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Fluff, Stuff, And Expectations

Tyler Durden's picture



A Flawed Strategy
“The experiences and behavior that some would label paranoid is a special strategy that nations invent in order to preserve their status quo. The problem of course is that when actual data confronts fantastic postulates that the real numbers triumph over the invention.”
                          -The Wizard
For months the European Union, the IMF and the European Central Bank focused all of their attention on the giant firewall that was supposed to protect the core countries of Europe. We had the EFSF, the ESM (still not in existence) and promises of a giant amount of money to ward off speculators and to stop any contagion from the periphery nations. This is all that we heard about, this is where the markets’ attention was focused and it was on this premise that equities and bonds moved one way or another.
I submit to you that it was all a diversion and one that, once again, did not work. The actuality is that the EFSF is down to $65 billion in available capital after the first tranche of the bailout of Spain. The ESM is hung up in the German courts until September 12. The bailout money is going to Spain, not the Spanish banks, no matter how hard Mr. Rajoy & Co. try to deflect you from reality. Consequently I think it is reasonable to assert that all of the fluff about firewalls was just that, fluff, as the core of Europe was always going to get infected and so is infected and firewalls do nothing as in zero for the sick nations that lie within their confines.
I think the real problem is that the European Union has come to believe their own concocted nonsense. I think they honestly believe that it is some band of speculators, some Jesse James type of gang riding out of the American West that is trying to drive up European interest rates and destroy their beloved construct. While it is certainly true that all markets have speculators I think that the Europeans are widely missing the mark on several fronts. The first is that the finances and the real debt to GDP ratios of the countries in Europe are so dismal for the most part that real money investors do not want to be exposed to their credits. I can report to you absolutely that any number of major money managers have pulled back or severely cut their exposure in Europe and will just not fund many European sovereigns and banks. Europe has brought this upon themselves in my opinion. They gave the world phony bank stress tests, they give us phony debt to GDP ratios, many European banks do not carry their Real Estate portfolios/loans at realistic levels, they continue to provide phony data on any number of items and many institutions, recognizing the manipulation, just said, “Enough.”
The bonds of Germany, France, the Netherlands et al now trade at negative levels in the short end and I will demystify this for you. It is not that the credits are so great it is that a lot of European money is mandated to stay in Europe so that the money has been put in the safest places available within the mandate and hence negative yields. This will only last so long however as Germany, France, Italy and Spain are the largest economies in Europe and two of them, Spain and Italy, are in serious trouble so that money flees from them and there is not enough internal firepower in either of these countries to sustain bond yields. Then, of course, each and every troubled nation wants Germany, the richest of the European nations, to foot the bill but Germany, with an economy of $3.479 trillion can only do so much, even with all of the games and the hiding of what they can, to support the rest of Europe. I submit that Germany is becoming troubled economically and that they will be in a recession along with the rest of Europe by the fourth quarter of this year or the first quarter of the next as a result of their rescue attempts. German is responsible, as an example for 22% of the liabilities at the ECB which is now $880 billion and equates to approximately 27.5% of their GDP. Germany is bearing the cost of the Target2 financing which is now some $800 billion which equates to 25% of their GDP.

  • German Gross Domestic Product (GDP): $3.479 trillion
  • Official German Sovereign Debt: $2.618 trillion
  • Percentage of Liabilities at the European Union: 27%
  • Percentage of Liabilities at the ECB 22.00%
  • Germany’s Percentage of the ECB Debt ($4 trillion) $880 billion
  • German annual cost for the EU budget $46.36 billion
  • German Guarantees for the Stabilization Funds $280.6 billion
  • German Guarantees for the Macro Financial Assistance Fund $211.14 billion
  • German Target-2 Liabilities $800 billion
  • German Guarantee for the EIB Debt $157.29 billion
  • Sovereign Guarantee for KFW $588 billion
  • Total German Sovereign Debt & Guarantees $5.581 trillion
  • Official debt to GDP Ratio 81.8%
  • Actual German Debt to GDP Ratio 160.4%

The Next Two Days
All eyes will be on the Fed and the ECB during the next forty-eight hours. The actions of these two central banks will hold the entirety of the markets’ attention. I suspect both will disappoint as the expectations, especially for the ECB, to provide some kind of miracle will not be the manifest destiny hoped for by many. There is only so much anyone can do when you sit at almost zero interest rates. It will be interesting to see what these two institutions actually offer but I suspect that the current overblown expectations are nowhere close to the reality that we will be given.

                 -Terry Goodkind, The Sword of Truth


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Wed, 08/01/2012 - 08:39 | 2668132 GetZeeGold
GetZeeGold's picture



I'm full of can have mine.


