Your Bazooka Bluff has Been Called

Another long week at work filled with some drama that I could have done without. Looking forward to Superbowl weekend! Go Saints!

Remember, tomorrow is Friday night so get your requests in.

Note of Thanks
Last night I asked for help regarding revenue number for Whirlpool (WHR) for the past 9 years so I could work on an idea I was rolling around. Stagflationary Mark pointed me towards a great source for collective information on the S&P and that would have worked. An Anon reader was so kind as to pull up the WHR revenue numbers on his handy Bloomberg Terminal for me and provide a great chart for the years 1992-2009 and with estimates for 2010 and 2011 to boot! Thanks Anon! I will be reviewing that this weekend. I wish Anon all the best, especially as it pertains to things of chance, like say, the lottery or scratch tickets! (inside joke).

Side Dishes
I will not pretend that the big story was not the market panic/puke today but there were some other morsels that may go unnoticed that I thought were worth a look:

-Market Ticker notices that Cisco Systems (CSCO) has gone the route of zero percent financing to boost sales. This smacks of desperation and it reminded me of the height of the tech bubble when CSCO would lend money to customers to buy their products! Not quite the same, but a trend worth watching.

-No longer a banking executive with national security protections, Ken Lewis is going to court. It will be interesting to see if old Kenny boy tries to take Bernanke and Paulson down with him, and he is sure to have an armada of attorneys focused on doing just that. One can dream.

-In the most overwhelming vote ever held at Economic Disconnect, 87% of respondents think the triad of trouble (Bernanke, Geithner, Paulson) are liars. My vote was for mogwai's that ate after midnight, but that was the only vote it got!

Your Bazooka Bluff has Been Called
"I'm Daring You Billy"
Dick Brewer to Billy the Kid in "Young Guns"

On Tuesday I noted that Philippines failed to sell all of their bonds for the second time this year. Sovereign debt issues are a focus of mine for many reasons and today it seemed it was a focus for just about everyone.

In my mind there were two possible things at work today, one was the same old trick we have seen and the other would be a new chapter in the debt crisis.

From the department of the "same old story" the sell off today could be the never fail trick played by the FED and their friends to dump the stock market right before a major bond sale. Keeping in mind that indirect bids for the 21-day auction this week registered at ZERO (that's 0.0) the bulky sale next week of debt (around $150 Billion total) may have been a bit nerve inducing. Nothing like a major market route to get yields down and participation up, especially when US debt is so much better than any other debt in the world. Safe haven status rules indeed. If this was the motive then I would expect a quick reversal later next week and the good times to roll again.

If however this was something else, then we have an important inflection point facing nations all over the world.

So let me back up a minute. Remember a little time ago when Dubai was facing a serious debt issue? Markets swooned a bit and the credit markets were nervous. They were of course rescued by Abu Dhabi (though it became somewhat muddled) and all was well once again. What is important is that an explicit guarantee was demanded by the market and one was provided.

If this sounds familiar, it should. Who could forget Hank Paulson's claim that all he needed was a "bazooka" in regards to Fannie Mae and Freddie Mac:
"If you have a bazooka in your pocket and people know it, you probably won't have to use it"
Of course in reality the market rolled up in a fully loaded APC with reactive armor and called the bluff. Paulson's bazooka was limp and a full and explicit backing of FNM/FRE debt soon followed. Now they even has unlimited backstops!

And thus the current situation should be easy to recognize.

CDS protection costs for Greece, Portugal, and Spain were blowing up today. For some time now the Euro leaders have tried to maintain a "no bailout policy" in regards to Greece specifically, in my mind to try and keep themselves out of having to do the same for Spain which is a much bigger problem than Greece.

Well that game is now up. The players behind the money want a plan for an explicit backstop for Greece and some plan for Spain as well. The CDS costs will force the hand of the Eurozone here. In this day and age of government intervention in everything and anything this was inevitable. Why risk money on a wink and a smile when you can get a government guarantee on the whole thing up front? Why indeed. Anyone remember all those fire side chats about moral hazard I tried to have all the time? Maybe now you can see why.

The Euro currency is not going to break up. You know it, I know it, everyone knows it. I expect some kind of announcement either tomorrow or over the weekend in regards to the Greece issue that will also lay out the path forward for the next in line countries. Printing press Euro style coming up! I can recall all those weekend announcements for the latest greatest US banking bailouts during the height of the crisis, this will be no different.

In response to a dialogue I was having with the EconomPic author in this thread I noted the following:

jake,
why unlikely?
Short version; bluff of Euro has been called. Explicit backing of problem debt (Greece, Spain, Portugal, etc) is now demanded by the markets. How can they not answer and what does that mean for the currency?

