THE DIVINE COMEDY

Dante wrote the original version.  Italy and The Boys in Brussels and the ECB have been busy on the sexual.

For those who pay attention to such things Banco Populare did Vicenza and Venetia Banaca are well known; for those who do not they are a couple of busted Italian banks who have been in that shape for some time.  Kept on life support, last week the situation became impossible causing the ECB to declare the banks as having failed and requiring a dissolution under the Euro version of the "living will" as we call it  Over Here.

Simple, right?  Except that this is Italy and Italy is Over There.

Seems that there is a section in the ECB rules and refs that says if a national government determines that the survival of the bank in question is important to the region, rather than The provisions of the EU and the ECB, the government can apply its own bankruptcy laws to the resolution of the problem. OOOOOO-K.  Just what does that mean?   Well in the case of these two sterling institutions here's what happened.

Italy decided that the institutions were important to the neighborhood (Venetian and Tuscany...not exactly pockets of poverty) and as a result home rule applied.  At the end of the day, shareholders and   Sub-debt holder (more on that) got creamed, the government decided that after a "transparent decision process" (who knew?), Inter Sanpaolo would assume the assets, employees and businesses of the two institutions.  And oh, the senior debt holders would be protected.  It gets better

Taking a page from some previous operations, there would be a "good" bank and a "bad" bank.  In order to deal with the "good" bank, Inter would get about five billion bucks as a thank you for taking this on.  The "bad" bank?  Eh, we gonna guarantee you about thirteen billion so you no getta hurt.  One wonders why Italians tend not to pay taxes. Or, as one guy put it a while back, gains are privatized, losses are socialized.  Banking as it should be if you ask me, but nobody is.

Aside from the farce of it all there are a couple of serious questions that might be asked such as what the hell is the real policy Over There for dealing with failed banks?  Then there is the issue of the sub debt which is not your everyday piece of paper but a specially developed instrument which in many jurisdictions has been a prime source of newly issued bank capital.  This is there first instance where it has been REALLY treated as capital in every respect.  What is is future and how will it trade?  Finally, in a moment when Dodd/Frank is being reviewed and re-written, is it possible to square the circle with the two major regulatory systems and if not, what will be the outcome.  Got me on that one but we're going to visit a few more circles Down There before we get the answer to that.

JANET TIME .....YAWN

Fed moved 25 b.p. today as everyone knew they would.  Ms. Yellen's statement sounded like nothing had happened since the last meeting...nothing, zero, nada on the election or it's possible aftermath.  She was  a bit bullish in he predictions which called for a probable thrice-hike of 1/4% in 2017 and an eventual top rate of 3.00% by end-2018.  Down went the DOW 114 points; up went the dollar index; the 2, 5 and 10 year shot up with the latter easily passing 2.53% but the Long Bond sat still.  Damnedest thing...the curve actually flattened on the long end.  What does all this mean?  Beats me.  Markets are bullish; rates have been moving up; employment is at full capacity according to the manner by which it is counted which is of course rubbish and sentiment is sky high.  Janet, who loves data followed the data.  Can we all move on now?

Oh, if you are looking for truly nuts, the Greeks are back in the news.  Not to be content with BREXIT, the mess in Italy, the upcoming French and Dutch elections, the Euros have decided to grant the Greeks no further debt relief because it appears the Germans threw a hissy fit over PM Tsaspris' decision to grant Christmas bonuses which was verboten under the standing agreement.  OK, say the Greeks, we're going to call for snap elections early next year so you guys have THAT, too, to deal with and of course a conservative government will win on a campaign of dump the Euro and if it comes to it, the Union as well.  Guys, can't we all just get along?  The Greeks can NEVER pay what they owe so why care.

And of course the Italians are forming a new interim government, the 1,236,202 in the last hundred years and people are actually bidding up the shares of Italian banks like this is a good thing.  UniBank is talking up their capital raising exercise and Monte di Paschi is as well.  Speaking of wells, there has to be something in the water in Italy...the old Roman viaducts broke down or something.  They gotta test that stuff.

