The Emperor is Wearing No Clothes

As I’ve covered in pretty excruciating depth these past few weeks, the Euro in its current form is sliding unrelentingly into the grave.

Some traders seem pretty excited about that eventuality.

Why? There’s plenty of money to be made killing the Euro, (just like there was plenty of money to be made in naked-shorting Lehman brothers to death):

Markets are ruled right now by fear. Investors: the big money, the smart money, the big funds, the hedge funds, the institutions, they don’t buy this rescue plan. They know the market is toast. They know the stock market is finished, the euro, as far as the Euro is concerned they don’t really care. They’re moving their money away to safer assets like Treasury bonds, 30-year bonds and the US dollar.

I would say this to everybody who’s watching this. This economic crisis is like a cancer. If you just wait and wait thinking this is going to go away, just like a cancer it’s going to grow and it’s going to be too late.

This is not a time to wishfully think the governments are going to sort this out. The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.

A few points:

“They’re moving their money to safer assets like Treasury bonds, 30-year bonds and the US dollar.”

Safer assets like the US dollar? Sure, that’s what the textbooks tell you has been the safest asset in the post-war era. But are they really safe assets? On dollars, interest rates are next to zero. This means that any inflation results in negative real rates, killing purchasing power. Let’s have a look at the yields on those “super-safe” 30-year bonds:

At 2.87%, and with inflation sitting above 3.5% these are experiencing a net loss in purchasing power, too. Yes, it’s better than losing (at least) half your purchasing power on Greek sovereign debt, or watching as equities tank. But with the virtual guarantee that stagnant stock markets will usher in a new tsunami of QE cash (or better still, excess reserves) expect inflation, further crushing purchasing power.” 

“The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.” 

Well Goldman Sachs are the ones who convinced half the market to price in QE3. And they’re also making big noise demanding action in the Eurozone. I’m not denying Goldman don’t have massive power — or that they are ready and willing to book massive profits on Eurozone collapse. But — like everything in this crooked and corrupt system — they are vulnerable to liquidity crises triggered by the cascade of defaults that both myself and Tim Geithner (of all people) have talked about over the past week.

Of course, we all know that as soon as that tidal wave of defaults start, global “financial stabilisation” packages will flood the market to save Goldman and J.P. Morgan, and anything else deemed to be “infrastructurally important”, and survivors will take their pick of M&A from the collateral damage.

And kicking the can down the road using the same policy tools that Bernanke has been using for the past three years (i.e., forcing rates lower and-or forcing inflation higher) will result in harsher negative real rates — making treasuries into an even worse investment. Eventually (i.e., soon) the institutional investors — and more importantly (because their holdings are larger) the sovereign investors — will realise that their capital is rotting and panic. In fact, there is a great deal of evidence that China in particular is quietly panicking now. The only weapon Bernanke has is devaluation (in its many forms) — which is why he has been so vocal in asking for stimulus from the fiscal side.  

And — in spite of the last week’s gold liquidation, as China realised long ago — the last haven standing will be gold. Why? Because unlike treasuries and cash it maintains its purchasing power in the long run.

The Emperor is wearing no clothes.

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11 thoughts on “The Emperor is Wearing No Clothes

  1. This trader seems pretty smart. Though I have some questions; he said that times like these are perfect for making fortunes, but then he went on about investing in Treasury bonds – which are only for preserving your wealth on the very short term (return-of-capital instead of return-on-capital, as on the very short term the US appears more solvent than EU banks). I wonder though what trades he had in mind for making said fortunes in times like these.

    • Buying out of the money puts in things like the S&P, Euro indices. Credit default swaps. Shorting all European financials. Double short ETFs. And yes, he included buying U.S. Treasury bonds and the dollar, the two biggest bubbles in history.

      Certainly there is some money to be made. Treasury bonds and the dollar are by no means the way to make it. As I detailed in the article, negative real rates mean you don’t even get return-on-purchasing power.

  2. I like triple shorts myself :). The only downside is that they’re more vulnerable to short squeezes like the gibberish that went on today.

  3. “And kicking the can down the road using the same policy tools that Bernanke has been using for the past three years (i.e., forcing rates lower and-or forcing inflation higher) will result in harsher negative real rates — making treasuries into an even worse investment. Eventually (i.e., soon) the institutional investors — and more importantly (because their holdings are larger) the sovereign investors — will realise that their capital is rotting and panic. In fact, there is a great deal of evidence that China in particular is quietly panicking now.”

    — Truth!

  4. Good work picking up that BBC interview. I don’t usually watch TV during the day (honest), but I happened to catch that and my jaw dropped too. Also, shortly after the interview, when they did the routine round-up of ‘the markets’, along with the FTSE, Dow and Nikkei, they also showed the price of gold. I can’t remember ever seeing that before. Interesting editorial decision.

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