This morning Europe woke up to find the Asian markets had all plunged. Japan down 1.5%, the Hang Seng down 2%, Shanghai smarting at 2.93% down and India down over 2% as well. European bourses promptly ran for the exits. London opened 1.7% down, Paris 2% down and Frankfurt down 1.8%. A second day of major declines. Everywhere financial stocks have been prominent among the losers. Financial worries have never gone away in 2 plus years of pretending bank debts and solvency are fine and fixed.
The headlines are all about European debt worries over Greece and now Spain. And those are indeed worrying. Greece looks unsaveable now which would present Berlin and Paris with a very large bill. All the bond holders are looking at Italy whose worries the market is finally waking up to (downgraded on Friday by S&P) and of course Spain, worrying that Spain might now head away from strict bail-out the-bond holder austerity measures. The Bond market will have a seizure at this possibility and the next ratchet will be worries about just how insolvent the ECB itself is, given how much utterly worthless paper they have accepted as collateral from Spain, Greece, Italy and Ireland.
The way it works is National Central banks accept worthless paper from the banks in their nation in order to ‘save’ them (actually saving their bond holders) and issue Central bank Sovereign Debt to cover it all. This sovereign debt can then be tendered to the ECB by one route or another. Thus the debt gets called different things as it passes from private banks to Central banks and changes from private debt to sovereign debt, but at base, if you trace the worthlessness back to source it ends up being private debts that no one has had the moral courage to force out into the open.
Anyway…
Spain is the one that Europe cannot afford to save and cannot afford to not save. So in this sense the headlines are correct. BUT if this was the sum of what is currently going wrong we would be in a better place than we are. Because European debt is but one of the miseries we have been storing up for ourselves during the last two years of playing kick the can.
Commodity speculators took major pummeling last week. Banks are down in Asia and particularly in Australia. The tech bubble is looking mighty strained and there is rumour about that the short sellers will soon emerge blinking from their bunkers like an army of the previously declared dead with one word rising like a chant from their midst – linkedin, linkedin. Will the undead shorts now feast on Linkedin? If so, and if its stellar post-IPO price dips just as GM did and more recently as Glencore’s did, then we may be seeing the beginning of not just a tech bubble burst but a commodites burst as well.
Combine that with a new political order in Spain which just might not stick to the previously agreed austerity plan and you have the beginnings of a panic. Just imagine if democratic demands took precedence over bailing out insolvent banks and their bond holders. Shock horror! Add in reports that China’s growth is now slowing at the same time as Japan has firmly plunged back into full blown recession.. again.. and you can start to edge towards the exit.
Should China’s slow down be seen as likely to be deep and long then demand for commodities will be priced a lot lower and their current speculaitvely inflated prices, which took a dive already last week, will dip agian. Hopefully at least some of those who have been speculating will get skinned.
The real fun from any considerable and sustained drop in China’s demand for commodities will be in Australia and maybe Canada. A slow down in China would show up in Australia in a sustained dip in demand for the commodies upon which Australia depends and a slow down in funds flowing from China to Australia’s property market. Either would be no fun for Australia since their bank and property bubble is already bloated and has had a very unhealthy mottled complexion for some time.
Australias’ banks are hideously dependent on market funding the way Northern Rock was before it imploded. Just last week Australia’s big four banks were downgraded by Moodys precisely because of fears over how completely dependant they are on wholesale funding.
European debts, commodity speculation, a tech bubble and a slow down in China. Pently of headlines to chose from.
The new political order in Spain will have to wait. A substantial part of the population still have (vain) hopes that the conservative party PP will put things right.
General elections are scheduled for 2012, although there's going to be huge pressure on president Zapatero's shoulders to call for early elections. Looking at yesterday's local elections' results, a complete victory for the conservatives is more than likely. However, it is also more than likely that conservatives will founder in the task of fixing Spain's economic and employment problems.
Therefore, unless major events tip the balance earlier, I think we'll have to wait until 2013 to see the Spanish population rock the boat any harder.
"Hopefully at least some of those who have been speculating will get skinned".
Inevitably someone will. The likelyhood is that it will be the smaller players. One of the recent developments in playing the financial and stock markets is the use of automated software programmes by the biggest players to make instantaneous purchases and disposals. (the 'human' factor is there to act as gatekeeper when anomalies appear).
The game is to recruit software developers who can write a better programme than your rivals.
However it's not the same as say writing a weather predicition & risk analysis programme where the risks assessed are natural events.
Because the risks include the actions of other investors we're in the realms of game theory.
And these players want the brunettes as well as the blond, in a winner takes all gameplan.
What did everyone think the players were going to do with all that Q.E.? – what they know best – the same thing that got us here in the first place – but faster.
I see greece hinted that a series of privatisations would be announced. Led by sales of the state's stakes in OTE telecoms company, Postbank, the ports of Thessaloniki and Athens and the Thessaloniki water company.
Elsewhere Greece to sell 5% of OTE shares to Deutsche Telecom
Its suggested the stake will be sold at 27.5 euros a share, above OTE’s closing price of 11.77 euros on Wednesday
Why would anyone pay 15.73 euros above share price in a buyers market?
It looks more like charity than business.
Everywhere else it seems but Australia and perhaps China has had its property bubble burst. So how long can Oz resist? It must be held up by the commodities boom as it has long been recognized as overvalued by all the usual yardsticks. Even before the bust in the US it was. So I wonder how the average Australian homebuyer views this… does he carry on like nothing is happening in the blithe belief it has not yet happened? Are people still happy to pay the high prices being asked?
Just wondering what it feels like there.