Thursday, January 19, 2012


That's how yesterday was spent; in meditation.  I was saying to myself, "Self, is this the way they are really going to go?  Have they really all gotten together and said ok, we've run out of ideas and when you run out of ideas just throw money at it?"  It really looks that way.

Now I am still having a hard time believing the conslusion to which I have come but there doesn't seem to be any other explaination.  Over here it started last week with Ben and Billy the Dud seemingly ready to buy every upside down house in the country.  This week the clamor...muted to be sure...was for QE III in a "meaningful" amount as one observer put it which is code of course for a trillion dollars.  Over there, the ECB made it very clear that it was prepared to come up with at least as much as the wildly successful 3 year facility for the banks and yesterday the IMF announced that it was looking for an additional $500 billion and asking the EU to increase it's bail-out fund to at least a trillion Euros to contain the risk of contagion in the financing of Europe's sovereign debt...a 450 billion Euro increase at a minimum.  Now let's see, close to a trillion from the ECB, a trillion from the bail-out fund, $500 million from the IMF (minimum); where is Everett Dirksen when you need him? At least the Euro side is sterilized--we know where that's going to wind up--but the dollars from QE III?  Boy, I bet the rest of the world, places like Brazil for example, are just going to love that.  But do these guys care?  Nah.  Not a thought.  The battle that Brazil has to fight in taming the inflation that these actions create...well, that's their problem.

The IMF announcement is a classic.  Any lawyer can tell you that the first thing that is taught to you in law school is never ask a question unless you're damn well sure what the answer is going to be, so in this case for all the denials (and they were immediate) that the U.S. was going to participate in this money-raising exercise, we are.  Mme. Lagrande is a very good lawyer and with the U.S. holding 18% of the voting stock of the IMF unless she was sure the U.S. was there, she never would have said a word.  This will of course cause an uproar in Congress but The Leader and The Suit don't need Congress for this one.

And there, dear readers, is the plan.  There is no longer any doubt that all the money in the world will be made available just as we speculated last week but now I am sure.  I'm shocked I suppose but not surprised.  Even the time frame is revealed which coincides with the maturity of the ECB facility.  For the next three years.  Tomorrow, Mario Monti will release his restructuring plan for Italy.  The early leaks point to a well-reasoned approach and a recognition that what ails Italy and by extention the EU, is not simply a financing bind but, indeed, a structural deformity in Italian society, with specific steps to be taken within a specified timetable, which I bet is three years.  We shall see.  In the mean time Italy and Spain both had relatively successful bond auctions with a modest reduction in yields for both but still at levels far too high to be sustainable.

Within my meditation came the realization that this was one hell of a bet.  Monti I am sure is serious in what he is trying to do, but if the returns are not what are expected and the growth that is absolutely essential is not achieved--not only in Italy mind you but throughout the Union--the waste of resources and the destruction of wealth that will result will be monumental and chaotic.  These guys have gone all-in and I gues I never thought that they would.  I honestly thought that the plan would be to muddle along and deal with a minor default here and there but now that option appears to be gone.  Now, Greece HAS to work.  Now, Portugal cannot be ignored.  Now, Spain CANNOT be allowed to fail despite the enormous financial burden it faces which, through the disclosure of the debt owed by the independent states, grows daily.  At least that's what I came up with.  I would certainly like to hear from you as to whether you think I'm correct or what it is that I have missed


  1. Meditation, or medication? (A nap, or a beer)

    I'm really trying to get my arms around some of these ideas. Why QE3 and why now? Bank credit has been expanding, jobs have been recovering, even home prices and starts seemed to have begun to stabilize. Our banks aren't falling apart (even if there is a basket case or two out there). Would clearly be an election year goose.

    The IMF also perplexes me, but you're more attuned to this than I. US MMMF exposure has been substantially reduced, I imagine the French and the Spanish and the Italian banks are all now ring-fenced and in "due to" positions. Didn't see the europeans ponying up through the IMF when we wanted to bailout our banks, and I doubt they'd help us with CA.

    I'm also intrigued by Mme. Legarde's statement that "many Executive Directors stressed the necessity and urgency of collective efforts to contain the debt crisis in the Euro Area" - I read "many" as saying "not all" and as implying "the US said no again." But you're probably right (they still have the exchange stabilization fund, don't they?)

    The european banks have to submit their capital raising plans today. Mone de Peshi will have to auction off the art work. Not sure anything can be done for Commerzbank (other than the Deutschelanders continuing to look the other way). Spain looks like a depressionary cycle is kicking in - viscious circle where land prices fall, causing banks to be under-capitalized and municipal governments to need revenues. IMF and World Bank are downgrading their prospects for european growth (time only helps if you can profitably grow your way out of a crisis - Europe is not Asia - they just keep digging a bigger hole)

    Greece, Ireland and Portugal are all gone.

    But hey, at least us NYers have a professional football team we can still root for while "meditating and medicating"


  2. BTW: Bini Smaghi spoke at yesterday's Goldman conference - any idea what he said?