By MoneyMorning.com.au
–The gold charts we showed you yesterday made the case for a golden recovery. Today we cede the chart analysis to the master, our technical guru Murray Dawes. Murray’s posted his latest big picture update over at his Slipstream Trader YouTube channel. Go have a look now.
– Murray’s work highlights the interconnection of markets. But you have to wonder if the equity markets have basically put up their hand to the bond market and said, “Talk to the hand, baby.” That’s what you do when someone has bad news you’d rather not hear, baby.
–What bad news? How about one-year Greek bond yields of 114%? This is the bond market’s way of telling you Greece is going to default. In fact, that news is probably old news for stock market investors. So what’s the new news?
–The new news – the news not priced into the stock market yet – is that the €3 trillion figure being thrown around in markets might as well be a basket of unicorns, shamrocks, and rainbows. If investors think the European Financial Stability Facility (EFSF) is the €3 trillion solution to Europe’s sovereign debt woes, they are bunch of suckers and deserve the losses that are coming.
–Moral judgements aside, the bond market is starting to communicate some useful information about Italy and Spain. Mind you, the European Central Bank has been doing the equivalent of putting its hand over the bond market’s mouth and telling it to shut up. By buying government bonds, the ECB keeps official borrowing costs down for Spain and Italy and confuses the price signals coming out the market.
–But the signals are still there. Yesterday Italy and Spain sold a combined $24 billion in bonds. Most of them were short term. The market is reluctant to lend to European governments for 30 years. But three months is doable.
–The yields on Italian and Spanish bonds are still remarkably low given the size of the debt that needs to be refinanced in the next 12 months. Italy paid 4.51% at its auction of two-year notes. The interest rate on 10-year Spanish government bonds is now 5.07%
–You can see from the chart below that Italian and Spanish 10-year yields have not yet gone the way of Greece, Ireland, and Portugal. If and when they do, all hell will break loose in financial markets. The ECB is trying desperately to prevent all hell from breaking loose.
–As for shares, the best thing you can say about them right now is that they’re not European government bonds. That alone may have accounted for the big moves overnight. Aussie stocks rocketed up 3.6% by the close yesterday. Gold, silver, and commodities rallied too.
–But it’s probably not a bad time to back up, grab a history book off the shelf, and see if anything like this has happened before. You’ll find a case study below from Greg Canavan, editor of Sound Money. Sound investments. The excerpt is taken from a recent issue of his monthly report. It’s the anatomy of a credit contagion…
Does Greece 2011 = Austria 1931?
The whole euro-debt crisis has become a farce. Each day the market reacts to rumours about a potential change to the situation. Big rallies and declines characterise each day’s trading. This is a feature of a fragile and vulnerable market.
The probability is increasing that we experience a disorderly event in the next few months
‘The few who understand the system, will either be so interested from its profits or so dependent on its favours that there will be no opposition from that class.’ – Mayer Amschel Bauer Rothschild.
‘Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again… If you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.’ – Sir Josiah Stamp, Director, Bank of England, 1940.
‘The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.’ – Abraham Lincoln
‘When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time, a legal system that authorizes it and a moral code that glorifies it.’ – Frederic Bastiat – (1801-1850) in Economic Sophisms
For subscribers who have been with SMSI since the start, the above headline might look vaguely familiar. In just the second issue, published in February 2010, I asked whether the situation in Greece in 2010 was similar to that of Austria in 1931.
Over 18 months later, it is only the year that needs changing. The situation in Greece is mired in uncertainty. It has the ability to trigger a credit crisis on par with that experienced in 2008. I’ll explain why in a moment. But first, let’s look at the parallels to Austria in 1931. Here’s what I wrote last year:
‘It is worth remembering that upheavals in Europe triggered the economic malaise that made the Great Depression “Great”. Although 1929 is etched into history as being synonymous with the Great Depression, the real tragedy did not get underway until 1931.
