Top 10 Reasons Why the Mafia is Better than the State

Something for you to think on a Sunday

A trading idea

As of today, wheat futures are 689 USD and corn is 607.60. That is a good 81 USD difference and offers a nice statistical arbitrage opportunity if we pay attention to their colinearity. We can short a wheat future and long a corn future with the same expiry since I would expect these prices to converge. Remember that these crops are interchangeable in the products they are used for in many industries, such as biofuels. What's high price will lead to a switch to corn.

Opening a position in stages if the gap opens and again closing it in stages gives even more profit. The risk is limited, given the colinearity model. Obviously the model can break down, at least temporarily, but the risk is far less than a directional position. If the gap narrows down, we close the position at, say 30 USD difference, still higher than the the past year's average gap. We can collect 50 USD times the leverage the future offers with relatively low risk.

Furthermore, I would risk a little and bet for a deflationary collapse in commodities given the current environment, loading a little bit more on the short side. Other people are warning about this too.

There is no tomorrow

Leve oil's abiotic origin aside, one cannot go on without doing the math and see that, even though oil can be replaced, if we consume faster that its replacing time, we will quickly run out of it.

Women are attracted to males' energy usage

If you have a degree in Physics or Chemistry, you soon realize that everything is about energy. I don't have one, but I also recognized that fact long ago.

This is also important in Psychology and Sociology because of their biological roots, although I think it has been overlooked. If we look at the characteristics the animals display when mating, we find that the ones selected by the female gender are those that take more energy to be built or to be done.

Particularly, a female will be more attracted to the driver of an Audi than to the driver of a Citroen. Not only does it cost more to purchase, but it also costs more to maintain because of the fuel consumption. This costs can be attributed, in turn to the materials being harder to extract and to manufacture, hard meaning more energy-consuming, and the people intervening also require more energy consumption for their lifestyle.

Beware that I am not saying any energy consumption is acceptable by females. A guy with a resistor connected to the electrical network is not appealing, nor is a teenager traveling weekly from their parents to her place 1000 miles away just to sit on the sofa.

We also see this effect in marketing. An example is that Nokia failed to see iPhone's threat.

The iPhone did not sold only because of its higher technical capabilities (we can list a lot of technically-superior devices that failed miserabily) but because of the energy usage it prompts social groups to use: having an iPhone is having a lot of social options to spend energy on, such as surfing the web with multimedia capabilities, storing videos and music to be readably available to show at social events. In general it is a device that makes the user use. Members of a social group who don't have those abilities are neglected, such as those out of Whatsapp groups, who don't receive the latest group agreements. Therefore, the iPhone not only makes its user use it, it also creates the need for other users to use it.

Nokia stated that a phone that big would never be marketable. They failed to estimate the new wat that device would make possible to spend energy on social events and how that energy would be well used on these events.

It's coming fast: A Generalgouvernement close to you

Remember this?

In May, 1968, college students took the streets to revolt against their respective governments. Those students had not lived through the war and did not know the harsh conditions their parents and their older brothers had lived in. Instead, spook by a soviet-friendly political class and ingenious artists, poets and musicians, and finding themselves in a world that had just started pumping oil for leisure, removed the austerity and labor-oriented values their fathers had learned, shook Europe claiming class discrimination. They established themselves in power during the next decade. Funny thing: they never allowed anybody else into power structures. Today, this is a better world because you can voice your ideas without fear of being sacked just because of these democratic fellas that overthrew the old governments forged during war time, by war people.

Here is Daniel Cohn-Bendit, Hercules of civil rights in his time

Today he doesn't look like a lower-class protester anymore. He instead looks like the European bureaucrat and corrupt politician he is

Funny thing: He confronted bureaucrats and (for the most part less) corrupt politicians in the 60s.

Well, this very same guy is proposing to force Greek people to comply with whatever diktat out of Germany. Apparently, this guy said that "If you leave the Greeks to muddle through alone, you are risking a military putsch". So much for this democratic bunch of pirates. He just joined Barroso in this kind of interventionist shit. Sure it is better to make Greek people pay every time they breath instead of letting them out of the euro and rebuild themselves. That would hurt the banks too much eh? Very good Cohn-Bendit, you just took off the mask you wore on for more than 40 years, you hypocrite bastard. Why don't you just leave your eurocratic green seat and bake some bread for some poor Greek children?

