...on topic: I'd not read about S&P getting raided in Italy. Freaky, but not surprising.
The problem in a nutshell as I'm seeing it - just my own best guess of what's going on, based on reading the financial press and blogs:
Italy, though heavily indebted, is not actually insolvent. The debt/GDP trajectory is better than the US - Italy has a plausible forecast to stabilize that ratio, we don't.
BUT when you throw in the debt and contingent obligations Italy will incur by being part of the bailout fund for Greece, Portugal and maybe Spain... it's broke...
...so everything then falls on France and Germany (and some too-small solvent countries like the Netherlands)...
...then France appears insolvent, and drops out of the bailout fund...
...then everything falls on Germany...
...and the Germans, quite sensibly, say no...
...and it's game over. Note the entire sequence above doesn't actually have to happen - it's all spreadsheets and whatnot - but if the markets conclude that the solution set is the empty set...
Sucks to be them... except... about 40% of US money market funds are invested in EU bank debt.
Which will precipitate a virtual bank run on money market funds.
Which is Lehman Brothers all over again.
Don't panic. Probably got until at least Tuesday or Wednesday to take cash out of the bank.
Or - quite possibly - the sequence I described above won't play out. I hope.
lady red - here is an article which is a much more detailed version of what I wrote above. I found the informed speculation it contains to be pretty interesting.
(Yeah, it's on Zero Hedge, but the chronic Jew-hate in the comments there seems to have abated, mostly. And mostly I don't read the comments.)
"*Attention – Due to the uncertainty in the global precious metals markets, we will not be able to accept any additional orders until the global markets re-open in Asia. We expect to be accepting orders around 6:15 pm EST. Sunday August 7th, 2011, following the market open."
What I cannot figure out is how this happened. Anyone with half an ounce of brains in t"heir heads would have realized how true Margaret Thatcher's words were: The problem with socialism is that you eventually run out of other people's money."
Any idiot should not that you cannot continue to spend money you don't have without coming in for a hard crash landing. And it makes someone racist and a terrorist to point out the obvious?
My hope is that enough people have wise up and we will send the asses and the RINOs packing next year.
@lr#7: I can decode this a bit for you. Precious metals dealers hedge their inventories in the futures markets.
(Yes, the people who push the idea of "physical gold" use "paper gold" to manage their own financials).
Basically, they are traders, not investors - they aren't sitting on big unhedged inventories of gold. (In technical terms, they aren't "structurally long" gold). They're long physical gold in their inventory, which they hedge with short positions in the futures markets.
The problem with hedging is that it requires two markets to be open at the same time.
Mostly the PM dealers figure they can judge the prices over the weekend fairly enough to take some orders without worrying about it too much.
But this weekend the orders are coming in thick and fast, and they can't offload their short positions to compensate. So they have to stop taking orders.
The price of gold could skyrocket or crater. Or both. I'm betting on both - there will be forces pushing both ways. Funds which are holding gold and have to liquidate to meet margin calls or redemptions could push the price down. (Or not).
About that non-farm payroll number...
ReplyDelete...on topic: I'd not read about S&P getting raided in Italy. Freaky, but not surprising.
The problem in a nutshell as I'm seeing it - just my own best guess of what's going on, based on reading the financial press and blogs:
Italy, though heavily indebted, is not actually insolvent. The debt/GDP trajectory is better than the US - Italy has a plausible forecast to stabilize that ratio, we don't.
BUT when you throw in the debt and contingent obligations Italy will incur by being part of the bailout fund for Greece, Portugal and maybe Spain... it's broke...
...so everything then falls on France and Germany (and some too-small solvent countries like the Netherlands)...
...then France appears insolvent, and drops out of the bailout fund...
...then everything falls on Germany...
...and the Germans, quite sensibly, say no...
...and it's game over. Note the entire sequence above doesn't actually have to happen - it's all spreadsheets and whatnot - but if the markets conclude that the solution set is the empty set...
Sucks to be them... except... about 40% of US money market funds are invested in EU bank debt.
Which will precipitate a virtual bank run on money market funds.
Which is Lehman Brothers all over again.
Don't panic. Probably got until at least Tuesday or Wednesday to take cash out of the bank.
Or - quite possibly - the sequence I described above won't play out. I hope.
Lewy, do you think markets will close worldwide on Monday if the panic gets too crazy? I've been hearing rumblings...
ReplyDeleteThis is a scary time. Very.
lady red - here is an article which is a much more detailed version of what I wrote above. I found the informed speculation it contains to be pretty interesting.
ReplyDelete(Yeah, it's on Zero Hedge, but the chronic Jew-hate in the comments there seems to have abated, mostly. And mostly I don't read the comments.)
link
More info on why France is key to the Euro bailout plans.
ReplyDeletelewy, I've been glued to Zero Hedge lately. I rarely read the comments (the bitchez! But you're right- the chronic Jew-hate has subsided for now).
ReplyDeleteMore interesting reading here.
ReplyDeleteWow. How often does this happen?
ReplyDelete"*Attention – Due to the uncertainty in the global precious metals markets, we will not be able to accept any additional orders until the global markets re-open in Asia. We expect to be accepting orders around 6:15 pm EST. Sunday August 7th, 2011, following the market open."
:-/
What I cannot figure out is how this happened. Anyone with half an ounce of brains in t"heir heads would have realized how true Margaret Thatcher's words were: The problem with socialism is that you eventually run out of other people's money."
ReplyDeleteAny idiot should not that you cannot continue to spend money you don't have without coming in for a hard crash landing. And it makes someone racist and a terrorist to point out the obvious?
My hope is that enough people have wise up and we will send the asses and the RINOs packing next year.
@lr#7: I can decode this a bit for you. Precious metals dealers hedge their inventories in the futures markets.
ReplyDelete(Yes, the people who push the idea of "physical gold" use "paper gold" to manage their own financials).
Basically, they are traders, not investors - they aren't sitting on big unhedged inventories of gold. (In technical terms, they aren't "structurally long" gold). They're long physical gold in their inventory, which they hedge with short positions in the futures markets.
The problem with hedging is that it requires two markets to be open at the same time.
Mostly the PM dealers figure they can judge the prices over the weekend fairly enough to take some orders without worrying about it too much.
But this weekend the orders are coming in thick and fast, and they can't offload their short positions to compensate. So they have to stop taking orders.
The price of gold could skyrocket or crater. Or both. I'm betting on both - there will be forces pushing both ways. Funds which are holding gold and have to liquidate to meet margin calls or redemptions could push the price down. (Or not).