Come on!? How freaking hard is this?

After everything, how can you possibly have your head so far in the sand that you could believe Greece is the only thing holding the euro back? What in the last 3 years makes you think the problem is a tiny, insignificant cluster of islands practically in Eastern Europe!?!

You want to know why the euro is screwed? Go back to my previous writings on the subject. Look at the numbers I laid out for you. See the trillions of euros in debt that’s maturing, even as I write this.

GREECE LEAVING THE EURO DOES NOT MATERIALLY IMPACT $3 TRILLION IN SHORT TERM MATURITIES

God, I feel like there is no font large enough to bash into your eyes. But I’ll try just one more:

GREECE IS NOT THE F – U – C – K – I – N – G PROBLEM

I would have thought that obvious before now, with all the fire popping up in Spain and Italy and Portugal and Ireland, and a half dozen other irrelevant EU countries no one’s ever heard of. But apparently, it’s pretty goddamn difficult a thing to grasp.

The best you can hope for, in terms of the euro, is a monumental rally as the egregious short position that’s been growing against it gets mulched into a thousand pieces. That would spark quite a fierce rally.

But that doesn’t have shit to do with Greece leaving.

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This week was disappointing, after the smorgasbord of gains I was served the week prior. I traded flat, despite many opportunities to see follow through.

TVIX was the most disappointing of all. It is only a very small position, but it’s a very small position that I want to see 300% gains on. It keeps extending, acting as if it wants to run, only to see itself get shut down.

Perhaps people are afraid of “the TVIX” after the severe pain it delivered to its holders earlier this year? Perhaps they do not trust “the TVIX” to not be, well, TVIX?

What I do know is that TVIX is trading BELOW its NAV by almost 20%. I understand it’s a crazy asset; one I would NEVER buy with any serious amount of money. But come on, let’s have a break.

For two days in a row, TVIX was up by 10%, only to give back everything in the final hour. It was bullshit; don’t throw empty beer cans at my horse – I don’t care how dilapidated it is.

At any rate, fears of a weekend surprise are unwarranted. Are the EU leaders even meeting or conversing?

AND WHERE pray tell, did this talk of Germany being “on the seat of their pants, facing pressure at home” come from? Up until now, all the responses I’ve seen have suggested Merkel enjoys broad support at Germany for checking the rest of the countries. Then, two days ago, suddenly I’m hearing how Germany is feeling the heat, “definitely going to give in any day now…”

Like they gave in last year? Yeah, they sure have shown themselves to care about pressure. The sitting German government has only kept at bay the rest of an entire continent, vetoing the efforts of all foreign governments that want change. I’m sure the sidelined opposition in Germany is going to succeed where dozens of countries have failed.

There is only opposition to austerity in Germany if you focus in really closely on the protestors. Sure Germany hates austerity, if you ignore all the Germans who don’t hate austerity…

The most recent protest of austerity in Germany drew a crowd of 20,000. That’s about a quarter of .1% of the Germany population that have demonstrated they are against austerity. That’s also assuming all 20,000 were even German; it’s not exactly hard to hop on a train in Europe. Looking at Merkel’s approval ratings, there are still way more Germans who think austerity is just fine.

If you believe that kind of opposition is going to bring about change in Germany, you also probably believe OWS is going to bring about change here at home. In which case, we have nothing further to discuss.

In order to change things, you’d need to see a real serious change in the German economy. Even a small contraction would probably not do it – life would continue to be just dandy for a significant majority, who would keep things on the tracks. No, you would need a month or two of Spain-like contraction to see political change from Deutschland.

By the time that happens, markets will already be in full on retreat.

The odds of Germany relenting are nil. Not now. Not for months. Maybe not ever. Germans are content to sit and watch the others struggle, because they’re convinced nothing can stop the other countries from struggling. It will take a grave turn of events at home for Germany to change that position.

