Reality Bites

It appears as though the Europeans just don't get it. Maybe it isn't Europeans per se, just politicians. Either way, the decision of German financial markets regulator BaFin to prohibit naked short selling did not have the intended affect of calming that markets. In fact, the announcement of the ban on short selling (combined with concerns that German chancellor Merkel will support an EU financial transaction tax) sent the euro plummeting versus the dollar as investors sought safety in U.S. treasuries.

I have previously written that, as with the U.S. banks in 2008 and 2009, market vigilantes want more than promises by politicians that measures will be taken to keep troubled EU members solvent. They want real reform and solutions. Following this afternoons announcements the following story appeared on the Dow Jones news wire:

(Dow Jones) "This shorting thing just never works. Back in July 2008, the SEC banned naked shorting on 19 financial companies, including Lehman, Merrill, Fannie and Freddie. How'd that work out? Well, before they had to extend the ban to 799 companies in September, Lehman, Merrill, Fannie and Freddie were gone. Citi and BofA were all on the verge of collapse, saved only by Uncle Sam's big pockets, just like AIG. And who knows who else would've gone down in the storm. The point is, Germany can ban naked shorting, but they can't ban a company from destroying itself, which is the real issue."

The author is dead right. Investors want substance. All they get is rhetoric and commitments to spend money. All this would do is create large amounts of debt and not fix a single thing. For a year the financial markets traded on hope and backward looking theory that certain phenomena always occurs. Now market participants want real responsibility, real growth. real job and wage growth. With productivity gains in the U.S. and dysfunctional Europe making the U.S. look like the model of fiscal prudence, investors may be waiting a real long time.

During the financial crisis of 2008 (and before) I warned that, contrary to what many people believed, many structures backed by subprime or low-doc / no-doc Alt-A and even prime mortgages would never be worth 100 cents on the dollar no matter how long they were held. Now the FDIC is inheriting hundreds of mortgage bonds which are essentially worthless from failed banks. As more banks fail, the FDIC's portfolio of garbage grows.


The recent interest rate declines and more Fed jawboning has sent the prices of floaters, especially LIBOR-based floaters falling (in spite of the recent rise in LIBOR rates due to trust concerns between banks). I don't think that rates could trend much lower and although credit spreads may widen a bit farther the time to buy them for trading purposes may be near. However, one must have the conviction to sell one's floater positions after making a few points. Holding LIBOR floaters for income purpose is, well, European.



Trivia: How many government bond issues does Norway have outstanding?


Answer: Norway has only six government bonds outstanding. It is the sixth largest oil producer.