And the other Wells...Fargo that is.  Their living will was rejected.  Poor Big Danny Tarullo:  the only saving and loan on his watch list (he likes that kind of business model) has let him down.  Talk about the Grinch who stole Christmas.  Danny is left pontificating while staring out into space wondering how did it all go so terribly wrong so fast.  Worst yet, in 45 days of so he's going to have to deal with that bunch of thugs from Goldman Sachs over at Treasury so here is my first prediction for the new year:  Mr. Tarullo will be the next governor to resign from the Federal Reserve...IT'S BEGINNING TO LOOK A LOT LIKE CHRISTMAS........!

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Tomorrow will be the last regular entry for a while except for the occasional effort.  We head East to baby sit and then for Christmas and when we return we'll be all-consumed selling our house and moving to another smaller location in the neighborhood.  Very bittersweet.  This place has been great to us and in the almost 16 years we have owned it not very many bad things have happened.  But it's time.   I hope to be up and running by mid-January.  A most Merry and Blessed Christmas to all, you my readers and a Brilliant New Year.

                         

ALFRED E. NEWMAN TIME

Remember the great character of Mad Magazine?  His mantra was, "What, Me Worry?"  Old Al seems to be running things these days; nothing can stop the euphoria that has enveloped everything.  The ten year closed at it's highest yield (2.47%) in ten years as the optimism relating to the U.S. economy increased.  The DOW was up 40; the dollar reigning supreme against everything but oil related currencies (who cares) as people become more convinced that the production agreement will hold (it will not).  And as for the attitude towards our friends in Italy...

Wow!  Unibanc is well on it's way to raising some 14 billion Euros of new capital.  Of course they have had to sell a couple of their crown jewels to do so but Hey, who's counting.  And Monte de Paschi...this weekend it announced that it will go forward in it's attempt to raise 5 billion in new capital through a variety of mechanisms to include a debt for equity swap with junior bond holders.  To repeat:  it has no chance, no chance at all of it happening UNLESS the fix is in and there is an alternative credit risk standing in the wings about which we know nothing.  Perhaps there is because everyone with whom I spoke this morning in Europe believes that there is a deal in the works.  Perhaps so but if there is not and the Italian government has to engage in a straight bail-out as discussed on Friday and in the process wipe out a substantial number of small investors (voters), Mr. Newman's view will change very quickly and with it I suspect the view of the markets as a whole.  Not to belabor the fact but that scenario spells big trouble on a global basis as certainly the Euro and the Union will be imperiled.

But we are not there yet and things are so good that there is talk--nay suggestions--that the Fed moves 50 b.p.s on Wednesday.  I don't think so but how sentiment has changed.  Janet?  Janet who?  What the heck, Babe, you had some good, long innings.

We will see what tomorrow brings because I have a feeling that this thing is getting to the day-to-day stage.

BANKS, BUNK AND BAIL-OUTS

The latest bunch of nonsense flying around Europe is that the Italian banking situation is really not systemic at all, it's simply a problem of a couple of institutions that can be easily fixed.  Yes Monte di Paschi and Unicredit might have a few difficulties but nothing that a patch here or there couldn't fix.  The rest are fine.  Unicredit is talking about 13 billion Euros in new capital and Monte di Paschi...well, 3.5 billion would be a good start.  One minor problem: nobody has the slightest idea where that kind of coin can come from and it sure isn't coming from anywhere until Italy has a new government and there, My Son, is the rub.  Italians are not noted for the formation of a government at the drop of a hat: killing one off, yes but forming one?  A big no to that

There is another current through all of this running north to south.  Italy really hasn't stepped up to the plate in the same manner as their norther Union members.  What wouldn't trouble the French and the Germans in the slightest is for the Italians to engage in some form of nationalization which gets them off a very nasty political hook regarding a bail-out either directly through the Union or the ECB in what is shaping up to be a very ugly election year.  Against the Charter?  Who cares when one is in survival mode.  Which brings us to the ECB.

Mario is in a hell of a spot.  We should remember that the concept of a united Europe came about not solely as the result of a desire to reduce nationalist tendencies but as a buffer against the hegemony of the United States as well.  At this moment in time  neither reason seems to be working especially in regard to the United States which is now expected by many to be the engine of economic progress in the coming year.  As a result, rates are moving smartly northward, currencies are weakening against the dollar, the Fed is certainly going to begin tightening next week and Sr. Draghi has no choice but to continue his QE operation probably targeted at Italy in direct opposition to the rest of the world.  The problem is he doesn't have enough ammunition to make a difference.  Italy's economic prospects are bleak and with them it's banking outlook is bleaker.  I don't envy the guy.  As I said the best thing that can happen is we get through next week and wait for the Christmas Season to provide a respite.  That would be the conditioned response but in times like this, who knows.

