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  • Irish Bailout Was Simply A Shifting Of Creditors (IRE, EWP, NBG, PT)

    Many different parties celebrated the recent $113B bailout of Ireland (NYSE:IRE), especially given that Greece (NYSE:NBG) is doing so well now (note the sarcasm). Oh, but the fun doesn’t stop there for taxpayers, no, no,, in fact you can expect Spain (NYSE:EWP) and Portugal (NYSE:PT) to follow suit, leading to a complete collapse of the EU fund. But don’t worry, the mainstream media has you covered, there’s nothing to worry about, right?

    The following is a publication made by, and it should serve as a guideline for what the recent influx of EU bailouts is really all about.

    We very much enjoy the view of Michael Cembalest (CIO, JPM Private Bank) when it comes to the sensitive topic of geopolitics, as it tends to provide that incremental perspective over and above what otherwise his and other banks would skirt around due to conflicts of interest (after all they are banks). Today, in his Eye on the Market report, Cembalest looks again at the Irish bailout. And while his summary of the 4 key dynamics (in his opinion) is certainly spot on, it is his footnote that caught our attention, as it carries in it the most pertinent information: namely, that since its bankruptcy and currency devaluation, Iceland’s economy and stock market have surged, unbound by the shackles of a zombie monetary system and exponentially growing debt. Ireland, to the contrary, can only hope for at best a gradual decline in its economic output instead of an outright collapse now that European Commission council is the country’s new politburo. It can also, at best, hope that its pension fund will have a few penny farthings left for the aging population once it is done rescuing Europe’s banks. It is precisely this option that a formerly democratic country refused to offer its citizens, and is the reason why its entire government should be tried for treason: instead of using empirical evidence that default and devaluation is the best outcome, Ireland crumbled to the interests of a few parasite plutocrats, which have just their own interests in mind, and never those of the host nation (which ends up being abused and discarded like a used condom off the side of the road).

    The key issues on the Irish bailout per Cembalest:

    1. Bailouts don’t change the level of debt that countries owe, it just shifts the creditors around. The latest steps remind me of the desperate attempts by US banks to lend more money on top of prior money during the late 1980s to Latin America, when Citibank chairman Walter Wriston’s “countries cannot default” thesis was left in ruins. For everyone that said last spring that “Greece 2009 is not Argentina 2001”, they’re right; Greece’s budget/trade deficits and debt/GDP were much worse.

    2. GDP figures can be misleading indicators of risk
    . Greece, Ireland, Spain and Portugal (GISP) are small in GDP terms relative to Germany and France. But their banking systems grew to be very large (e.g., a 20% haircut on French bank exposure to GISP countries would wipe out French bank equity). Irish Finance Minister Lehinan intimated that Ireland asked to be able to apply haircuts to senior bank debt, and was told by the EU that it would make no money available if there were any haircuts, due to fears of contagion. What does that tell you about the risk of small countries, or the European banking system?

    3. This crisis is not just about sovereign debt/deficits. Ireland and Spain were model EMU citizens, with deficits inside of the 3% Maastricht level for years. The problem: total sovereign, corporate, financial and household debt, and each country’s ability to service it. Despite reductions in its budget deficit and reduced reliance on ECB funding, we’re still very nervous about Spain. Why? Its economy is still on the brink of recession. Were it not for the ongoing collapse in imports, Spain’s GDP would have declined in Q3. BBVA and Santander should be able to ride out a recession due to international diversification, but the other half of the banking system (Caja banks) is another story entirely. Risks in Spain are not just about the banks; nonfinancial private sector debt is 220% of GDP, the highest in the world.

    4. The politics may get more divisive. The EU imposed a deal on Ireland’s lame duck government that consigns the country to a very painful future. The continued gutting of the Irish national pension fund is, to put it mildly, a controversial decision. Meanwhile, Eurogroup president Jean Claude Juncker said this over the weekend: “I am concerned that in Germany, the federal and local authorities are slowly losing sight of the European common good”. As per last week’s EoTM, I am not sure anyone knows what that really means right now, or if such a concept was ever properly established as it relates to the European Monetary Union.

    This is all well-said and very coherent. But it is not what we want to highlight. What we do want to emphasize is the comparison of Ireland to Iceland. Aka footnote one:

    The Irish “bailout” plan, with its EUR 54,800 cost per household, is by all accounts a modern-era “Long Day’s Journey Into Night”. Ireland’s future, by the way, looks a lot more bleak than Iceland’s. Iceland took a different path (debt default and a devaluation of 60%). Two years on, Iceland is rebounding: exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates fell from 18% to 5.5% and the stock market rebounded 50% from its lows. In Ireland, GDP is contracting at a 9.7% rate; real wages, price levels, the money supply and exports are falling; and unemployment is stuck at 14%.