Enough with the fluff already.


Wed, 08/01/2012 - 08:51 | 2668140 Ghordius
Ghordius's picture

to be frank, this is one of the better "out of the box" articles, it has some meat on the "europe is doomed" bone.


I place this kind of articles in the box of "the war for the minds and hearts of the money markets managers". The incomparable Gillan Tett of the FT wrote a very good article yesterday, calling money markets "The Achilles heel of America's financial system". She mentions how last summer the "skittish bunch" "dumped eurozone assets en masse in a distinctly destabilizing way" and that "that stampede could easily be repeated" (which I slightly doubt). Further, it goes "Nobody in Washington will publicly say that they want the money market funds to shrink, even if this creates a more stable system". Well, I join her in wishing that nothing happens to create a new panic that would have us to regret "this shameful and dangerous $2.6tn policy fudge".

Wed, 08/01/2012 - 08:41 | 2668142 malikai
malikai's picture

Too much fluff, not nough fluffers.

Wed, 08/01/2012 - 08:49 | 2668163 GMadScientist
GMadScientist's picture

Do not doubt Robo's resolve!

Wed, 08/01/2012 - 08:45 | 2668154 Umh
Umh's picture

The invisible hand is always at work. Politicians believe that their words are significant. The truth is that people listen to the "leaders" wanting to here what's going on. Since the "leaders" frequently lie the people say out loud what the "leaders" want them to say while checking their wallet discreetly.

Wed, 08/01/2012 - 08:46 | 2668156 RobotTrader
RobotTrader's picture

Gold and sliver now getting destroyed.


Poor General Jim and Alf Fields now have to field yet another 1,000 phone calls from angry CIGAs.

Wed, 08/01/2012 - 08:49 | 2668160 GMadScientist
GMadScientist's picture

Thank you dear 8 pound 6 ounce new born infant jesus, don't even know a word yet.

Wed, 08/01/2012 - 08:52 | 2668169 GetZeeGold
GetZeeGold's picture



Gold and sliver now getting destroyed.


Thank you sir......I'll have another. When my stack of subsidized gold reaches critical mass...I will detonate.


You might want to stand back.


Wed, 08/01/2012 - 09:21 | 2668270 malikai
malikai's picture

You didn't build that stack.

But I bet you'll lose it in a freak boating accident.

Wed, 08/01/2012 - 10:26 | 2668541 HungrySeagull
HungrySeagull's picture

It's not getting destroyed, HOENY THEY SHRUNK THE PRICE!



Wed, 08/01/2012 - 08:51 | 2668166 malikai
malikai's picture

Now all we need to complete the show are the margin hikes in gold, silver, crude, eurusd, and finally margin cuts in futures and options for indexes and equities.

Wed, 08/01/2012 - 08:51 | 2668167 adr
adr's picture

That usually means QE is off the table. If so your precious stocks will be hammered as well.

Wed, 08/01/2012 - 08:58 | 2668173 tocointhephrase
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"Gold and sliver now getting destroyed"

Partly correct, most Silver has been destroyed or is unable to be recovered, however most Gold is still available. Hence Silver will probably return you more fiat currency over the long term EDIT: or even better, lots of gold when the ratio is more realistic 16-1 or less imho.

Just bought some nice Silver Panda's, Silver Britannias and a nice Silver 10oz Kookaburra 2007 today along with 2 Young Victoria Shields (Sovereigns) and a 1 oz Gold Panda.


Wed, 08/01/2012 - 09:03 | 2668203 dwayne elizando
dwayne elizando's picture

Nice. I just bought a 5 oz ATB silver coin. Really I only bought though because its a giant quarter.

Wed, 08/01/2012 - 09:14 | 2668242 tocointhephrase
tocointhephrase's picture


Wed, 08/01/2012 - 08:49 | 2668161 The Axe
The Axe's picture

I thank ZH for pointing out the serious flaws in the world's economies, however the SP is at 2008 highs...So the always and glaring disconnect of markets vs economies makes the constant harping...just useless... The markets are  so BROKEN....they represent nothing ..NOTHING

Wed, 08/01/2012 - 08:50 | 2668164 DavidC
DavidC's picture

"phony bank stress tests".

The Eurozone was not the first to do this, it took the US, which did it first, as its example (and, indeed, most of the other shenanigans, like lowering interest rates).


Wed, 08/01/2012 - 08:56 | 2668182 Ghordius
Ghordius's picture

+1 most of european policy is based on this: 1. please stop 2. please, pretty please, stop! 3. ok, since you are not stopping, we'll join you. 4. oh, we can't join? then we'll do it ourselves.

followed by the badly understood 5. we'll put up something similar that cushions the trouble all this will cause. example: the EUR

In short: the US leads, europe mostly follows.

