WHY ?

Public service announcement : Anything that may seem remotely like trading or investment advice in this post is of course not advice in any way or matter at all. Anyone stupid enough to invest money without knowing anything about the investment have themselves, and not me, to blame when they go bust.

I have long thought that the US was in a bigger hole than Europe. And while long-term, I think total collapse is more a threat on the US side, the prospect of a deflationary collapse still looms very probable in Europe. Within a few months, I suspect that the ECB will have to decide if they are going to monetize to the grave, or let the house of cards fall. Here’s what sort of convinced me :

LGD 100 (Loss Given Default) by Reggie Middleton

Reading between the lines, you soon find the conclusion that the shareholder capital of all the major banks in Europe is likely to be wiped out if Greeces starts the dominoes. This means that the majority of the European banking sector has to be liquidated (a situation in which it will be hard to find buyers for assets …. ) and that we are now in a situation where there is exactly 0 margin for error. No wonder they are feeling desperate in Brussels. Basically, they cannot let Greece fail. And they will continue to hand out money to Greece and others until finally something cracks. It may be the Greek banks. It may be a Greek revolution. It may be a German court decision. It may be the market figuring out that Spain and/or Italy is toast.

When this all happens, it is without a doubt 2008 all over again, with the exception that there is no margin for any country to save any bank. On top of this, entire retirement funds and money-management centers will collapse. IF this starts a run on short-term european debt papers (which may very well happen, even for short-term papers), then US money market funds are going down as well. If you do not realize what I’m trying to say here, I’ll put it simply : In 2008, a lot of financial institutions were about to go broke because the pyramiding paper ponzi failed. Had they been allowed to do so, and orderly liquidations hade taken place, we would be seeing the light right about now. There would also still be solvent governments in Europe. Since everyone played pretend for three more years, we are now more or less guaranteed a critical system failure, meaning more or less EVERYONE goes broke simultaneously. The crisis will rage on for at least a few years, a period during which the political systems will be damn close to the breaking point.

Thank you, eurocrat elite, for doing your darndest to try and utterly destroy society.

A few people are guaranteed to know this right now. This is the reason for the neverending bailouts. They cannot and will not allow this to happen. The financial class, as well as politicians all across Europe to one extent or other know that they are staring down the barrel of complete system collapse. So, it is my belief (and the recent ousting of Bini Smaghi from the ECB board could theoretically be a sign of this) that once Trichet has managed to escape with his “honour” intact (*snarl*), the next ECB chairman will create an emergency mechanism at least the size of the Federal Reserves. In short, “print print print print print print print print oooops!” is the order of the day. And just like the US Federal Reserve, larger and larger amounts of money will give less and less of an impact.

Germany may put a stop to this, and will then be called nazis. As always. Finland may opt out and re-introduce the Finnish Mark. Greece may dump the euro volountarily, in the end. Any number of events could trigger system failure despite an endless printing of money. Because if the “transmission mechanisms” of the banking system, meaning the ability to get bank A to lend to bank B who lends to bank C etc. fails despite guarantees by insolvent governments and an insane ECB, its game over.

I think you get my point by now.

What this means is that we may in fact (and I really, really, really hate saying this) be seeing significant strengthening by the USD against the EUR. I’m not saying the USD is suddenly a good currency, rather I’m saying that the USD and EUR are like two first world war fighter planes that have collided in mid-air, and are now doing a downward spiral of death. In the end, it will end with a big bang and lots of fire. But currently, it looks like the EUR-plane is tilting further down than the USD-plane.

But currency speculation is madness at this point. A better way to hedge against the collapse is to short european banks. I’m sure they will make it illegal soon enough, at which point the value of almost all European banks will reach zero in no-time, effectively preventing any way of saving them by emitting new shares to increase capital. Good move, regulators! But until then, the EuroStoxx50 index contains quite a few banks (~30%), so if you cannot short those stocks outright, this would be a good proxy. There are also a few ETF’s out there I think you can short, and in Sweden there are a few financial creations that are reverse banks. As I said – don’t take my advice on anything, but the one thing that is looking almost as clear as gold in the end going up, is European banks as a group going down. Way down. Way, way, way, way down.

On that cheery note, I will leave you for now. I will soon be on vacation, and then it will mostly be pics of stuff I’m growing, some trees, and possibly the ocean. Stay vigilant!@