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European leaders have decided that, despite a track record a mile long, packed with failures, they really do know how to utilize resources and yield a positive result. So, temporarily ignoring the trillions of euros in debt they possess, which are bursting at the seams, they will likely begin issuing “project bonds”.

What is a project bond, you ask? Well, it is definitely not a euro area bond, as Germany and Austria both came out today (at almost exactly the same time as the announcement of an agreement on project bonds) and repeated that they would fight Eurobonds to the grave.

So, if project bonds are not euro area bonds, who is backing the project bonds?

Why, all of Europe of course. Which sounds awfully similar to Eurobonds.

So why is Germany saying they are not backing Eurobonds? Well, mostly because the number of bonds to be issued are rather scarce; a few hundred million euros worth. Far too little to really concern Germany – or accomplish anything meaningful, for that matter.

This is a small consolation prize for Francois & Friends. Thanks for playing. Fuck off, now.

And why should Germany act otherwise? They aren’t stupid. They know that the only thing worse than having idiot neighbors is having idiot neighbors with your PIN number. What do European politicians think they could possibly build to bail them out of this mess? A highway to nowhere? Maybe some bridges? A few more airports? Or maybe they just blow the wad erecting statues of themselves in the image of Jupiter?

This is a topic of discussion only because EU politicians are NOT thinking.

Project bonds will be a screaming failure. They will not accomplish much; most of the money will probably get caught in the limbo of project approval and red tape. And what they do accomplish will not positively impact the EZ. For reference, please refer to ‘shovel ready projects’ and the inspiring progress they have helped to usher in here at home.

If you’re a well-connected solar panel manufacturer in southern Spain, this is probably good news for you, as you’re about to be funneled hundreds of millions, only half of which you’ll be obliged to round trip into the reelection campaigns of the men and women who green light your funding approval form.

If you’re anybody else, this is a distraction.

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I know, cliché shit coming from the guy who’s been a raging bear for a year.

But, what is exactly running higher today? I’m seeing industrials, tech, and commodities – most of the buying is strictly isolated to where the vast majority of the carnage has been located. Meanwhile, the safety plays in the blue chips have been modestly retracting.

Make sense, as a sign of relief, but not exactly a running bull market.

Meanwhile, the $EURUSD is skipping from a mid-afternoon bludgeoning, and the dollar has lost gains to par for the day.

So we have an active story of rebounds in anticipation of a solution from the G8 meetings, overlapping a relief of oversold conditions. Fine.

The selling’s not over yet.

Any hope of “growth policies”, whatever the hell those are, are misplaced. If European leadership was smart enough to pursue pro-growth, don’t you think they would have done so before now? Where is this sterling leadership coming from, exactly?

Angela Merkel, Francois Hollande, and a hand full of EU appointed, unelected technocrats (not to mention the latest crop of extreme nationalists) are going to issue in dazzling policy that spurs the EZ economies, returning demand, fixing balance sheets, and ushering in a new era of prosperity – it’s just that easy to you.

The best that the EZ can do right now is defer to the ECB to print another trillion. That will keep the game going. It will also destroy another eighth of the European economies. Think about that for a second.

Outside of that, you should not expect any brilliant reinvestment from Europe. You should expect morons to fling money at wind and solar energy, reinforce entitlements and short term benefits, then drop the rest of the money building agencies that will employ ten times more bureaucrats than private sector jobs they could ever hope to create (before negatively impacting markets, of course). A third of all expenditures will end up in the pockets of the politically connected. The rest will not yield any useful benefit to society.

You shouldn’t expect anything more, because none of the people who are involved in this discourse have ever delivered anything more.

The hairs on your back should be standing straight up – I mean, what could Obama of all people possible teach Europe about “thoughtful government spending”? Are you referring to all those awesome policies we’ve had here at home that haven’t done shit?

“Pro-growth” Europe is a myth. Of course, it’s a myth that will probably cost me more money as suckers buy into it. But seeing how we’ve given back all the gains since January, I ask you, how has being a sucker been any more rewarding that being a skeptic?