From The Greek Reporter:

During the past hours, the Greek media has been circulating a shocking German article from www.german-foreign-policy.com that argues than in Berlin, authorities are considering coup scenarios and other ways to use armed forces to impose their will on Greece. The article is entitled “ On The Relevance of Democracy”, and it presents several nightmare scenarios on how the Germans intend to turn Greece into a protectorate since the German austerity dictate can no longer be enforced with democratic means. The article also refers to German commentators who are drawing comparisons to the situation in the later stages of Germany’s Weimar Republic: “In the Greek situation, the worst case would be a reversion to a dictatorship,” warned an influential commentator.

Did you believe you lived in Greece? That is now Generalgouvernement des Sudens. And you Poles, I tell you this: In your little Eurocup 2012, Germans are playing at home.

Awful normalcy bias

I look around and see a lot of people continuously hoping for a return to normal, always claiming that next year will get better (like they did last year), as if times of scarcity were just but rare events in human history.

It is wonderful how short-termed the human brain is. People only remember the last years of consumerism, they only remember buying a wonderful piece of technology that allows them to communicate instantly with anyone no matter where they are in the world, or performing the miraculous action of driving a car and traveling many miles in one hour.

Those things we take for granted and that are a gift from the Earth to the generations that have made use of that energy. With the end of cheap oil comes higher production costs and higher financial needs. With a consumer loaded with debt, factories need credit to perform operational tasks. This makes investment incompatible with higher interest rates, since higher yields won't be payable if consumers don't spend.

What we need to be aware of is that the era we have been living in is over. With the end of cheap and abundant oil comes a societal collapse and a population crash. People take for granted the button on the wall they press and lights go on, the take their car, their phone, their broadband, their movies and their clothes for granted. They observe last century's uptrend and apply linear thinking. So everything has to go up and this is but a bump. It is not, fellas, sorry. From here on bumps will be times where no conflicts and no economic events make the news. No news is good news, as it was always true.

Well, on the trading side, below there is a BAC (via Zerohedge) presentation for Sunday evening market opening you might find interesting. My bias: Awful rats in the leviathan that the EU is have most under control, at least those poor Greek bastards. Surely they ran some campaign to convince the public the EU will be friendly this time and that alternative parties are too crazy to take over the government, like those Golden Dawn cronies harassing people. They will tell "normal is good". All over again. Or maybe they have special ballots that only admit votes to New Democracy. Who knows.

Nothing changes and EURUSD goes to 1.28.

What I am almost sure is that hell does not come tomorrow. It will come, but not tomorrow.

Citizens of the South, fear the ESM

Spain got its first bailout on Friday, as many people had been preaching for years now. A bailout that was to be avoided at all costs by the Spanish government and, once accepted, is not referred to as a bailout, leading to international mockery (see You say Tomato, I say bailout, Details Emerge About Spain's Cramming Down "Bailout" Loan). 100 bn WOW! It is a big deal, way bigger than the Spanish people would be able to swallow, and has incidentally coincided with the weekend of Italy-Spain Euro 2012 match. Good stuff to distract the populace.

The money goes to the FROB (Bank Ordered Bailout Fund). Part of the bailout comes from the EFSF (now) and another from the ESM (when established in July), which does not compute as deficit.

We need to focus on the seniority status of the debt incurred when bailed out by the ESM. Senior debt means that debt with that status takes priority over any other debt. The problem with this type of aid is that it leaves Spanish bond holders in a secondary place when paying. I believe that the tensions on the Spanish sovereign debt will not relax since international bond investors know that they will come second to the ESM and there will be little if nothing left for them to take in case of problems. As per Wikipedia page on ESM:

Critics have noted that the ESM severely confines the economic sovereignty of its member states and criticise that it provides extensive powers and immunity to the board of ESM Governors without parliamentary influence or control.

But there might be more to it. The EU may be withholding information as to what their final goal is. Simply ask yourself the following question: If the market asks for a 6% yield on the 10Y and the rescue package comes at a 3%, where is the catch? Their intention is not just saving the banks (their true intention). Otherwise this operation would have been carried out avoiding the State-owned FROB and using more standard ECB financing instruments such as LTRO. Why not make an adjustment operation with Spanish banks, or open a third window of liquidity at 1% and with larger balance-sheet flexibility?

My advice to young Spaniards is to look for opportunities overseas starting today.

Furthermore, Bankia, an entity that has capital and reserves of 10,000 million and losses (assets less liabilities) of at least 40,000 million has a market value 4 billion. New financial engineering all over again. How did it come to this? Mortgages for everybody, overratings, avoidance of risk aversion models, impossible targets, fierce competition between branches, bonuses... Some insiders knew the system would ultimately fail simply because they did not care where they were going to. 

