We’ll Address The Problems The Day After

No, we haven’t somehow magically fixed the system. I was looking at the debt of eight of the major European countries, and combined they alone owe about €7 trillion. Now, some of those aren’t a concern, like Germany (about €2 trillion) or France (€1.7 trillion). However, remember that the financing needs of France and Germany are still a drag on the rest of them, because they need to compete.

And of course the extreme short term nature of some of this debt is really going to force the hands of world governments and central bankers. As I’ve said before, something like half of Italy’s debt comes due over the next 2 years alone. That’s a very skewed-to-the-right kind of distribution; the average maturity doesn’t even come close to telling the whole, terrible story.

So if the money being released to Italy is just enough to get it to May, then how much of the other funding will be eaten up trying to save the rest? If the private financial markets don’t respond well to these announcements and the opportunity for the EU countries to start rolling their debt over isn’t presented, then we’ll be back to square one very soon.

Also, the view of China is getting darker. There have been plenty of ominous signs coming from the Land of the Rising Sun. Most recently, their troubles with their housing market have been front and center; a decision to totally ban all sales of homes for anything less than the original purchase price, followed by images of men standing on the curbside with cardboard signs trying to hock their own houses, and finally an almost immediate reversal of the decision as if the government’s hand had been physically burned upon touching a hot surface; these do not coincide with the popular imagery of a China with an iron fist over their economy and populace.

And finally, across the entire system demand is dropping. China growth is slowing; the EU is having a manufacturing contraction, the U.K. just entered a recession, and only here in America do we seem to feel that we’re immune. Yes, net demand is falling and demand is king.

But for the time being, sit back and relax and enjoy the fruits of the rally that Bernanke has planted for you. Sure things haven’t changed, but Bernanke & Co. have bought the world a few months. It will prove to be a costly few months, with prices of commodities being whipped higher by maniacal lunatics with no sense of subtlety or impact of their actions. But it will be profitable nonetheless.

The bond market today acted very positively, with yields depressing across the board, and U.S. treasuries finally giving up some more yield. Also, the dollar took a bludgeoning to the knees. These are all things that needed to happen if our markets were going to ramp higher. We’ll have plenty of time to get all dark and depressing again, after New Years.

And now I’m going to teach each of you first hand why central bank intervention is a bad idea in a non-deflationary environment.

You wish to know why I’ve been saying that the Fed “can’t” intervene. Watch closely, and with amazement, as energy prices skyrocket to levels you had only vaguely imagined possible. The currency swap seems innocent enough. However, Europe’s currency needs are huge.

Even if Uncle Ben limits the net amount of money he’s willing to expose the United States to, the damage has been done. He has told the markets, “I will do whatever it takes.” And the markets are about to respond in kind; without abandon.

Intervention by central banks in a true deflationary environment, like what we experienced in 2009, is almost a free endeavor. Failure to intervene results in a total shutdown of economic output anyway, so who cares if the dollar is devalued? Something is better than nothing, after all.

But what they’re doing today is reckless. Just remember, the blood must still be paid. There are only tradeoffs.

I don’t really believe that the euro has been saved today. It has been granted a reprieve, however. The amount of money that Europe needs to keep from stalling out is measured in the trillions. By linking that much money to the rest of the world, the job has become a little lighter, surely. But how far are they willing to go, when the repercussions start to materialize?

In short, kiddies, I’ll see you closer to WTI $150, and we’ll reassess there just how well the economy’s doing and whether or not you still believe we make it out of this.

I bought UCO for $43.48.

I’m selling ERY, EUO, and covering UCO at the open. Depends on how the sales go, but basically a huge loss realized in UCO, ERY is probably a small loss, and EUO I think is still up a smidge.

I needed to see the coordinated efforts first hand. The problem was just too huge to hang around and hope for a resolution. But now that I see old Benjamin hasn’t lost his touch, I can get behind the Merriest fucking Christmas rally you’ve ever laid eyes on.

The Europeans have bought themselves at least two months. Probably three. We’ll reassess where things are then.

Happy freaking Holidays.

It’s almost stupid how regularly nowadays that a saving grace, 2pm salvo kicks off an end of day buying spree.

Who’s doing the buying here? I know there are plenty of you who are hyper-bullish. You’re always hyper bullish, and you’ll put that pay check into stocks no matter what. So there’s some I guess. And after October, I’m sure there are plenty of shorts that are being suffocated by the rising tide too.

But the consistency with which a 2pm rally materializes to magically save you on down days over the last month and half…it’s maddening.

I want to refrain from acting like some sort of crazy conspiracy theorist, but it is damn hard not to.

In other news, every position I have is losing me money today. Isn’t that just great?

Should Europe wish to demonstrate to the world that it is not about to come breaking apart, now is probably the time to do so.

