World Out of Whack: Oh, Yeah? Or What?

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

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In this week’s edition of the WOW: What comes after threats?

I’m not sure if you saw it but 3 weeks ago the obvious was finally laid out to bare by none other than Mario Draghi.

“If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full.”

Oh dear, he does look pissed

Even though the pressures have been mounting, there has been scant comments from the elites with regards to the question on everyone’s lips. What happens when/if a member state actually leaves?

Draghi’s threat to member states who are checking the exits and considering their alternatives is the first real public step towards acknowledging the problems.

As Reuters reports:

“Based on data to end-November from the Target 2 payment system, that would leave Italy with a 358.6 billion euro ($383.1 billion) bill. The system records flows of payments between euro zone countries.

The threat of defaults on cross-border debts has often been credited as one element keeping the euro zone together throughout the financial crisis.

As these payments are not generally settled, weaker economies including Italy, Spain and Greece have accumulated huge liabilities towards Target 2 while Germany stands out as the biggest creditor with net claims of 754.1 billion euros.”

This time they can’t blame it on Brexit.

Remember, Brexit was actually easy since our pasty friends had never made the decision to join the single currency. It’s not going to be so easy when actual member states opt out.

What investors must realise is that even the elites have had to come to terms with the abject failure of the European Union and the utterly ridiculous notion that the entire region could operate under one monetary regime while experiencing different business cycles.

Not to mention the notion that sovereignty would be ceded to a bunch of wealthy elites by a populace of some 500 million people who’ve been fighting with each other since man began recording history.

Pray tell what happens when Marine Le Pen wins the French elections and proceeds to do exactly as she’s promised?

Frexit: Le Pen to seek euro exit in six-month negotiation plan

And as in any divorce, the real mud gets slung over who owns what and more importantly who owes what. Debts? What debts?

After all, Le Pen’s party never had anything to do with taking them on in the first place. They were against it remember? For their part the French people are already miffed that France has had to contribute to bailing out Stavros in Greece and Luigi in Italy. Enough!

And so when Draghi says, “You pay”, the currently unstated response is, “Oh yeah? Or what?”

It’s coming. Watch.

What about this guy?

Beppe Grillo and his 5 Star Movement, Italy

Italians are in no mood to endure more pain and cough up more money to those who they increasingly see as their oppressors, 5 Star Movement or not.

The truth is that after 18 years of incredible mismanagement and faltering economies the man on the European street feels that he’s already paid enough. To ask him to pay more to an unelected body of millionaires in Brussels is a pretty tough sell.

And so while I laid out how this was going to go down with the easiest short in recent history the question nobody is asking right now is what comes after?

A gander over to Wikipedia tells us that Europe’s military has experienced continued cuts pretty much since the last world war. Right now they’ve pretty much got a shiny brass band and some colourful flags.

I expect this will change too. Long European military buildup? There are worse trades.

The question is…

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I think 2017 is the year we see the great experiment unravel and 2018 is probably the year that scores begin to be settled. It ain’t gonna be pretty and I sure hope I’m wrong.

– Chris

“Appear weak when you are strong, and strong when you are weak.” ― Sun Tzu, The Art of War


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