Dr. Strangelove In Europe (Did Kong Just Mount The Bomb?) in [Market-Ticker]

Posted 2011-12-21 08:43
by Karl Denninger
in International

Dr. Strangelove In Europe (Did Kong Just Mount The Bomb?)

You have to wonder.

It was expected that the ECB's newly-minted three-year facility would put about €400 billion into the market this morning. Instead, it was somewhere around €600 billion, expanding the ECB's balance sheet by a literal 20% overnight.

Essentially every bank of consequence in the ECB clamored to the ECB's window to borrow the cheap money, with Draghi egging everyone on. This, you would think, would be cause for an extension of yesterday's rally, since expansion of borrowing is a good thing, right?

Not so fast.

The market appears to have discerned that the European area banks have literally pulled the pin on a financial doomsday trade.

Yesterday European spreads screamed inward as "someone" was buying the hell out of European debt. Today we learned who it was -- everyone.

Of course nobody "officially" can be told what to use the money for, but it doesn't really matter. What we have happening here is that there's little question that adding more than €500 billion in additional leverage to the European system is a "good thing" -- that's definitely bad.

Many people in the financial community expected that it would be several days or weeks before the market figured it out. Instead people started to noodle on this literally within minutes and it appears they also immediately came to their senses as to the wisdom (or lack thereof) of what the ECB has just done.

There's one way to think of this that parallels our experience here in the US -- think of this as the Lehman Trade, or the MF Global Trade, or if you prefer the Fannie and Freddie trade. The latter is probably more-appropriate, given that there are a number of banks over in the Euro Zone, including some really big ones, with leverage ratios approaching (or even exceeding!) 60:1. If this trade "works" and nobody loses more than 2% or so you make more money than you ever have before and everyone gets really big bonuses!

If it fails, well, there's no Euro, there's no bank, the governments involved probably collapse and there's likely to be a war, so who gives a damn -- go for it!

Here it comes!

