Bond Parishioners Are Leaving The Euro Church

Via Mark Grant, author of Out of the Box,

I have been on Wall Street for thirty-eight years now. You may claim brains and bril­liance and the best invest­ment com­mit­tee this side of Alpha Cen­tauri but I can smell the napalm in the morn­ing and my nos­trils are jump­ing as if infused by pep­per gas. It was in the spring of 2010 that I con­cluded that Spain was going to get put in “time out” and I put it in black and white. Yes­ter­day as Moodys down­graded Spain by three notches to just above junk and likely today the Span­ish banks will feel the pain and as the yield on the Span­ish ten year is just under 7.00% the heat is on and the stove has been turned up to high. The Ital­ian 10 year yield is 6.25% now and finan­cial mar­kets oper­ate as a mat­ter of faith and it is obvi­ous that the parish­ioners are leav­ing the church.

A man named Pedro was walk­ing along a steep cliff one day, when he acci­den­tally got too close to the edge and fell. On the way down he grabbed a $125 bil­lion branch, which tem­porar­ily stopped his fall. He looked down and to his hor­ror saw that the canyon fell straight down for more than a thou­sand feet.

He couldn't hang onto the branch for­ever, and there was no way for him to climb up the steep wall of the cliff. So Pedro began yelling for help, hop­ing that some­one pass­ing by would hear him and lower a rope or something.

"HELP! HELP! Is any­one up there? HELP!"

The Spaniard yelled for a long time, but no one heard him. He was about to give up when he heard a voice. “Pedro, Pedro. Can you hear me?"

"Yes, yes! I can hear you. I'm down here!"

"I can see you, Pedro. Are you all right?"

"Yes, but who are you, and where are you?

"I am Heinz, Pedro. I am from Berlin."

"You are Ger­man? You mean, really German?”

"That's me."

"Heinz, please help me! I promise if, you'll get me down from here, I'll stop spend­ing too much money. I'll act just like a Ger­man. I'll be finan­cially respon­si­ble for the rest of my life."

"Easy on the promises, Pedro. Let's get you back up here safely; then we can talk."

"Now, here's what I want you to do. Lis­ten carefully."

"I'll do any­thing, Heinz. Just tell me what to do."

"Okay. Let go of the branch.”
"What?"
"I said, let go of the branch. Just trust me. Let go."

There was a long silence.

Finally Pedro yelled, "HELP! HELP! IS ANYONE ELSE UP THERE?"

With yields just off of Kelvin’s Absolute Zero some peo­ple are bet­ting on the Fed’s eas­ing or some new LTRO by the ECB but let me tell you some­thing; when you are at zero inter­est rates then injec­tions of liq­uid­ity are not going to accom­plish what they might under other cir­cum­stances. Liq­uid­ity never cures sol­vency prob­lems which is just exactly where we are now. All the talk of ring­walls, fire­walls and bul­let proof vests have not done one thing except to give the EU and the IMF fod­der for a delu­sion­ary dis­cus­sion. If the patient has can­cer then pro­tect­ing him by apply­ing sun­screen has all of the value of lend­ing some­one $5.00 to buy a Fer­rari; it is a nice ges­ture but it hardly gets the job done. The EU is mak­ing any num­ber of nice ges­tures but they are not get­ting the job done and Ger­many is just not going to per­mit them to head into are­nas that might accom­plish some­thing because Ger­many can­not and will not allow the Ger­man peo­ple to have the same stan­dard of liv­ing as the peo­ple resid­ing in Athens. There is the preva­lent school of thought that Ger­many even­tu­ally will be forced to accede and I am 180 degrees from that posi­tion; it will not hap­pen! In the end it will be Ger­many for the Ger­mans and this is a his­tory les­son that is stamped in iron across eons of our past.

There is talk of Euro­pean bank deposit insur­ance; there is no mech­a­nism in place for this, no banks have paid into any­thing and it would be months or per­haps scores of months before this could get approved even if every­one wanted to approve it which Ger­many has can­didly stated it does not. There are rum­blings about Eurobonds which Ger­many will not approve and it is noth­ing more than the weaker coun­tries ask­ing Ger­many for more money which Ger­many will not pro­vide. There are demands for the EFSF and/or the ESM to pro­vide money directly to banks but this can­not be accom­plished under either char­ter and to change them would also take months. I state again, as I have in my last sev­eral com­men­taries, that if Ger­many does not want to pay then noth­ing will be done and Ger­many, as sure as I am on my boat in the Bahamas, is not going to lower its stan­dard of liv­ing or see its bor­row­ing costs rise to a Euro­pean aver­age with­out a polit­i­cal upheaval that would top­ple Ms. Merkel’s gov­ern­ment. There should be no sur­prise that Greece and Spain and Por­tu­gal and Ire­land keep ask­ing for money and it should not shock any­one that many clever schemes have been pos­tu­lated to try to get Germany’s money and it should also not sur­prise any­one that Ger­many mouths all kinds of nice and polite phrases to object but in the end Ger­many will keep reject­ing any plot that will lessen their lifestyle. It is the plead­ing song of the beg­gars and the char­ity dona­tion of the wealthy but that is all that it is ever going to be as Ger­many is not going to roll over to pla­cate the other nations.

Don’t For­get

Sun­day is my “Big Fat Greek Election.”

Toula: “Will you please stop play­ing with your food?”

Gus: “After Sun­day we may not have any food to play with!”

Copy­right © Mark Grant