MAYBE I SHOULD STAY AWAY

The DOW broke its winning streak today.  It's sort of like our class secretary.  It seems nobody dies when he's on vacation.  I keep telling him to never return.  I should probably take my own advice.

Mario Draghi did his thing today at the ECB which was really a lot of nothing which is what was expected.  All one could take away from his comments was that he's still not happy with the direction of the European economy but not so displeased as to initiate another rate cut.  Since everything is negative Over There I still keep trying to figure out why the guy wants to do more of what doesn't seem to work but as I keep saying I'm confused about a lot of things.  Oddly, there was no mention of the state of European banking which strikes me as being the numero uno fly in the ointment at the moment.

DeutscheBank suffered another downgrade this week but it is the entire Italian system that is the focus of the international markets, especially Monte de Paschi di Sienna, the world's oldest bank and far and away the most beautiful bank headquarters ever unless you are completely turned off by 15th century Italian architecture.  It's broke as is most of the system but I can't help believing that Sr. Draghi pays it no interest because he knows damn well that it will not be allowed to fail and the only question is who gets stuck with the bill.  Odds on here it will be the taxpayers of Europe (again) but this one is a bit of a closer call.  The problem of course is that while the problem is immediate, so is August and therefore we must recognize that like manana, domani is a word well-understood in Italy. It's going to get solved because Italy is a real country but with the Brits on the way out, getting there will be a delicate dance to insure that no one follows good ol' Albion in a huff.

Speaking of BREXIT, Ms. May met with Angie yesterday and Frankie Holland today to introduce herself and have some preliminary back and forth on the subject.  Except for the standard press releases, there has been little reporting on the talk...probably because there was nothing of substance to report.  This is like the early rounds of a heavyweight fight; jabbing and probing and faking.  We can certainly back-burner this one until 2017.

OK.  Now we are up to date.  With all this excitement maybe I should have stayed away even longer.  But duty called and I responded.  Besides, I couldn't afford the neighborhood.

SO FAR, SO RIGHT

I'm really beginning to enjoy this.  Even took an extra day with the kids but despite a lack of my firm hand, things are going just as I expected.  The Euros are in crisis mode with the ECB of all people calling for the UK to move quickly as to how they wish to get out despite the fact that is obvious to everyone that the Brits have no intention of moving quickly...certainly not before they choose a new PM which will be a woman...again!!! (Don't we look stupid making so much of our situation Over Here?)   It took them about a nanosecond to figure out that the EU needs a deal far more desperately than they do and as every day goes by, their negotiating position improves.  The Euro politicians have buggered this to a fare-thee-well with some real worries ascending as to whether they are going to be able to put the genie back in the bottle.  Meanwhile, the Italians are openly talking about a bail-out of their banking system which, while legal I believe (have to check on that), is certainly not the preferred solution to what appears to be an intractable problem and sent (among other things) Angie off the rails the other day.  But the Italians have a real problem that was once their strength:  like Japan, their voters own the country's debt and in particular, the debt of the banks.  Therefore, if the banks get refinanced, somebody has to pay the price and if that person is Pietro Baccala from down the street instead of some insurance company...well, you get the picture.  Tough call for an Italian politician.

On a broader scale, Europe's worries are having a rather profound effect on global markets.  The rush to safety is palpable.  The 10 year is at 1.33%; the Bund in every maturity is negative; Japan's 20 year turned negative today, and then there's that old canard on which I have been harping: liquidity.

