Tuesday, July 24, 2012

Newton, Europe and Casablanca.

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
Mario: [singing]  

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"

12 comments:

Charles Butler said...

The TNT ain't nothing. Rajoy's packing peseta plutonium in his pocket.

Dee Dee Humberside said...

If we're going Bob Marley re: Spain, I guess there is an even more appropriate song (pardon the fuzzy memory)

Emancipate yourself from monetary slavery
[...]
How long shall they kill our economy
While we stand aside and look?
Some say it's just a part of it:
We've just got to cook the books.

Won't you help to sing
This songs of freedom
Cause all I ever have,
Redemptions bonds
Redemptions bonds
Redemptions bonds.

Anonymous said...

C says'
I fancy a bit of a turnaround Tuesday just to catch some late shorties. This week 'feels' wrong to me in being directional.

Leftback said...

Thin summer markets always produce a lot of big swings and exaggerated reactions.

Mangler's cell phone has been ringing for a few hours now, even as she gambols on a Bavarian hillside, gazing down contentedly on the Ulm, somewhere between Unterbergsdorf and Zwischenflüße. She wanders the Alpine meadows with flowers in her blonde locks, without a care in the world, unaware that in Frankfurt, European financial stability is melting down in the July heat.

Because it's one thing for the Spanish and Italian banks to be suffering, but Deutsche Bank has just reminded The Chancellor that some of their positions are going to be seriously far underwater if there isn't some concerted action. François is also calling, her new love interest, to say that he is about to leave town for the Cote d'Azur, but he understands that his banks are really in "la merde plus profonde" (deep doo-doo for our US readers).

Soon dear Angela will have to bid a teary farewell to her dearly beloved Bavarian partners for the summer and abandon their shared Christian conservative values of fiscal and monetary rectitude. For our heroine will turn her back on her first love, with all his solid Germanic virtues, in order to embrace the profligate Spaniards and Italians as they grapple with economic depression and their ever more exciting yield curves.... She is aglow with anticipation, as she speaks into the phone, I am coming, Mario, she whispered softly, I am coming.

VandalsStoleMyHandle said...

Had to undo my top button there, LB.
Indeed, nothing in this crisis is black and white, as portrayed by some of the more excitable pundits, but rather various shades of grey (of which I'm informed that there are a goodly number).

The one strange thing is that despite the Spanish yield curve going belly-up, there seems to be very little of the more breathless '10 days to save the Euro' type spiel this time around. I don't really feel too comfortable getting long until I start hearing a cacophony of 'make or break weekend for the Euro' type schlock.

amplitudeinthehouse said...

Merkel's trip down Mulholland Drive continues...

amplitudeinthehouse said...

Dear Chancellor Merkel,

If you find yourself falling out of a nightclub on Mulholland Drive at five in the morning with no shoes and shirt on...no, you don't need the bloomie charts to find out if you're trapped in an hallucination..that's how we roll!

Leftback said...

The mystery deepens.
"amplitude in the house" is:

a) Charlie Sheen
b) David Hockney
c) Demi Moore
d) Love child of the above.

Giraffe said...

Reminds me a bit of that (in North America anyways) children's classic, The Cat in the Hat Comes Back.
Pink snow everywhere despite the troika's best efforts to mop or move the mess ...

Where's Euro-Cat Z and his Voom?

WellRed said...

Sigh. I am so sick of this same old story. Can´t Europe just collapse so I can buy C at 10 and BAC at 3. Maybe sohan a maybe US homebuilders for less than $1 each. Then retirement would be just around the corner and I wouldn´t have to pay attention to this lot of fools for much longer...

Adrian Scott said...

I would respectfully propose that the word 'equilibrium' should be excluded from the vocabulary of conversations in this context.

Polemic said...

Adrian.. ok. It may well have been used in haste. But any suggestions for altrnatives?