Break-down in recovery Consensus

Here is a second bit of why I’m not with the recovery story.

I think the consensus among the policy -makers and central bankers is fracturing. I think something similar is happening between the various market players. Who are roughly: stock market investors, Bond market investors and the big-banks who are speculating on the volatility in both.

A solid consensus was and is essential for the ‘recovery’ plan to work. Everyone has to tell the same lies and maintain the same fiction in both words and deeds. If the consensus breaks, it all falls apart.

At the FED, there are voices of discontent who are getting more numerous, louder and bolder. Prominent among them is Richard Fisher, Head of the Dallas Fed, who is getting quite outspoken about the absolute necessity of breaking up the Too Big Too Fail banks. His voice, added to others, means the cozy Big Bank/ Bernanke/Geithner consensus is under growing pressure.

At the same time, the rough agreement by the Stock Market , the Central Banks and the Bond Market, all agreeing that the Big Banks had to be saved and whatever it took was OK – is also begnning to break down. The Big Banks have been speculating on volatility in both stocks and bonds. Bonds via CDS on Currencies.

I think the Bond market is now beginning to feel that the printing and borrowing policies which have been for the survival of the huge and insolvent banks, are now beginning to get out of hand and may now be storing up lots of pain and losses for the Bond market. The bond market is particulalry alarmed by indications that fluctuations in currency values may be getting away from a safe zone of controllable and profitable volatility, and getting into a boat-rolling-over zone instead. This sentiment means the consensus over print and borrow is also breaking.

Today’s news from Europe will accelerate this break-up.

This morning the trigger was Hungary’s largerst bank having its shares suspended after suddenly falling 10%. The secondary detonation was in those banks exposed directly to Hungary – which is Austria. At the same time, alarm is spreading sideways to countries not directly affected but in similar positions – Rumania, Bulgaria, Greece and others. After the seconday fires, we now have another set of fires, among the big players exposed to the Austrian and Greek banks – Soc. Gen of France down 6%, BBVA of Spain down 5%, Credit Agricole of France down 3%. BBVA is hirting badly now. Which will pull Spanish soveriegn CDS into danger territory. Expect words from the Government as well as a failed bond auction in the offing.

Later, if a way is not found to head this off – the next lot of detonations will move from the debts themselves to the CDS bets on those debts. Thay are another deck up. In the next few days we could hear the muffled sounds of Hypo Real Estate and perhaps even AIG both issuing some metalic rending sounds from below the water line.

To finish off the discussion of consensus break down, it is also occuring at the level of Bail-out institutions. The head of IMF’s policy-steering committee, Mr Youssef Boutros-Ghali said today that the IMF did not actually have the cash to bail-out Europe. And that is BEFORE today’s fun and games. The fund’s share holders (US and other main Western Nations) are thinking of doubling the IMF’s issuance of its own debt/bonds. This woud be backed by the 3000 tonnes of Gold the fund has.

Which might seem OK – in that at least there is gold to back it up. But more IMF bonds will just compete for Bond market cash. Taking away from nations who need bond buyers themselves. It could also put lots of Gold back on the market at a time when the last thing anyone needs is volatility in yet another market.

So now the FED, the ECB and the IMF are all printing.

Now that has the ring of solid gold recovery about it, doesn’t it?