Author : John E. Charalambakis
Date : October 9, 2011
The markets are known to be moved by the forces of greed (upswing and bullishness) and fear (downturn and bearish trend). In a similar way, in the cosmos there are two contradictory mysterious forces that move the universe in opposite directions. The first one is known as dark energy, which makes up about 70% of the universe, while the second one is known as dark matter that makes up about 25% of the universe. The balance of it i.e. 5% is made up of ordinary matter like galaxies, people, and stars. Dark energy is trying to expand the universe, while dark matter tries to slow that expansion. The exploding stars and the motions of the galaxies are nothing but reflections of the underlying forces that are trying to cancel each other out.
The expansion of the universe requires tremendous energy for its acceleration. Scientists these days have proven that before the universe (which is about 13.5 billion years old) got into the expansion phase, dark matter had prevailed (more than 5 billion years ago), and hence the universe was a smaller place than it is now.
It seems that in the financial markets we are moving into a period when the internal implosions of paper instruments (what we previously labeled the GRB, a.k.a. gamma ray burst phenomenon) will enhance the power of dark matter and will slow down markets significantly. The result would be economies that fall from one recession to the next, and where any growth might be dismal. Dark matter will be holding the economies down. The fear of the market is well-founded given the over-accumulation of debt and the toxic instruments circulated around.
However if dark matter prevails on the macro level, we are of the opinion that dark energy will prevail on the micro level, with the result being that financial institutions will implode and that implosion will accelerate and speed up the decelaration of growth. Case in point is Dexia Bank. It was just a few months ago when the EU stress tests gave a clean bill of health to Dexia. Just last week, the governments of France and Belgium had to guarantee the paper/bonds that Dexia had sold in the markets. The amount of this bad paper could exceed $200 billion! Would it be a surprise then, if France and Belgium get downgraded, especially when France has the worst sum of public and private debt in Europe, as our October newsletter showed? (even worse than Greece?)
We dare to say that shorting Belgium and France might still be cheap, as the following two graphs show.
In general, shorting European markets via a generic index as shown below might still be a profitable proposition.
Neither have we been fooled by randomness nor are we facing a black swan/unpredictable market development. We have simply entered into an era when acceleration of implosions degenerates financial institutions and decelerates growth. As that era unfolds high-yield paper may sufffer significantly.
It seems that we are afraid of a deep market-surgery, because we are afraid of the utlimate catharctic called death that resurrects life. I will let Bob Dylan and his lyrics titled “Death is not the End” speak to that.
The protests around the globe sing a tune that questions the wisdom of governments that keep bailing- out failed financial institutions, especially when they themselves do not trust each other and take their funds and deposit them with the central banks. Many weeks ago – prior to any call for banks’ recapitalization – we wrote that the EU banks’ unsecured debt and paper will force a market implosion.
We read and hear of proposals that empowering the EFSF (European Financial Stability Fund) via injections and guarantees will in turn enable it to recapitalize the banks. We are just wondering who has the real assets to be pledged as collateral to empower the EFSF in the first place? Is that France?
The scenery is reminiscent of the lyrics found in the Do Ya song of the Electric Light Orchestra:
As the forces of dark matter accelerate the impending implosion-death which in turn will bring about the deceleration of economies, the central banks may be forced to pledge unlimited cash and guarantees to avoid systemic defaults, destroying the value of money, and forcing us to sing again:
Ode to anchors and to real, hard, tangible assets that are no one else’s liability!