Shorting Eurozone Banks and the Chinese Boom

We woke with a fright. It sounded as if someone, or something, was scampering around downstairs. The bookcases shook and the bedside lamp vibrated violently. “We’re being robbed!” was our first, half-asleep thought.

Your editor leapt out of bed, grabbed the heaviest thing he could find (a half-read novel by a dead Frenchman) and crept slowly, stealthily down the stairs. Alas, the pen is no more use than the sword when it comes to combating a foe of this variety. Luckily for us, the action was over by the time we reached the first floor landing.

So went your not-so-brave editor’s first earthquake experience. The 6.9 magnitude “shake” reverberated a few hundred miles off the Taiwan coast last week. We’re told they are relatively common in this part of the world. Apparently, this one was just a baby.

Near death experiences aside, it was the earliest your editor had been out of bed – without having a plane to catch – in quite some time. We decided to grab a McDonald’s breakfast to celebrate the occasion.

“It was a sideways shake, which aren’t as bad as the vertical ones,” a local friend, Michael, explained to us later that day. “But you live in a new building, so you are probably safe either way. Except if a really big one comes. Then…well…I don’t know…”

The problem with Black Swan events – epic natural disasters, market crashes, best-selling books called The Black Swan, etc. – is that they are entirely unpredictable. What’s more is that, after the fact, it’s hard to imagine the world without them. Imagine for a second, living in a world without Google…or Harry Potter…or The Daily Reckoning. You’re right. It’s impossible!

Now, how can we possibly prepare for the unknown, you ask? Good question. The short answer is, we can’t. Fortunately, not everything is as unknown as it appears. Black Swan events are hard to predict because they are unprecedented (until they happen, of course). But there’s nothing unprecedented about a currency implosion…or a sovereign debt default…or, indeed, the collapse of an entire empire. It would be unprecedented if these things did NOT occur periodically. In fact, the only thing that ought to surprise you about the somewhat regular repetition of these events is that people are actually surprised when they invariably come to pass.

This morning we read that protestors have taken to the streets in Greece, where a new round of government austerity measures is working its way through the political process.

“This is going to be the biggest story in financial markets this year,” Rob Parenteau, chairman of The Richebächer Society, told Addison in an interview last week.

“When the Greek government cuts expenditures and raise taxes, it will suck cash flow out of the private sector. Houses and firms will not have as much cash flow. That means the existing debt load to the private sector will be harder to service. So we’re not going to see just public debt distress – which investors understand now – but private debt distress as well. Some of these countries, like Spain, have very highly leveraged private sectors – even more leveraged than their governments.

“What this means, is that banks that have exposures in terms of private loans to households and in the Eurozone periphery are going to find their loan losses going up. And then investors are going to start asking questions about their capital adequacy. And then, how can they raise capital in such an environment?

“I think many of the Eurozone banks could be wonderful shorts.”

The situation in Sparta – and across Europe – is a powder keg, no doubt about it. But what would come as a greater shock: That a single currency experiment involving dozens of countries and hundreds of languages spread across deeply entrenched lines of cultural and political tension, should simply last forever? That ratings agencies of questionable motivation and deplorable track records would, although characteristically late on the scene, somehow manage to get it all right in the end? That governments would overspend their kitty, only to find a magic money beanstalk in the backyard?

OR, that a bone-headed central planning committee botched the job, ripped off the masses and guaranteed a painful, embarrassing economic demise for the entire continent?


We read also that China, engine room of the world’s great economic recovery, may be sputtering, breaking down even. The “people’s” government banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases over the weekend in an effort to cool the runaway mortgage market there. According to Bloomberg, “Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.”

Marc Faber, Gloom, Boom & Doom report mastermind and perennial Agora Financial Investment Symposium favorite, reckons the Middle Kingdom’s economy could crash within a year. Jim Chanos says they’re “on a treadmill to hell.”

Many find such comments shocking. But again, what would be more likely – that an economy of a billion-plus impoverished people would slingshot from utter destitution to world-beating financial prowess under the stewardship of a communist brain trust within a couple of generations? Or that a few trillion yuan worth of centrally planned bubble blowing had gone astray? It wouldn’t be the first time a foaming gaggle of speculative investors had been duped by a slew of politically-greased handouts and freebies.

Of course, we could be wrong about the embattled euro and the bubblicious, Chinese miracle. Maybe Europe will defy the critics…and maybe the Chinese stock market will go to the moon without a hitch or a hiccup along the way. In any case, it is probably wiser to insure against the odd Black Swan than it is to place all your money on them.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning