- ”This is a bailout of the banking community… especially in France but of course also in Germany.”
- Questionable whether the French banking system could take the hit, estimated at 35 billion euros. This would raise questions about their Spanish, Portuguese and Italian bonds. This is not the end, but the “end of the beginning.”
RT:
- How does this help the Greek people? They will be “paupers in Europe.”
Hendry:
- There is a remedy. The remedy is that Greece could leave the Euro. If it were to bring back the drachma, the currency would be very, very cheap. This would bolster tourism and exports. London is full of foreign shoppers now that the pound is down 25%.
- Soveriegn bankruptcy is the normal and healthy procedure. Bankers take the hit they deserve.
- Great political flaw in the euro, trying to join cultures that don’t want to join. Angela Merkel is not being generous. Spending taxpayers’ money is not generousity. She’s trying to salvage a bankrupt philosophy.
RT:
- Moral hazard issue is not being talked about. This gives a green light to Spain, Portugal, etc to spend away.
Hendry:
- The truth is unpalatable. Giving an over-indebted country more debt is not the solution. We need to restructure the debt and punish the irresponsible banks and investors.
- We should never compromise with bailouts, and certainly not on Greece, which is just 2% of the European economy.
Taleb thinks hyperinflation is a strong enough possibility to justify way OTM bets on gold (long) and bonds (short). The one bit I agree with is the long gold / short stocks play (though I think gold is likely to fall with stocks, just not as much), and I suspect that deflationist Hendry would concur.
Hendry thinks that deflation is here to stay, that nations will start to default, and that the market will at least start to worry about sovereign defaults by nations like Germany and the US (even if they don’t actually default, he’ll make money in that situation as the price of insurance goes up).
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(The video cuts off when Hendry passes the mic, and I don’t have a link to the rest. If anybody else does, please post it.) (EDIT: http://2010.therussiaforum.com/news/session-video3/ Minute 24:00 and after. Thanks Charles!)
Hendry makes a point I’ve made myself: the euro is like gold for countries like Greece (they can’t print it) so it will have to default.
Hendry says his porfolio is inspired by Nassim, but basically the opposite. He’s fed up with other people’s opinions. The hedge fund guys are “so uncool.” He doesn’t talk to brokers, and he reads nobody else’s research.
Debt loads are bound to squeeze all of the vitality out of the risk takers in the market.
UK interest rates are at the lowest since the Bank of England was established in 1692. He is betting that the central banks won’t raise rates in the next 4 months and he will make 4x his dough if right.
He thinks the sovereign default scenario today is like the mortage bond situation three years ago.
Now, who is the true contrarian? Is hyperinflation really a black swan right now? Every chat board on the net has been buzzing about it for years. When Taleb said every human being should short treasuries, every human being agreed with him!
My how the times change. Seems only yesterday everyone was expecting the dollar to collapse, when it already had! Now it’s time to fret about its opposite, the euro. I am a major dollar bull for 2010-2011, but when everyone is one one side of a trade that has gone a long way in a short time, you have to consider the odds of a correction. In the highly levered currency markets, these can be lightening fast.
Here’s the last 3 years of the ETF FXE (1 share = 100 Euros priced in dollars):
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Take a look at the 10 cent rally over a few days in September 2008 (and the remarkable similarities in price and RSI between the weeks prior to that move and the action since December). If the analogue plays out, we’ll get a quick spike to shake off the shorts and keep people guessing, followed by an even deeper decline. The catalyst in ’08 was the shorting ban. Maybe now a Greek bailout provides the nudge that sends shorts scrambling.
Bear in mind that if this scenario plays out, all of the other risk assets are likely to follow suit: this means a general drop in the dollar and yen, and spikes in stocks and commodities. I have to admit, a correction would fit just fine in all of these markets.
Aside from the charting similarities, what gives me an inkling that something like this could be in the works is the prevalence of chatter about how a Greek bailout is going to weaken the currency or even lead to the breakup of the eurozone. I happen to agree, but I don’t like having this much company.
One person who’s company I don’t mind sharing in the markets (short-term trades notwithstanding) is Hugh Hendry, who is the lone voice of reason at the table with a Spanish politician and the esteemed ignoramous Joseph Stiglitz. Other than for clues on public sentiment, he’s the only reason to watch this little TV production on the Euro’s troubles (he speaks in part 2):
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Stiglitz is being disingenous or is just a plain fool; a bailout is exactly what people are talking about (that’s what he means by “if they stand behind it”). The idea seems to be for Germany and the EU (including possibly even the UK) to gaurantee Greece’s debt, in the way that the US taxpayers were forced to back up Fannie and Freddie’s debt.
Hendry is right — the debt is unpayable, and default is the only option, even with refinancing at lower rates. Greece should just get it over with and repudiate the debt. It is by far the best option for the nation, though the worst for Greece’s politicians and the cronies and unions who benefit from government spending.
Stiglitz doesn’t understand markets. He seems to think the debt crisis is the result of “market mistakes.” This is utter nonsense — without the moral hazards created by deposit insurance, GSEs (Fannie, Freddie, FHA, etc), and the promise of central bank bailouts, financial institutions would have had an incentives for prudence. In our system today, they have none, since losses are simply shifted to the public. It is the greatest financial scam the world has ever seen, but certified “economists” like Stiglitz are steeped in central banking propaganda and incapable or unwilling to see what is right in front of their noses.
