The Next Big Short

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Includes: ADRU, DBEU, DBEZ, DEZU, EEA, EPV, EUFL, EUFN, EUFS, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, GSEU, HEDJ, HEZU, HFXE, IEUR, IEV, PTEU, RFEU, SBEU, UPV, VGK
by: Mark J. Grant

It has dawned upon me, with all of the hoopla surrounding Bitcoin, it may as well be the new game at the local casino. Craps, Blackjack and Bitcoin, the thrills of the night. I have always maintained that there were three types of activities that take place on Wall Street. These are gambling, speculating and investing. Three ways to spend your money and it is your money, so take your pick.

Bitcoin, in my way of thinking though, is not The Big Short. No, the really giant play is something else entirely and all dependent upon the European Central Bank. Timing is everything and the timing here is when their printing presses are about to stop.

The boys and girls on the Continent figured out a temporary way out of their economic mess. Money from "Pixie Dust' and budgets can be afforded, pensions can be funded and their socialism can plow ahead. It has been a neat trick that was born from America's financial crisis and exploited to the nines. They are just so proud of themselves.

I don't get it. Why are they confessing?
They're not confessing.
They're bragging.

-The Big Short

Yields on the 10 Year Sovereigns

Germany 0.31%
Netherlands 0.40%
Austria 0.45%
Belgium 0.50%
France 0.64%
Spain 1.45%
Italy 1.69%

United States 2.40%

*Data provided by Bloomberg

People hate to think about bad things happening so they always underestimate their likelihood.

-The Big Short

Think of it, Belgium's 10 year yields 480% less than America's and Italy's 10 year is 134% less than ours. Economically, of course, it makes no sense at all. If, ten years ago, someone would have said this would happen, the author would have been placed in the corner with a dunce cap affixed. Yet, it happened. No denying that!

So, you may wonder, to use the terminology of Alice, in her Wonderland, "What will make it unhappen?" After all, the Pixie Dust could roll on forever and the ECB could never stop. An AI printing press. Well, there are two ways this little manufacturing enterprise could grind to a halt. One is economic and one is political.

We're going to wait and we're going to wait and we're going to wait until they feel the pain, until they start to bleed.

-The Big Short

You see, economically, it could come to that even at these rates, that certain countries will not be able to afford their social programs. What to do then? Keep printing until Italy's 10 year yields -10.0% and people get less than nothing on their investments and the retirement accounts and the pension funds run dry? Social upheaval will be at hand. The marinara sauce will be running in the streets, along with the blood.

Politically, pick a country, any European country, that wants to follow Britain out of the trough. Italy, in my opinion, is the most likely now with their mandated elections in March. Mr. Berlusconi and Mr. Grillo are demanding, once again, that Italy should be governed by the Roman Senate and not the Berliners of Brussels. I note also that Ms. Merkel is losing sway and that the German scriptwriters of today may not be the scriptwriters of tomorrow.

As time plays its hand, in both routes, it would also send money scurrying to the United States as the "safe haven," once again, regardless of Mr. Draghi's promises and protestations. Leverage has a funny way of calling your bluff and it can exert itself in a wide variety of manners. Then, toss in the banking systems in Spain and Italy and the proximity gets closer still. Target2 is fragile enough and I doubt if it could take a major hit and still be on its feet.

So, I pick the bonds of the European Union as The Next Big Short. It is only a question of when to pull the trigger. Don't get itchy quite yet.

It's chaos down here! Where are we at?

And Caesar wept, for there were no more worlds to conquer.

-The Big Short