First the headline news, reported by Tyler D over at Zerohedge. Erste Bank revealed that the amount of bad loans on its books is actually 40% higher than previously reported. You can read the details here. There are some important things to note about that. First, it happened over the long holiday weekend after which my models have been predicting a broad market sell off to begin in the US. Will a very large butterfly in Austria create tornadoes on Wall St?
The smart leveraged gambler is like a cat: very quick to run for safety if danger is perceived. And when the largest bank in a supposedly conservative country like Austria loses 25% of its value overnight based on admission of hidden losses, well, that is perceived danger IMO. Who will they not be able to pay because of this? What derivatives might get triggered. Will it cause the Euro to tumble and thus strengthen the greenback? And if it does, won't US stocks need to come down? I don't know the answer to any of these which is why they seem like danger to me.
Another thing to note here: Erste didn't go down because of new bad news that just happened all of a sudden folks. As I have written 10s if not hundreds of times in these pages, the damage is done over a significant period of time. It only seems like it happened suddenly because the reveal is instantaneous. This is the dirty secret of the markets: lots of bad news is already built in but it has been thinly papered over and once the herd begins to fall through into the economic abyss below, the stampede for the exits will begin.
Trust me folks. Bankers have been getting the backing of their governments until now. They have been allowed to hide bad assets from shareholders. But now the governments of the world are trying to unwind the associated leverage while the economy is supposedly stronger in order to relieve some of the mounting pressure on their so called economic shock absorber.
Unfortunately, these guys do not know how bad things really are. As they allow some of the worst offenders to fail they will realize that it causes an unintended chain reaction because of the use of derivatives. Want to see a great simulation of what a chain reaction is like? Check out this 2 minute video. You know the chain reaction that started in 2007 and ran until 2009? Well, this time it will be worse.
No soft landing will be possible. The defaults have already occurred. They just haven't been reported to us. This is how a Ponzi works. It is actually a little insolvent from day 1 but as long as new suckers keep coming in the appearance of solvency can be maintained for a long time. But as soon as people begin to lose confidence in the con, it collapses seemingly all of a sudden when in fact the collapse had occurred long ago and was just being made worse each month by the con men.
Cap'n, I'm holding my breath... Is that the edge I see?
ReplyDeletehttp://georgiainfo.galileo.usg.edu/gastudiesimages/Ship%20Sailing%20Towards%20Edge%20of%20Earth%202.jpg
Steven B.
Nah, chalk this up as yet another fake claim of ignorance about seeing it coming.
ReplyDeleteThe information has been out there and it was even alluded to in 2008: more than 60% or so of the loans by Austrian banks were to its neighboring countries in East Europe. Most of these countries have been in deep recessions since then, with millions of people defaulting on their personal loans, be they vehicles or homes or small businesses. Few of these countries have been able to find a footing, even if precariously, at this time.
All the Greek kabuki theater was the tip of the Eastern European iceberg and, just like the tip is still under water, so is the other 90% of the iceberg.
Knowing this, I am not surprised at all that the largest of those over-extended Austrian banks, likely the most over-extended one, has been skinny dipping. The other two or three large Austrian banks are surely next in line to be found with no trunks.
And it will not be restricted to Austrian banks by any means. IIRC, other countries whose banks were heavily vested in East Europe were the Netherlands and... Germany. East Europe is marginal to Europe; Austria and Holland are marginal in Europe; but Germany is the core of Europe. If Europe is shaken to the core, what will be of the BRICS? How long would it take to erode the periphery of NAFTA? How long until its core, the US?
Now, if I, a mere dilettante in economics, am not surprised, certainly those who make a living in the finance industry have known about this for a long time. Perhaps they kept their peace because, in cold water, their balls shrunk without a speedo. So, calling attention to another bank mooning the fish might attract too much attention to themselves. Or rather, more likely, nobody wanted to be the first, because it would just tip the fall of the dominoes.
Well, it's quite likely that this is the first wave of dominoes falling after all. It has nothing to do with finances; they have been unchanged for over a lustrum. Rather, this is all about popular mood. The mood of the American people is probably representative of the mood of other peoples. If people here, who have been much more indoctrinated to worship the state and their overlords with idolatrous symbols and songs and postures, don't buy the official line and statistics, because they can't hide the obvious economic and social deterioration caused by economic hardship, and are on the verge of something, the peoples in Europe seem to have realized their situation a couple of years ago.
The turn to conservatism, even extreme conservatism have already manifested in polls for a while. Before the recent conservative wins in the EU parliament and some separatist movements in Italy, Spain and UK (Scotland is likely going to approve recession through a referendum), even the Swiss - THE SWISS - forbid the building of more mosque minarets in a referendum. In some Eastern European countries, the elite which made them members of the EU were ousted in lieu of Euroskeptik elites. I think that it's important to highlight the electoral process where the popular mood was expressed, because it's clear that it reached critical mass to affect the course of events.
Bottom line: read the Elliott Waves to be aware of the direction and keep the ear on the ground, not on the telly, to hear the voice of the people.
Steven B, I had a similar picture in mind: the album cover of the aptly named Kansas album, "Point of Know Return". Once the people lose their childish view of the con men, once they actually know what is going on, there is no going back. Another long standing precursor is the old holiday song:
ReplyDeleteToyland, toyland
Good little girl and boy land
While you dwell within it
You are ever happy there
Childhood joyland
Mystic merry toyland
Once you pass its borders, you...
...can never return again