The SS €uro is taking serious water. At the hastily called EU Summit Captains meeting on the Brussels Bridge, it was agreed that the best course of action, despite the worsening waves of bank runs, was to simply instruct the orchestra to continuing playing the same old familiar tune and order the rearrangement of the deck chairs.
However, all the captains somberly recognized there were neither sufficient lifeboats nor anyone willing to come to their rescue. As usual they were in complete disagreement on what to do, they knew they had insufficient resources for anything dramatic and they were well aware the public passengers had no tolerance for any cold water austere attempts for the sake of survival.
The EU banks runs have been steady and consistent. Deposits have been relentlessly fleeing the peripheral countries and heading for the safety of deposit at German banks, and to a lesser extent French banks. Meanwhile the banks in turn were depositing money at the ECB for their own safety.
Not all money however is ending up at the ECB or anywhere in Europe for that matter. Needed capital to restart growth is presently heading for the safety of the US Dollar and US Treasuries.
The 10 Year US Treasury Note hit a 120 year low when it touched 1.48%. Dramatically down from a recent high of 2.30%, as the European situation worsened based on troubling European election results. Investors are willing to accept real negative returns for the sake of perceived safety. Even Germany last week could float Bunds with a zero coupon.
A strengthening dollar is not good for a US stock market denominated in US dollars. It now takes fewer dollars to buy the same basket of stocks and US markets are down 9%.
How long will this go on? The short answer is: "Until the inevitable printing begins once again."
That moment appears close, but we aren't quite there yet. More pain and more time are required to give the money printers the cover they require, lest they ignite the hyperinflation rocket prematurely.
All However Is Not As It Appears
As simple as the above scenario appears on the surface, like the iceberg that has been struck, there is significantly more below the surface. With the ship taking water at countless points the best that the Captains can determine is to place the inadequate bilge pumps near the most critical holes.
1- Something Smells In The US Treasury Market
The JP Morgan trading debacle gives us the best view of the what is going on below the waterline. Still answering questions about the mysterious disappearance of the $600B from MF Global, JP Morgan is now under investigation for what is being represented as minimally a $2B Credit Default Swap trading mistake. CEO Jamie Dimon doesn't react the way he did, if this was all there is to it. The issue appears to be centered in the Interest Rate Swap market. A market that JP Morgan holds a notional positions in of $57.5 TRILLION, of their $72 TRILLION total of Derivative Swaps. MF Global was apparently on the wrong side of the Greek Debt trade. Is JP Morgan more egregiously on the wrong side of the EU Debt trade?
The sudden surge in March of the 10 year US Treasury surging to 2.30% caused serious losses to someone in the Interest Rate Swaps market. Considering JP Morgan IS the Swaps market there is a good likelihood they got hit. With the massive fluctuations in Europe it stands to reason there would be equally if not larger problems there also.
What needs to be pointed out is that during these historic events the Euro has not tanked and the US Dollar has only got stronger. Something doesn't compute somewhere when we consider that sovereign debt supply is through the roof and there is a dearth of buyers. The US Treasury is not moving up (in price) solely because of European flight to safety. There is too much supply and European banks are simply too illiquid. There is a huge Tens-of-$Trillions Swaps game going on, JP Morgan is at the center of it and EU debt crisis is entangled in it.
The Bank of International Settlement (BIS )is reporting the latest quarter ending December 31st, gross market values , which measure the cost of replacing existing contracts, increased to $27.3 Trillion. This was driven mainly by an increase in the market values of Interest Rate Swap contracts. The rise in gross market values was the largest since the second half of 2008.
Counterparty risk is at the highest level since 2008 at $3.9 Trillion.
Something is breaking somewhere? I suspect the SS €uro bilge pumps are not even close to handling these sorts of gushers?
2- EU Bank Loan-To-Deposit Ratios Are The Achilles Heel
To put the bank runs in perspective, we need to be reminded that bank Loan-to-Deposit ratios in Europe are blatantly obscene and are 3 times more than the US banks. Many are over 100% and some over 200%.
I often complain about the Chinese banking system as corrupt. They are paragons of prudence at 65-70%, compared to the bandits in control of the established European banking cartel.
3- Insufficient "Quality" Collateral Available
Banks are now out of quality collateral and the deposit runs are consequentially even more devastating. Quality banks are getting dragged into the problem. Clients are reporting that getting their hands on their segregated gold holdings at some Swiss banks is suspiciously difficult and delayed. Why segregated gold?
The SS-€uro is now taking on serious water and she barely has her Bow above water.
Though we have reached our target support levels in the S&P 500 for sort attempt at a rally, market crashes usually start from oversold conditions, as punished buyers have already abandoned ship.
This is deep global waters and there is a long ways down before the SS €uro possibly settles.