The rush to buy security is a bit different this time.  This is not a trading phenomena; this is a true rush to safety on the part of the buy and hold crowd at precisely the same time that every central bank around--bless their pointy little heads--are trying to pump liquidity into the system in order to spur global economies and manufacture inflation for their wonderful economic models that have been wrong for the past 15 years.  As I have said before, the Fed owns 20% of all Treasury debt outstanding; the ECB more than that...and they are buying corporates as well.  The Bank of Japan...God on;y knows.  The markets are now completely distorted as a result of central bank activity and as the 10 year Note is the touchstone for so many pricing decisions around the world, it is fair to say that no one know what the price of anything should be today.  Sound familiar?  It should.  2007-08 could be described as the greatest credit mispricing in history.  This is a condition looking for a bubble.  One is usually found.  But before that happens, it might very well be that someone needs Treasuries in order to settle something and they will not be available.  If we have a big fail...By the by, looked at the price of Gold lately?  It ain't just me.

Jobs data tomorrow.  There has been a flurry of OK economic numbers in the past week or so, but I am told the good folks on the Street are really concerned about what 8:30 a.m. tomorrow brings.  I f this is another bummer, there could be real fireworks, particularly in light of the fact that the central banks' ammo belts are at bingo.  This number could really be cooked as there is so much at stake.  If not, go long on Sikorsky Aircraft.  Helicopters are the best at dropping money from the sky...and for watching the sun set.

I LOVE GOOGLE

Google got mad at me again over the past two days...or maybe I just messed up which could be the case but the result was I could publish nada.  Which perhaps wasn't a bad thing because nothing that I was writing made sense 24 hours later which gave me time to reflect and pause for a moment in my certitude.

Unlike the mystery of the fault--was it me or Google--I'm pretty sure about this: nothing that I  was writing made sense because nothing out there is making any sense at all.  I am completely confused as to what is going on as is I think everyone else.

Take oil:  WTI traded up to $47 a barrel last week and the sentiment on the Street was that the market had stabilized.  Only problem was there was more of a glut last week than ever and there appears to be no end in sight.  The U.S. is importing more oil than in the past two years while production has fallen just 3%.  Why?  Well, according to the WSJ, it is cheaper to store oil in the U.S. than on a ship and surprise, surprise, the U.S. has a great deal of excess storage capacity.  Coulda fooled me, but there ya go and on cue WTI traded down to $43 today.  Now that's a hell of a lot higher than the $26 of a few months back but apparently Iran is pumping and selling so fast it would make your turban spin and selling it at a discount in Europe to buy back market share.  Needless to say, so is everybody else to preserve market share.  See what I mean?  What's going on out there?

Bond yields, after a brief spurt, seem to be indicating that the future is not bright but in regard to the stock market the talking heads have come to the conclusion that equities are "fully priced," either indicating a satisfaction with things or a complete lack of alternatives for investment.  Now if the bond guys are right and the market is fully priced, some people are going to lose a hell of a lot of money pretty soon.  I know about losing money.

Puerto Rico had their first default on Monday worth $400 million and seem to be heading for a second of $1 billion in about a month with the Congress playing politics as to how to solve this problem.  A mess in the muni market one would think?  Nah, nothing moved despite the fact that all the rules of the game could get changed overnight.  It restores faith in humanity.

We had a bank failure in Italy the other Day.  Big Deal?  Not really except that those clever Italians had, in i scuri set up a living will for this institution focusing on it's take-over by Unibanco.  Only problem was when Unibanco popped up to announce that they really didn't think  they were in a position to do that causing the government to institute an immediate bail-out which of course they are not supposed to do.  BUT, not to worry because things are looking up for the Eurozone economy.  Yeah sure.  The largest bank in the third largest economy announces that it doesn't have the where-with-all to fulfill a previously agreed deal and things are looking up?  On top of that, the latest out of the UK has the BREXIT polling just about dead even, tightening considerably in the two weeks post-Obama (gee, did I predict that?) with the referendum barely a month away.  After three months without a government, Spain is about to have a new election and whilst there is little shouting thank goodness, Greece and its creditors are still somewhat at loggerheads.  Buy Euros as suggested?  Sorry can't see it.

And then there is China.  I'm not even going to try.  The latest big thing in China is commodity specu...ah...investing.  Why not.  The government in the first four months of the year pumped about a trillion and a half into the economy.  Heck, you have to spend it somewhere.  Good for the fly-over zone, however.  Live Hogs have been up for a week.  Who says we're not part of globalization.

I could get onto to Japan but that is a chapter in itself.  Besides, the more I write on a wet, miserable day like this the more I get depressed.  I should stop writing.  I wonder.  Did Google have my well-being in mind?  What a lovely thought.