Wednesday, July 20, 2011
TMM think that the news coming out of the Eurogroup pre-meeting discussions is pretty positive and hints at a cunning plan.
As Baldrick would ask "Is it as cunning as a fox what used to be Professor of Cunning at Oxford University, but has moved on and is now working for the U.N. at the High Commission of International Cunning Planning?". Not quite - but close.
TMM are looking forward to their first royalty cheque from Mangler and friends as they appear to be turning to the preferred options we posted last November. We have already seen an agreement to expand the EFSF, but now there are whispers that they plan to use the EFSF to recapitalise the banks. To us, this is a most important step because as money multipliers work through banks and not sovereigns, you create a leveraged marginal buyer of EU govt debt. These buybacks are also helpful for debt sustainability as it spreads the pain with the private sector and unblocks the bank credit channels. Problem No 1 solved (for now).
The second issue is how to raise additional revenue and that is likely to come from a mooted bank levy. TMM think this is pretty consistent with the usual decision process of credit crises we have generalized below.
1) Identify problem
2) Deny the problem
3) Get called out by market
4) OK, admit you have a problem
5) Get confused as to how to cover the cost of solving the problem
6) Market REALLY calls you out
7) Quick! we need a readily persecutable minority group with lots of money! Merkel: vait I know I know.... Sarko: Don't you start!
8) All together now: BANKS
9) Recovery returns except to watch boutiques, Stringfellows or to bank employees' pay packets (unless they are based in Asia).
10) Everybody lives happily ever after so long as your CB can be a bit soft on inflation (the Swerve tells Mr T or, rather Mr D, to "walk with me")
The bank levy plan could also be seen as its own bit of cunningness. You raise a levy on the banks and use said money to give back to the banks as a bail out by buying the toxic waste off them at par. The banks are in effect forced to a take a loss (the levy) on their holdings, but it doesn't appear as a haircut and so avoids a default or credit event. Et voila!
Now TMM may think that the plan is more than a sticking plaster on an aortic aneurism, and may even be seen as the cardiac surgeon saying "Now then, lets see what we have here then". It will not solve the key problems of overspending in the peripheries and all the rest of the Euroblx but it should be enough to divert the market hordes for a bit longer and even to repel Hannibal. The problem now will be selling it to the rest of Europe and already the French and the Finns are up in arms:
KATAINEN: FINLAND DOESN'T SUPPORT INCREASING EFSF SCOPE
SARKOZY ACCUSES GERMANY OF "SELFISHNESS" OVER GREECE
But to TMM this secondary problem is analogous to the Democrats vs Republicans over the debt ceiling. There IS a bandage to strap over the gushing wound, but now its just down to internal bickering and it will go to the wire before it is applied. But, just as in the US, it will be. No long term solutions, but enough to keep the patient alive a bit longer.
In the Baldrick league of cunning this plan is up there, but TMM don't think it's quite as good as his original solution for Europe:
Now, as to markets. Some people including commentators on this blog may say that TMM getting excited at this point makes us some of the biggest spivs around. To that we quote Keynes: “when the facts change, I change my mind. What do you do, sir?”, and note that if Eurocrats were less spivvy then we would be too. The thing we have had difficulty with has been playing decoupling in the context of Italy, which similar to its politicians has far reaching roots that are difficult to ignore. But yesterday's seeming relaxation of the budget impasse in the US coupled with leaked EU headlines suggesting that the Eurocrats have finally realised that they need to implement a systemic solution firmly marks a turn in the newsflow. Add to that a lack of positioning, burned P&Ls and a confluence of technical levels, and there is nothing to suggest that markets do anything other than march higher. The turn ties in nicely to our old TMM theory about the 16th/18th July generally being a market turn date (think we mentioned that this time last year). But what to buy? (Yes, folks, back long again after having been whipped like a Iranian blasphemer at Captain Bligh's whip party on National Whip Day).
US equities - have always liked them relative to Europe on our theory that the two regions can trade on their own merits or demerits.
We have been mumbling about CHF over the past few days and think it's worth loading up on short CHF. Soothsayer signals showed a 13/9 buy complete on Monday, there was an outside day in usd/chf too and a load of other reasons TMM will go into re Switzerland at some other point.
We are also looking at Irish bonds, which look cheap and now appear to have hit the circuit breaker we've all been waiting for; although Irish bank seniors and Greece and Portugal are ripe for a No. 2 on the back and sides.
But, as with every cunning plan that Baldrick has,.. there is a chance that it may not work.