WILL THE “EVIL SPECULATORS” WIN? I HOPE SO
Those evil speculators are back at it again this evening as the Euro once again gets battered and bruised and descends towards a new low. Yesterday’s “shock and awe” resulted in a brief rally in the Euro before it began tumbling once again. The currency is trading off 0.68% as I type (2:15 AM EST).
The Euro is likely to face its stiffest test to date as the coming weeks and months unfold. We’ll find out just how much the bailout package can do to protect what I believe is a mortally wounded currency. As I mentioned yesterday, this is not a solvency crisis, but a currency crisis. This is of vital importance in my opinion. The issue of solvency is unique to Europe. After all, there is no solvency risk in the USA, UK or Japan though many would like you to believe such fear mongering. This solvency crisis in Europe just so happens to be showing the Euro for what it really is – a hopelessly flawed currency system that is destined for failure.
The Euro is simply unworkable in its current format. The problems are deeper than what George Soros described as a “patently flawed” combination of monetary and fiscal policy. In addition to the very serious political flaws there are enormous trade flaws. The trade surplus of Germany is directly inherited as deficit by the surrounding nations. While Germany views this as a sign of strength it is in fact imposing severe strains on the deficit nations. We have seen this time and time again with single currency systems and trade deficit nations. It never ends well. Without serious changes these flaws will persist. I believe the only workable long-term solution is the return of true monetary sovereignty in each of the European nations.
The politicians of Europe clearly don’t understand this as they bailout bankers while imposing harsh austerity measures on their own citizens. Yesterday’s bailout package was the hardest kick of any can ever kicked down any road. For the sake of Europe’s politicians they better hope we are not in a sprint to catch up with this can. If yesterday’s “all in” bet is called as a bluff by global speculators it will have tremendously damaging near-term effects. They have once again gambled with people’s lives due to their own ignorance of the world’s monetary systems.
These men and women have foolishly thrown down the gauntlet against the “evil speculators” of the world. As regular readers know, I think the Euro was flawed from its inception and its vast inefficiencies and resulting imbalances have been exposed. These imbalances have helped contribute to the plight in Europe and now Europeans have literally killed one another over the continually detrimental decisions of their governments.
In the coming weeks, months and perhaps years we will find out just how well natural selection works in the markets. Politicians have continually attempted to kick the can down the road, save dying companies and prolong the inevitable. Clearly, the population is growing tired of seeing good money thrown at bad.
If I am correct, there is no amount of money the Europeans can throw at the problems they confront. The only true answer is reform. As the markets recognize this they will gnaw at the Euro like a wounded animal. Eventually, the politicians will wake up to the fact that the Euro will never be a world reserve currency and that its very existence is contributing to the economic woes in Europe.
In the end, we should all hope that the “evil speculators” weigh on the Euro and attack it with a vengeance for it is not until a restructuring of the EMU that we can be certain that Europeans will never kill each other due to the lack of monetary independence that their countries have. While this is potentially very bearish in the near-term I think it will do a great deal in laying the foundation for the next great sustainable bull market.
“If I am correct, there is no amount of money the Europeans can throw at the problems they confront”
I agree but the problem is the governments are all users of the currency and not issuers of the currency so from a governmental level all the money they throw at it needs to be borrowed – making the problem worse. If the ECB throws all it needs to at the problem the Euro will be seen as a very soft currency and continue to decline.
They can have a weak currency and no soverign defaults or soverign defaults and a weak currency. Either way the weak currency is guaranteed. Things will accelerate when the reserve managers who were piling in start to leave, hedge or just stop buying – it will of course be blamed on the speculators!
The only thing I can see saving the Euro is coordinated intervention – Fed/China/BOJ.
The whole thing is a big mess. I still can’t think of a good outcome. It’s surreal that we’re going thru this just 18 months later and applying the same band aid. If I told everyone what was really on my mind I would probably scare the sh*t out of people. This has the potential to nuke the market in the short-term if the bluff is called….
Let’s hope they’re working on plan B as we speak. Just in case. BOJ and FED could be jumping in sooner than people think if this starts to go south again. Then what? We expose the two largest economies in the world to previously unfounded solvency risks?
Expose the FED & BOJ to solvency risk in what way? Even if they purchase Euro-denominated obligations and the Euro tanks, they’ll be okay. Or do you think it’ll be the other way around where the USD and YEN drop after purchasing Euro-denominated obligations?
