Wednesday, November 16, 2011

We’re In The Middle Of A Run On Europe—And It’s Gonna Get Worse

Specifically, a run on European debt.

So this morning, I woke up—hung over and alone, except of course for the Nympho Twins and the Thai hooker they insisted we hire last night—and was confronted with some bond market action that was . . . absurd.
Yeah, I know: A spread like that
doesn’t seem humanly possible.

Actually, kind of scary.

Yeah, Italian bonds are back to yielding over 7%, Greek debt is ludicrous (28.85%? Really?) as it has been for the last year, Portuguese 10-years are at 11.29%, the Irish at 8.20%, Spain at 6.33%—numbers that more or less fit where we are supposed to be insofar as the PIIGS are concerned, following the whole Greek Drama and Italian Farce, right?

So what’s up with Austria’s debt? Nevermind France’s debt, which is of course higher because of the whole Italy thing—what about Holland’s debt? Finland’s debt? In short, what’s going with the debt of the non-PIIGS who are not Germany?

Take Austria: Their 10-year is yielding 3.63%—which is 186 basis points over Germany’s 10-year, which is at 1.77% as I write: In other words, Austria’s debt is yielding over twice Germany’s.

What was the German/Austrian spread on, say, September 1? A mere 67 basis points, on a German yield of 2.15%.


France is seeing historic spreads this morning with the 10-year yield at 3.67%, and Holland—Holland!—seeing wicked spreads as well. Christ, Holland is essentially Germany’s Germany insofar as fiscal prudence is concerned—and the Dutch yield is surprisingly wide.

Check out this quick-and-dirty chart, comparing spreads today to spreads back on Sept. 1:

Click to enlarge.

All of these spreads are at or scraping all-time highs. CDS’s are also up across the board—even though the two new governments in Greece and Italy are making all the right noises about Austerity and Fiscal Discipline and such.

Again, WTF?

All of these facts and figures and information floated in my head, until all of a sudden, it snapped into place:

We’re about to have a run on the eurozone bonds.

Like, now—unless somebody does something about it.

The “somebody” of course is the ECB: The European Central Bank has to go out there and put a stop to this incipient run—today.

Why today? Because tomorrow the French are gonna go out and hawk something like €25 billion in two-to-five year debt; the Spanish are also putting out something like €4 billion. Here’s a link to a handy chart, courtesy of Zero Hedge.

What will happen if this incipient run isn’t nipped in the bud? The French are going to be up shit’s creek tomorrow, November 17—and from there, it’s only a matter of time before the eurozone disintegrates.

At my Strategic Planning Group, we’ve been putting together contingency plans for the break-up of the eurozone. All the analysis is in the “When The Euro Breaks” scenario at SPG—from the best case, to the worst case, to the really worst case.

But up to now, those contingency plans for the break-up of the eurozone were something that I honestly thought wouldn’t need to be applied any time soon. Eventually, yes, of course—but not so soon. Like planning for the end of the world, or for your own death: You know it’s gonna happen eventually, just not as soon as it actually does.

But now? Sheesh: If the European Central Bank acquiesces to Germany by not going out there and stabilizing the bond markets with some fairly massive purchases, then we are going to see a run on the eurozone bond market. And it’ll be just like the 2008 Global Financial Crisis—only instead of conventional weapons (plain old mortgage bonds), this crisis will be with nukes (European sovereign debt).

In a previous post, I’d been thinking that—since the European leadership is so keen to avoid any type of Lehman-like event, and will do literally anything to prevent such a triggering crisis—the likely absence of a trigger might actually prevent a collapse. But now, that might be wishful thinking: An avalanche happens not because a gunshot sets it off—it happens because all of a sudden, there’s simply too much pressure.

Like what’s happening this morning in the bond markets: No gunshot—just an avalanche.


  1. The contagion is spreading rapidly. It is amazing to see bonds rise on the stronger countries in Europe. Great colored picture I came across yesterday on the debt to GDP levels of the European Union:

  2. Said this exact same thing in the newest bears vid. Great minds think a like.

  3. Multiple system organ failure, a situation familiar to trauma surgeons, is when a traumatic event triggers systemic events in major organs that cannot cope with the overwhelming stress. The stresses mount as one organ after another fails, increasing the stresses on the remaining functioning organs, until the unfortunate patient - hooked up to every IV and medication known to man, and surrounded by every specialist that can be found, encircled by screaming familiar members - collapses into the final death spiral. That's multiple system organ failure, MSOF. Google it; you'll learn a lot. And if you understand fractals, you'll understand how nature likes to repeat herself, even in the deepest vaults of the banking universe. Somebody please look at the clock and tell me when to "call" this code.

