Tuesday, September 27, 2011

The archetype of the trader

A video interview of a trader with the BBC has gone viral today. In that interview, Alessio Rastani not only predicts the end of the euro, but reveals that he, and presumably all traders like him, up to and including Goldman Sachs, have been waiting for the opportunity to make money from a crash. If you haven't yet seen it, take a look. You'll see the world as it really is.

This is what Europe is up against, and why, at the end of the day, there are only two choices for Europe if the creditor countries attempt to get 100% of the money back that Greece owes them: A European (Economic) Government, or European Collapse. The interdependencies of the banking system are too extensive to avoid contagion from Southern Europe to the core financial centres of the North. The pattern until now to throw good money after bad in the case of Greece has exacerbated, not reduced the threat.

We see here, in this video, the archetype of the financial market trader--a living representation of all that we associate with the movers and shakers of the financial world--displayed in all its glory. And yet there is no real-life archetype of a European President, of a European Government, that could take authoritative decisions in economic policy Barosso? Van Rompuy?

Exactly. European leaders are selected for their weakness, their capacity to work with the heads of government of the member states, who fear for their prerogatives and only vote for those who are smaller, in a figurative sense.

Barring a turn-around that establishes a European government, we had all better hope that Europe comes down to a negotiated partial default (rather than a complete default), or that Greece leaves the euro or both. Because the alternative is as Mr. Rastani says: governments don't rule the world. Goldman Sachs does.

Sunday, September 25, 2011

War Games and the Euro

In a previous post, I argued that Europe needed people with experience in military affairs to work out strategy and tactics for dealing with speculative attacks against the euro.

And they are here. Breugel is influential. And rightly so.

Things just got a lot more interesting

Saturday, September 24, 2011

Bankers, politicians and honesty about Greek default

The head of the Dutch Central Bank stated yesterday he wouldn't rule out a Greek default. With so many politicians refusing to say the obvious, this is yet another example of central banks acting sensibly when politicians won't. The ECB is warning the the entire common currency is in peril, and it is only the G20 central banks that have moved to ensure liquidity when the Greek case goes critical.

Ironically, out of all the intended reasons for keeping central banks independent of political control, this was not one of them. The failure of democracy in Europe means that the central banks have no choice but to act.

Tuesday, September 20, 2011

France, Italy and the war's fluid front

China has stopped doing business with a number of French banks, and Siemens, for one company, has stopped as well. There is concern that the banks will be hit by a possible Greek default on public debt next month. A good amount of Greek debt will have to be paid or rolled over, the Greeks and the troika of EU, IMF and ECB have been at an impasse, and Germany has just announced that it can't possibly vote on new support until 2012. A default is coming, and the Chinese, who have excellent business acumen in these things, are pulling out.

The silver lining in this cloud is that they will probably be back, purchasing assets and shares at a bargain at a later date, but not before France is significantly weakened, and before the Chinese have strategic positions in French investment banks. Note that will come with political as well as economic influence.

Italy has also been downgraded, and the country is unable to find a replacement for the outgoing Berlusconi.

The war has extended beyond Greece, Portugal and Spain and is now rampaging in France and Italy. The Dutch and the Germans are retrenching budgets all the more to compensate and ringfencing themselves from the carnage. Spain seems to be holding the fort well enough.

This isn't the end of it. Indeed, because the Europeans will not support the economic stimulus plans that the US is proposing, there will be a downward spiral for the next decade in which employment, wages and general economic welfare in Europe will decline. The only people to benefit will be the ones with enough cash to buy in at a discount.

All of this assumes that a default doesn't happen, and/or that Greece remains in the euro. But leaving the common currency may not affect the other countries that are now in the midst of the war.

Assuming Greece stays, invest in emerging markets. Growth will not be happening in Europe for a while.

Thursday, September 15, 2011

Spain gets it right again

Spain has proven once more adept at reading the signs of an attack and going on the offensive. As everyone closes around Greece and France, Spain has passed a balanced budget amendment to its constitution. I expect it will do better than otherwise possible in the turbulence that is coming up this month and next. Indeed, with Spain's lower overall spending profile, the adjustment should hurt less than it does elsewhere.

It's not that budget retrenchment is objectively necessary, especially for Spain, with its low public debt. Nor is it that the current hysteria about deficit reduction is somehow right in treating Spain the same way as Greece or Portugal. Instead, the objectively good reason to move is that markets collectively are sloshing in a huge wave around Europe and don't really care about economic fundamentals any more. They care about political signals like this that identify a country as one of the winners.

Spain has decided it's going to come out of this crisis even stronger than it started. With such a big wave coming, whilst other countries are looking at it and wondering whether they can swim, Spain has just pulled out a surfboard. 

They may just pull it off. Whether it works or not, you've got to admire the balls behind that move.

Tuesday, September 13, 2011

Why are German banks hiding?

French banks are being pounded again today for holding so much Greek debt, but the other story this week (still) is that a number of German banks have decided to withdraw from the stress testing of the European Banking Authority.

To which my response is: are they smoking crack? The banking community has taken a big hit in trust over the last four years, and transparency is the way to restoring it. In order for regulators and the public to know the truth, stress testing has to show what is there. The response of the German banks, that telling the truth about what German banks are holding would exacerbate the euro zone debt crisis only serves to reinforce why German banks and their motives should be distrusted.

Although the UK banks are screaming about new rules on capital adequacy this week, at least they are designed to make the banks safer.

And why in all that is holy would anyone keep their money in such a place. If you're reading this and you're German, the answer is: you shouldn't. Withdraw your cash and put it in an institution that will be honest about what's on its books. Because however ugly it is, what you don't know will hurt you more than what you do.

Thursday, September 8, 2011

Why? Britain and European passport controls.

The UK has always insisted on going its own way within the EU. Okay, we get it, and although I can't think of where that might actually have been a good thing (some Brits reading this will surely look at the euro zone crisis and laugh out loud, despite the fact that their mortgage payments are permanently higher to support the value of sterling), I can respect being eccentric if you aren't just making life difficult just to make a point. To wit:

Insisting on passport controls within the EU makes Britain (and yes, I'm looking at you, Ireland) look like a third-world banana republic with a huge chip on its shoulder. Grow up and let freedom reign already. I've just returned from a trip to Cambridge, a trip in which I spent three times more time in passport control than actually flying. There is a reason I won't be accepting many more invitations to the island anytime soon. It's a complete pain in the ass, even coming back into Schengen. And that's a shame. Because I'm going to tell my UK colleagues next time....let's just meet in Paris.

Switzerland pegs to the euro

Yesterday, the Swiss central bank announced it would intervene to prevent the franc from rising above 1.20 to the euro. What I want to know is how much money the main Swiss banks have planned in as ammunition. Because the markets will surely test it now.

I'd think twice about buying stock in Swiss banks at the moment.