    This is nothing less than yet another example that in the great collapsing game of Keynesian fundamentalist’s dilemma, he who defects, defaults and devalues first is the winner. Congratulations Iceland. To everyone else: enjoy the eventual revolutions. They are now inevitable, courtesy of your favorite neighborhood parasite banker.

    Disclosure: No Positions
    Nov 30 1:33 AM | Link | Comment!
  • US Dollar Surging as Mainstream Media Claims the Opposite (UUP, UDN)

    The US Dollar (NYSE:UUP) and (NYSE:UDN) has received nothing short of negative press since the introduction of Quantitative Easing part deux, amassing a total of $600 billion in printed paper (none of which is backed by gold bouillon). In theory, all exogenous variables equal, this event should depreciate the currency, however, it has done the exact opposite. An inverted Head and Shoulders pattern is beginning to play out, thus a closer inspection should be noted.

    This shouldn’t come as such a surprise to experienced traders, who know very well, when the whole world is sure about one thing, the exact opposite tends to happen. Retailer and mutual fund players have grown increasingly perma-bullish towards risk-on behaviour, as even the worst of news seems to flow in one ear and out the next.

    (click image to enlarge)

    From a technical perspective, the murky water becomes more clear, and we are able to see why the recent $600B government monetized debt has been unable to lift the markets. The US Dollar, at one point, was shorted at an unbelievable rate of 97%, something rarely seen, thus leaving it prime for an epic squeeze.

    The chart clearly shows that the RSI (Relative Strength Index) bottomed out near the 30, becoming very oversold, and is now finally starting to bounce back, similar to January 2010. MACD divergence also seems to be moving in a positive direction, and is inching closer to a bullish cross. Slow stochastics have already made a bullish cross and are beginning to gain momentum as investors buy into the currency as a safe play away from risk.

    The target for the Head and Shoulders pattern would be an immediate attempt at breaking the neckline located at the $90 level, which was seen back in late 2008, early 2009, and mid 2010. This is one of the strongest chart patterns, thus once it comes into fruition, expect equity markets around the world to begin a sell-off.

    Currently we lie just below the 50% retracement, which should pose some resistance, along with the 50 and 200-days moving averages, though wouldn’t expect these to put up much of a fight.

    Many speculators and consipracy theoriests believe that global news and events follows the markets lead, will this principle hold true this time?

    Disclosure: No Positions
    Tags: UUP, UDN
    Nov 29 11:51 PM | Link | Comment!
  • A Green Close on S&P 500, or Nine Billion in Monetized Debt

    A miracle on Wall Street, or just another bailout-style sham? The S&P 500 found a way to rally (almost green, but not quite) at exactly 2PM EST to somehow, someway, beat some of the most negative cumulative inflow of news to hit the world since the Great Depression. Furthermore, on a less surprising note, we are quickly approaching the 30th week of cumulative mutual fund outflows — well, atleast now we can be sure that the Banks will be eating each other’s profits, rather than our own.

    Yes folks, today,  a total of $9 billion of debt was monetized by the wonderful, cheerful crooks that run this country, the Fed. Of course, none of this money goes to improving the health of the economy through job creation, taxation and incentives, no, no, it is money used by the primary dealers to levitate stocks to a green close — i.e. helping the rich get richer, and the poor get poorer. Not only that, but it was a DOUBLE POMO day, $2.5M used in the first hour, with the rest in the last two hours of trading.

    Still wondering how many more months the taxpayers will go before hitting the streets, hands full of torches and axes?

    The good news: insider sales of S&P stocks were only 218 times greater than insider purchases. This is a notable improvement from last week’s nearly 9,000x ratio. The bad news: the ratio was skewed by what is probably the biggest insider purchase in the past 6 months: someone bought 542,198 shares of Citi at $4.30 (hopefully not a short cover). Take that out and things get sad again. The worst news: insider selling, in total notional continues to trend ever higher, and while better than last week’s $1.2 billion, this week’s $757 million in sales is a top 5 dump when looking at the last 24 weeks of insider action. Adding to this the fact that this week will see the 30th consecutive outflow from domestic equity funds (absent Mary Schapiro, Tim Geithner, and Ben Bernanke resigning of course), and the confidence game continues.

    Disclosure: Long FAZ
    Nov 29 11:11 PM | Link | Comment!
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