brother disco stu's shocker - tuesday, page-33

Okay - Institutional wrap up, as much as I can decipher reading between the lines.

Broken up to a few themes - amalgamation of a few guys I had dinner with in Hong Kong two nights ago. I cannot be blunt for fear of rumor-mongering but here it goes.

1) Banking crisis in Europe. Sovereign debt is one issue. But banks are well capitalised to withstand a Greek default (not an Italian one though). So ignore any media cries about how the banks will be affected. They have been provisioning for this for a long time. The REAL problem is funding requirements and short term rollover funding terms. A fair bit of their short term funding has been used to backstop and provision for a Greek default. This causes a micro-economic version of a liquidity crunch, where by banks do not have enough liquid assets to conduct their daily business. In particular Societe Generale seems to be the highest risk, with an extremely large portion of their funding lying in the short term swaps - and they are seeing liquidity dry up fast as collectively all banks around the world are keeping their powder dry for a Greek implosion. So in the absence of short term liquidity to fund short term requirements - banks become technically insolvent.

To make it easier to understand - think of it as this way. Soc Gen has 26% of the required funding commitments for 2011, versus Credit Suisse who has 82%. More importantly - 69% of Soc Gen's short term funding rolls over soon. Where as 33% of Credit Suisse's funding rolls over soon.

That is the real problem. Instos cannot see how if you remove Spanish, Italian and Greek bonds off the balance sheet (or if you deem them illiquid), Soc Gen can continue business. It's like having commitments to lend 100b dollars and only having 26b in cash to lend out, while out of that 26b in cash, 19b of that needs to be renegotiated and refinanced soon.

Of course, with the ECB providing sufficient liquidity (are they still?) and now China coming in - those Italian and Spanish bonds arguably can be classified as liquid. But for how long? As the Italians and Spanish continue to issue more and more bonds and flood the market, they become so diluted in value that any liquidity in that market becomes destroyed.

Hence why it is a circle of death.

2) The impact of the implosion of the Euro is already being thought about as a valid tail risk over the next 6 months. Rumors of a wily old fox who broke the pound in 1992 (or 94 I can't remember) re-entering the market last week in size, pummelling the Eur/USD market in SIZE.

If stories and accounts of his modus operandi are true, he is usually 2-3 months off an actual black swan event on a macro/monetary policy level which pays off for him. If the accounts are true - he is expecting either a devaluation of the EUR due to Germany leaving or the abolishment of it completely within this side of Christmas.

3) China isn't as safe as everyone thinks. People on the ground are seeing tough times ahead.

4) US remains a problem, but not the same ones faced in Europe. But it is a problem that is due next year, not immediate - hence the risk trade being to short Europe and long US. That's why the SPX is still at 1168, while the DAX has broken 5000.

Bottomline - it will pay off to short the SPX but not as much as shorting European bourses. And the fall in the US markets will be a short, sharp, shock followed by a V-pattern rebound and will probably drag it to new highs.

Before the States are exposed with new funding and liquidity problems like Europe are now. The catalyst for that will be QE3 and how the Chinese react to a further dilution of their foreign reserves.

And in case you missed it - the Euro is probably toast.