Futures are under pressure in the US, off about 2%.

Italian 10-year bonds hit 7%; The spread between Italian and German bond yields widened to the most since the introduction of the euro. Italy’s credit-default swaps jumped to a record.

RaJa’s Jeff Saut blames the yield spike on the Europeans ending credit default swaps. No insurance option makes the cost of owning bonds without insurance much higher. (I suspect that is but a small part of the problem).


Watch how US markets trade today: Do we gap down, and see more distribution and selling pressure? Or do buyers come out of the woodwork to accumulate at 2% better prices?

The reaction to the news, and not the news itself, is what matters most.

Category: Bailouts, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Look Out Below, Italian Edition”

  1. T_S says:

    Interesting via Saut. Note that a 50% haircut on Greece sovereigns did not trigger
    a CDS event and therefore no CDS payout, which seems a little silly. Rising yields
    make sense under this environment.

    Too damn much financial entropy.

  2. [...] And markets don’t like it.  (Money Game, Big Picture) [...]

  3. Michael Gavin says:

    Summary from Barclays Capital inst sales:

    1) At this point, it seems Italy is now mathematically beyond point of no return
    2) While reforms are necessary, in and of itself not be enough to prevent crisis
    3) Reason? Simple math–growth and austerity not enough to offset cost of debt
    4) On our ests, yields above 5.5% is inflection point where game is over
    5) The danger:high rates reinforce stability concerns, leading to higher rates
    6) and deeper conviction of a self sustaining credit event and eventual default
    7) We think decisions at eurozone summit is step forward but EFSF not adequate
    8) Time has run out–policy reforms not sufficient to break neg mkt dynamics
    9) Investors do not have the patience to wait for austerity, growth to work
    10) And rate of change in negatives not enuff to offset slow drip of positives
    11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
    12) At the moment ECB remains unwilling to be lender last resort on scale needed
    13) But frankly will have hand forced by market given massive systemic risk

    Hint:Not Good.Sell EUR, Buy Gold

  4. Mike in Nola says:

    Nah, it’s not Italy; it’s the union victory in Ohio.

    We all know that unions are the biggest threat to the economy. Just ask Mish.

  5. kingcoal says:

    The Euro debt crisis has cost 2 PMs to resign… French election is 6 months away…

    stikes everywhere…Euro zone PMIs are falling…not exactly a stable and healthy outlook

    And Saut blames the rising yield on lack of CDS?

  6. dougc says:

    The logic of “the ECB buying Italian debt ” will end the crisis escapes me. If the past is relevant then the debt is not erased, in fact Greek bonds held by ECB will not take the haircut. Interest payments on ECB bonds will have to be made. If a write off is required to solve the problem and private investors are going to take the hit wouldn’t that require higher interest rates to assume the risk. Also a 20% insurance is a joke if 50% writedown takes place. The answer to too much debt is not more debt and leverage, it needs to be forfeited and bond holders to accept the losses.

  7. Here is how the banker’s game works:

    1) Get the government to issue some currency (cash — paper or reserves at the central bank — reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.

    2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America’s currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.

    Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).

    3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.

    4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.

    5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.

    6) The bankers then have to decide how to “reset” the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.

    7) Another way to “reset” the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.

    8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).

    For more details on this stuff please read the following articles in order listed below:








    Mansoor H. Khan


  8. dead hobo says:

    BR wondered:

    Watch how US markets trade today: Do we gap down, and see more distribution and selling pressure? Or do buyers come out of the woodwork to accumulate at 2% better prices?

    Probably more of the same … volatility trending upward in a punishing and torturous end of year rally.

    Earnings apparently still matter and so does news that the economy is improving. So do improvements, such as they are, in Europe. So far, in spite of the sensational headlines and incredible antics of governments and their dangerous, apparently soon to be former, leaders, everything is still trending upwards. Improvements exist, only they are incremental and obscured by the flash of new bad news. So far, the incremental improvements trump the unceasing bad news. Also, to the positive, I have heard of several instances of job hopping due to pent up demand to leave one job for another without being laid off first. This is a great sign of economic improvement, although, it is only incremental.

