Actually, I don’t think they are. If that were the case, then how could you explain the bumbling? One possible answer is that it’s deliberate. That sounds conspiratorial. I think there is some evidence of that.
In my opinion the explosion that occurred over the past fortnight in Italian bonds could have been avoided. All it would have taken to contain the fear factor was for the ECB to have stepped into the market in a forceful manner and suck up the supply of bonds. When they failed to defend the market it led to widening spreads, which in turn lead to more sellers and finally margin increases and a crisis.
The market knew that there were milestones in spread levels that would automatically bring more selling. The ECB was also well aware of this. (Don't believe these folks are dumb, they're not) But they ignored it and day-by-day the pressure grew. After 6.75% was broached, it led to a quick collapse. It ended with Berlusconi resigning. The panic in the bond market ended the next day.
It’s been suggested in a number of publications that the ECB had a hand in the Italian blow out. As of yet there has been no comments from the government(s) involved nor the ECB.
The following is a close up of a chart created by Zero Hedge. This segment looks at November 8 through 11. The green circles are the timing of ECB interventions (note market reactions).
Notice that there was no intervention on November 8th. As a consequence, Italian 10-year bond yields went soaring past 7%. The consequence? That night Berlusconi was forced to throw in the towel. The next day the ECB initiated aggressive intervention. The lack of intervention on the 8th followed by the steady buying on the 9th, 10th and 11th was not an accident. It was a policy decision.
The following headline had it both right and wrong. The bond market did do Berlusconi in. But it was the ECB, behind the scenes, that engineered it so that it would happen.
Why in hell would “they” do that?
****
I was going through some German periodicals. I saw this ad for a brandy distiller. In English it reads:
Everything should go well for all!
Yes, things should be even better! Everyone should be able to work without worrying. All should be able to afford to travel, to fill their homes with beautiful things and to fulfill the heart's desires, both large and small.
That is what Germany wants! For itself and for all of the countries in Europe. Together, we will work to secure and raise the standard of living!
The ad is from 1940. The last line reads:
That is what Germany is fighting for. And only a German victory will realize the goal of a European economic community.
It does make you think. Are they manipulators or just bumblers?
.
H/T: Russ Halley
Posts
For about a half hour there was a different version of this piece. That one had HTML problems relating to new fonts and indexing for quotes.
ReplyDeleteI blew up zero hedge and BI, so this a redo without gremlins.
A regular, Mr. K had the following to say. His comment got vaporized.
Mr. Kowalski said...
Oh Bruce-- you clearly have not grasped the reality in Europe-- Democracy is for Others. Notice how quickly and angrily the troika reacted when Papandreou threatened a referendum. The EU's end around democracy by haughty diplomats will come back to haunt.
I try not to assign to conspiracy what cock-up can explain.
ReplyDeleteGerman exporters, that is all. They don't want a strong euro. During the early 2010 EUR crash they were throwing gasoline on the fire with their press clips.
ReplyDeleteOnly in an insane world would Germans, the only people in recent history to experience hyper inflation, be represented as economic saviors based on their birth.
Their "hawkishness" must not be questioned.
Perhaps Berlusconi's bravado had him claiming that he didn't need the EU's help saving Italy. They told Berlusconi, "ok, big boy, fish or cut bait". Berlusconi is now out of the way.
ReplyDeleteVery interesting spot Bruce.
ReplyDeleteCentral bankers know the game that is being played: the battle for the spot as 'world reserve currency'.
The ECB seems set to steer clear of the massive QE being inflicted in the US/UK and elsewhere, and looks to be the 'last man standing' when the dollar falls.
It can afford to do some debasing, as long as it holds up longer than the dollar, when the huge gold revaulation at that point will save the Eurozone.
Never attribute to malice that which can adequately be explained by stupidity
ReplyDeletePardon me, but why, besides him being an execrable character, was Berlusconi's ouster favored by the ECB?
ReplyDeleteI don't have enough info to judge, but a weaker gov in Italy would cede more power to centralized EU bikes.
ReplyDeleteAutocorrect strikes.
ReplyDeleteReplace bikes with "bodies"in the sense of unelected governmental organs.
While it is certainly a plausible story that the ECB helped push Berlusconi out, to think the market would have been any nicer to Italy is also not true. The market would have pushed Berlusconi out, but the ECB did it instead. The "crisis" will probably come to an intermediate pause when the ECB steps up and starts buying OATS. Letting the market determine whether France is a core or peripheral nation is not within the interests of the ECB and they know that.
