Out of the Swamps of Nothingness…
Well here we go again. It’s another week into the interminable Credit Depression. We wish we could write about happier subjects. Or tell light-hearted jokes. But the situation is still pretty serious.
To be fair, life on planet Earth is probably neither better nor worse now than it’s ever been. The sun goes up. The sun goes down. People live. People die. Injustice is rife. Some people try and fight the good fight. And everyone gets up to do it again the next day.
What makes today different is that there are so many people on the planet. All of them are integrated, more or less, into the same financial system. And that financial system is buckling. It’s the kind of situation that doesn’t allow you to kick back and relax. And in fact, the more unstable the situation is, the more erratic, emotional and unstable the behaviour of the people in the system becomes.
MF Global’s Australian Break Down
Take just one example that bears directly on Australian stock prices and the value of the Australian dollar. The collapse of broker-dealer MF Global Holdings Ltd. The firm declared bankruptcy on October 31st after making a $6.3 billion bet on European government debt. And that was the good part of the story.
The bad part of the story is that prior to declaring bankruptcy, some $600 million in client funds went “missing”. They may have been transferred to the firm’s own proprietary trading arm. Investigations continue. Meanwhile, some $3 billion in customer assets are still frozen as liquidators try to and clear things up. And the Australian branch of MF Global was shut down over the weekend after no buyers for the business could be found.
There’s a lot to be worried about here. The alleged and outright theft of customer funds is hard to fathom. Australian customers have had funds locked up. And Australian employees of MF Global are now out of work. Those are two direct impacts.
But there are indirect impacts too. The bad bet on Italian debt is sadly familiar (think LTCM). But the systemic issue is how many other firms are sitting on bad sovereign debt bets. And how many other firms are using government bonds for collateral?
MF Global and the Future of Markets
The big systemic risk is that a blow-up in Europe forces a big unwind in futures markets. MF Global’s problems were caused by making the wrong call on government bonds. But thousands of traders and hundreds of firms and dozens of banks have their balance sheets stuffed with those same European government bonds.
If the value of those bonds falls – and every day you get a new European government watching its bond yields go over 7% – then the owners of those bonds will watch their assets fall, their equity get wiped out, and their capital base shrink. The very small pile of assets supporting a much bigger pile of leveraged positions in financial markets will become even more unstable.
This status quo is what makes it hard to take the current market action seriously. It really is like dancing to the band on the Titanic playing “Nearer, my God, to thee” as the boat went under. They went to their maker in style.
By the way, there WILL be dancing at the Doomers’ Ball this Friday at the Windsor Hotel, but only if you’re one of the 300 ticket holders. The event sold out quickly. But one reader would only confirm her purchase of a ticket if we could guarantee dancing. There will be a pianist. And if your editor has anything to say about it, there will be dancing.
If we were on the Titanic, we couldn’t guarantee we’d get across the ocean of time that stands between now and Friday. But as our feet are firmly planted in St Kilda, we’ll take the rest of the week to look at what other systemic issues beset the financial system, and whether there are any chances to wring a profit out of it (get a lifeboat).
Until then, we trundle along in the wake of the bewildered policy makers. They are trying to solve the world’s big debt problem with more debt and leverage. You do what you know, after all. But it reminds us of an image used by the German philosopher, Friederich Nietzsche.
Nietzsche was writing about a particular problem, which he described as trying “to pull oneself up into existence by the hair, out of the swamps of nothingness.” Europe is trying to maintain the existence of its single currency and its political union by pulling off just such an impossible feat. They have to try it. But it probably won’t work. More tomorrow on why.
for Markets and Money