The European Bailout Absurdity: Money for Nothing

The European Union came up with a trillion-dollar bailout for itself at the dawn’s early light yesterday. Initially, the bailout plan goosed the euro back above $1.30. But by day’s end, the euro’s value had gained almost no ground whatsoever. Hardly a resounding success on Day One of the campaign.

I mention this event reluctantly, knowing how averse we Americans are to news out of Old Europe, that boring backwater of sclerotic cafe lay-abouts, socialistic train service, and less-than man-sized portions of things that real men don’t eat anyway.

The question begging itself here, of course, is how Europe intends to come up with roughly a trillion in bailout money. Sell Portugal to China? Cut Greece up into bait and catch whatever fish are left in the Mediterranean Sea? Frankly, I’m stumped. Talk about robbing Peter to pay Paul… All the European nations are already so hopelessly enmeshed in chains of unfulfillable counter-party obligations that the bailout might as well be a game of musical chairs played in the Large Hadron Particle Collider, set to the tunes of Karlheinz Stockhausen. The European bailout is, in fact, an absurdity. I predict that the effect of the announcement will last all of one trading day on the stock markets.

The truth is that the imbalances of global finance are so grotesque now that the whole money system is hanging together with nothing but spit and prayer. I get rafts of e-letters every week warning of a supposedly-coming global currency – a companion idea to the notion of a one-world government. Both are fantasies. Events are taking the nations of the world in the other direction: towards break-up, downsizing, down-scaling. Likewise, if major currencies such as the euro and the dollar blow up, they’re much more likely to be replaced by more local bank-notes backed by gold than by some hypothetical Amero or Globo-buck.

Early yesterday morning, the European stock markets were zooming, and Bloomberg even carried a wonderfully mysterious headline saying Greek Bonds Rally. That was especially rich – like, who the hell is going to load up on Greek bonds now? Is there a pension fund somewhere run by such dimwits that they would sell their positions in the Goldman Sachs issued Wolverine CDO in order to get in on the new bargain in ten-year Greek sovereigns? I hope those pensioners are prepared to spend what remains of their lives selling chestnuts from pushcarts on the streets of Oslo.

As if life in the USA wasn’t surreal enough last week…

Once upon a time, the stock market was a place where people with capital went to look for productive activity to invest in – say, a company devoted to making soap flakes, or an underpants factory. Now the market is a robot combat arena where algorithms battle for supremacy of the feedback loops. Thursday’s still-baffling fifteen-minute “crash” was an excellent demonstration of the diminishing returns of technology. People too-clever-by-half, aided greatly by computers, have now gamed the investment indexes so successfully that these markets no longer have anything to do with investment – they’re just about shaving micro-points of profit at high volumes by micro-milliseconds off mere differentials in… math! This is truly quant heaven, a place where only numbers matter and there is no correspondence to anything in the real world. In other words, last Thursday’s bizarre action was a warning that the American stock markets have become certifiable.

These algo-robots may be elegantly complex, but they are really no more than triggering mechanisms, and Thursday’s – whatever it was – glitch, let’s say, ought to be regarded as a mere preview of the coming attraction: a spontaneous capital combustion in which the putative contents of these stock markets get sucked into a black hole so vast that the trading desks will have to find a way to arbitrage infinity to ever again catch a glimpse of America’s receding wealth. And it could all happen in a finger-snap… But probably not tomorrow.

Until then, rest assured that whatever else is going on out there, credit default swaps never sleep.

James Howard Kunstler
for The Daily Reckoning

The Daily Reckoning