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EURO EXPERIMENT: EU Bullied into $1T Banking Bonanza.
Like a chess game, the bankers called ‘checkmate’ against the EU political leaders on Friday May 5th, 2010. Two days later in an urgently called weekend meeting the EU finance ministers hurriedly announced the biggest bailout in history.
Most people take more than two days to buy a car, but the frightened EU officials were pressured into reacting before the Asian markets opened Sunday evening. This is eerily the same scenario we saw on the eve of the US $700B TARP ratification, the Bear Stearns takeover, Fannie /Freddie Conservatorship, AIG Bailout etc.. A coincidence – Yeh right!
How was this pressure applied? Who has such power? Who won and who lost? As I explained in “Extend & Pretend: Shifting Risk to the Innocent”, it is all part of the dynamic new market strategy of Regulatory Arbitrage. You had better learn how the game is played or you will be toast.
For the accompanying slide presentation see: Tipping Points – Commentary
"Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that.
Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do.
So basically Goldman can create shorts faster than Europe can create money."
Jim Rickards CNBC 05-10-10
Former LTCM General Council
Prior to the May 5th, 2010 Flash Crash where the DOW dropped a record 1000 points in a matter of minutes, I wrote in “Extend & Pretend: Shifting Risk to the Innocent” why this was going to happen. The market reacted in a perfectly predicted fashion and was the result of the same parameters that caused the 1987 record one day market drop. In 1987 it was caused by Portfolio Insurance and today it is about Dynamic Hedging (son of Portfolio Insurance). Yes, High Frequency Trading (HFT), and Dark Pools are involved, but only to the extent that they are part of the continuous refinement of the Dynamic Hedging process.
Dynamic Hedging is a key tool in applying political pressure, which is critical to the success of the three step process I will refer overall to as Regulatory Arbitrage.
The Flash Crash came on a day when the Dow was already down nearly 300 points, Greek rioting pictures were on all TV channels and the markets over the previous week had given up all the year-to-date gains. At the May 7th EU summit meeting however; it did not escape EU leaders that the sell-off the day before came with the early polls from UK elections that signaled a potential minority party win by the Conservatives. The poll results spooked the market since this and critical German elections in North Rhine-Westphalia on Sunday could potentially make EU leadership a lame duck and further spook financial markets. The EU leaders felt so forced to take action that they arguably violated (expect it to be challenged in German courts) the EU constitutional agreement.
“ … a battle of the politicians against the markets. I am determined to win”
German Chancellor Angela Merkel
“…unfounded off-the-wall suggestions and speculation”
EC President Jose Manuel Barroso
“…confront speculators mercilessly … know once and for all what lies in store fro them”
French President Nicolas Zarkozy
It is pretty scary that EU leaders felt they had to go to such an extent to demonstrate action. They were running scared due to a well crafted international banking strategy.
The pattern has become so consistent and predictable that I am able to flowchart the steps.
Let me briefly outline how the Regulatory Arbitrage strategy works. For those that may argue that international banks are not that well coordinated to implement such a strategy, then you might want to view this process in a bigger context of what modern day international banking has evolved towards, by the simple imperative of the pursuit of profit maximization and the advancement of technology. It is today’s version of Adam Smith’s ‘invisible hand’.
THE INSIDIOUS PROCESS OF APPLYING PRESSURE
I detailed in “Extend & Pretend: Shifting Risk to the Innocent” the central elements of Dynamic Hedging, Capital and Regulatory Arbitrage. Each has a specific role to play in the process of applying pressure towards the ultimate goal of shifting risk from private hands to public hands. This risk is assumed as part of a “Risk-On” strategy via high levels of leverage to generate trading profits and investment fees. These high risk speculations which would be classified in previous years as pure speculation need to be turned into investments. The way you turn a speculation into an investment is to remove the risk.