Wed, 08/01/2012 - 08:57 | 2668184 scatterbrains
scatterbrains's picture

Speaking of fluff I'm hoping that 60k /ES that got dumped (or shorted?)  Isn't the NYfed ppt preparing to fluff markets via "buys to cover" in the thin, wee hours of the morning on globex.

Wed, 08/01/2012 - 09:07 | 2668210 MillionDollarBoner_
MillionDollarBoner_'s picture

Don't worry...RumpBoy assures me he has it all under control ;o)

Wed, 08/01/2012 - 09:11 | 2668230 Tucson Tom
Tucson Tom's picture

Meanwhile,in other top stories,

The number of worldwide terror attacks fell to 10,283 last year, down from 11,641 in 2010 and the lowest since 2005, the State Department reported.Wow,I feel so much safer now! no need to buy gold,we are all going to be OK.

Wed, 08/01/2012 - 09:16 | 2668246 q99x2
q99x2's picture

Yeah. Its just a distraction until the riot gear gets in.

Wed, 08/01/2012 - 09:17 | 2668253 adr
adr's picture

I think we have gone into the Twilight Zone just as we did in 2007. The real economy has slowed to a crawl, and is in fact going backwards. The lies that sent the market to all time highs are being swept under the rug, but people are noticing the lumps.

In 2007 it was the belief that homes would continue to increase in value allowing for massive levels of consuption that would prop up the bubble market value.

In 2012 it is the belief the Fed will continue to hand out money to finance stock buybacks and the production of massive levels of inventory, that will eventually be sold in a massive consumption boom. This will validate the bubble market.

In 2008 it was apparent that there just wasn't any more buyers for overpriced homes. Commodity inflation destroyed the purchasing power of the population, and now they couldn't make the payments. The realization that the gravy train was gone killed the market.

In 2012 we are seeing that there just isn't any more buyers for the overproduced inventory. Someone has to take the hit, either the retailers or the producers. You can't paper over losses forever.

Wed, 08/01/2012 - 09:55 | 2668395 youngman
youngman's picture

Remember that quote that the subprime loan thing was they are still in charge...

Wed, 08/01/2012 - 09:21 | 2668269 spanish inquisition
spanish inquisition's picture

Sounds like people are losing their ability to suspend their disbelief over the fact that most of the world is insolvent. We are in a Bond movie and there is just enough reality where I can overlook the gazillion dollar gadgets, perfect shots, hot women, improbable stunts and still enjoy myself and pretend it is real. Then it happens, they fly a helicoptor, perpendicular down a narrow street using the blades as weapons.

Poof, the impossibility of it is too much to suspend and the spell is broken. In the darkness, I see one or two other disappointed silouettes, hear a couple of groans and recognize the smell of stale burnt popcorn.

Wed, 08/01/2012 - 10:28 | 2668548 HungrySeagull
HungrySeagull's picture

It's not poof.

More like a bitchslap.

Wed, 08/01/2012 - 09:38 | 2668334 Blopper
Blopper's picture

If market collapsing is the only right outcome expected and almost everyone is waiting for it to buy at the "bottom", then how can it collapse?

Wed, 08/01/2012 - 09:53 | 2668385 oogs66
oogs66's picture

Germany economy sucking wind now too, but they will stick old plans or try something new?

Wed, 08/01/2012 - 09:57 | 2668407 youngman
youngman's picture

Does anyone know if there is an ETF on wheelbarrow manufacturers......that my friends is the canary in the coal mine

Wed, 08/01/2012 - 09:55 | 2668394 WhiteNight123129
WhiteNight123129's picture

Mark Grant does not get it.

He should realize that no massive firewall, no massive new debt to solve a debt problem is a blessing! The speculators should be blessed to force governments to cut, everyone should bless austerity and have this game continue on and off and a bit of printing just at the last minute for another 3-4 years. The mistake would be for the market not to be able to force governments to cut spending because the printing press asks like morphine on cancer. Pain is a defense mechanism, if you supress pain you do not know you are mortaly wounded like in the US. So everyone in Europe should thank the speculators and Germany for forcing the adjustments. The last think you want is a massive firewall of new debt to solve a debt problem, or a massive new bazooka of printing and spending. Take the pain, avoid the catastrophe at the last minute with minimal printing everytime things look on on the point of breaking and FUCKING CUT SPENDING!


Wed, 08/01/2012 - 10:18 | 2668499 bobbydelgreco
bobbydelgreco's picture

europe will disappoint but before nov ben won't at least that's the way i'm betting 