  4. This is the death spiral that will finally hit the American banks that loved to gamble so much.

  5. Don't get so worried. Banks are just selling Euro sovereign debt generally, to move towards compliance with Basel 2.5.

    Also, sovereign risk is being recalculated.

    PIGS are still collapsing, sure. But the downmove in the more rock-solid sovereigns (along with the newfound hyperlove of bunds) indicates this is just a rebalancing thing.

  6. I thought you were going to stop writing if we didn't get hyperinflation by the end of this year...

  7. "We’re about to have a run on the eurozone bonds."

    Gonzalo, you are half right. The truth is more in the ballpark of "We are about to have an organized raid on the EZ bonds", that taken together with the organized EURUSD push to 1.30 until December is just what happens when you have a "half spontaneous collusion" of trading interests.

    Fact is most of this EuroCrisis is a wonderful money making opportunity for our beloved great global banks.

  8. I think the system will somehow, steal the money from the savers and give that to the spenders. This is a crazy, criminal and unpredictable world. The most difficult item to falsify, devalue and diminish is gold, under the floor board on your property. The rest is fair game for the predators and believe me, they got more skill in taking from you, than you would ever have watching your savings.

  9. The only option left is to print Euros 24/7 and attempt to devalue the continent back to prosperity. The U.S. is running that very play right now and will continue to do so until the dollar collapses in a crash of worthless bonfire paper. For the record, no country in history has been able to devalue it's way into better shape and in every such instance the end result was total destruction of their currency and political system.

  10. Hello,

    I'll cut a bit out of the comment I made on GL's post on the Euro Debt Crisis:

    German, French, British etc banks, and US banks via CDS bookmaking operations, lent-insured money to other countries recklessly. They looked the other way when Goldman helped Greece's right wing government defraud its way into the Euro Zone. They profited greatly from this fraud. If they are now insolvant they deserve to go bankrupt. Society, in fact, needs them to go bankrupt. Individual bankers that were involved in fraud should be prosecuted and jailed. In a healthy society, this would otherwise be known as Justice.

    Germany should not print to save these banks. Nor should it tax the German people for this purpose either. Any pain Germany and other exporters suffer from letting these banks go will be self inflicted for their not having properly regulated these banks in the first place.

    GL, along with TPTB, is in a panic about the "pain" we'll all suffer if a "credit event" happens. But Pain, we should understand, is a good thing. Ask any biologist. Ask any parent. Pain fixes the collective mind of a population, and of a child, not to do the same foolish or selfish thing in the future. Pain, like Angst, liberates.

    If some of Germany's present prosperity is a result of the extention of fraudulent credit, then Germany's pain, when the credit is withdrawn, will be instructive and positive. It will come about justly, through the application of justice upon the banks.

    In healthy societies, the hirearchy of values demands that Justice take vast precedence over short term economic comfort. Arguments to the contrary reveal who and what you are. People say, but if we allow Justice to happen there will be a "credit event". How petty our societies have become.

    In the long run, Germany will not prosper by selling things to people who do not have sufficient real wealth, as opposed to more credit, to pay for these things. Prolonging a fraudulent credit system to sell VW's is not economically wise. Neither is throwing whole populations under the austerity bus politically wise either.

    Deep down Germans know both these things. They know what happens when you print money to prolong a disfunctionally indebted economy, cf 1923. They also know what happens when you throw the mass of ordinary people under the austerity bus to balance a budget, cf Bruning and von Papen, circa 1930-1933.

    Germany should not print money to prolong a bankrupt, criminal financial system. Germany should not print money so as to give this system a second chance to catch its breath and then go on to do more damage to real people who work real jobs in the real economy.

    Advocating steps which could lead to hyperinflation will only aid and abet the banks.
    The world will not end if these banks go out of business. In fact, History suggests there is much more long term risk in helping them stay alive.

