Moving Deck Chairs on the Titanic
Well it looks as if Julia's days are numbered. Kevin has surprised us all and launched an all-out offensive on Gillard. Whether it works out for him is anyone's guess, but I can't imagine him striking unless he felt confident he could follow through.
I would love to be a fly on the wall this weekend during the horse trading that must take place before Rudd can get the numbers needed to topple the PM.
I'm not going to spend my time today trying to analyse the situation. I'm sure the mainstream media will bludgeon us over the head with minute-by-minute analysis of every twist and turn. We'll be sick to death of it by Monday.
Also, it has to be said that our lives will not be enriched one iota by a change of guard in the Labor party. Their policies will continue to pick our pockets. And Labor will still get their butts kicked at the next election. Moving deck chairs on the Titanic. That's all it is.
So today I would prefer to cast my eye across the oceans to Greece. The announcement of the $130 billion bailout has not ended Greece's problems by any stretch of the imagination. I am sure you have already read about the fact that the optimistic outcome is that Greece will have a debt to GDP of a little over 120% in 2020. That is still an unsustainable level. (Even their pessimistic outlook for growth looks incredibly optimistic to me.)
How anyone can still imagine that this is going to end well is beyond me. I personally wouldn't be surprised to see the deal unravel over the next few weeks before the 14.5 billion euro is due to be repaid on March 20. I can imagine waking up one weekend to see that Greece has called a bank holiday. This would be a precursor to them leaving the euro and returning to the drachma.
The Telegraph recently said that 'Plans for Greece to default, potentially leaving the euro, have been drafted in Germany'. They can obviously see the writing on the wall.
The Greek people have officially been thrown under the bus to save the large European banks. The Troika (ECB, IMF, EU) now wants Greece to change its constitution to ensure 'priority is granted to debt servicing payments' as stated in a recent announcement.
Luckily this can't happen until at least 2013. And the current government will be long gone by then with elections due in April 2012. So it looks like it is a long shot that the Greeks will be forced to change their constitution to ensure their enslavement.
Remember, according to ZeroHedge only 19 cents of every bailout dollar is actually going to Greece. The rest is being siphoned off to the European banks that lent too much money to Greece in the first place. The New York Times yesterday revealed that the terms of the new deal will also allow Greece's lenders to seize the gold reserves in the Bank of Greece.
The determination of the Troika to 'save' Greece is purely based on the fear that if Greece goes then Portugal, Spain and potentially Italy will not be far behind.
This is why we have seen the immense expansion in the ECB balance sheet over the past few months.
This was caused by the recent LTRO (Long Term Refinancing Operation) where the ECB handed out nearly 500 billion euros to European banks. The hope was that some of this money would find its way into the peripheral sovereign debt market. In the end it did and we have seen Spanish and Italian bonds rallying strongly over the past few months due to this huge liquidity injection.
The reason I mention the LTRO is that the next round is coming up on the 29th of February. The LTRO involves the Euro creating money and lending it to the banks for three years at 1%. I think it will be very interesting to watch the outcome of this second round of cheap money for the banks. My gut feel is that the banks will feel far more comfortable sticking their snouts in the trough for all they can get this time around. The mainstream thinks we will see another 500 billion euros getting snapped up with some expecting it to be closer to 1 trillion!
My gut feel is that it will be closer to 1 trillion and potentially even above that immense figure. Who wouldn't want to fill their pockets with money at a cost of 1% a year when there are so many places you could place that money for low-risk returns.
How the European bond markets react in the weeks following the second LTRO will be incredibly important. If Portuguese, Spanish and Italian bonds start selling off again, even though banks are full to the brim with cheap cash, then you can become very confident that the situation in Europe will unravel again.
The contagion that will flow from such an event will be very real. If you had euros in Portuguese banks and saw Greeks ejected from the euro and given drachmas, which would devalue massively against the euro, what would you do? If you were smart you would see the writing on the wall and start getting your money the hell out of there.
You can see from the above chart that the smart money has already left Greece. Even Italy is starting to see the first signs of money moving offshore.
Also you have to ask yourself: if you were a bank with a balance sheet already full of peripheral European sovereign debt would you be incentivised by the cheap money to go and load up further on dodgy debt that may be in line for restructuring at some point in the future? Would you consider that a 'risk free' trade? I certainly wouldn't. That's why I believe the money that the banks snaffle up next week won't find its way into the peripheral European bond market in the sizes desired. It may help to steady the ship for a while but it won't cause a huge rally in their debt markets.
Italy needs to issue 45 billion euro a month for the next two months versus 19 billion euro in February, as reported by Reuters. I'm sure this is one of the reasons for the timing of the next LTRO.
This current rally in the markets worldwide probably has a few more weeks to run on the back of the optimism after the Greek deal and the excitement leading up to the next LTRO. But I fear that early to mid-March will see an intermediate and even perhaps a long-term top in the markets. So by all means join in the party, but I think you should make sure you are dancing close to the door.