ReplyDeleteOK, so the ECB has pushed out Berlusconi - big deal! Not worth being tagged as conspiracy... The markets have achieved in the blink of an eye what no-one succeeded doing in 17 years: get rid of Berlusconi.
ReplyDeleteAnd what regards this 1940 ad: you've gotta be kidding me, BK! You're not implying any German imperialism to today's situation, are you? And besides, you *really* shouldn't make those kinds of links when referring to germans.
Just Burlesque-coney? You must be kidding! Jon Corzine bet the situation WRONG. And, all the MF investors have learned there is no such thing as "customer accounts!" What a lesson!
ReplyDeleteWhile what's happening in Europe isn't even Brussels doing. Because they're going down! But instead of a "crisis" all Angela Merkel is doing is "exit strategy!" (That's why your understanding about the GOLD dilemma ... just shows ya HOW MUCH GOLD THE GERMANS STILL HAVE IN THEIR VAULTS. (Trillions.)
When the thunder and lightening show stops, IF Switzerland is "forced to give up its banking holidays" ... you get to GOLD being the accepted common denominator.
But all that's missing? Is Angela Merkel landing like Jon Corzine.
Lawyers, ahead, are gonna have a field day!
People at risk? Not sub-prime holders of anything.
Where can Angela Merkel lose her bet? The EU is gonna get torn apart. With the help of the British. (The French? They don't know how bad it is ... and the kind of "craps game" Sarkozy has really been playing!) You think the Greeks are gonna have any deck stacked against them? How? They'll be threatened with losing the EURO? The one thing the Greeks did ... when the EURO cash machine flowed in ... Is that it flowed into ordinary Greeks pockets. It wasn't limited, like it was in Ireland ... to just the banksters. And, "real estate" developers.
Gold's always good. But it's hard to sleep on when it's under your mattress.
And, GOLD FUTURES? Well, if you keep them in accounts at MF ... Jon Corzine's cash cow. You lost 'em all.
What does "austerity" look like, anyway, in Europe? You go to Rome? And, Peter takes from Paul?
Everyone on the sidelines will laugh.
But I doubt if the german's can rise to the occasion and "conquer Europe."
While Japan got it's own troubles.
And, China? Lots of people. Just a few rulers. Who hope not to get their names in the paper.
Obama? He just stays clear of the debris path. And, for this reason, alone, I think he can win re-election.
That, too, would be funny. Because a lot of politicians are gonna get the boot. Maybe, they'll join a union? I wonder what their dues would be?
You know. It reminds me. Going back to ancient times ... women with very wealthy husbands ... got loaded up with jewelry. Where they looked like Christmas Trees.
ReplyDeleteDo you know why? If there was any attack, and the rich person had to run away in a hurry ... his wife was laden with all their wealth.
But if you've ever been inside Tiffany's ... you'd know that on the retail level, everyone who bought anything OVERPAID! That's the kinds of markups ... gold and fancy stones always held.
Anon at 11:05
ReplyDeleteYou say:
OK, so the ECB has pushed out Berlusconi - big deal!
Actually it is a very big deal. A central bank uses its power to unseat a government? You don't think that is significant?
Is assassination okay in your book? I hope not. This is a different form of assassination.
Where does it say that northern European bankers can unseat a government?
As for whether the Germans should take heat. Well I think they should. Is it fair to make comparisons to things in the past? Tell me we why it isn't.
bk
Bruce,
ReplyDeleteDo some homework would ya? The ECB initially extended their SMP to include Italian debt after Berlusconi promised fiscal reform, including higher taxes on the rich. As soon as Italian yields spreads came back in, Berlusconi was backtracking on said reforms. The guy is a snake playing a dangerous game. The ECB has no obligation to buy anyone's debt and if Berlusconia doesn't want to play by the rules, then they have every right to suspend the program. Berlusconi thought he was smarter than Merkozy and was gaming the system as hard as he could, so the ECB stopped buying Italian debt. There is nothing wrong with that. Let me reiterate: THE ECB HAS NO OBLIGATION TO BUY ITALIAN DEBT.
How is the ECB to know that after ONE DAY of not buying, Berlusconi would go?
Not that it really matters, this is Pareto optimal. No child molestor should be running a country. His ownership of media companies in Italy kept him in power. As The Economist cover a few months back put it "[He] screwed a country". His level of corruption makes your Senators look like paragons of virtue. I don't think the ECB was planning on deposing the guy, but if they are that ruthlessly calculating, and have that good a read on domestic poltiics in Italy, then I have hope for Europe and applaud their efforts.