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I’m almost obligated to get into this affair with Dimon & Co. However, I promise you I’ll save you the self-righteous lectures, which are so well versed and recorded at this point to fill a small history book or ten.

It’s not that I don’t agree with much of what’s being said. Or that I have anything against those of you who are saying it. More that, since you are all so on top of this, I don’t have to be.

Instead, let’s talk about something a little more practical.

Dimon mentioned that they have a $2 billion loss, presumably unrealized, over a 6 week period. We know that the position is composed largely of derivatives. So, we have a timeline, and we have a medium. But we are missing a quantity. That’s unfortunate, as it would be let us know how deep JPM is, and what they need to do or have happen in order to unwind it.

But hey, let’s just guess.

What do we know happened about 6 weeks ago? Well, looking at yields of major bonds, that was about when both Italian and Spanish 10 years reversed hard off their, up until then, descent from the ECB LTRO operation. We also know that buying those bonds, betting on further depressed yields was a VERY popular trade amongst the financier elite. Look at Corzine – who has deep ties to Dimon.

In fact, JPM was clearing Corzine’s trades in the MFGlobal affair, if I recall, so some of this position could even be a legacy. That would be fascinating. But that is WILD speculation on my part, so let’s get back on track…

It seems reasonable to guess that the culprit of this blow up is European debt. It was a popular target. The timeline’s right. So, assuming it is EU debt (specifically Spanish and Italian bonds), what does that tell us?

Well, Italian 10 years are currently trading up 50 basis points. Spanish 10 years are trading up 100 basis points. .5% and 1% – those are our defining numbers.

Rather than trying to blend them, let’s just assume that the entire position was either all Spanish 10 years, or all Italian 10 years, with the truth being somewhere in the middle.

Now, I know from looking them up that CDS coverage on an Italian 10 year will run you about $450 to insure a $10,000 notional bond. That’s a 1% profit spread for the bond holder. And I know that CDS coverage on a Spanish 10 year will run you about $500 – again a 1% profit spread for the bond holder.

So, if JPM had a prop position in Italian or Spanish CDS betting bonds were going to swing the other way, how big would it have to be to generate a $2 billion loss?

Well, for Spanish debt, which have rallied 1%, the move in CDS, assuming that same 1% profit spread for bond holders, would be from about $400 for coverage, to the current $500. That’s a 25% loss on any uncovered position JPM might be holding.

For Italian debt, which have rallied .5%, the move in CDS, assuming that same 1% profit spread for bond holders, would be from about $400 to $450. That’s a 12.5% loss on any uncovered position.

Now, in order to actually determine the size of the position, remember that their loss will be equal to the amount they’re losing on the mark-to-market aspect of the position, minus any positive carry trade they get up front for the CDS. The quickest way to do this is a solver method. I’m not going to bore you. I did it on the side.

For Spanish debt, the position would only have to be about $9.5 billion to generate these size losses. But, for Italian debt, the position would have to be much bigger – probably $23-24 billion in CDS.

So, I feel I can say pretty confidently that JPM has a $10-25 billion uncovered position in CDS, betting on better yields for EU bonds.

Now, JPM probably doesn’t feel very comfortable right now. Between the limited number of sizable buyers of CDS and the idiotic moves that EU countries have been making to restrict the rights of CDS holders, plus the fact that everyone knows JPM has this big position, the odds that they manage to unwind this thing at current prices are nil.

So Dimon says he’s going to offset the losses (which could still grow significantly, especially if EU bonds keep getting hit) by realizing some $1billion or so gains from equity markets.

Well, markets (were) up 10% in the first quarter of this year. So if Dimon thinks he has $1 billion in gains, just swinging with a wide guess here, that’s about $10 billion in assets he thinks he’s going to be able to sell.

