Tuesday, July 24, 2012
Mr Newton had a theory that TMM often quote loudly on sailing holidays when watching folks trying to step from small boats onto quays. Every action has an equal and opposite reaction. In the case of boating it sounds like a "splosh". But in the case of finance it normally sounds like a "crash".
In finance many resultant actions are often referred to as "unforeseen consequences", but to TMM it is all Newtonian. Every new rule or regulation results in an equal and opposite reaction, normally of bypassing the rule to try and regain the previous equilibrium, whether it be trade sanctions (trade via intermediary countries), speed traps (get a GPS with all cameras mapped), tax laws (build a structure and avoid even if immoral) or restrictions on short selling (borrow someone else's stock or stock market and sell that).
The problem with bombshell regulations and rule change is that the explosion they cause, far from killing the problem, just blow it into tiny fragments, each harder to detect and spawning its own new set of problems. TMM thought this lesson had been learned with the oil tanker Torrey Canyon, where bombing the wreck just spread the damage wider.
Yesterday's reaction by the Spanish to falling asset prices has seen their bombing of ALL short selling. Great, well that's stopped that but look at the instant effect elsewhere. Every associated market has tanked, hit by the Spanish fallout. Now instead of containing the Spanish situation the Newtonian reaction has meant the mess has spread further. Thank you Spain, next time you need to relieve yourself why not put a ton of TNT down the pan to flush it and see what your neighbours think.
Indeed some unsuspecting neighbours have been hit by flying euroturd. Much as how a whole class, including the smug class swats, is put in detention because of the rowdy behaviour of a few bad boys', Moody's has put the Holy Pious States of Holland, Luxembourg and Germany on negative watch. "Please sir it wasn't me", "Well you could have done something to stop it, so shut up".
But today TMM are somewhat challenged as it would appear that the rules of financial Newtonian physics are being tested. In the case of Europe "No action" spawns a massive price reaction and the reverse also applies - price action spawns "no reaction". Each action has an equal and opposite "no reaction". So what gives? It would appear that the markets are testing European response by screaming "Wakey, wakey Mr Eurostrich, look I've set your nest on fire!" There are thoughts that if they push prices far enough Eurostrich rhetoric will turn to action, but with the Eurocrats on the beaches (where we will fight them) it appears that Draghi has been left in charge of the defences where he is yelling the policy script over the ramparts of fortress Euro - "Go away. We are really dangerous, really we are, you'll regret it ...and errr.. Your mother was a hamster and your father smelled of elderberries".
But despite Draghi's public warnings, in line with European policy guidance, we think its all gone a bit Casablanca.
Markets: Play it again Mario.
Mario: [lying] I don't know what you mean, Miss Markets.
Markets: Play it, Mario. Play "As Time Goes By."
Mario [lying]: Oh, I can't remember it, Miss markets,. I'm a little rusty on it.
Markets: I'll hum it for you. Da-dy-da-dy-da-dum, da-dy-da-dee-da-dum...
[Mario begins playing]
Markets: Sing it, Mario
I couldn't care much less
A mess is still a mess
A lie is just a lie
The fundamental things apply
As time goes by.
And when asked by the EU
I'll say "and f**k you too"
On that you can rely
No matter what the future brings-
Weidmann [rushing up]: Mario , I thought I told you never to play-
[Sees Markets, Mario closes the ECB and rolls it away]
So what has actually changed to kick off this latest Spainfest. What has appeared that we didn't know already? Spain need money. Yup knew that. The regions are in the kaka, yes knew that. Banks need funding , yes know that. And we also know they have a MOU for E100 billion. We know the troika is going back to Greece and we know that the European economy is getting a shoeing until this is sorted out. We also know that the issue has gone Tabloid again. But the difference now, probably thanks to Moody's, is that ALL European bonds are falling.
As Bob Marley would have sung "Exodus .. dadada daa daa dadada .. Movement out of Euro"