TPC, can you elaborate more about how the death of the euro can nuke the market in the short term. What’re the chain of events if the euro fails? Thanks.
TPC, say what you gotta say. Not sure you could scare people anymore than we are all scared right now.
This trillion, combined with the fact the US and Japan are envolved, is all about inflate or die. I was hoping all the tail risks that are out there would go away, but now I see them as the only possible outcomes.
TPC, like I said, please let us know what is on your mind!
Let’s just say that I have a discomfort about this market that I haven’t had in a really long time. Since just before housing peaked and Lehman went bust….I don’t want to use the word crash, but I would not be one bit surprised if we experience a vicious 20% decline in the coming months….
Shanghai apparently wasn’t impressed by the bailout. Sold off almost 4% from open to close….
I don’t think that the drop in the Chinese markets has much to do with what is happening in Europe. The Chinese markets are already in a very bearish mode and recent inflation (CPI and real estate bubble) as well as expectations of more tightening is what is scaring investors there.
PIIGS leave, establish Brady bond type workout for Euro debt and they get their own currencies, fiscal and monetary policies and soem IMF help to stabalize deficits in meantime. I think something along those lines is the only way out unless global growth and credit expansion somehow explodes again!
Sounds reasonable enough to me. The public wouldnt like ANOTHER bailout like that, but it’s probably inevitable. If this bailout fails (which is certain with time) I see growing unrest in Germany. They may very well end up wanting out as well. In that case, the whole experiment crumbles. Low odds though.
On a sidenote, the futures market is very jittery here. I’ve only seen this a few times in my life and it was always around huge market moves. Investors are very nervous.
SHCOMP has been in bear mkt for about 1 month now. Data today was solid with inflation still the main concern. Very poor property auction in HK today hurting sentiment here as well.
Sarkozy is threatening Germany with war. Did anyone notice?
Hard to notice things that don’t happen.
After leaving the negotians sunday, Sarkozy told the press the Euro is a matter of war and peace. Since war is impossible on the european continent without Germany and France on opposite sides, the meaning of his words are obvious: Germany has to accept the bailouts or there will be war with France.
Since when did the French have a military?
The jokes are endless:
Seen for sale on EBay – One French Army rifle. Never fired but dropped once.
As Patton is reported to have said; “I would rather have a German division in front of me than a French one behind.”
Well, a military that would fight…. France that is…
hahaha hey guys some respect for the French readers LOL…We can’t have the best wines and cheeses in the world and be warriors at the same time! On a side note, I would like to remind our fellow Americans that without the French (ha Monsieur Lafayette!) the States would still be an English colony!!!
Touche! The jokes are all in good fun. There are more than enough jokes to go around about the Americans….
TPC…Shanghai didn’t go down due to the european package. It went down because of fear of harder tightening in China.
Of course. Didn’t mean to imply that a $1T bailout package could make anything fall other than the jaw of every citizen on the planet….
You don’t live in Europe. We simply can’t go back to 30 different currencies. I think a weak euro is better than 20 different ones.
Changes are in store. Perhaps not the return of ALL former currencies, but the EMU is broken in its current format….
The EMU will breake only when the Germans get broke. And it will happen. Mind my words.
The politicians will act in their own best interest and do what they do best, create more government. They’ll continue to solidify a stronger E.U. government and use whatever excuses they can find. What happens when the entire continent is broke is another question…
Look at it this way:
The Euro HAS already changed – it’s only happening under the cloak of a “short term” solution. It’s possible the Euro will keep the same name – but it will become the exact same thing it sought to replace
1) China’s fall is not due to Europe crisis, it is due to tighten police. But Chinese market is a policy controlled market more than a natural market. There are a lot of weapons that government can use to lift the market. At this moment, China has not used any of them since the recent fall. It is because they need to cooled down the property bubble first, it has threaten the stability of government. they expect 30% price fall, some big homebuilder just start to give 15% discount. In the past two days, you started to see the media say” tighten policy start to work and a government owned newspaper start to say” stock market fall unreasonable”. Those are all initial signs that government will intervene market, the bottom line is Shanghai index 2500. You will see government starts to intervene before it, the market will not fall too far beyond it.
2)I agree Euro is a flaw currency, should be broken. There are tons of good reasons to let it fall, just as 2008 there were more than enough reasons to let banks fall. But I do not see there is any political intention on it. So this is the battle between governments and “speculator”. I am from China and still remember 1998 Asia crisis. The battle between “speculator” and Chinese government.Chinese government at the end bit them badly. As long as the government has strong intention and ability, “speculator” will not win, because theoretically, government has unlimited resource. Chinese prime minister just said that they support Euro bailout. I also think US is at a critical point that they have to join the fight. At this stage, with all the government against “speculators”,it is hard to imagine “speculator” will win at last.
