[Russ Winter]

The stock market has had 3 bubbles since 1995. The first was the tech bubble, the next the housing and the current one the liquidity/government bubble. Incredibly once again the credit agencies have been used to facilitate the latest and most lethal bubble. In this doozie we witness unfettered belief by it’s participants that it’s within the power of the Central State to make good every loss, guarantee every debt, maintain the System mostly to benefit the 1%, and meet every geopolitical challenge. All we need is the “will” to force the government to use its essentially unlimited power to “fix everything.”  I’ve used the term Wizard of Oz to describe this, but now don’t think it does this justice.  A people conditioned to this expectation will have great difficulty accepting that their government has already done everything possible, and that these stupendous debt-based expenditures are simply not sustainable going forward.

The primary hallmark of the liquidity bubble are near zero interest rates in the major countries most responsible for it. First and foremost that would be the US, UK, Japan, Germany and China.  One can also call this the bubble in havens.  The liquidity bubble in turn has also fostered a “zombie market”.

A look at the CB balance sheet as a percent of GDP  reveals how they have essentially propped the system without doing anything to correct the problem.  The CBs are waiting for the cavalry apparently, except most think they are the cavalry. The big three CBs now hold over $8.5 trillion in grossly overvalued debt securities and apparently have plans for more.  Actually economic backing seems not matter not, and that is the very definition of a Ponzi.  Remember that CB balance sheet liabilities in the end fails on the sponsoring nations, which would be the EU, US, Japan, UK, etc.

And it is easy to overlook the U.K whose financial system is essentially bankrupt. The aggregate cost of bailing-out its banks exceeded the entire value of England’s gross domestic product. The government already owns most of the country’s largest banks – including Royal Bank of Scotland (RBS) and Lloyd’s (LYG).

This leaves the globe in a constant wash, rinse repeat pattern of emergency “solutions”. Markets can be temporary maintained because the liquidity from this just runs around overpaying for the increasing pool of trashy and increasingly insolvent financial instruments, and when the investments don’t work, there another slew of liquidity. Meanwhile the underlying quick sand is giving way.



One also has to ask how come global bank stocks are doing so poorly after receiving trillions in liquidity assistance from the primary central banks of the world? And looking forward, in Europe there is nearly 700 billion Euros ($900 billion US) in fictitious capital bank bonds maturing in 2012 on largely insolvent banks. Who buys those?  Many believe the banks will use cheap three year LTRO to fund themselves, leaving the ECB with more big cans of worms and even more exposure to insolvent banks.  And in turn who buys the sovereign debt of the countries who are directly and indirectly backing their banks debt?  The market seems to think Germany and France can borrow cheaply enough to effectively finance the insolvents (see chart 3) with their biggest burden being Italy and Spain. In the case of Spain [Jobless hit 5.4 million] with two out of the three youth age 16 to 25 out of work, more credit downgrades are the least of the problem.

I have already written on the topic, Is Germany the savior of Europe.  I would merely add, that only in a clueless Orwellian or Soviet Union like world would a leader, in this case the aforementioned savior Germany come up with a proposal like this one. Is this a AAA? :

Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade.” 

source: Hussman







The ECB doesn’t need to create a bad bank, it already is the largest one in history. The ECB’s holdings can be tracked here, included in the sludge are insolvent sovereigns, but the big story are 864 billion euros in “loans” already made  to insolvent banks. Barclays analyzes what the ECB is on the hook for so far:

The ECB bought adjusted for maturities (in cash) between May 2010 and end of December 2011,  putting the current total ECB holdings at about €211bn (and probably close to €220-225bn in nominal terms). We would estimate,  that of the current €211bn SMP holdings (in cash terms at time of purchases), Greek bonds account for around €36bn, Portuguese bonds €20bn, Irish bonds €19bn, Spanish bonds €46bn, and Italian bonds €90bn. The losses of these purchases is estimated at 30 billion Euros.

Italy, which just received a  credit downgrade to BBB+ with negative watch is a country that now struggles under a heavy burden of what is essentially external debt. Similar to emerging markets nations that experienced severe fiscal and currency crises in recent decades, Italy will not be able to roll over its government debt in the private marketplace.   It really makes little difference if they borrow at 6%, in which case Germany and France take the hit via the ECB and EFSF, or at 7% or 8% if the private market takes more of the the burden. The result is the same trajectory, default and restructuring. At that point, Italy’s creditors will receive the same treatment that holders of Greek government debt now face,  a 50% “voluntary” haircut without any benefit from hedging arrangements they’ve already purchased.





As far as the artificial low rates in Japan, the UK. the US, Germany and France,  all it would take is a rise to 4%, and the result would be trillions in losses, and a world of hurt for the liquidity, “safe haven bubble”.  In a word, it would be a “game changer”.   Take a good look at how fast rates rose in the following similarly debt ridden countries?































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