Déjà vu all over again?

Haven’t I seen this movie before?

The storm?

The gathering storm in Europe?

Haven’t I seen headlines before like those today – May 17^th, 2012?

• “Spanish borrowing costs soar”1
• “Rajoy says Madrid faces being shut out.”2
• “Greek euro exit looms closer as banks crumble.”3
• “Flight of Euros From Greece Accelerates With Coming Vote.”4
• “Drachmageddon.”5
• “Euro starts to crack as investors look to the exits.”6
• “Euro’s last turn before the Grexit.”7US Federal Reserve Balance Sheet 1994-2012

The worry?

Haven’t I seen the grim faces of the UK Prime Minister and Bank of England Governor as they look across the Channel and wring their hands over euro-can-kicking-itis – as they did yesterday?

• “…[M]ake-up or… break-up.”8 (James Cameron)
• “[The eurozone is] tearing itself apart without any obvious solution.”9 (Sir Mervyn King)

The no? The yes?

• Haven’t I seen the Germans saying “Nein!” one minute and “Ja!” the next the way Jens Weidmann, Bundesbank President said last week:

•  “Greece will not receive any more financial aid if it does not stick to the agreed bailout deal.”10

While this week Angela Merkel was described in a headline this way:

• “Merkel Says She is Open to Stimulus for Greece… German Leader Softens Stance and Advocates Keeping Athens in Euro Zone.”11

The ambivalence?

Haven’t I seen the Greeks always wanting to stay in the euro and always threatening to leave? The way I saw it yesterday even with the leftist and supposed extremist, Alexis Tsipras of the Syriza party? Who said in one breath in an interview with Christiane Amanpour of CNN:

• “…With this [austerity] policy we are going directly to the hell…”

But in the next breath…

• ‘We don’t want Europe to be in a catastrophe way… we want to save Europe.”12

The pose?

Haven’t I seen the ECB (European Central Bank) talking tough on the surface but being soft under the surface? The way it did yesterday when they refused to fund four Greek banks? But, of course, let those banks be funded by the Greek Central Bank? Which then funds itself from the ECB? And all of this followed by the friendly headline:

• “ECB Urges Athens To Remain In The Bloc.”13

The cries?

Haven’t I heard cries of hopelessness?

• “Europe Is Missing a Contingency Plan…”14

Haven’t I heard the old IMF deus-ex-machina cry?

• “Only the IMF can break the euro debt crisis logjam.”15

The markets?

Haven’t I seen the European markets go down as the storm gathers?

• The Euro Stoxx index has declined -18% 16 since March 15.

Haven’t I seen Europe drag down the US as people figure the storm may cross the Atlantic?

• The Dow Jones has declined -5% 17 since May 1.

The Fed?

Haven’t I seen people – even within the US Fed – say that low interest rates are fueling an excessive taste for risk, as the minutes of the Fed revealed yesterday? When…

• “…some members of the Federal Reserve’s rate-setting committee saw ‘signs that very low interest rates might be inducing some investors to take on imprudent risks.’”18

The risks?

Yet haven’t I seen the Fed wanting to do just that – get people to take risk?

• As JP Morgan did with its famous CDX.NA.IG.9 trade that is now costing at least $3 billion? 19
• As those who are giving $15 billion to Facebook’s selling-IPO shareholders are doing? 20

The past?

Didn’t I see the same movie last year – late Spring to early Fall?

Haven’t I seen it since 2008?

The savior?

Isn’t the outcome always – that Central Banks Ride To The Rescue – with programs called QE2 and Operation Twist over here? Or SMP or LTRO over there in the land of the ECB? 21

Or Governments Ride To The Rescue – with stimulus plans or austerity plans followed by stimulus plans?

Won’t there be QE3 as bond guru Bill Gross predicts?22 Or LTRO 3? Or other variations on the theme?

The put?

Hasn’t the Greenspan-Put of 1987-200623 – the confidence that Greenspan would always step in with massive temporary liquidity in a market crisis – morphed into the massive Perma-Put?

Doesn’t the chart of the Fed’s balance sheet on Page One show that? 24

Isn’t it the reason for the confidence that the Fed, ECB, JCB and other central banks will always step in with gargantuan and permanent buying up of assets?

The believers?

Can there be cause for real concern if, in the end, a Big Daddy will make things better?