You really need to get rid of that foil beanie, you look like a fool in it. Tyler Durden is drowning you at the bottom of the deep end.
I don't know if ECB is in league with Merkel, but Merkel wanted Belusconi out pretty strongly just before the period in question.
ReplyDeletePanic in the markets is the most acceptable way for regime change these days, so I guess you can say that was an unmissible opportunity if you're looking for such a thing.
Quixote,
ReplyDeleteThanks for the kind words. Much appreciated.
I put up a chart. It clearly shows what the ECB did on the 8th and thereafter. They let the collapse happen, then they picked up the pieces with three days of heavy intervention.
Just the facts.
You don't like my conclusions, fair enough. But if you don't see evidence of manipulation here then it is you who is wearing the tin foil hat.
I am not arguing that the ECB didn't intervene. Not that I necessarily trust everything coming out of ZH, but I am prepared to accept this as fact. There was a deal between the ECB and Berlusconi on austerity in exchange for ECB purchases. Berlusconi was back-tracking on his austerity, betting the ECB would blink. Guess what, they didn't. Good for them.
ReplyDeleteThe fact that this managed to depose Berlusconi is a fortunate coincidence.
I really do encourage you to stop your dialogue with Tyler Durden, he is infecting your brain. I implore you to revert back to the sleuthing you used post, which was backed up with research and documents rather than wild-eyed speculation of conspiracy.
The piece I don't get is why Jon Corzine bet on Burlusconi. The collapse also collapsed MF Global. And, Jon Corzine was a PRO when it came to complex bonds.
ReplyDeleteWhat if you take Neil Farage's barage against Rump-roy. For being unelected. And, for the Belgian "complex" ... which includes Merkel and Sarkozy ... As REMOVING FROM OFFICE ... all the people they don't like. So, in Greece, the prime minister "Papendrayoo" resigns. And, an unelected official from the IMF sits down there, instead.
The same thing happens in Italy. There's an IMF "puppet" installed into the Italian government.
It was this easy for the german's and the french to gobble up sovereignty?
Now that MF Global has spooked investors, who are "first learning" that the house bets with their money ... but usually doesn't go bankrupt. What gives?
MF Global's bankruptcy is "exchanged" for Italy, France, and Spain, under new leadership that will be cooperative with Belgium?
China's got its own exploding bubble.
And, Japan's cleaning up its nuclear fallout mess.
America's mainstreet investors are not involved.
How bad is it to hold bonds? (Meredith Whitney says 50 to 100 American cities face default.)
If people in America don't save (the way the german's do). And, Mainstreet's not investing in Wall Street. And, not buying real estate ...
Will it turn out that only a "few" politicians are in charge, where none of them have been elected to office?
Hasn't Merkel's "negotiating tactic" (instead of collapsing the EU pronto-tonto) ... gonna cause more pain and devastation, ahead?
How does Belgium win?
Bruce, I found your blog, yesterday, at InstaPundit. It's a great blog. And, I forwarded Glenn's link to everyone I know!
ReplyDeleteI hope you don't mind my comments.
The story of how things went bad is LONG. It started, with Bill Clinton in office; and all the pressures to make poor people homeowners. The greed this ignited was unbelievable. Only a few people stayed out of investing money they could never pay back. Because there was a belief what they owned was even worth more than they paid.
Then? We got the American bailouts. (But Meredith Whitney's attention was already drawn to how cities and counties in America were saddled with debts they could never repay. And, if you bounce a problem down the road for "the next generation" ... you only make it that much worse.)
Meredith Whitney's comments went out over 60 Minutes. But about a month after her appearance ... the bond market in America was still working. And, municipalities were buying bonds.
Now to germany. (I loved Michael Lewis' comparison to the german's love for shit, as long as they themselves stay clean.) In his example, he's looking for women's naked mud wrestling. Which germans loved watching (in Frankfort. Where you have the world's largest red light district.) The germans would go. And, put plastic caps on their heads, so that they wouldn't get "splattered." But when it came to shit, Lewis refers to a book (translated into English) ... written by Alan Dundes. An academic folklore specialist.
The germans got involved in destroying every economy they could throw money at. Even being a Wall Street "joke" ... that when sub-prime loan packages couldn't be sold to anyone else. "Dusseldorf's bankers" were buyers.
Bankers don't like to take losses.
When the Irish government stepped up to the plate to pay off all the "foreign" (german) banks ... the Irish people accepted the liability without a peep.
Turn to Greece. Not Ireland!
