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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (103571)	10/28/2011 8:51:39 AM
From: RetiredNow	Respond to of 149317

Hi all, before you all start giving each other high fives over the recent stock market action, put your cautious glasses on. I've been saying it for weeks now that the answer to too much debt is not more debt. Kicking the can down the road may delay the reckoning, but it doesn't eliminate the root causes of the problems that will eventually ensure the reckoning happens. The only way to really solve this problem is to wipe out the shareholders and the bondholders. That sounds radical, but they are the ones who took too much risk. It shouldn't be the tax payers that have to bear the consequences of stupid decisions by banks and sovereign nations who levered up too much to make stupid investments and expenditures. Before You Get Complacent With The Rally... Let's flesh out this morning's Ticker on the European "deal", shall we? Greece is "saved", right? Well, maybe. It doesn't really matter though, and here's why, after I went through everything I could find on the "deal" along with the general conditions that are left in Europe after today.. The "bailout fund" (EFSF) is levered. This means that whoever funded the thing (duh!) is going to take first loss up to the unlevered portion. In this case since the leverage will be 4:1 or thereabouts the first 20-25% will come right out of the funding parties hides. Oh, and after that 20 or 25% loss? *The fund collapses!* It only addresses Greece. That's both good and bad. Good, in that it successfully "kicks the can" on Greece for a few years. Bad, in that it leaves unaddressed (and unaddressable!) Italy and Portugal, to name two other problems. The speculators will go after the other nations involved. Bet on it; Portugal, in particular, has really stinky economic fundamentals and Spain isn't that much better. There's an old saying by "Scotty" on the USS Enterprise that comes to mind: Captain, we cannot withstand another attack! Yep. Those people who bet correctly on the CDS got screwed. There's "voluntary" and then there's voluntary. If I shove a gun up your nose that's not exactly voluntary, but that's the deal here. Either take this "bargain" or you'll get nothing, and by the way, you can't collect on the CDS either. What's worse is that it appears the ECB doesn't get haircut at the same time everyone else does. This not only eviscerates the CDS market it also eviscerates the priority of claims - not that this is anything new (cough-GM-cough!) for the powers-that-be. There are some people, however, that will get *severely hurt* by this little fiasco despite taking the correct moves in in the market. Beyond the ethical issues there's a systemic liquidity issue here that is underappreciated: You generally only get to screw someone once - they don't come back for seconds. I'll go out on a limb: The rally today is massively overdone and the market will figure it out soon enough. Most of this today looked to be the machines playing off the Euro/Dollar cross, which is the usual pattern - dollar goes down and Euro goes up, market rockets higher. We shall see how this all plays in the next days and weeks, but my best guess is that this is very similar to some of the "bailout" announcements in the 2008 timeframe when we got moonshots in the market but the liquidity damage was *far* more important. It took a while before the latter became evident, but it did in good time and when that showed up the consequence was ugly. I think we're headed for the same sort of "event" in the coming weeks, but there may be some delay. I would not be terribly surprised to see a moderate pullback and then one more good push higher before people figure out that the next target in Europe has been lined up and the cannons made ready. Don't get complacent folks - this isn't over.