Just as a team from Bank of America believes that if the Greeks exit the euro…

• “Central banks around the world would act in concert as in 2008-2009; the EU would take a big stride towards “fiscal union” (real fiscal union, not phony German Fiskalunion); a system of pan-European deposit guarantees (i.e., a euro version of America’s FDIC); and capital injections to stop contagion in the banking system… The ECB would cut rates, launch quantitative easing, blitz euroland with liquidity, and drive down Club Med yields with mass bond purchases.”25

The give-up.

Is there any reason to be managing risk if risk always gets taken care of?

Or…

Is this time different?

Or…

Are these the right questions?

Or…

Does the fact that these questions arise at all indicate a basic change to our financial environment?

One Answer.

I think the answer to the last question is “yes.” There is a change.

As to the rest of the questions?

I offer them for your ruminations.

– John Allison

1 The Telegraph, “Spanish borrowing costs soar as FTSE losing streak continues”. May 17, 2012. Front-page headline.

2 Watkins, Mary et al. “Spain warns on borrowing cost risk.” Financial Times. May 17, 2012.

3 The Telegraph, “Greek euro exit looms closer as banks crumble.” May 17, 2012. Finance-page headline.

4 Alderman, Liz et al. Flight of Euros From Greece Accelerates With Coming Vote.” The New York Times. May 17, 2012.

5 Mackintosh, James. “The Short View.” Financial Times. May 17, 2012.

6 Ross, Alice. Euro starts to crack as investors look to the exits.” Financial Times. May 17, 2012.

7 Editorial. “Euro’s last turn before the Grexit.” Financial Times. May 17, 2012

8 Associated Press. “UK’s Cameron urges Eurozone to “make up or break up.” The Washington Post. May17, 2012.

9 Grierson, Jamie. “David Cameron and Sir Mervyn King urge eurozone action.” The Independent. May 16, 2012.

10 Kuehnen, Eva. “No more aid for Greece without reforms: ECB’s Weidmann.” Reuters. May 11, 2012. Content taken from an interview by Jens Weidmann, head of the Bundesbank in Sueddeutsche Zeitung.

11 Kulish, Nicholas et al. “Merkel Leader Softens Stance and Advocates Keeping Athens in Euro Zone.” The New York Times. May 17, 2012.

12 Gold, Lucky. “Going directly to the hell.” CNN. May 16, 2012. Report on Alexis Tsipras, leader of Greece’s second largest, leftist political party, Syriza, and his interview on the Amanpour news show.

13 Blackstone, Brian et al. “ECB Urges Athens to Remain in the Bloc.” The Wall Street Journal. May 17, 2012.

14 Nixon, Simon. “Europe Is Missing a Contingency Plan Amid Greek Exit Fears.” The Wall Street Journal. May 17, 2012.

15 Goodhart, Charles. “Only the IMF can break the euro debt crisis logjam.” Financial Times. May 17, 2012.

16 Decline of Euro Stoxx Index from March 15, 2012 through May 16, 2012: 2608.42 to 2138.49: -18%.

17 Decline of Dow Jones Industrial Average from May 1, 2012 through May 16, 2012: 13,279.32 to 12,598.55: -5.1%.

18 The Overheard Column of “Heard On The Street” in The Wall Street Journal. May 17, 2012.

19 Alloway, Tracy et al. “How a storm in a teapot became a tidal wave.” Financial Times. May 17, 2012 and  Schwartz, Nelson D. et al. “JP Morgan’s Trading Loss is Said to Rise at Least 50%.” The New York Times, May 17, 2012.

20 Winkler, Rolfe. “Three Fears for Facebook as IPO Approaches.” The Wall Street Journal. May 17, 2012.

21 “QE” = “Quantitative Easing”; “SMP” = “Securities Market Program”; “LTRO” = “Long-term Refinancing Operations.”

22 Gross, Daniel. “PIMCO’s Bill Gross: QE3, Inflation, Muted Growth on the Way.” The Daily Ticker. May 16, 2012.

23 Alan Greenspan’s tenure as Chairman of the Federal Reserve lasted from June 2, 1987 to January 31, 2006.

24 I could only find a chart showing the years from 1994 onward rather than 1987 onward.

25 Evans-Pritchard, Ambrose. “Market rally on Greek exit?” The Telegraph. May 17, 2012. The quote Evans-Pritchard’s summary of what a Bank of America research trio from France, Germany and Greece is forecasting as an outcome of a Greek exist from the euro.

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