    This crisis is only a threat to the banks - and to those who have invested under the assumption that there will always be another bailout. Of course, it does represent temporary economic pain in the real economy. But, as I said, this pain should be welcomed. The Germans, the French, etc are great nations with very long and distinguished histories, who have accomplished great things and lived through far worse things then "credit events" which primarily affect bankers and those who placed bets on never ending bailouts.

    If this Ponzi financial system in tottering on the brink, don't save it. Rather, I say, lets give it a push.



  11. As a not rich German I am quite fed up with all that babble about impending catastrophes. As I see it, this only serves the parasites to rob more easily from the producing class. And maybe lets some analysts feel wise and some politicians feel competent.

    To my understanding, if any country, bank or person cannot pay its debt, then the borrowers and nobody else should have to bear the consequences. Everything else is fraud.


  12. As a Catholic I resent you using Christ as an oath in this article. [Oops I forgot you are Catholic too!] OK then.....
    Congratulations GL on an other step forward for diversity.

  13. The European banksters will force gold and silver prices down to show that their debt crisis has nothing to do with real money.

    However those with common cents who put that money to work during the forced decline should benefit greatly as people slowly awake from their stupor and put fear aside.


  14. "In healthy societies, the hirearchy of values demands that Justice take vast precedence over short term economic comfort. Arguments to the contrary reveal who and what you are. People say, but if we allow Justice to happen there will be a "credit event". How petty our societies have become."

    This paragraph sums it all up. The same as the millions of (non medical reason) overweight that have it within their power to eat less, more healthy and exersize regularly (common sense to everyone, no?) ... but never will because the mindset throughout most of the world is; "pleasure first".

    Whether this happens tomorrow, next week or 2 years, is all that your debating. Unless the "mindset" of the masses changes dramatically (not gonna happen, because thought to action won't come fast enough). It's just a matter of when everyone goes on a real strict diet!

    btw, great article ....

  15. Lightner said (@11:53am)"To my understanding, if any country, bank or person cannot pay its debt, then the borrowers and nobody else should have to bear the consequences. Everything else is fraud."


    Lenders AND borrowers should bear the consequences.

    Anyone stupid enough to lend to a bankrupt, drunken sailor (for example) should be fully prepared to bear the consequences of a default.

    If you can't afford the loss then don't make the loan.

    In that simple context is the heart of this entire, ongoing financial-crisis shit-storm.

    Large entities that have risked far more than they could ever afford to lose now face losing it. And they are not prepared to bear the consequences.

    Worse yet, our glorious political "leaders" are prepared to do ANYTHING to prevent the kind of pain & suffering that will cost them their chance of re-election.

  16. Just wait till the yields start up significantly in the US. School will be out,, CA, IL, NY,FL, and a whole slew of states will bomb out--Meredith will be proven correct--she was just a bit early due to the machinations of the illegal and unconstitutional FED kicking the can.
    --The FED is ownde by the Big Banks--
    --The FED gives our money to the Big Banks--
    --No money gets to Main Street--
    --There will be no jobs till interest rates normalize to 4-6%. 70% Jobs come from small [Main street] businesses. --
    --The money to capitalize those businesses comes from small savers --middle class and pensioners in CDs in regional/local banks and Credit Unions--
    --We should all take our money out of the big banks who gamble with our money [no more Glass-Steagall]--And put it into the local banks and Credit unions.
    Regain your independence--save your savings--TAKE YOUR MONEY OUT OF THE BIG BANKS NOW!

    send this viral...

  17. It seems like we are waiting endlessly for EU politicians to finally get the courage to do what UK & US have done to "recap" their banks ... print money like it going out of style (because it is).
    Unfortunately, not enough attention is being paid to the fact that this is the wrong strategy. The global economy is going through a systemic phase change, not just a bad business cycle recession.
    Just the amount of debt we know about is simply unpayable, and the big banks are beyond saving both from moral and practical standpoints.
    A third grader can understand that you can't fix a debt crisis with more debt. Just like you can't unflood your basement with more water.
    Therefore, instead of joining the printing party, the EU should declare a bank euthanasia day, and nationalize all the suspect banks. Ideally, the US and UK would join them. They should keep the banks operating in a receivership while bad assets are quarantined in a bad bank entity of some sort. This entails huge write offs of all bad debts. The good parts of the big banks should be spun off into various new banks that can function sustainably.
    At the same time a global Glass-Stiegel should be implemented separating investment from retail banking, and brokerages from taking positions against their clients. The banks would be reconstituted along these lines. This bankruptcy process is basic to a capitalist system: its been done thousands of times before, with very positive long term effects. Although maybe not on a simultaneous pan-global scale.
    The best thing about this approach is the taxpayers do NOT take on the debt: it is expunged from the system. The shareholders, bond holders and management are the ones who take the losses. That is good because they are the ones who screwed up in the first place.