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User Info	Dr. Strangelove In Europe (Did Kong Just Mount The Bomb?) in forum [Market-Ticker]
Visualcsharp Posts: 343 Incept: 2009-12-19 Round Rock, TX	I think we're beyond the realm of mere psychopathic or sociopathic behavior. We're into some territory that most of us never dreamed we'd be in. I'm not sure that even the phrase "pure evil" captures it. 2011-12-21 08:47:52 Permalink
Csauer52 Posts: 386 Incept: 2008-06-11	Tickercon 1? 2011-12-21 08:52:41 From PDA Permalink
Thesev Posts: 1375 Incept: 2007-10-30 Louisiana Online	I loved it. Ms Squick was commenting on....errr, cheerleading the "success" of this just as the graphic they were using turned back and plunged. Heh. ---------- The reason the republic isn't working is that it's being run as a democracy. It doesn't matter who you are, or who you Think you are, the Math is Going to Win. 2011-12-21 08:54:01 Permalink
Wearedoomed Posts: 3584 Incept: 2009-01-14 slightly red state	MERRY ***ING CHRISTMAS, EVERYBODY! ---------- And you, my father, there on the sad height, Curse, bless me now with your fierce tears, I pray. Do not go gentle into that good night. Rage, rage against the dying of the light. 2011-12-21 08:54:44 Permalink*
Zarathustra Posts: 5937 Incept: 2009-04-29 Funkytown	Just another day in a normal, natural, healthy market... ---------- "And in knowing that you know nothing, that makes you the smartest of all." - Socrates 2011-12-21 09:00:52 Permalink
Rvacha Posts: 8295 Incept: 2008-10-03 Cleveland	The net was actually quite a bit lower, roughly 210 billion http://www.zerohedge.com/news/gross-ltro.... Quote: The first-ever 3-year liquidity operation by the ECB was an unqualified success. Banks bid for a greater-than-expected 489.2bn, making this the largest-ever single refinancing operation in the ECBs history. However, this is not the net amount by which outstanding ECB open market operations have increased. Because banks reduced their use of the Main Refinancing Operation (MRO) by 123bn yesterday, and also the use of 3-month long-term refinancing operations (LTROs) by 111bn allotted today, the net increase is smaller. Moreover, several banks made use of the possibility to swap out of the recent 12m LTRO that was allotted in October into the new 32-month facility (123 out of 181), to the tune of 46bn. So the net increase in outstanding open market operations is about 210bn, which is a considerable amount compared with the 514bn in total MOs that were outstanding at the beginning of the week. Secondly I question whether the funds will be used to buy more debt or if instead they will be used to finance existing assets. EU bond action seems to imply the later is possible ---------- "I suggest you panic." - Hugh Hendry Last modified: 2011-12-21 09:13:40 by rvacha 2011-12-21 09:12:59 Permalink
Quillbill Posts: 1469 Incept: 2009-06-23 Northwest Illinois	Is a pullback in equities today not an appropriate and natural response from profit taking since this move was front-run yesterday? The widening spreads across the world economies a result of the flip? What would be the defining evidence of this solution failing? ---------- It is a new day....DO SOMETHING WITH IT! 2011-12-21 09:20:36 Permalink
Stuart Posts: 28 Incept: 2011-12-15 Phoenix Banned	More debt? Are we surprised? I hope that people are waking up to the fact that there is only one playbook, add more debt. I also hope that no one is thinking that the powers are going to wake up one day and propose a 50% cut in spending and pay down the debt. Why go into fantasy land? To say I told you so? Prepare for the debt reset. The constitution will be put on hold until order is restored. 2011-12-21 09:22:01 Permalink
Genesis Posts: 130685 Incept: 2007-06-26	Watch spreads. ---------- I don't care* if it makes sense -- only if it makes money. -- Me* Bank (n): See scam, fraud and theft. *Eat a bankster -- they're low-carb.* *What part of "shall not be infringed" was unclear?* 2011-12-21 09:22:03 Permalink
Xanii Posts: 60 Incept: 2011-05-09 Espoo, Finland	I wish i could see into the future to see the endgame to this. Not funny, not funny at all. Europe is dry powder keg just waiting to explode. 2011-12-21 09:27:37 Permalink
Genesis Posts: 130685 Incept: 2007-06-26	When I look into my crystal ball I see Major Korg. ---------- I don't care* if it makes sense -- only if it makes money. -- Me* Bank (n): See scam, fraud and theft. *Eat a bankster -- they're low-carb.* *What part of "shall not be infringed" was unclear?* 2011-12-21 09:29:04 Permalink
Mo Posts: 12158 Incept: 2007-06-26 Pa. Online	Isn't this a European version of TARP? ---------- Welcome to Pottersville 2011-12-21 09:30:40 Permalink
Bertdilbert Posts: 2655 Incept: 2008-12-22 CA Online	The Euro is still a speeding vehicle headed up a dead end ramp, they just extended the length and height of the ramp to create a better show once the vehicle goes airborne. It will probably end in a heap of money printing. ---------- Dear Euroland: Relax, Germany has a plan for your money! Political Capital Defined: We are out of money but will tax our citizens for whatever it takes to "SAVE" the Euro. 2011-12-21 09:33:36 Permalink
Ilikecoffee Posts: 1563 Incept: 2008-04-17 cold , AK	Brent still under 110. How do they do that? ---------- You can trust the government, ask any American Indian. "When people lose everything and they have nothing left to lose, they lose it" Gerald Celente 2011-12-21 09:41:56 Permalink