    Sell offs, I suspect, are oriented towards raising liquidity and repositioning, not due to end of world events (at least today). People are finally realizing CDO insurance is not as stable a business as car insurance and may even be (heaven forfend) in some cases only a fee generating scheme with no reserves of meaning or adequate value available for a possible payoff. Listen, if major European banks are hurting because of simply holding European debt, then how in the world will some half baked hedge fund be able to pay off if needed? Will they try to collect from some other doofus who sold them a policy without ever thinking a payoff might be needed?

    To the good, this means that, in the future, to issue credit, borrowers will have to demonstrate they are actually credit worthy. Such a concept.

    Anyway, equities are still the investment du jour. They are what they are. For better or worse, you know what you are buying and an almost infinite amount of transparency is available for interested parties. Hedge funds still have to make money and this is the only game in town.

  9. nofoulsontheplayground says:

    The NDX has tagged and rebounded off the weekly 50-SMA the past 3-weeks. That area is currently at 2290 NDX. I expect that to hold today.

  10. Josh says:

    From what I’m reading this morning, the DAX is on the verge of completing a RS in a largish H&S pattern. S&P futures tested the trendline up from October 4th, and more-or-less held it so far this morning, but RUT futures broke the trendline solidly and are not backtesting the break.

    From a beerish EW perspective, if this is part of a big 5 wave down structure that started in the Spring, best guess is that this is either B of 2 (in the big 5) or the very first step of 3 of 3 (in the big 5).

    And then there is the unexhausted TD weekly and monthly readings suggesting that the bigger direction of the markets is now up.

    Nuts. The TD readings have been the most accurate in recent years IMHO, so my best guess is that this will just be corrective (though perhaps the B of 2 in EW that leaves the wave 3 down more time to start in a few weeks).

  11. Moss says:

    Without the ‘credit event’ the use of CDS to hedge is gone. The whole concept of ‘net’ exposure is meaningless. The increase in margin requirements for the sovereign garbage ‘nets’ that out.

    It is a good idea to review the Exeter Pyramid now that the CDS engineered risk management mirage is toast.

    Soon the ECB will be forced to 1. lower rates again 2. print and purchase.

  12. [...] futures makes the latest missive from Andrew Horowitz of the Disciplined Investor all the more timely: How [...]

  13. Concerned Neighbour says:

    Barry, it doesn’t appear like buyers have been hiding in the woodwork the last month. But for what it’s worth, I believe they should be.

  14. dougc says:

    If the market doesn’t rebound on the rumor of the day proclaiming “The EURO crisis has been solved by ______________________”, watch out below.

  15. schnauser says:

    might this be the problem: file:///Users/johnhiser/Desktop/LCH.Clearnet%20Group%20-%20MF%20Global%20UK%20Limited_default%20notice%20Ltd.webarchive

    counter party risk in the MF Global affair finally rears its ugly head?

    LCH Clearnet is a big player in Europe, no? http://en.wikipedia.org/wiki/LCH.Clearnet

  16. MIRTTB says:

    >>The reaction to the news, and not the news itself, is what matters most.

    News follows Price.

  17. rktbrkr says:

    4 Euro govs have changed over
    Ireland (directly related to bank bailouts to boot!)

    PIIG so far, somehow they missed Spain but they’ll go soon. If Frau Merkel attempts to bail everyone then her pigface goes up on the pike too

  18. rktbrkr says:

    As trading came to an end on Wall Street, the Dow Jones industrial average was down nearly 390 points, or more than 3 percent. The broader Standard & Poor’s index was off about 3.7 percent, with bank stocks hit the hardest.
    European shares fared little better, and the euro tumbled. Bond yields in Italy, one of Europe’s largest economies, surpassed 7 percent, approaching the level that had sent other euro zone nations to seek bailouts. Spanish and French bond yields also rose, amid fears that the contagion could spread further.

  19. Robert M says:

    That the Ministry of Magic allowed the Dept of Invisibility to continue to the float the idea of no risk after what happen is