The financial system is short-term and with the deregulation, managerial incompetence, it is even more short-term. In addition, bank management was full of inept and corrupt politicians. Finally, it is shielded (too big to fail). With 12 million hostages, including depositors, and current account holders, you get what you want. 30,000 million, for instance. This is how things are and there is nothing left to do. We keep talking about financial system reforms and bank bail outs and say that some country "has been bailed out", but essentially we keep having the same financial system and the same government and regulators that favored the elements that led to this situation.

The only think we can do is try to laugh at it

Liberté, fraternité, egalité ... is all over!

With Mr. Hollande's arrival, France is planning on reducing some worker's retirenemt age from 62 to 60 and keep a lot of social benefits (mind that Hollande was very popular between the immigrant and minority communities). This might be a sign of joy for some, or a sign of delusion for others. In a time when liquid money is king, who will finance all this?

French banks have been liquidating many of their USD-denominated assets and repatriating euros. A drop in French real estate could mean a hard hit in their balance sheets and systemic failure. On the other hand, the state sovereign debt auctions leave those of Spain in the size of a country fair raffle. If Mr. Hollande does not implement austerity measures, he will need to increase the selling of bonds, which will come at a higher yield and the spread with the bund will widen. Once its banks need a bailout, France will enter the same spiral that PIGS went into.

Fight for the State resources will mean further clash between different straits of society, especially between culturally different groups. Recent racist violence coming from second or third generations of immigrants is growing at an alarming pace, and this reflects in the white vote for Marie LePen's far right party. This video gives a very grim outlook of France's future as a society

Kicking the can down the road... until the road ends

I wanted to write something more about the worsening crisis in Spain. I was behind on my reading of (Cathy O'Neal) mathbabe's blog when I came across her blog entry and has left me pretty much without arguments to add to the discussion. I quote her for the reader's convenience and pick up where she left off:

[...] Currently the worst example of this method is in Spain, where the banks are finding it politically impossible to admit their losses. [...]

What are the chances that this method of delay and pray will work for Spain? With an enormous housing bubble and 24% unemployment, not good. Most of the bad loans that have been extended after non-payment are housing market related. Half of the lenders are zombie, which means insolvent but still technically open for business. Essentially the numbers are just too high and now everybody knows it (see this Bloomberg article for the low-down on Spain).

So what should Spain be doing?
I like to point to the example of Iceland, which admitted its debts early on (although it has to be admitted they didn’t have much of a choice), defaulted on a bunch of international debt, bailed out their citizens from onerous home debt, and is recovering nicely (see this Bloomberg article for more on Iceland).

Oh, and let me add that they (Iceland) are indicting and jailing the bankers who got them into the mess, to the tune of 200 indictments. [...]

Unfortunately, it would be tough for Spain to repeat that act- it depended on the fact that Iceland has control over its economic choices, but Spain is part of the Eurozone and as such is embedded in a huge network of agreements and debts and currency with the other Eurozone nations.

In some sense, Spain is being forced into the zombie bank situation by a lack of options. Unless I’m missing something – would love to be wrong!

You are not wrong mathbabe. Actually Spanish politicians put into practice the centuries old tradition of the picaresque novel and tried to do some euro printing on their own. How? By injecting newly issued sovereign debt into Bankia's balance sheet. In this way, Bankia could go to the ECB and take more credit, and kick the can down the road. Draghi is not a fool and called their bluff the next day. Big slap on the face. Now Zerohedge is all over Bankia.

The Spanish housing bubble has not corrected itself as banks make up their balance sheets, and with the help of some more credit, merging with regional public saving banks rich in customers' current accounts, IPO and government bailouts now and then, they have been able to avoid asset depreciation. However, problems keep piling up and Spanish politicians keep thinking in terms of the housing market that brought (unreal) prosperity, refusing to take hard action. Keep calm and go on. Everything is paid for with austerity measures and tax raises that affect the productive layer of the Spanish society, sending the SMB to the abyss, which reduced the capacity of raising taxes, increases unemployment and drags people into poverty, which in turn reduces people capacity to buy a house. This will eventually crash the Spanish housing market. However, no one will be able to afford a house because, by then, the government will confiscate private savings (freezing accounts, or exiting the euro).

There will be much more pain in Spain. I would like to teach politicians that houses built for workers in a place with no jobs are worth the numbers of jobs in the place: nada. Finally, here is Biderman dealing with this topic (looks like this delay and pray is becoming a trending topic).

The ball is on the Spanish people's roof. They can choose to begin to understand, or they can choose to go on watching soccer.