3) TPC: I really like your blog, you have a great skill of risk management. Thank you for all the wonderful work.
Europe is in a bad shape, no doubt. But if you look at it in aggregated terms, here are the stats: government deficit – 6,3% ; publice debt – 78,7%… Euro area numbers.
Some countries face structural problems and have to suffer to fix their problems. If Germany allows for inflation around 3% for the next decade, the adjustment won’t hurt that much and it is beneficial in the long term.
Yes, each government has his budget policy. What about in the USA? or China? or Brazil? Isn’t it the same? Aren’t there states or regions with independent budget policy in these countries?
Cultural speaking, I guess, and this is just a guess, that there are more differences between the ultra conservative/religious peole from south USA and a more liberal peole from the north than the differences between Finland and Portugal’s people.
Europe is a Peace Project, a Union of Common Values and Liberty. I believe the european elites will do what is necessary to preserve what took more than 50 to conquer.
P.S. – I enjoy reading you, despite I strongly disagree with your point of view regarding the future of euro zone.
All the best
I think the only solution for Europe will be a centralized management of finances, with European taxation and European expenditures. Otherwise there is no way I can see to save the Euro. I think the bailout gives time to leaders to think about solutions (we know that European leaders usually never agree… except when in crisis). I also think that the Euro will fall with the blessing of Euro economies which will export more and therefore grow a bit more.
BR
aorani
Yes, but true political unity would require one set of laws, one treasury and one central bank all under the same roof. That is a dream in my opinion. Frenchmen will never be accepted as Germans and vice versa. The idea of a universal government is a dream. There is too much history here….
Spot on. The Euro was founded on the basis of two notions:
1. To fight hyper inflation that was plaguing Europe for decades
2. To establish a competitive currency against the USD
If you look at these two concepts, it shows that unity was based solely on a common stance AGAINST their perceived threats. This is certainly not the same as unity based on social acceptance and agreement.
Besides, if the possibility of a “unified” Europe was even plausible, why all the riots and debating?
The Euro and EMU is a project with political ambitions of unity. But as long that the financial policies of each country is not firmly controlled with real sanctions for those who defect it will run into trubble. The club med-countries weren’t ready for the euro. It was a mistake to integrate them in EMU.
Now the damage is done.
TPC,
I’m not sure if you saw this but I couldn’t help but….love it
Enjoy.
http://finance.yahoo.com/tech-ticker/whoa!-did-nassim-taleb-cause-thursday%27s-market-crash-482998.html?tickers=dia,spy,xlf,^gspc,^dji,bcs&sec=topStories&pos=6&asset=&ccode=
Whoa! Did Nassim Taleb Cause Thursday’s Market Crash?
Posted May 11, 2010 09:21am EDT by Joe Weisenthal in Investing, Banking
Related: dia, spy, xlf, ^gspc, ^dji, bcs
From The Business Insider, May 11, 2010:
Update: See below for quote from Taleb.
The Wall Street Journal’s Scott Patterson and Tom Lauricella have a delicious story tonight that is too good not to believe.
The nut is that a fund linked to Nassim Taleb — Mr. Black Swan — may have placed the initial trades that got the ball rolling for Thursday’s violent selling.
On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.
The trade by Universa, a hedge fund advised by Nassim Taleb, author of “Black Swan: The Impact of the Highly Improbable,” led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
Intriguing!
As their story goes this trade lead others to buy protection, prompting one thing to lead to another and then voila — black swan crash!
As the panic selling intensified, some HFT funds scrambled to turn off their trading systems to avoid the meltdown — among those doing so was Manoj Narang’s Tradeworx, who rushed to get out of the market.
Readers may remember Narong for his appearance on CNBC last week (the guy on the right), where he was seen defending HFT on the grounds that it provides much-needed liquidity (though obviously, as this story goes, he wasn’t that eager to keep providing liquidity when the market needed it most).
Anyway… we’re starting to piece together the story of what happened a bit more, though we’re not all the way there.
But just the fact that the Taleb-linked fund might have had a role in setting off the dominoes is too perfect.