  18. I agree with Unna above.

  19. Roy Cobden said... (November 16, 2011 2:24 PM)

    "Lenders AND borrowers should bear the consequences."

    .. of course I agree with you (and will try next time not to be overly simplifying :-)

  20. I believe that Bernanke's Fed and the ECB will attempt to print their problems away, taking care to recapitalize European banks. I look for this coordinated action to take place within weeks. Italy and Greece will be given the choice of accepting socially dangerous budget cuts or leaving the Euro. I believe both will accept the deal and stay. Lets see if their societies hold together as they both enter deep Depressions and their social programs are sliced like a provolone. Soon enough, Portugal & Spain will share Greece's fate

  21. Balanced budget amendment, financial regulation, super committee, stimulus, Glass Stiegel, the Federal Reserve, Ellen Brown, ... what a bunch of bull shit.
    Fiat money and fractional reserve banking are the enablers of this world wide banking fraud.
    Andrew Jackson had it right when he gathered the Federal Reserve and banking leaders and called them thieves: "Better to get rid of tens of thousands of you than to let you steal from hundreds of thousands".
    He then abolished the Federal Reserve, but fell short by not outlawing fractional reserve banking.
    Want to fix the system?
    Gold standard, no Federal Reserve and execute anyone that practices fractional reserve banking.

  22. "So this morning, I woke up—hung over and alone, except of course for the Nympho Twins and the Thai hooker they insisted we hire last night"

    Sound like fun to me!

  23. So... what's the best way for Joe Hometrader to make $$ on the impending doom?

  24. Mathematics trumps politics again. Just default and reorganize under austere budget conditions. Proponents of socialism and the Nanny state will soon realize they are now responsible for their own actions and take fewer risks to ensure their health.

  25. A stunning post from Unna. Thank you for your brilliant summary. I'll try to help you push. m

  26. In Holland ("The Netherlands"), parlementarian and eurohater Geert Wilders wants to know if giving up the euro and thus returning to the Dutch Gulden might turn out positive for the Dutch economy, after weighing costs and benefits. He has asked London-based eurosceptic (!) Lombard Street Research to find it out. If it turns out that returning to the Gulden renders positive, Wilders wants to call for a referendum on the euro.

  27. If you think Europe's debt is bad, look at the USA. Just how extreme is the US debt obligation? It’s about 15 trillion dollars and rapidly climbing. A trillion is a number so large it’s hard to grasp…but let’s try. A trillion dollars is a thousand billion dollars (1,000,000,000,000). If you were to spend a million dollars a day for the next 2000 years how much would you have spent? Let’s do the math. Two thousand years X 365 days per year X one million dollars per day would equal a whopping 730 billion dollars. That’s about ¾ of a trillion dollars and represents roughly the US bank TARP bailout amount in 2008. The annual US federal spending is about 3.8 trillion dollars. Government spending exceeds the budget by 1.3 trillion dollars. If the government didn’t borrow to cover the deficit, every household in America would have to pay approximately $11,000 in additional taxes. Experts anticipate that excessive deficits of this magnitude will remain on the radar for years to come.

  28. That comment by DDT is profound: "You can't unflood your basement by adding more water". Indeed, you can't, but you can make things "fair" by getting your accommodating central bankers to flood all the basements in the neighborhood. And "fair" is what many people want.

  29. Brian Pretti at Contrary Investor is fond of saying "liquidity is a coward ... whenever you need it - it's not around". That's basically what's happening with European debt. Everyone is dumping it now. This sage will go on - until European politicians finally face reality and throw some countries out of the union.