To which he responded (quickly too, which I do appreciate the time taken, I know how busy we all are):

not necessarily unlikely that we'll see a correction in markets and/or economic downturn, but i think unlikely of a crisis of the system (where counterparties don't trust one another, bank runs occur, and the global economy shuts down).

it will be interesting to see how this plays out. i can see two opposing stories play out if the spain, greece, portugal get bailed out.

1) the euro gets crushed
2) the euro rallies as the uncertainty is reduced

I always get a bit lost where a government guarantee is taken as gospel without regard to the method of making good. I guess in the end you can sell off parts of your country (to whom?) or take away from private citizens to make good, but that carries it's own risks and not in a financial sense!

Still I think Jake will be right on number 2; the Euro will rally (not much) on the perceived reduced risk.

Now I have been seeing many running a victory lap in regards to the US dollar after all this. Enjoy the jog gentlemen. We have our own eurozone here called bankrupt states and California makes Greece look like, well, Greece. There are many others. Mish has extensive coverage of state and city issues and I would refer you there. Indeed the US dollar may be "King Crap of Turd Mountain" but that is not something you want to brag about at parties.

What About Gold and Silver?
Gold and Silver were crushed today and we even had the obligatory Clusterstock "Gold Sucks" post to top it off!

Now one would think on a terrible day for the markets gold would be a big winner. Instead it outpaced the indices to the downside. Silver was especially blown away. Gold and silver are hedges against fear, confusion, printing presses, uncertainty, inflation, deflation, cancer, H1N1 are they not? Well the answer is sometimes yes and sometimes no.

The metals were destroyed last March just like the markets, but stopped falling before the markets did, recovered faster, then were overtaken to the upside. Gold has been directly correlated to the indices at times and other times it has been off on its own. Gold has been walking hand in hand with the dollar at times and other times they have run away from each other. What does it all mean?

I have no idea.

What I do know is that the US will be faced with a double dip in housing that will prompt Quantitative Easing 2.0 for the mortgage market. Bankrupt US states will require another round of cash buckets to be handed out. Unemployment will require extension (forever?) of extended benefits. The Eurozone will have to confront a mass of angry union workers hell bent on getting their promised payouts. And much more.

I have always desired a large scale discussion on just what money is. The events of today only fast forwarded that talk. Today gold and silver got dusted. Tomorrow maybe paper money will encounter a similar problem.

Have a good night.

Currency Consternation

Does anyone know a good way to get rid of literally a ton of acorns on a lawn? That is my mission, and I have no choice but to accept it, this weekend. I am going to try and use a leaf blower to concentrate them, then scoop them up. If that fails, I will dry a big dry vac. If that fails, I may have to pick them up by hand, in which case I will not be posting due to hand cramps. Any ideas? They have never been this bad before! I will be doing the usual Friday Night festivities, so please leave a request should you like to see something, anything on the blog tomorrow. Most anything goes that is appropriate (as in no nudity and no Beatles).

Economic Disconnect Mention
On the blogroll, you may know the site Some Assembly Required. This site is a daily stop for me and I really enjoy the authors work. I was very surprised and excited than an article of mine found it's way onto a post over there today. My entry is the 7th one down under "The Question". A real treat for this author!

Currency Consternation
This week I had discussed how this blog's readership was down. From what I could gather it seems many are just tired of the games and tired of the same old, same old in the markets (or maybe my writing!). Well there may be something very different in the works that is worth some attention.

The discussion about the future of the dollar is still raging full force after a big kickoff this week. The dollar of course does not exist alone, and currencies are entwined in ways I really cannot comprehend.

To start, currency debacles tend to have outsized effects, even if their relative scale is not such that one would think so. Consider:
1994 Mexican Peso Crisis
While swiftly addressed, it had all the markings of a serious problem.

1997 Asian Financial Crisis
The floating of the Thai baht (butt?) caused widespread damage across the globe

1998 Russian financial crisis
The Russian debt default not only sealed the doom of Long Term Capital Management, but almost caused the first "systemic risk" meltdown which was delayed until 2008.

From these three examples I take away that currency problems can be the cause of serious market dislocations across the globe. With an eye towards that angle, lets take a look at this weeks developments.

This nonchalant piece really dismisses the news as something not going to happen soon. I wonder what the headlines about the Thai baht were like the day before:

Latvia on the brink
LONDON (MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.
Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region. The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.
There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Fair enough I guess, but of course we have no idea what exposure these banks have.