We’ve reached out to Taleb for comment. Our guess is that if/when we hear from him, his answer will have to do with the the stock exchange’s pronounced lack of robustness. See our interview here for why that is.
Update: Well we called it. Here’s Taleb’s response for comment on the story:
“Just landed all I can say is that the explanation is in “robustness and fragility” in the second ed. of The Black Swan ironically coming out tomorrow, particularly the discussion on ‘weakening of causality’.”
I saw that earlier. Interesting. I still think the cause here is much simpler than everyone wants it to be – pure fear led to no buyers. It’s happened since the dawn of markets. Sometimes there are just no buyers and the few bids on the board get hit at very low prices. I’ve seen it happen personally. I’ve personally been on both sides of such trades. Crazy that it could happen in the S&P’s, but that’s what happens when you have a very fragile market that no one trusts.
Oh I agree 100% – the only thing older than the phenomenon of a big sell off is the “short seller witch hunt” that follows. Although I guess since the 80s, this witch hunt has merged with the “technical glitch” witch hunt.
Why is it so hard for people to grasp that bids fall off the board and rock bottom market maker/specialist bids get hit on market orders???
I just liked that I was on the same side as Taleb
DID YOU CAUSE THE SELL-OFF (picks up phone dials 911 starts doling out IP addresses).
I guess you have to see it to believe it. Sometimes there just isn’t a bid or an ask – even in the deepest markets.
A frightening notion has become more realistic to me of late. So much of our government is run by incompetents – see the Senate Panel”s comments to GS two weeks ago, and it’s even worse at the House Level. Remember that moron (can’t remember her name — a CA congresswoman) demanding to know if BAC had raised interest rates on their credit cards?
In past, whenever they got too far off track though, we could always count on market forces eventually bringing them back. But now, “market forces” are represented to a degree never seen before by computer algos, HFT platforms and other Quant driven models. I still can’t get over that 1000 point drop. Should not have happened and likely would not have happened under the old specialist system, where they were responsible for maintaining an orderly market. But now, we have these unbelievably sophisticated trading programs in which there is little human control and I bet not a 1000 people in the world truly understand are paired up against policy makers who are so cluelessly moronic that I wouldn’t trust half of them with my checking account much less the powers they have. It’s like HAL against the monkeys in the early scenes of 2001. You have to believe that it’s now possible, and indeed, increasingly probable, that you could have a down 2000 point or more day. And no one would know exactly why it happened. How the hell do you manage a family’s finances and try to invest for college education and retirement in a world like that?
Was Thursday’s mishap a set up for this bail out?
The best performing asset class last year was Gold. This is the endgame and the finale will be WW3. NOT BY ACCIDENT – but strategically planned by your rulers.
World Wars have been started over less: this EU currency and debt problem has a real tinder box feel to it.
Well if I did, it sure took a long time and a whole lotta pain to manifest itself. Then again, the markets are so fragile and so easily to manipulate that I guess I must regrettably accept my “anti-american” short bet which triggered every market to do a 10:1 sell off while simultaneously crashing Bloomberg and Retuers…and causing the EUR/USD cross to drop nearly .04! Rest assured though – I’ll save a nice front row seat down in hell for you when that time comes…..lmao
I find it also a bit ironic that despite our differences of opinion on some subjects at some times – we ended up on the same side of the same trade – and took it straight to the bank! I think that speaks for the power of analysis over emotion and the pursuit of truth over assimilation to lies.
…of course, I did have a beta that would’ve given you an ucler
But the real question I have is: did you spend the last 2 days cherry picking expo months and strikes for the next round?? Despite my abundance of “real work” accomplished, I have had it on my mind for a few days now….
“I love it when a plan comes together!”
PPS After my boss tried in earnest to convince me that option trading has no impact on the indexes, I had another co-worker asking me about a good strike to choose for LEAP GLD shares. I told him, “I”m sorry, but a magic 8 ball will give you a much better answer on that shitshow”
I think you and I agree on a lot more than you might think. Despite that first conversation
I’m sure you made a lot more in % terms than I did on the trade. Nonetheless, it was magnificent when it played out. Covering on Thursday was glorious. My only regret is knowing that the government was going to come out with a huge plan on Sunday and not even going long for a portion of my portfolio. Ah well, hindsight is 20/20. Luckily, my foresight isn’t far off 
I’ve been pretty inactive in the last few days. I want to see how the dust settles here. I still think there is potential for a massively disruptive event if this bailout is proven to be what I think it is – another waste of money.
I’m basically neutral right now.