods’) and many of the bearish Euro comments have come out of their shop. Maybe coincidence, maybe not.
Great post!
But remember it’s the German and French banks that are getting bailed out. No one really gives a shit about Greece, Portugal, Ireland, or Spain.
“German banks are nut deep in shitty Greek debt”. Very well thought out post. I believe German banks, instead of Mortgage Backed Securities, hold what they call, covered bonds. A major difference between MBS and covered bonds is that many covered bonds stay on the books of the issuing banks, even after the bonds are sold. Therefor, if the bonds go bad, they are still the banks’ liabilities (through indemnification). Wall Street bank-created MBS, on the other hand, get stuck up the bondholders’ asses, and the banks that created them, like Goldman Sachs, who even short their own creations, make money on the suckers that bought them, and still walk away free of liability. Some of the Wall Street banks, like Goldman Sachs and Citi, are stuck with PIIGS bonds. But, if they are covered bonds, the European banks that issued them may still be on the hook for at least some of the losses.
I don’t disagree with the Fly that bailouts will continue as long as the banks and bondholders can control the populace, but eventually, the populace will rise up, and there will be haircuts for the rentier bloodsuckers. I can’t help but think that the young and highly educated Irish people, who have not yet fled the country to try to find employment elsewhere, will be the first to pull an Iceland and say “fuck you” to the bondholders.
Great points.
Very good points Baron, especially in differentiating the types of debt. The hilarity in the situation is while a Greek default would certainly hurt German banks (especially the Landesbanks, which are state backed and incidentally deal with many of the retirement funds pensioners draw in Germany), it would blow up Portuguese and Spanish banks (spanish banks are incredibly weak), which would lead to a cycle of bank implosions. Another factor, which you point out – with the young irish population – is that the average age in many European countries is high. This, in my opinion, adds incentive for further bailouts as a weak market would destroy many pension funds. In addition the system is structured in Germany in a way that people currently paying into their retirement are in fact paying for current retirees (i.e. a money in – money out system) and so significant economic shocks would cause serious problems for Germany retirees.
This may have been one of the reasons for Germany trying so hard to maintain employment levels when the crash happened (as well as keeping some spare capacity on hand), because while employment fluctuates the number of retirees is increasing and there are only so many increases in retirement age Germans will swallow.
If Greece doesn’t do like Iceland, the riots will continue and worsen. If Greece does do like Iceland its the beginning of the end of the Euro, and possibly the E.U.. The stakes are high on both sides, but at the end of the day, Greece cannot pay back that much debt. If they inflate the huge debt away, America style, it will have serious reprocussions on belief in Euros. Either way, the destruction of the Euro is the inevitable outcome, but if Greece tells the banks to fuck off Iceland style and brings in their own gold currency (As the Max Keiser movement there is wanting), the banksters will be farther from achieving their world currency. If they go the breathtakingly large inflation route, in a similar timeframe as the US, then a global currency is that much closer.
“It’s a global economy, for better or for worse.” Definately for worse.
Actual video of a cock-gobbler:
http://www.youtube.com/watch?v=EqghVWehgrM
now this is what im talking about ! the man has found inspiration again! and i agree with your thesis and shall follow.
but, we must not get blown the fuck up in the process! could happen via a china slowdown, so caution is paramount!
Commodity ETFs are no good, too much futures fuckery whittle them down. Better off with the producers!
by the way, my WNR is engorged this morning.
Fly,
All BS aside, thx for providing this service/information center.
Greeks can’t balance a budget? I think it was a swindle. Correction, is a swindle, an ongoing one, and the Eurocrat marks just haven’t figured it out yet.
You ‘Mericans are not so good at balancing a budget either 🙂
http://stocktradinginvestments.com/identifying-value-in-commodities-valuing-precious-metals-part-1/
there’s 20 years left of
terbium
indium
hafnium
gallium
palladium
platinum
antimony
germanium
silver
and 40 years left of
zinc
tin
lead
uranium
tantalum
gold
rhodium
Then of course there’s oil and natural gas not far behind, copper and iron not far behind and something will have to change. the natural reaction would just be price increases. The extreme would be high or hyperinflation and much higher prices for everything or deflation of credit and ability to purchase and consume precious metals decreases.
For the Chinese Bubble, Its not “if” its “when”….thru out history, all bubbles pop. That darn hard trick is finding what finally does it.