“Tough luck, Lonnehan. But that's what you get for playing with your head up your ass!”
-The Sting
There is noise and fluff and soap bubbles floating in
the wind but don’t be distracted. Like so many things connected to the European
Union it is just hype. In the first place do you think that any nation in
Europe is actually going to put up money for the firewall no matter what size
that they claim it will be? Let me give you the answer; it is “NO.” The
firewall is just one more contingent liability that is not counted for any
country’s financials, one more public statement of guarantee that everyone on
the Continent hopes and prays will never be taken too seriously and certainly
never used. Any rational person knows that some
promise to pay in the future will not solve anything and it certainly won’t
create some kind of magic ring fence around any nation. Think
it through; what will it do to stop Spain or Italy from knocking at the door of
the Continental Bank if they get in trouble and the answer is clearly nothing,
not one thing. The firewall is just a distraction to lull all of you back to
sleep and all of the headlines and discussion about it makes zero difference to
any outcome and so is nothing more than a ruse. “Look this way please, do not
look that way, pay no attention to the man behind the curtain, put up your
money to buy our sovereign debt like a good boy and everything will be just
fine.”
“Did you ever hear of a hustle called Two Brothers and a Stranger?”
-The Color of Money
The more that the 170 politicians in the 17 countries discuss the size of the firewall, whether Germany will guarantee more money or not, whether the old fund will be used in conjunction with the new fund; the more the scam is in play. It is a hustle organized by a very elegant set of grifters and since Eurostat clearly states that “promises to pay” are not counted on any nation’s financials then why would you think that “promises to pay” have any value in fencing out economic contagion? Spain or Italy will hit the skids based upon solvency issues and whether the interest rate on their debt is 7.00% or 5.50% makes very little difference in determining the outcome. The core issue for these countries is whether they can pay their debts and as their recession worsens and as the payments come due the squeeze is on. The LTRO money is beginning to run dry and unless they do another one and take the debt at the ECB up to $6 Trillion or the EU starts handing out money like candy upon the street corner the debts cannot be paid. The Ponzi bonds may well roll on and the Ponzi scheme may well get bigger but just because the Bernie Madoffs on the Continent tell you that your money is safe; Mark Grant will tell you that it is not.
One Degree of Separation between “Being Right” and
“Winning”
We play the Great Game to win. We do not play the
Great Game to be right. Get this clearly in your minds because it makes ALL the
difference. Here is the embarkation point and the disembarkation point between
money managers. Here is the line, the Great Divide, between coming out on top
and falling by the wayside. Winning is the thing, it is the only thing and
“getting it right” may lead you to be a winner but it is not what is really
important; winning is what is important. Consequently when “The Con” is on
there are only two realistic choices; do not play or trade around it. For
longer term investors you must recognize that the sting is underway and invest
your money in other places. For the hedge fund types you can bet against or
trade with the momentum but while doing so never, ever forget that “The Con” is
in motion.
“Someday, following the example of the United States of America, there will be a United States of Europe.”
-President George Washington
Now here is a great example of what I am trying to
explain. This comment from the first President of the United States has turned
out to be basically correct. However, if you had betted on it then it would
have been some two hundred and change years before you won your bet.
Generations would have come and gone and so, being right, is not always the way
to play the Great Game. Further, “being right” is always defined by the
timeline on which the proposition depends and so Father Time, your best friend
and worst enemy, forever intervenes in the outcome of any investment. An
LTRO, a Quantitative Easing, the printing of money, always drives up the prices
of assets in the short term; this would be as in ALWAYS. Then when the well runs dry
again the opium induced swindle is played
again and sometimes again and again but then, inevitably, there comes a time, a
moment, when for political or economic reasons the presses are shut down and
there is no longer any new money. Here, at this specific point,
the road switches back, the reversal begins, and the Pied Piper demands payment
for the use of the printing presses.
You do not need to go back two hundred years to the
wisdom of the Founding Fathers to see what is currently happening. Try just
four years ago, 2008, and the presses were rolling, the mortgages were bundled,
the ratings agencies gave them a AAA based upon diversification, no
documentation was needed for loans and the hustle was in full play. In Europe,
in 2012, the presses are rolling, the quality of collateral is now the second
lien on Mr. Popandopolous’s gyro Greek diner and the hustle is in play. In
America the presses are rolling, Chairman Bernanke is engaging in “twists” and
turns and now we find that our own Federal Reserve Bank, according to Bloomberg,
has even bought a “small quantity” of European sovereign bonds. Our Fed is even
nicer than the ECB; no demands for collateral at all so that not only does the
rabbit pop out of the hat but the hat pops out of pure air. Alchemy is alive
and well. The Philosopher’s Stone has been found and it is resident at the
world’s central banks.
The Game Book
Now yields in the longer end of the curve are
beginning to back up. This is your first indication of trouble to come. Then it
will be even higher yields, the equity markets will begin to back up, assets
will decline in price and your portfolios will be chock full of flung mud.
Given the particularities of this crisis, with TIPS at negative yields and the
yields on short term bonds just off of Kelvin’s Absolute Zero; the risks are
magnified. It is out of bullets and into corporate bonds tied to Inflation, and
fixed-to float bonds and anything and everything to adhere to Grant’s Rules
1-10; “Preservation of Capital.” I don’t care if you do not like structured bonds
or if you keep intoning the mantra of liquidity because normal old fixed coupon
bonds in the space of five years and out are going to have marks to market that
will cause a gagging sensation and so the Great Game must be played from a
different angle. When the time comes that the LTRO play
is over and when the Fed shuts off the spigot then the Hell that will be paid
will be lining up at everyone’s doors demanding cash and not accepting anymore
IOU’s. Bow to Hamelin and thank the gods of the marketplace that your eye was
good enough to see the Pied Piper making the turn and heading down the road.
''The music stopped, and I stood still,
And found myself outside the Hill,
Left alone against my will,
To go now limping as before”
-Robert Browning, The Pied Piper of
Hamelin
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