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Monday, September 5, 2011

Market Thought... I worry about you, EU

European leaders have allowed Europe's finances to become a cluster fuck.  The financial-structural weaknesses of the Euro, and the years of ignoring the problematic issues, has allowed Europe to get to a really fucked-up place.

I worry about Europe because there is no leadership. Just a bunch of people in high-powered positions talking with zero uniformity.  Trichet telling the world banks are well capitalized at Jackson Hole, while at the same conference Lagarde is telling the world the EU banks need capitalization.  From my perspective (an investor and speculator) Trichet has his head in the sand, as a run on the EU banks has become beyond obvious.

A crisis leads to some interesting emotions. The emotions of the people allow for the wrong leader to emerge, so long as stability is achieved. And with Europe already having a history with crazy leaders emerging (ie Hitler, Mussolini) from a dire straights, I worry for them politically.

Throughout their sovereign debt issue, nationalists have been emerging all across Europe. Scattered chatter of intolerance has been rising ever since. The chatter is loudest when confronted with the bailout package. The most obvious response was this weekend with Merkel's party losing elections at her home province.

Unfortunately, this weekend showed the complete and utter lack of leadership that showcases just how messed up and chaotic Euro experiment has become. There was a senior IMF economist that told the WSJ he expects Greece to see a hard landing before March. This obviously could be theatrics do to the breakdown in bailout talks on Friday between the ECB/IMF and Greek Gov. But with the increased level of negative bank chatter, the IMF economist should have kept his mouth shut. On Sunday, there was an article that had an ABN executive speak of the difficulty in inter-bank lending. This was then corroborated by Deutsche Bank Chief Executive, while also highlighting the fact that EU banks will see difficulty for years. "It's stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels," he said.

These concerns are most likely not exaggerations, and puts credence to the IMF estimates that some $200B is needed for the EU banks. Even though some dispute the number, the market does not give a rats ass about the opinions of EU leaders anymore. The DAX closed down 5% today, and the market will force the leaderless schmucks into action.

Seems like the only European official with a handle on this thing is Lagarde, or at least she is the only one being honest publicly.

The futures look like shit because of potential systemic risk in Europe, again.  If the current leadership in Europe are serious about maintaining any sense of the Euro, and their grand experiment, they will take action very very soon. This will most likely mean an EU wide forced bank consolidation, with a ton of re-capitalization and restructuring of debt.  The question becomes, when?

The good news, the consolidation and recapitalization of Greek banks took place with little chatter indicating it was in the works. Hopefully, things are happening behind the scenes. In the mean time, looks like the SP500 is in for another fucked up day.

How low we go completely depends on how bad the EU leadership allows this thing to get.  But as the SP500 gets closer to 1100, individual stocks will get really really inexpensive, as the market is baking in a credit freeze, again.

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