To put things into perspective, if Dimon somehow managed to get on the sell side of 1 out of every 2 trades of a still very liquid stock like AAPL, it would still take him more than three days and 18 million shares to offset things. Assuming he somehow didn’t also collapse the market, which over a 3 day period he most certainly would.

Should Dimon manage to sell 1 in 10 shares of average trades in AAPL, keeping with our little game, it would take him more than 2 weeks to offset this.

And, being more reasonable still, if Dimon can only sell 1 in 100 shares of the average trade volumes of AAPL without risking collapsing that particular market, then it would take him over 4 months, in terms of AAPL, to cover his ass on this.

And if things get worse for JPM, with current estimates the losses could get as high as $4 billion, then naturally JPM would have to unload even greater equity positions to offset that. The total amount of assets they would need to sell, (and there by the expected reasonable time line for doing so), could triple, or even quadruple.

I know that $10 billion, $20 billion, or even $40 billion does not sound like that much in this day of trillion dollar bailouts that we live in. However, each of these is equivalent to a fairly large hedge fund entering a full-blown margin liquidation.

So, in summary, I would guess there’s going to be a powerful put over this market for at least a few months. Firstly because they will definitely have to be selling stock directly, which will lead to lots of momentum stocks like AAPL breaking down and lots of future setups that traders favor getting disappointed as “the JPM put” is in effect.

And secondly because, from the standpoint of the CDS, there are only two ways for JPM to get out – they can buy back the CDS directly, or they can go short the corresponding bonds to close the position. Well, $10-25 billion in CDS would be covering $200-600 billion in euro bonds, wouldn’t it?

Even if JPM only tries to close out a tenth of that, that’s still between 2-6 weeks worth of funding for a Spain or an Italy. They’re having enough time trying to sell their own debt directly; imagine having to compete with short sales by JPM?

So, what I’m saying here is this. This is not an LTCM “holy hell, we just destroyed the world with $1 trillion notional exposure” kind of event. But it is serious, and it does come at a most inopportune time. Particularly should equity markets begin to sell off, JPM might actually start to sink European bond auctions scrambling to save itself. This could at worst spark the next LTRO round, or on a lesser level the need for a $50 billion or so injection from the ECB.

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Perhaps the most rampant folly I have heard throughout the start of 2012 is that somehow we are now immune from selloffs relating to Europe, because we are now somehow total experts on ALL possible outcomes from the EU.

Never mind that this weekend, most pundits were taken completely off guard as extremist movements sprung up like dandelions in opposition to austerity and, yes, the euro.

Never mind the surprise when Norway of all places almost had their government collapse, without warning.

But what I find so ironic about this line of thought is that it is exactly identical to what I heard last year around mid-June, when the same people were arguing that we could not experience a selloff because the market was now candidly aware of all risks from the previous selloff of 2010 – which was in response to Greek debt woes.

And oh how we didn’t get one…

What disturbs me is twofold; firstly, that decadent traders are presupposing that the collective efforts of markets are even capable of comprehending the ever evolving developments from these sensitive issues (judging from the now cliché shock every time something new and unexpected happens, I’m going to guess not), and second, that the discounting always seems to give the most improbable outcome benefit of the doubt (financiers who are universally hated will manage to simultaneously devalue their currencies, restructure their debt without aid from private investment, and avoid price shocks, while not sparking revolutions from the people they are toying with) when any error in the least – error such as we’ve been seeing mispriced – should result in calamity.

When we look past what “the market” – which at this stage in the game seems to be mostly traders staring at their own transactions in a mirror – thinks it knows, and instead focus on all the things that we’ve gotten wrong…well, my own confidence in our ability to appropriately price in “risk” is more or less nonexistent.

However, while you may disagree with me, the distinction is that if everything works out perfectly, markets are at best adequately priced where they are. Whereas, should you discover that I am correct and there is nothing more omniscient about a half million junkies placing bets on opaque outcomes than any one of these men and women on their own, the result will be a proverbial bloodbath since there seems to be no amount of caution left.

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