‘The Austrian bank Boden-Kredit- Anstalt was rendered insolvent in the aftermath of the late 1920s credit boom. It was “saved” in October 1929 by merging with the stronger Oesterreichische-Credit-Anstalt. An international syndicate headed by the Rothschild’s of Vienna, and including J.P Morgan and Company, injected new capital into the merged entity.
‘The Austrian Government guaranteed the bad debts of the old bank and the merged entity spent 1930 “muddling through”. But then in May 1931, the Credit-Anstalt bank collapsed. Some blamed the political climate at the time, with the economic union between Germany and Austria (Zollverein) spooking France. Others simply stated that Austria had “consumed its capital”, with the result that a banking collapse was inevitable.
‘Whatever the reason, the collapse of Credit-Anstalt triggered a run on German banks by French and US creditors, leading to the forced closure of the German banking system. London financiers were heavily exposed to German banks and industry, and were caught out by the banking sector shutdown, which effectively froze their assets.
‘This in turn caused panic amongst London’s foreign creditors and a run on sterling, at the time the world’s (weakening) reserve currency, began. And so went the contagion that crippled the world economically and provided the impetus for Hitler’s rise and decades of economic and political turmoil.
‘In the 1930s, contagion went from the periphery to the core in very quick time. Austria folded in May 1931. By September of that year, Britain had gone off the gold exchange standard (a poor imitation of the classical gold standard) and devalued the pound sterling.’
The subsequent currency, economic and political upheaval was profound. Confidence in the system disintegrated as the system itself altered beyond most people’s recognition.
Stock markets around the world renewed their falls. They finally reached a bottom in 1932. In the US, the ‘bottom’ (not that anyone knew at the time) represented a fall of around 80 per cent from the 1929 highs. Needless to say, if you had any cash, that was also the buying opportunity of a lifetime. But few had any cash.
Then and now
Obviously the parallels today to the situation existing in 1931 are eerie. But there are also major differences, which is why this drama has dragged on for so long.
Amongst Europe’s major powers there is a strong desire to maintain the status quo. France and to a lesser extent Germany, are doing their utmost to keep the Eurozone intact. Back in the 1930s, it was pretty much every man for himself. Great War enmities lingered and spilled over to the economic and political sphere. Coordinated action was impossible.
While there are certainly differences between then and now, you should ask – will the outcome be any different?
Greece is sliding towards default. It would’ve happened back in 2010 but the politicians and bankers did all they could to avoid this impending reality. They provided Greece with billions of dollars in loans, hoping growth would pull the country out of the hole. Instead, the depression has deepened and Greece has just dug itself in deeper.
This ensures the eventual day of reckoning will be that much worse when it arrives.
The whole euro-debt crisis has become a farce. Each day the market reacts to rumours about a potential change to the situation. Big rallies and declines characterise each day’s trading. This is a feature of a fragile and vulnerable market. Confidence is fleeting.
On the one hand, the market is saying a Greek default is imminent. On the other, those with an interest in maintaining the status quo make soothing statements about Greece sticking to its austerity program and remaining a part of the Eurozone.
In my opinion, the market is far smarter than a bunch of determined and self-interested politicians and bankers. Greek one-year bonds are yielding a massive 134 per cent in the secondary market. The two-year note trades on a yield of nearly 77 per cent (see chart).
Greek two-year bond yields
Greece simply doesn’t have enough money to endure. It desperately needs a €8bn loan from the European Union and International Monetary Fund to be able to pay its bills. The loan is due in the next couple of weeks but it is under threat because Greece has not met previously agreed austerity targets.
So over the weekend, Greek politicians proposed a new property tax to try and secure the rescue funding. Without it, a default is a certainty. Like Australians, the Greeks love their property and further civil disorder will stem from these latest measures.
Regardless of whether the tax is actually collected though, the intention to do so will be enough for nervous Eurocrats to release the next tranche of the rescue loan. It’s not really a kick, but the can will be scuffed down the road for a few more weeks at least.
Dan Denning
Money Morning Australia
