The Theatre of the Absurd

Too late for prayers and useless pity

 Mrs. Ethel Chauvenet: Does Elwood see anybody these days?

 Veta Louise Simmons: Oh, yes, Aunt Ethel, Elwood sees “somebody.”
                                                       -The play, Harvey

by Mark Grant

Andrew Ross Sorkin once speculated that I was the next “Doctor Doom.” Anyone that knows me or that reads my commentary with any frequency would know that this is hardly my personality nor would I stir pots for the pleasure of watching the froth. Sometimes it is just that I can see the rabbit leaning on the light post before others even see the street corner upon which it is standing. Others may also see the lamp post but they are frightened to admit it because their leaders have screamed for so long that it isn’t there and will never be there; never mind any 6’3” pookah. However as the light is beginning to dawn and as the early morning shadows that played tricks with your vision dissipate; more and more people can see the vague outline of Harvey leaning against the lamp post and, startled by his presence or not, they can no longer turn away and pretend him out of existence.

“What can I do for you Mr. Dowd?

 “What did you have in mind?”

The troika arrives in Athens tomorrow. The preliminary estimates of meeting the budgetary targets under the Memorandum of Understanding signed off on by the EU, the IMF and the Greek government indicate an achievement somewhat akin to an Olympian running down the track in the opposite direction. A novel approach, no doubt, but one hardly likely to win any race.
The IMF and the German government over the weekend stated specifically that if the requirements were not met that no more money would be doled out while the Greek government said they would require another $50 billion to get them through September. The revolving stage of Europe is about to head back to Athens and we well may have reached the last act where the final curtain is pulled and the show is shut down. If this is the case then you may expect screaming, vile proclamations of betrayal and all manner of scathing statements to be issued forth from the plains of Marathon. In the end, whether Greece remains in the Eurozone and retreats to the Drachma and receives some kind of debtor-in-possession financing or not it will mean that Greece will default on a total of $1.3 trillion in obligations unless some deal is worked out so that Europe keeps some kind of funding so the $238 billion of Greek obligations at the ECB does not default which would wipe out the equity capital at the ECB and require Europe to recapitalize the European Central Bank amid all kinds of shouts of dismay. It will be interesting, one might speculate, when Finland asks the ECB for collateral and one can only hope that they do not offer either the securitizations of Greece or Spain as the off-set.

As we are all captivated by the farce at the Parthenon I invite you to step across the street and watch the “Masquerade of Madrid” where the leading character declares a “Great victory for Europe” as his country sinks into the Mediterranean Sea. The money for the Spanish banks will be going to the sovereign and the Men in Black will dictate the terms of the $125 billion dispersal. The regional debt of Spain is equivalent to the national debt and with $36 billion in regional debt maturities coming due before year end and a national fund of only $19 billion the math employed by Mr. Rajoy is the usual European tricks of Trigonometry. As the yield on the Spanish ten year catapults to 7.40% this morning in London and as each region in Spain climbs on the national debt wagon for relief one may expect continuing antics as the Prime Minister declares that the regional debt problems will not affect the debt to GDP ratio of the country. It is an old story in Spain where windmills are fought but I fear that romantic comedies will not be enough this time to placate those who will be called upon, in the spirit of brotherly love, to fund the nation.

The bank and regional debt problem is one the size of $350-400 billion in the fourth largest economy in Europe while their 12% contribution to the EU, the ECB and the stabilization funds will soon no longer be made I surmise. It is a squared problem then you see and a vindication of the notion that firewalls and fences do nothing to improve the health of the horses that are inside the corral. The animals are sick, infected by their own exacerbated standards of living which they can no longer fund internally given declining revenue bases as virtually every country in Europe, besides Germany for the moment, falters in recession. Hence you hear the cries and screams and the gnashing of teeth demanding that Germany picks up the bill but the size of the German wallet is not up to the task with a $3.2 trillion dollar economy that can only withstand so much.

The theatre season is sure to be a hit this year with revivals of Ireland and Portugal while the excitement continues in Athens and Madrid and the sets are alive with the “Sound of Music” though the tunes will vibrate to something in Heavy Metal and not to the sweet melodies of the Alps in July. It was a year ago when I predicted a U.S. Treasury ten year of 1.25% and we are but a scant 16 bps from that now. The Euro is now under 1.21/Dollar and there are negative yields in the short maturities for Germany, France and the Netherlands which I predict will soon be found in the United States. I am not sure what Mr. Bernanke will make of institutions paying him to leave their money with the United States government but it will be a classic example of a point in time where “Return OF Capital” became much more important that “Return ON Capital” but as I have asserted time and time again, given the 36% loss of wealth during the American Financial Crisis, that “Preservation of Capital,” Grant’s Rules 1-10, are manifestly the byword of the Faith at present.

The European Union has been, in a very real sense, like a masquerade ball. The intricately painted masks covering manipulated stress tests, hiding inaccurate debt to GDP ratios, falsified accounting practices, glossing over any sort of contingent liabilities as if the scars were not there and double counting assets however, like all extravaganzas of this type, is about to reach a conclusion. The night has been long and the hour is late but one by one the masks are being removed and the characters are seen for what they are; a less than a pretty sight.