When you gamble in a casino you are speculating. The risk is high and against you. To make gambling an investment is about reducing the risk. If you could ‘card count’ which the casinos ban, you decrease your risk. But it is still speculative. If you had weighted dice on the craps table you could also reduce risk, but there would still be an element of speculation. If you fixed the roulette wheel so you knew where it would stop, you are no longer gambling – you are ‘investing’. To have a high probability outcome that is known in advance is investing. The international banks are turning gambles into investments by the following process of guaranteeing an outcome. In less polite circles and street parlance it is referred to as ‘rigging the game’.
“Chess players think 3-4 moves ahead. Chess Masters not only anticipate their opponent’s moves but force them to make specific moves that guarantee a checkmate”
See Slide Presentation: Tipping Points: Commentary
THE CLASSIC TELL TALES OF PRESSURE
David DeGraw reports at Amped Content:
Tyler Durden reports at Zero Hedge:
Max Keiser who has written and authored Program Trading and HFT computer algorithms states:
DeGraw reports at Amped Content:
THE EURO BANK BONANZA
The “Speculators” made huge profits on the CDS run up, followed by horrendous profits on the plummeting Sovereign Debt Rates. If this isn’t enough, they then profited on financing the whole bailout including getting the ECB to accept repos on questionable assets from the banks. (5) Alarming?
publicized but crucial part of the deal is the move by the European
Central Bank to start buying not only government bonds of hard-pressed
countries like Greece, but private assets as well. This move--a
total reversal of longstanding policy--mirrors the action of the U.S.
Federal Reserve. Since the crash of 2008, the Fed has purchased more than
$1 trillion in mortgage-backed securities--aka: toxic assets--as part of
its endless transfusion of cash to U.S. banks. Now the European Central
Bank is doing the same to keep European banks afloat. (And not just
European banks: U.S. banks are deeply tied to their European
If this hasn’t alarmed you, add the fact there is strong evidence that the international banks have been short the Euro throughout this whole process and continue to be short. If recapitalizing the International banks was an objective, the European Crisis has answered those prayers.
IT MAKES NO SENSE
After the $146B Greek Bailout was announced and prior to the nearly $1T EU bailout the NY Times reported:
The above activities are as much a shift in modern Capitalism as a strategy of the global banks. When you make capital cheap and ubiquitous as we have over the last fifteen years, it changes investment strategy and behavior. It is more profitable today to speculate than make long term wealth generating investments such as factories and production which would create jobs. Long Term investments come with delayed profits and on-going risk. Speculation can be shifted to Investment by reducing the risk of the speculation. There are a number of ways of doing this. Risk is reduced by ‘stacking the deck’ or as in a carefully strategized chess game, by forcing your opponent to make specific moves that delivers the banks the game winning checkmate.
The only way to protect yourself from this money printing ‘speculative’ game is through the purchase of the only asset that is not someone else’s liability – Physical Gold and Silver. It however should be seen as an insurance play versus an investment since it protects your wealth versus realistically increasing it. In today’s Kondratieff winter, protection should be considered the goal.
The Cover pages of all German newspapers – “there are 99 headlines blasting the rescue for 0.5 praising it’ (9)
(1) 05-11-10 ECB risks its reputation and a German backlash over mass bond purchases Telegraph.co.uk
(4) 05-10-10 maxkeiser.com
(6) 05-06-10 The CDS Traders' Verdict Is In - UK In Deep Shit... As Are France And Deutschland Zero Hedge
(7) 05-04-10 In and Out of Each Other’s European Wallets NY Times
(8) 05-11-10 It Is Getting Ugly Quick In Fiat Land: S&P Now Down 8% YTD In Non-Dilutable Terms Zero Hedge
(9) 05-04-10 Greek Rescue Package Insufficient Will Need More Money Zero Hedge
For the complete research report go to: Tipping Points – Commentary
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The previous Euro Experiment article: 8 Financial Fault Lines Appear In the Euro Experiment!
Gordon T Long
Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development & application of Chaos Theory and Mandelbrot Generator algorithms.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, you are encouraged to confirm the facts on your own before making important investment commitments.
© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
Copyright and Disclaimer
© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.