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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • Hail To Mr. Papandreou! Now What? 0 comments
    Nov 7, 2011 4:35 AM | about stocks: TLT, SHV, SPY, GLD, SLV, UUP, UDN, FXE

    Mr. Papendreou has been betrayed and abandoned by his people, his fellow European leaders, and the world at large. After all, it was he who ordered the audit of Greek fiscal scam, exposed the problem that would've continued getting even worse otherwise, and worked tirelessly with all sides on a dizzying assortment of solutions/remedies. He has been by far the best ally in Greece for those wanting to prolong Euro. Although his call for referendum may have been too much of a gamble on such a critical issue according to Sarkozy/Merkel, there's no doubt he did it only because he felt backed to a corner by the domestic opposition. He must have felt confident that the referendum would ratify the agreement and pave the way for implementation, at least when compared to alternatives. But his counterparts would not trust him. They dumped him in a European heartbeat.

    OK, bygones. But now what? Back in early August I opined that Euro leaders could probably manage to kick the can down the road this time, if only barely. In retrospect, I grossly underestimated the number of lunatics in the continent. Now I truly do not know. The outcome becomes more binary and divergent as the tease continues and tension builds up; the market practically demands an earth-shaking climax either way. A closer look at this point, however, would be helpful, or failing that, at least more fun.

    First of all, Papandreou's saga brings my attention to another European leader in spot light, Mr. Berlusconi. As a guy to go bar-hopping with, I'd choose Silvio over George any day, even though the former is more likely to disappear and leave me holding the tab -- guy is so much fun it's worth the risk. As a leader during a crisis, it's another matter.

    But the market is behaving as if a non-Berlusconian Italy would be a huge crisis. This is curious. Between calling Merkel an "unfuckable lard-arse" (this from Berlusconi is an insult of a magnitude that may warrant some pondering to fully appreciate), dozing off while other European leaders try to save his country (twice), snubbing IMF, and complimenting the Obamas for their tan (twice), it's hard to imagine a new leader could possibly do any worse in terms of getting over the Euro fiasco.

    In fact, I've been surprised why bond vigilantes homed in on Italy rather than Spain. Did someone know something that we don't? If the true state of Greek account had been hidden for so long, is it conceivable that it could've been in other places, too? The argument goes like this: if there's a new government in Italy, there's a risk that meaningful auditing would be implemented, by IMF and/or some other party, and subsequently uncovers a Greece-like scam, only 100 times bigger.

    I know, this borders on conspiracy theory and I have no concrete evidence to support it. It's a blackswan event, in the same realm as Israel launching a unilateral attack on Iran, dragging an unprepared and unwilling US into it. But the latter is looking increasingly likely now. With the expectation that Berlusconi will lose (finally?) Tuesday's confidence vote, it doesn't hurt to be prepared.

    Second surprise from the Euro land is the lack of more widespread protests. With sweeping austerity measures in PIIGS on one hand, and deteriorating economy and emerging inflation in Germany on the other, you'd expect the people to be revolting everywhere by now. My interpretation is that the Euro experiment has been good to the people. It has allowed Germans to maintain an export sandbox and the people in the peripheral to enjoy an impossible lifestyle if not for the cheap credit coattailed on Germany. Coupled with the European elites' dogged determination of keeping the unsustainable going, this means the Euro experiment will likely continue until the immediate pain becomes unbearable, no matter how nonsensical it's been to the rest of the world way before that time.

    Third surprise, to me, is how much pride has hurt European leaders, or rather how they have allowed their pride to hurt their dream of the US of E. Good'ol US of A has been enjoying the drama from the fence. If Euro fails, USD would get rid of the most powerful and credible challenger to its reserve currency status, which is especially valuable in the current tough environment. But if Europe comes asking humbly for help (for more than swap lines at the Fed), the US would be hard pressed to say no. China has some incentive for sustaining the Euro. But Beijing has been burned and snubbed a few times throwing money around, and is gradually learning how not to use money. They will definitely not whip out the checkbook without a proper price, if only due to the sheer lunacy of 15-year-old Chinese sweatshop workers bailing out 55-year-old European retirees laying on the beaches of Mediterranean Sea, on a cheap made-in-China beach chair while texting about the sheer lunacy of Chinese sweatshops. But no! We're Europe damnit and we are a proud country! We don't need no stinkin' Anglo-Saxons or commies to help us!

    While I've been pessimistic about the Euro since the problem first surfaced, I reckon that it's theoretically possible, even a good idea in some sense. But it'd take a cultural change across the land -- don't take it from me, listen to Greenspan and Michael Lewis. And one big underlying factor making it impossible for the elites to adapt to reality and change course, and the masses to attempt a jab at mending cultural rifts, is the European pride. For all likelihood, their pride will ultimately do them in, just as it has dragged the continent into repeated wars.

    To sum it up, the Euro game has become completely unpredictable in any given timeframe, with increasingly divergent binary outcome. In a risk-on rally, everything except Treasuries (NYSEARCA:TLT) and USD (NYSEARCA:UUP) would go up in the current Correlation One universe; even gold (NYSEARCA:GLD) would go up, not because of the inflation hedge this time but rather deployment of pent-up cash. In a risk-off crash, everything except Treasuries and USD would go down; even gold would go down if the damage is real enough to cause a deleveraging tsunami. And there could be many false yet very violent, convincing, and painful moves in every direction before true clarity sets in. Volatility seems the only sure bet, though this does not equal to a VXX call or long VIX in any other form, which would be dangerous if the market rallies. Straddles or strangles (with strikes not too far apart) would make better sense.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: TLT, SHV, SPY, GLD, SLV, UUP, UDN, FXE
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