Adding to this is another subtle wrinkle that I think has importance on a much grander scale (FT, via Naked Capitalism):

Latvia denies plan to devalue currency
...Riga announced tentative plans on Tuesday to cap the amount that banks would be allowed to collect from mortgage holders in a move that analysts said would make it easier for Latvia to devalue....
...The Latvian proposals would allow banks to collect only the current value of a property rather than the original value of the mortgage, insulating homeowners from the 70 per cent drop in property prices since their peak.

And so a ripple near a coast spreads across the world.

To me, this is huge. One of the most vexing issues on the table right now is the "Delay and Pretend they will Pay" game being played by the banks. Banks hold many mortgage backed assets (both residential and commercial) at near par values. They refuse to take marks against them. They will willingly roll over commercial debt or allow residents to remain in a home indefinitely rather than force a foreclosure and take a hit to the value of the loan.

We have seen that mortgage "cramdowns" have not become viable yet, due mainly to the push back of the banks. They fall back on the delay plan.

If the lower tranche holder is 100% sure by government (think US state to extrapolate) proclamation that they will never see their money, then this game is up. The banks can pretend all they want, but they will be out of time and out of new money investors.

I am not saying this WILL happen, only that in desperation I would not be shocked to see entities resort to such a thing. Just like mortgage holders just "walking away", the banking system is arrogant beyond belief that people will pay their debts no matter what. Ivory tower and all that. Try living in a poor city and then get back to me.

Sticking to the currency theme, the falling dollar is causing many countries to try and protect their competitive edge. This is draining reserves of those countries and again, we know currency problems can go a long way. Consider (via Zero Hedge):
Asian tigers roar back at US Dollar
I advise reading the whole thing, but take away point:

Overnight, we witnessed intervention by various Asian central banks to suppress their own currencies against the Dollar. The banks of South Korea, Taiwan, the Philippines and Thailand all intervened to prevent appreciation of their currencies. The Bank of Korea bought $1billion. The Bank of Indonesia bought $350 million. The Phillipines' central bank bought $100 million. The Hong Kong monetary authority sold $3.88 billion Hong Kong Dollars to support its dollar-peg. The Yen is at 88.24, but there was no intervention by the BOJ, at least none that we could confirm.
These are serious moves. Why is this not front page news? It is difficult to tell whether these are simply more dramatic fluctuations on the world markets, or the start of a new phase in the crisis. What will be imperative is to pay close attention to the actions of global central banks in the days ahead. Currency is key. The next four weeks should be quite interesting indeed.

Scrambling to keep pace with the US dollar fall is sure to cause some kind of imbalance as those funds (large on a relative scale) are committed to currency moves.

From Clusterstock, another angle:

Asia Will Ambush Dollar Shorts Over And Over
Thursday's coordinated currency intervention by South Korea, Taiwan, the Philippines, and Thailand is just the start of what will happen should the dollar keep sliding.
Most export-heavy countries around the world are far from ready to address the hard changes at home required to deal with a weak-dollar world.
Their economies are growing fast. Yet for many leaders, this speedy growth is the only real legitimacy they have with their citizens, without which they could be in deep trouble.
Thus they'll fight tooth and nail to forestall any change from the status quo whereby Americans consume, while they produce and grow...
...While dollar shorts probably have long-term trends in their favor, many will be made into unfortunate examples by aggressive central banks along the way. Traders beware.

Another "the dollar will never fall" call.

I would submit that if the dollar keeps declining, the export countries (China excluded) simply do not have enough ammo to fight back. This is how a currency crisis happens. History shows us how serious this can be.

In closing (warning, more of the same old, same old) the one drawback of fiat currencies is that they are built entirely on confidence. Fiat currency can do all the "stupid pet tricks" the central banks want as long as confidence that the pet will perform holds.

Why is devaluation so disruptive? The same reason mortgage defaults are so disruptive, lenders/creditors just cannot believe you are going to stiff them. In their mind they are doing YOU a favor by loaning you more money than you can pay back, and at onerous terms, so you should do what you have to do for full payment.

When this does not happen by revolt (through devaluation or default) the system loses confidence because their bluff was called.

The world has seen devaluation many times in the last 100 years (US in the 30's still on the gold standard, US in the 70's walking away from the gold standard, Argentina 2 times, the three examples above, and Latvia maybe in the next month) so why the shock and awe? This is because it attacks the very premise of fiat currency.

I am moving to a stance that world money moves bear watching, and as the US markets seem as boring and predictable as can be for months, maybe you will watch too.

P.S.
With all the discussion of Latvia, I could not help but think about "The Wizard of Riga", former world chess champion Mikhail Tal. A true genius, I have studied his games many times and am still blown away by his brilliance and inventiveness.

Have a good night.