This post is not so much an homage to Levon Helm, the recently passed member of The Band, as it is a commentary on the Europe problem.
Make no mistake, though… Levon will be sorely missed.
If you recall the next line of “The Weight, ” the reply to the question was “He just grinned and shook my hand. ‘No’ was all he said.”
These days, a lot of squirming, posturing, and gamesmanship have been the standard as Europe grapples with the Greek issue. And the Spain issue. And, as indicated by their bond yields, the Italy issue. Never mind the Ireland issue. They’ve already nationalized all their problems and went from corporate bankruptcy to sovereign bankruptcy. And never mind Portugal; they’re just that little country hanging off the Eastern edge of Spain that is as bankrupt as Ireland. And never mind that Lisbon is about 90 minutes from Seville. Contagion can be contained.
Or so we’re told.
As U.S. Treasury prices hit record highs, Switzerland and Germany are issuing bonds with negative interest rates.
That’s not a typo.
Negative. Interest. Rates.
Wrap your head around that.
People are willing to pay Switzerland and Germany a “fee” to hold their cash because the cash under their mattresses, if re-denominated into their home currency, is perceived as worth less than a negative interest rate bond. Maybe the space in the prior sentence should be omitted and the sentence should read that the “currency is perceived as worthless.”
Now, truth be told, Switzerland has been trying to implement negative interest rates for a couple of years in an attempt to stem the relentless appreciation of their Franc. What’s stunning (to me, at least) is that people are willingly investing in these negative rate bonds.
I know a lot of U.S. investors who have been buying Swiss Francs to diversify their currency exposure. But I know none, who are buying negative interest rate bonds. But those in Europe seem happy with the idea. Well… “happy” may not be the correct word, but there is no shortage of bond demand.
It’s rare that you have the opportunity to witness a train crash in slow motion, in real-time, played out right on your HD TV. I think this may be one of those rare times.
It’s also a rare time when the capital markets may be helping to slow the train crash to a frame-by-frame video.
The threat of massive government intervention is preventing the short sellers from cratering the values of the zombie banks, zombie countries, and zombie continents. It’s preventing the zombies from being priced honestly. You know the drill. Don’t fight the Fed. Or the ECB. So the shorts are just nibbling. For now. And they cover with any rumor of intervention. This periodic short-covering provides rallies that “pundits” rely on to declare the start of the next hot trade.
The frog is getting warmer.
You see, I fear we’re becoming boiled frogs. Maybe you’re familiar with the story. A frog is cold-blooded, deriving its body heat from the environment rather than its internal regulatory system (the system you and I enjoy). Put a frog in a pan of water and slowly turn up the heat and the frog will ultimately boil, not sensing the need to jump.
Every rumor, news story, ECB plan, or Euro banking proposal, causes a spike in stock prices. Until the next day. The news cycle numbs us into thinking the problem may have a tidy solution. Or maybe a temporary solution that will last long enough to allow the formation of a long term solution. Stock prices react accordingly while risk does not get priced appropriately.
The frog is getting slowly boiled.
The uncomfortable truth is that Europe’s problems are not comfortably solvable. Nor are those of the U.S.
Is there a place where a man might find a bed?
He just grinned and shook my hand.
“No”, was all he said.