Turn to the problems of all the PIIGS. And, you see the termoil a single currency has generated.
What does the future hold?
Perhaps fewer investors willing to let banks lend money in other countries? (Germans can't lend to each other; because they'll fight inflation. And, their property values are dormant.
Somebody's got to lose!
And, citizens in Spain, speaking at the polls, just tossed out a lot of politicians! (Can those politicians walk through a revolving door and show up as lobbyists?)
How did Jon Corzine (who is a maven on bonds), fall into betting such a big bet on Italian bonds? He was betting they'd go downhill? Wasn't he betting, just like Goldman Sachs did? You know. Against the germans! Against the sub-prime market ... that was also invented inside Goldman Sachs.
I don't know where I read it. But I did read Merkel's "crisis" is no longer. Because instead of ending the pain of the EURO ... she began "negotiations." It's like a war.
Just like WW2, but without the dead bodies. Unless people are committing suicide. And, Winston Churchill said back then "America does the right thing. After all the other things they do."
What's on the other side of this calamity? First, don't people have to learn what's at stake?
"THE TRADE THAT KILLED MF GLOBAL"
ReplyDeleteThere's an explanation I just saw on the Net. Written by John Carney, Senior Editor at CNBC.com
It was a European debt trade that's a version of "what is known as a repo-to-maturity trade." Where "repos" are the financing technique where you buy something on loan. Miss a loan payment. And, what you bought (usually a car, I thought), gets repossessed.
In a "repo-to-maturity" (I quote) the trade doesn't close until the maturity date of the underlying bond.
To make the mystery deepen ... this "technique" was used to roll loans off of balance sheets.
It goes to the heart of complexity. I don't understand this. It goes to the heart of a gambler's willingness to bet something like "$100 that the next person to turn the corner is blonde.")
How did the Italian bonds get their values dropped? (They are supposed to mature in 2012.)
Corzine was betting on the SPREAD! The bonds, he thought, would pay out MORE money that he bet his company on covering. This is what drops.
Chicken Little The Sky Is Falling!
Is this what Wall Street traders do for a living? (Yes, Bruce. I know you have 25 years of experience on the street. You saw Drexel go down. You saw all the manic behaviors up close and personal.) But Corzine thinking he was in "no-risk" territory? Too bad he wasn't born a saud.
Hopefully, you'll devote some time to explaining just how MF Global fell.
Then, where are the gains to Wall Street if they kill Main street?
What did lots of Americans discover? The incompetency of the political class to provide a system where the ratings company would have rung the fire alarm bells.
Too late for that, now.
Quixote:
ReplyDeleteYou stand on your position that the intervention pattern was not manipulation. Fair enough. Let's let the history books decide this. I think more will come out. It was too important.
On my relationship with Tyler Durden. I could not be happier that I'm connected to him. Look at your screen today. Read the paper about how the German auction has failed. Read about the drop in China's PMI. Read about MFG. Look what Bernanke has done. I could go on for a bit.
The fact is that Tyler Durden has been more right than anyone out there. Yes he has been consistently bearish (as have I). And yes, there have been weeks and months that the bear side was the wrong side.
But you have to face it. TD has been right. Just look around you for the evidence.
bk
Carol Herman,
ReplyDeleteThanks for all your words. You have a lot to say. Maybe you should write a blog.
For the record. There is NO SUCH THING as a repo to maturity. There are a dozen ways for a bank to break a repo deal. This may have been set up as something that was supposed to be funded to maturity. But the banks had the legal right to pull the plug as soon as the collateral value began to sink. And they did.
bk
Buying a new house or property is one of the biggest investments you will make and should be taken seriously.
ReplyDeleteListening to TD I would have been doubling down my short at S&P666 and now bankrupt.
ReplyDeleteMy issue is not with his bearishness, it is with his penchant to assume conspiracy explains everything he doesn't have an immediate explnation for. Also, he seems to want the international payment system to collapse. Anyone as knowledgeable as him rooting for such an appalling outcome has earned my scorn. We caught a glimpse ofwhat that means in 2008. No international trade, no credit for farmers over the harvest, the death of fiat money. Barter society overnight, mass starvation etc etc. Rooting for such an outcome is utterly deplorable.
Quixote,
ReplyDeleteI don't want the international payment system to collapse. Neither does Tyler Durden. Neither one of us has any influence on the outcome.
"We" are not forcing things to happen. We are just reporting on what is happening.
Any chart can be looked at different ways. It does not help for people to literally attack one another. Attack the chart please.
ReplyDelete