Trying to drive while a passenger’s fat, clumsy hands are grabbing at the wheel is practically impossible. Nobody’s certain of where the car’s going...
Right now we’ve got politicians all over the globe grabbing at the wheel, causing uncertainty like we’ve never seen before. And it’s uncertainty that markets hate most.
Look at how the markets went hysterical when the Germans announced a ban on short-selling certain financial instruments. The announcement came seemingly out of the blue, making markets even more suspicious... what do the Germans know that we don’t?
Then in Washington, the US Senate voted 94:0 to stop the IMF “using its cash to help countries that are inextricably trapped in a debt spiral”. Now, that looks pretty serious to me and it’s riddled with uncertainty. Which countries are ‘in a debt spiral’? I thought that Greece was… so does this mean Greece isn’t getting a loan after all?
And this morning we read that the US has just voted through new legislation to tackle the banks, Obama says that Americans will never again pay "for Wall Street's mistakes"... markets hate this sort of thing...
How do we know... because the Vix index tells us...
What the Vix index is telling us
The Vix moves up when investors are fearful. And just look at how the index is spiking now (blue arrow).
2 Year Volatility Index (VIX)
Click here to enlarge
The markets have lurched back into fear mode. It had to happen – the Vix ‘fear-gauge’ is now registering ‘severe concern’ and could be on its way back to ‘panic’ soon.
In anticipation of market upheavals, I recommended taking out a Vix spread-bet back in mid March (the red arrow) at around 19. It’s currently hovering around the 40 mark.
And just look at the chart during the height of the crisis in December 2008 - the Vix topped out at 80 (the green arrow). Could we be heading back there now?
This chart is telling us something very important. It’s saying that the 14 month rally is probably over and we should expect some very choppy markets.
But so long as politicians interfere, it’s a little tricky placing your bets... quantitative easing here, a bail-out there and a change in regulation over there. It’s very hard to gauge how the markets will react in the short run.
I was discussing this problem with my colleague, Riccardo Marzi, who’s a professional trader. We both want to play the down-leg of this market, but we’re worried. The authorities keep messing-up our trading strategies.
How to profit from “idiot banks”
So, Riccardo’s come up with a plan. First, identify the story. He’s been looking into the Greek debt default story. Of course the market‘s been hinting at this for months, but we’re getting closer to it becoming a reality just now...
Right, so Greece defaults, then who’ll be the losers? Riccardo’s been doing some digging around and has come up with two big banks that are massively over-committed to Greek debt.
These banks loaded up on Greek debt which paid a higher yield than the more secure countries of the Eurozone. Maybe they tried to be really clever and played the arbitrage game, selling short the bonds of say Germany and using the proceeds to finance the purchase of Greek bonds. In this case, they could pocket the higher yield from the Greek bonds as pure profit.
They assumed that the Greek debt wouldn’t be allowed to default... turns out, maybe they were wrong!
Ironically, the only reason there’s any political will to stop the Greeks from defaulting, is to prevent these idiot banks from taking their losses.
The politicians are terrified that banks, like the two Riccardo’s identified, are going to take massive losses on their greedy forays in the sovereign debt markets. This could kick off another banking crisis. And that’s exactly why we’re not shorting these two banks... yet.
I’ll let Riccardo tell you about the banks that may be about to get blown up. Just click here. But for now, we’re doing nothing, it’s just too risky. Never underestimate the determination of politicians. Of course the market will have its way in the end, but your bets could get killed in the meantime.
Ultimately, the Greek debt will have to be restructured. It’s just a question of how it occurs. How much will the politicians give away to keep the banks from taking their medicine?
I don’t think voters will stand for politicians doling out more bail-outs without the bank’s bondholders and shareholders sharing the pain too. This time it could be very different to the ‘free bail-outs’ offered last time around. But we just don’t know...
So, we’re waiting for the default to happen, then we’ll be watching as the politico’s first put up, then shut up. We’ll be ready to put our short bets on, just as soon as the politicians admit defeat.
Right now, you need to get yourself ready. I’d advise you to get a spreadbet account set up and identify the targets, and then be ready to make your move.
Until the bonds actually default and the politicians have made their move, I’m sitting tight. I’m pretty confident about how this is all going to end, but playing the market is all about timing. And now’s the time to get ready...
Good investing.
Bengt Saelensminde
For The Right Side
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