    And since YOU did bring up Jesus in your article ... what did he say about this?

    "Give to God what is due to God, and give to Rome what is due to Rome".

    I would say that Rome is due for some serious fiscal austerity. And it will be administered - one way or the other.

    As for God ... there are many bankers and politicians who should be on their knees and praying at the current time. The list of their sins of extravagant.


  30. Wow! Great article and brilliant comments on the article. I hope all of you post on other sites, too. This world need more idealists like you!

  31. "If this Ponzi financial system in tottering on the brink, don't save it. Rather, I say, lets give it a push.- by Unna"

    Another great article GL.
    Unna among others had meaningful comments. I
    especially like Unna's closing.

    This is what I see. I see a snake, but I can't see the head or the tail. Can't determine if it is a rattle snake or cobra. All I see is the tail.

    Since the head is not visiable, it is hard to decide when it will devour the rat of our troubles and then bit me!

    sssss - I recently found a very long skin of a bull snake on my work shelf in the basement.

    Kansas out.

  32. Yeah right....some pompous puke who appears to live in an apartment building and runs a clunky website so full of crap advertisers that it hardly loads is asking $500 for his advice. Talk about hubris.

  33. You named your hands the "Nympho Twins?"

  34. The Eurozone has nothing to fear. Just like I said was going to happen, Euro issues will take down Fed primary dealers. Boom, MF global is dead. Who is next....?

    The ECB aint going to print so there ! Let the chips fall where they may.

    So there is a run on Euro debt..Ok what is the projected yield going to be on the US 10 year because of course, all of this Euro bond money will escape to the US markets. Negative 5 ?

    If the ECB stays out then the whole system is doe and the new system is born.

  35. AND...while the batton get passed around Euroland like a hot spud in an Irish soup kitchen....Our favorite Asian Dragon is sitting pretty with its multitude of sovereign reserves and stockpiles of hard commodities including PM's..just waiting for the loud crack of the split.. rendering the 17 nations assunder together with its Atlantic cousin and distant relative cross seas Superpower. A bitter pill to swallow for the Western Nations.

    The biggest risk is not concentric to the EU it has become a "Worldwide" concern. Pressure from G20 or IMF cannot pursuade the outlaws nor their respective citizena' to accept/adopt austerity and recapitalise post-haste.
    It is after all a contagion of FEAR...which has spread like wildfire from the insipid and self absorbed attention seeking scumbags who want their respective 10 mins of fame and recognition.
    Looking through the events of the recent weeks/months...there is IMHO ..more threat from the powers that be... that maybe they can't/wont do the required or the expected or the enacted necessary when and as required. The world could very well become a hot pot of numerous issues too big to resolve in isolation or cumulatively as one has literally fed and gorged on the other.
    As far as getting worse....hmmmmm. This time mes amis...this time....there may be just too many problems to resolve simultaneously. Stability has diminished to a nano second of what was previously a given 6 months. The proverbial could very well hit the fan and its gonna stink up not just EUR but the whole goddamn world.

    BUT then again...these are just the markets and they can be unforgiving. Everyone knows what to expect...almost written into the pricing. Capital has to find its price...thats just the way markets work.

    So lets play devils advocate...and play the contrarian card. ST resolution, prices adjust...financials recapitalised...and....THE MARKETS TAKE OFF.....BOOM.....In this day and age....we gotta learn to expect the unexpected. This works for both the Good...and the Bad...and the Less Bad. More importantly it is a salient reminder that we are all alone. There is no guaranteed backstop anymore.

    I'm currently a pessimistic optimist.

    Liquid Motion

  36. Ha-ha-ha, you're going insane, buddy.

    Don't worry, the world IS going to end, but not on Nov 16, or 17, or 18-20 either. Promise. Just chill out, OK?

  37. Whatever happened to GL's hyperinflation forecast for 2011? Where is the inflation? Where is the 10% CPI? Why are there no more updates on the topic?

    Shame on you Gonzalo.

  38. Go Unna! There's more than a few willing to push with you!

  39. Financial world crisis visually explained:

  40. Normally debts are paid or the lender takes a bath. Those are the only two options.

    Whats going on know is a search for a third option which is to let somebody else pay it, but to do it so they don't realize it.


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