J0nx Posts: 3067 Incept: 2008-08-12 The trashcan of the nation	There will always be one more stick save. If I have learned anything in 3.5 years it is that. Bet against them if you want. The right thing will never be done and high prices for food and gas, high UE and stagnant wages are here to stay. ---------- The fraud and lies are only allowed to continue because the people allow it. Either through apathy or ignorance, they still allow it. 2011-12-21 09:47:23 Permalink
R2judge Posts: 573 Incept: 2008-04-13 Burbank CA	Karl: "If it fails, well, there's no Euro, there's no bank, the governments involved probably collapse and there's likely to be a war, so who gives a damn -- go for it!" Isn't that what Weimar did after WW1? At first it seemed like a good idea, then blew up in their face in 1923. At first, leverage seems like a good idea, but eventually blows up in their face. Simpson or Bowles said there is no more than 2 years before it blows up and we have a recession like we have never seen before. 1923. 2013. Not repeating, but rhyming. Alan Greenspan came up with his Whip Inflation Now button when Ford was President. It wasn't until 1979, when inflation was threatening to blow off the top of the chart, that the political will existed to ratchet up interest rates and crash the economy, to stop an inflation spiral. There is no will to do anything now, because it is a Presidential election year. The automatic cuts only add up to 120 billion dollars. Unless the gloves come off in January and the government levels with the American people, it is just simply going to blow up when it blows up. 2011-12-21 09:51:10 Permalink
Sean Posts: 1765 Incept: 2009-04-21	Quote: that the political will existed to ratchet up interest rates and crash the economy, to stop an inflation spiral. There is no will to do anything now, because ... Because to do so would literally nuke the gov income and what it must pay in interest on its debt! ---------- * I think Ann Barnhardt is more and more right. God help us! * Progressives / Marxists / Communists are many things, STUPID and IMPATIENT are not two of them. * A hot civil war is coming. * And people wonder why I prep! Last modified: 2011-12-21 10:19:59 by sean 2011-12-21 09:54:10 Permalink
Winstonsmith2009 Posts: 1060 Incept: 2009-08-05	Could this action have been the reason for this event yesterday? "The chart below represents the bid to cover (9.07) on the US 4 Week Bill auction. Needless to say, the US just sold $30 billion at a yield of 0.000%." http://www.zerohedge.com/news/something-.... 2011-12-21 09:57:58 Permalink
Flappingeagle Posts: 1224 Incept: 2011-04-14	Quote: The market appears to have discerned that the European area banks have literally pulled the pin on a financial doomsday trade. I made a post that this was happening last week. The banks have made, and are continuing to increase, a bet on the surviving side of the end of the world. If they are right they win big, if they are wrong they don't have to worry about paying. From where they are sitting it is a no-brainer bet for the most part. The only way that I can see for it to be a stupid bet is if somehow the countries muddle along making some other strategy the best route to take. I can't figure out what that could be though. Merry Christmas; Flap ---------- Here are my predictions for everyone to see: S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu. "You can't build a house of cards on a shaking table." - Tony Johns The January 2015 AMZN put at $130 (cost $4.25) will be a winner. 2011-12-21 10:25:48 Permalink
Vitchilo Posts: 4576 Incept: 2011-04-27	And what happens if S&P/Moody/Fitch downgrades all of Europe ?? Kaboom? ---------- "Every normal man must be tempted at times to spit upon his hands, hoist the black flag, and begin slitting throats." -- H.L. Mencken 2011-12-21 11:05:56 Permalink
Jal Posts: 512 Incept: 2009-03-25	Will the 3-year liquidity operation by the ECB be leveraged? I see a shell game in which the countries with no money say here is some money for the pot but they don't have any money to put into the pot. Then, I see those same countries taking their bad investments and putting them in the pot and getting good 100% securities in exchange to make their balance sheet look good. The only thing that has happened is that someone has made some more commissions. Since the only thing that was put into the pot is only a promise that cannot be keep then if the fund blows up with all those bad investments ... the financial business will be saved. 2011-12-21 11:14:30 Permalink
Andyc Posts: 333 Incept: 2010-10-24 Banned	I wonder of this would have put Corzines trades in the black? Not that he would have unloaded them I'm sure he would have bought more of this junk. They get bailed and they buy more of the exact same soon to implode junk, its like a perpetual motion moral hazard trade. Trololo Fail for 10 Hours http://www.youtube.com/watch?v=gkfVdrtLc.... This stick save may take longer than that to fail, a month maybe?, but it will be just as excruciating to watch as this clip. : ) 2011-12-21 11:16:38 Permalink
Snowmizuh Posts: 1351 Incept: 2009-03-18 Alabama	I'm starting the think the only limit on this behavior is 64-bit architecture. 2011-12-21 11:28:36 Permalink
Grf Posts: 1337 Incept: 2008-12-08	^^^Comedy gold right there. ---------- "Every time we on TF talk about God and gays, God frees a banker and gives him a bonus." --me "Your farts are interstate commerce and if they want to stick a muffler up your ass they will do it." --Boughtthefarm 2011-12-21 11:45:58 Permalink

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