Wednesday, April 7, 2010

This Is What Government Intervention Looks Like

The Swiss Franc
The Swiss government decided that the Swiss Franc was getting too strong versus the Euro, so they sold a bunch of Francs to weaken the price. Look at the massive volume on the ETF (FXF) and the abnormal, massive intraday trading volatility!

Now FXF is comfortably back inside the downtrend that mirrors the downtrend of the Euro. Because of the intervention, it is as if FXF never broke out in the first place.

US Treasuries
The 20-year US Treasury ETF (TLT) broke critical support on Monday (Green Line). It did so on fears that the economy is expanding and the Fed will have to raise rates sooner, rather than later. The reality is that The Fed will buy as many bonds as it has to put a cap on interest rates. Today, somebody came in in massive size and punched TLT back up through resistance to get it solidly back into its trading range.

Never bet against the guy with the keys to the printing press… Rates will only rise when it suits the aims of The Fed.

Is Greece The New Lehman?

A few weeks ago, a friend of mine asked me to describe the financial collapse.

The picture of what actually happened became clear when the 2,000 page investigation into Lehman was released a few weeks ago. The conclusion of how Lehman failed goes something like this –

Every Quarter Lehman would take a bunch of bonds worth some fraction of their Face Value and sell them to another bank, with the promise of buying them back after the quarter closed for a similar predetermined value. The sale price would be something close to Face Value, so Lehman would appear to have more assets than they really had.

This game literally went on for years. Until one day, Lehman tried to borrow money from another bank and offered securities as collateral. The other bank investigated the collateral and determined that it was worthless and they asked Lehman for other collateral. Lehman came back and said “we don’t have any other collateral.

The bank immediately called their loan and demanded cash from Lehman. Lehman could not pay and the institutional run on Lehman began. Within days, Lehman was broke. Too much leverage, with worthless collateral led to a negative net worth.

Why do I bring this up? Because the same thing is right now happening with Greece.

Commerzbank will not accept Greek Government Bonds as collateral from Greek Banks! Greece banks have already spent some of the money loaned to them by Commerzbank and now Commerzbank wants its money bank.

How do you say “run on banks” in Greek?

Look at the National Bank of Greece (NBG) falling on massive volume the last two days. That ain’t the short sellers. That’s the poor fundamentals of insolvent Greek banks running out of cash in very large hurry (just as it wasn’t the short sellers who sank Lehman, it was Lehman’s bulls***t accounting that failed Lehman shareholders).

A real bailout of Greece is needed ASAP. But a panic should lead to yet another great buying opportunity if it should materialize.