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Stephen L. Weiss
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Stephen L. Weiss is an active investor, markets expert, public speaker and author. His most recent book is a novel called UNHEDGED (see below). He has also authored two well received investment books: The Big Win: Learning from the Legends to Become a more Successful Investor (Wiley, 2012) and... More
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Short Hills Capital Partners, LLC
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My book:
UNHEDGED: A Story About A Killing in the Market
  • The European Carry Trade and House of Cards 7 comments
    Dec 20, 2011 10:02 AM
    I think I understand this completely: the ECB lends to the troubled banks at 1% so they can turn around and buy more troubled sovereign debt, clip the coupon, and use as collateral with the ECB for those loans.  A brilliant carry trade!  Yup - good idea.  I guess Draghi was telling us the truth about not buying primary issue - he just set up the facility for the banks to do it themselves.  I'm pretty sure that carry trades in this manner always end badly but high marks on creativity.
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Comments (7)
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  • Great insight Steve. If this is what is going on, I think it's the equivalent of money printing through QE.
    20 Dec 2011, 04:37 PM Reply Like
  • Actually probably worse than QE from an inflationary perspective, since the loaned money, by definition, isn't being held in excess reserves, but rather being funnelled into the sovereign's operating accounts.
    20 Dec 2011, 04:40 PM Reply Like
  • Author’s reply » absolutely but no stimulus attached by governments
    21 Dec 2011, 08:17 AM Reply Like
  • Wow. The more I think about this, the more extraordinary I think it is. These loans will likely be up to 300m Euros when the ECB reports the numbers tomorrow ... bigger than the EFSF. No wonder the sovereign auctions aren't failing. This is just monetization of Spanish and Italian debt. It has to be massively inflationary.
    20 Dec 2011, 07:08 PM Reply Like
  • Author’s reply » Who wouldn't go into a free carry trade?
    21 Dec 2011, 08:18 AM Reply Like
  • Really interesting numbers today. $650m. Holy sh*t. That is an absolutely massive sudden increase in the Euro money supply. I'm really surprised the Euro hasn't fallen off a cliff.


    Also, I'm not convinced the banks are actually using the ECB for a carry trade. Upon the announcement of the size, the sovereign yields actually rose ... totally counterintuitive. Frankly, if I were on the Board of an undercapitalized southern European bank with too much sovereign exposure, no way would I increase the exposure to sovereigns with the proceeds of the ECB line, I'd just borrow against my existing sovereign portfolio and then use the proceeds as a war chest against withdrawals, pay down any drawn lines of credit and maybe invest in corporate loans, if anything.


    Maybe come the auctions in January, the sovereigns will arm twist the banks into supporting them with the ECB line and maybe some of the better capitalized banks will do the free carry trade. But aside from that, given the capital ratios in Southern Europe, we may not get as much carry as we think.
    21 Dec 2011, 01:32 PM Reply Like
  • Author’s reply » I would be very surprised if the ECB has not reached out to the banks and "asked" them to buy some sovereign debt. Italian banks have already said that they are in the mkt buying Italian bonds. Countering this though, I would doubt that the banks would want to show any more holdings of sovereign bonds than they have to.
    28 Dec 2011, 11:18 PM Reply Like
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