Murray Dawes
Slipstream Trader
Well it looks as if Julia's days are numbered. Kevin has surprised us all and launched an all-out offensive on Gillard. Whether it works out for him is anyone's guess, but I can't imagine him striking unless he felt confident he could follow through.
I would love to be a fly on the wall this weekend during the horse trading that must take place before Rudd can get the numbers needed to topple the PM.
I'm not going to spend my time today trying to analyse the situation. I'm sure the mainstream media will bludgeon us over the head with minute-by-minute analysis of every twist and turn. We'll be sick to death of it by Monday.
Also, it has to be said that our lives will not be enriched one iota by a change of guard in the Labor party. Their policies will continue to pick our pockets. And Labor will still get their butts kicked at the next election. Moving deck chairs on the Titanic. That's all it is.
So today I would prefer to cast my eye across the oceans to Greece. The announcement of the $130 billion bailout has not ended Greece's problems by any stretch of the imagination. I am sure you have already read about the fact that the optimistic outcome is that Greece will have a debt to GDP of a little over 120% in 2020. That is still an unsustainable level. (Even their pessimistic outlook for growth looks incredibly optimistic to me.)
Greek Deal Looking Shaky
How anyone can still imagine that this is going to end well is beyond me. I personally wouldn't be surprised to see the deal unravel over the next few weeks before the 14.5 billion euro is due to be repaid on March 20. I can imagine waking up one weekend to see that Greece has called a bank holiday. This would be a precursor to them leaving the euro and returning to the drachma.
The Telegraph recently said that 'Plans for Greece to default, potentially leaving the euro, have been drafted in Germany'. They can obviously see the writing on the wall.
The Greek people have officially been thrown under the bus to save the large European banks. The Troika (ECB, IMF, EU) now wants Greece to change its constitution to ensure 'priority is granted to debt servicing payments' as stated in a recent announcement.
Luckily this can't happen until at least 2013. And the current government will be long gone by then with elections due in April 2012. So it looks like it is a long shot that the Greeks will be forced to change their constitution to ensure their enslavement.
Remember, according to ZeroHedge only 19 cents of every bailout dollar is actually going to Greece. The rest is being siphoned off to the European banks that lent too much money to Greece in the first place. The New York Times yesterday revealed that the terms of the new deal will also allow Greece's lenders to seize the gold reserves in the Bank of Greece.
The determination of the Troika to 'save' Greece is purely based on the fear that if Greece goes then Portugal, Spain and potentially Italy will not be far behind.
This is why we have seen the immense expansion in the ECB balance sheet over the past few months.
Source: Sound Money. Sound Investments
This was caused by the recent LTRO (Long Term Refinancing Operation) where the ECB handed out nearly 500 billion euros to European banks. The hope was that some of this money would find its way into the peripheral sovereign debt market. In the end it did and we have seen Spanish and Italian bonds rallying strongly over the past few months due to this huge liquidity injection.
The reason I mention the LTRO is that the next round is coming up on the 29th of February. The LTRO involves the Euro creating money and lending it to the banks for three years at 1%. I think it will be very interesting to watch the outcome of this second round of cheap money for the banks. My gut feel is that the banks will feel far more comfortable sticking their snouts in the trough for all they can get this time around. The mainstream thinks we will see another 500 billion euros getting snapped up with some expecting it to be closer to 1 trillion!
My gut feel is that it will be closer to 1 trillion and potentially even above that immense figure. Who wouldn't want to fill their pockets with money at a cost of 1% a year when there are so many places you could place that money for low-risk returns.
Look to the Bond Market
How the European bond markets react in the weeks following the second LTRO will be incredibly important. If Portuguese, Spanish and Italian bonds start selling off again, even though banks are full to the brim with cheap cash, then you can become very confident that the situation in Europe will unravel again.
The contagion that will flow from such an event will be very real. If you had euros in Portuguese banks and saw Greeks ejected from the euro and given drachmas, which would devalue massively against the euro, what would you do? If you were smart you would see the writing on the wall and start getting your money the hell out of there.
Source: Bloomberg
You can see from the above chart that the smart money has already left Greece. Even Italy is starting to see the first signs of money moving offshore.
Also you have to ask yourself: if you were a bank with a balance sheet already full of peripheral European sovereign debt would you be incentivised by the cheap money to go and load up further on dodgy debt that may be in line for restructuring at some point in the future? Would you consider that a 'risk free' trade? I certainly wouldn't. That's why I believe the money that the banks snaffle up next week won't find its way into the peripheral European bond market in the sizes desired. It may help to steady the ship for a while but it won't cause a huge rally in their debt markets.
Italy needs to issue 45 billion euro a month for the next two months versus 19 billion euro in February, as reported by Reuters. I'm sure this is one of the reasons for the timing of the next LTRO.
This current rally in the markets worldwide probably has a few more weeks to run on the back of the optimism after the Greek deal and the excitement leading up to the next LTRO. But I fear that early to mid-March will see an intermediate and even perhaps a long-term top in the markets. So by all means join in the party, but I think you should make sure you are dancing close to the door.
Murray Dawes
Slipstream Trader
