Streetwise Professor

November 23, 2011

Connect the Dots

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 9:23 am

Two headlines in today’s WSJ.  German Bond Auction FlopsPressure on Merkel Intensifies:

The German chancellor faces calls to soften her resistance to euro-zone bonds that would increase investor appeal but also make euro nations liable for each others’ debts.

The connection between the two stories is clear, though the stories don’t make it: nor have any of the other stories I’ve read about the auction debacle.  All the down-at-the-heels Euronephews are looking desperately at rich Uncle Fritz to bail them out.  The more likely that becomes, the weaker the German fiscal position becomes.

And let’s face it.  Fritz is pretty wealthy, but not nearly wealthy enough to pay for Europe’s past profligacy.  The failed auction is a harbinger of things to come.

This will make the amputate-or-gangrene decision all the more pressing for Germany.

There’s an old blues song, Goin’ Down Slow.  That’s not what’s going to happen in Europe: they’re going down, but the descent is accelerating.

The lyrics of the song, though, do resonate:

I did not say I was a millionaire…
But I said I have spent more money than a millionaire!
Cause if I had kept all my money that I’d already spent,
I would’ve been a millionaire a looong time ago…

The money’s already been spent, and there ain’t no mo’.

Hit it, Wolf:

Print Friendly, PDF & Email


  1. Fritz is screwed in more ways than just than – a lot of his wealth is illusory: I have spent some time going over the Eurodollar abs market, and it has become a trade by appointment special. Almost all pricing is Level 2 if not level 3 pricing, liquidity reeks with dealers holding inventory in only the most liquid stuff and then for not very long.

    For those who do not know pricing “Levels” are a FASB 157(?) invention where one assigns a quality value to the marks Listed below are the levels along with a rough definition- along with Sotos’ snarky interpretations of what they really mean:

    Level 1: there is a live bid for the security in question. Sotos’ Take: I own 500mm, and there is a bid for 1mm, so that’s what it is worth.

    Level 2: There is no bid for the specific security, but based on where similar securities trade this is a reasonable value. I own 500mm, and this iw where I think there would be a bid for 1mm, so that’s what it is worth.

    Level 3 – there is no liquid market for like securities but based on reasonable yield values, this is what the security should be worth. Interpretation: “OK, where’s the dart board?”

    This IS flippant, and sometimes Level 2 pricing can be more accurate for specific securities than Level 1 (specified MBS pool values are often higher than the TBA market prices, which usually assume the worst pools are going to be delivered.

    The reason that this is important is that the ammount of assets needed to be sold to delever these institutions range from 500MMM

    Comment by Sotos — November 23, 2011 @ 11:32 am

  2. Sorry bad posting – post continues below:

    to 2 Trillion to meet their statutory capital requirements. In addition, the banks cannot continue to fund these dollar assets at any spread. The market is, however, too illiquid to absorb anything near the amount needed, which means lower prices, which in turn would lead to further losses, which reduces capital. These losses occur either on a realized or unrealized basis -thank you accountants!. The Krauts are truly “Gebumpsed” as one might say.

    To extend Howlin’s analogy further the lyrics should be changed to:

    Cause if we had kept all my money that I’d lent to my neighbors who already spent it,
    we would’ve still be Billionaires for a looong time to come.

    It is gone – get used to it.

    Comment by Sotos — November 23, 2011 @ 11:42 am

  3. Here’s another dimension from the IMF:

    An elegant (i.e., parsimonious and not overfitted) model showing the evolution of the co-movement between sovs and their domestic banks post-Bear. Goes a little beyond Reinhart and Rogoff (2009). “… after supporting banks in the previous months, the by now weakened public finances had themselves an adverse impact on the financial sector. The government’s ability to support banks had been compromised, and banks’ holdings of public bonds became a more serious strain on them. Also higher sovereign spreads meant higher borrowing costs for domestic banks, leading to higher rates charged for investment and, hence, lower investment rates and growth. At the same time, new revelations of banks’ weakness raised sovereign spreads. Thus stresses in one domain were quickly transmitted to the other. This feedback loop goes some way toward explaining the rapid rise in spreads in some countries and hence the emergence of a very high degree of country differentiation.” (p. 22)

    I would observe that not even Uncle Fritz could re-cap/nationalize der deutchenbanken-kaputen if they all had to take a hit(s) on their sov debt (i.e., mark to market). And that doesn’t even count the ruinous consequences of der deutchenbanken-kaputen having to perform on the CDS contracts they wrote. These deutchenbanken-kaputen are still massively levered with no capacity to absorb even a minor error; hence their hoarding of capital now, and selling of assets (e.g., DB looking to sell RREEF, DB Advisors, Deutsche Insurance Asset Management and the Americas section of DWS).

    I keep imagining Sgt. Shultz from Hogan’s Heroes as Uncle Fritz for some reason. Go figure.

    Comment by markets.aurelius — November 23, 2011 @ 12:10 pm

  4. Thanks for the posting about the rot behind the impressive German walls Sotos.

    I used to think Russia’s Ambassador to NATO Rogozin exaggerated when he said the missile defense radars being installed in Europe could be used for offense and be used to strike a target in Moscow in less than seven minutes, without enough warning time (worse than the missiles in Cuba which could have hit Washington in 15 — not enough time for Kennedy’s chopper to escape the blast radius). That was before the test of that hypersonic system out in Kwajalein [sic] that can hit any target on Earth in less than an hour. Just more ‘war toys’, along with those drones that can record breathing patterns to discern if someone’s a ‘terrorist’, for SkyNet to kill us with when the Machines rise.

    Comment by Mr. X — November 23, 2011 @ 3:15 pm


    Phobie – reporting Homeland Security lies.
    local paper — ‘no malicious activity’ linked to water pipe failure

    In other words, the whole thing was either made up from whole cloth or a false flag. Got a correction, Prokofy?

    Comment by Mr. X — November 23, 2011 @ 7:14 pm

  6. @Markets.aurelius. You are exactly right. There is no way out. They keep pretending, and scurrying around, but it’s futile. The hole is too big to fill with the teaspoons available to them.

    Too funny re Sgt. Schultz. Several years ago I applied the Sgt. Schultz metaphor to Bafin, the German securities regulator, for its inability to see any manipulation in Porsche stock. But it would work here too.

    The ProfessorComment by The Professor — November 23, 2011 @ 8:19 pm

  7. Stock manipulation? What are you some kinda ZeroHedge commie now, SWP? 🙂

    Comment by Mr. X — November 24, 2011 @ 7:11 pm


    More on fake DHS allegations about Russian hackers causing the water pump in central Illinois to fail — and the anchorwoman’s bird flipping to her colleagues which got depicted as flipping off Obama.

    Comment by Mr. X — November 24, 2011 @ 11:47 pm

  9. […] Howlin’ Wolf is singing the blues for Europe. They are going […]

    Pingback by Black Friday Breakfast Links | Points and Figures — November 25, 2011 @ 4:49 am

  10. I’ve been writing about manipulation for 20+ years, X man. I wrote the book on manipulation. Of course, it’s #2,755,934 on Amazon, but I did write the book! And you can get it on Kindle!

    The ProfessorComment by The Professor — November 25, 2011 @ 3:19 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress