Next week should be a sight to behold no matter how it finishes. Over this coming weekend the Greeks will vote again and the future of the Eurozone may be held in the balance. Also this weekend, the Egyptians will vote, in essence for what “type” of government they will have going forward. Then, later in the week, The Fed will meet and announce their “decision” on monetary policy. I say “decision” because they have none other than re opening the spigots wide.
Of course, we will also continue to watch as Spain convulses and savers continue to withdraw funds from their banking system. …And let’s not forget Italy, as they are surely next in the crosshairs. In reality, what is happening is a “run”. Yes, banks are being run but the big story is that this has become a run on sovereigns. I believe that within the next week or two, Italy will succumb (Spain has just today hit the “7%” threshold and Italy has surpassed 6%) and bring with it the realization that the string of dominoes has fully begun. The ratings services have added to the instability and kept the spotlight entirely on Europe but I find it hard to believe that Britain won’t surface with problems from rehypothecating everything not nailed down.
I can’t but wonder (as I have written and harped on for weeks) what these dislocations are going to mean in the derivatives markets. Clearly as JP Morgan just semi ‘fessed up to a derivatives boo boo, others may be on fire internally also. It all boils down to counter party risk. The mathematical outcome when a market gets so much larger than the system as a whole is that everyone, yes EVERYONE becomes a loser. Even the winners lose when the losers can’t pay. The funniest aspect of all here is that the bigger and faster you win, conversely the bigger and faster someone else loses. It’s all about getting paid and that won’t happen if your counter party has lost too much too fast. We will find out very soon who has been in bed with whom, who supposedly won and who supposedly lost. Ahh the dangers of a market without a central clearinghouse!
What many are wondering is whether the Fed announces QE 3 (actually 4) or not. As it stands right now, I doubt they will announce. If the weekend’s elections (including France) were to unsettle markets drastically, then I might change my thoughts but the stock markets are not “down” enough to warrant firing a public bullet. QE is not (never has been) about the economy, it is about the financial markets. Publicly there is not enough stress so “publicly” there will be no QE, just my guess.
Behind the scenes however is a different story, money flows to where it is needed as illustrated by recent Treasury auctions where the Fed “POMO’s” (permanent open market operations) buys Treasuries in the open market within hours of an auction. Truly gross, brash, in your face monetization but who cares as long as the market opens tomorrow morning. …And that is where we are now…and next week…and every week after that, anything and EVERYTHING will be done so that the market “opens tomorrow”. Legal, illegal, shady or fraudulent, it doesn’t matter. In private or in the public eye, that doesn’t even matter anymore which if you are looking for clues, tells you that we are in desperate times. Yes, I know the old saying about “desperate times”; I will up that to “in desperate times, desperate people will do ANYTHING and EVERYTHING” no matter what the consequences.