Despite the well-received Italian bond auction, the results were not rosy. Yes, Italy managed to raise all the money it needed; I suppose if you thought Italy would raise less money than what it needed, this is some consolation. However, at points the yields on their bonds pushed way past 7.5%. And demand was “sufficient,” not “strong.” They had 1.5 times volume for bids. Keep in mind that most successful auctions tend to see 3-4x volume.

So really Italy is hanging on the edge of the cliff.

Today, we have ministers of 17 countries meeting to discuss what can be done. And from the sounds of it, all the usual garbage is on the agenda. Euro bonds, treaty changes, forcing out weak countries, and of course finalizing the EFSF…if this is all the EU can offer, then things are going to get darker soon.

Any bond offering that comingles liability of weak countries with the strong is going to absolutely decimate the only two strong countries in the region; France and Germany. Really, France is already toppling. Germany cannot support all of Europe on its back. A Eurobond or an elite bond means the fall of Germany, not the salvation of the others.

Forcing out the weak nations could be very messy. I suspect the euro would drop precipitously and you would also have huge logistic problems. Plus, it makes it look like the EU is starting to break up; not good for trying to issue loans denominated in a failing currency.

I don’t want to hear talk about a treaty change either, unless it accompanies other more immediate and useful measures. How long did it take the EU just to set up the EFSF? Do you know when they started talking about that dumb thing? It was May of 2010. Remember?

And it still isn’t finalized. We’re 19 months from the initial agreement to create a simple fund to loan money to European countries, and the damn thing has barely made loans to two of them. There is also no talk on the funding of the more robust tasks that Europe has set the EFSF to handle.

If the EU decides to try and implement treaty changes as their thoroughbred race horse, then I fear the markets will tank in a drop that causes one to look on 2009 with nostalgia. Whatever these morons are saying, you won’t get treaty changes finalized until any time before January 2013. You’ll be lucky even then, because with Europe’s track record 2014 looks more convincing.

Half of Italy’s debt alone will have come due by then.

The EFSF itself seems to be the bread and butter of this meeting, and I hope for all our sakes that it isn’t a total wash. I don’t enjoy watching the potential destruction of the financial markets and I really would love to see things pan out. But you’ll notice I’m keeping some large hedges against that outcome because, frankly, I don’t believe the European’s are competent.

But what really needs to happen, as we all know, is for the ECB to become a lender of last resort.

More than that, the ECB and the Fed need to work together, or else Europe’s progress will be our undoing. If we could get an announcement like that then I could actually commit to being optimistic.

Listen up, all of you. You keep telling me how Europe can easily correct this problem just by printing money and making a few “structural changes.” I don’t buy the structural changes bit, because we’ve advanced so far that Europe’s obligations are going to go off like bombs no matter what they do. But they definitely do need to print money or else we’re going to watch a continent go offline.

Now you’re committed to a rally because “no central bank has ever refused to print money.” Fine. But that appears to be exactly what this central bank is doing right now. The EU has been pretty insistent on not doing much of anything for the last two years.

If the EU wants to be around in another 3 months, then now is the time to step up. Don’t talk about what they can do to fix their problems. Start actually using a few of these solutions. Because the bond market isn’t interested in listening to this tripe any longer. It is loudly signaling that if Europe doesn’t do something, then they’re on their own. And Europe cannot afford to be on their own.

Europe is supposedly set to “finalize” the EFSF today. Maybe they should quit “finalizing” programs, and start “implementing” them. I mean, they want us to believe that they can get a handle on their problems.

Well then, prove it.

Let’s keep it coming. We already worked our way through the “Fab 5” this morning. Now we have dialogue pushing the creation of a bailout fund that’s going to guarantee debt (sound familiar?) of European banks. You know, take the exposure of sovereign nations out of the picture.

Who’s going to fund this?

Um, the sovereign debtors who’s debt is affecting the banks.

But wait! Let’s not stop there. I mean, come on gang…that’s only 6 recycled, uninspiring market pumps in less than a day. Why are we giving up now!?

Why not keep it coming?? We can have talk about creating a bailout fund for the bailout funds. I mean, it’s not like people are actually putting up cash into these fucking things. Who has the $600 billion in the EFSF? Imagine how big the fund could be if the EU dumbasses put the money instead into an EFSFSF (European Financial Stability Fund Stability Fund)? Then, China and Brazil could put their money into the EFSF and EBSF (European Banking Stability Fund), receiving guarantees from the EFSFSF.

From there, we could get the private market involved. I mean, $600 billion guarantees $1.4 trillion from the BRICs. $1.4 trillion would in turn guarantee $3.26 trillion of private sector money, according to the EU’s math.

Voila!! Magnifico!!! Crisis solved.

Then we can underwrite the whole fucking process onto the backs of the Germans, vis-à-vis some crazy bund offering that makes them liable for the whole God-damned mess. I mean, how can this go wrong!?