Spain
I bottled it on the euro. I got the timing wrong on three trades on the trot, which is the signal to me that I have lost my feel for market sentiment. Closed out with a £700 gain (it had been £1600). I fully expect the euro to drop back, thus making it getting the timing wrong on four trades on the trot!
So, no position at all at the moment. I'm just a little bit out of my comfort zone at £300 a cent (I find myself checking the rate rather more often than I ought), but £200 is no bother. Perhaps I should have kept £150 a cent open, but I was a bit dispirited about my ability to get any decision right.
Fundamentally, in the long term, my feelings are unchanged (although the Merkel compromise acceptance caught me a bit by surprise). But in the long run we are all dead, and you can go very broke waiting for the markets to see things from your point of view.
Once again, but it bears repeating, there is not one crisis at work here (well, there kind of is a "meta" problem, that being the fundamental disequilibrium between the net exporters and the net importers, without exchange rate or interest rate weapons to alleviate them on one side, and without financial transfers from country to country on the other, but this is not the problem causing the current crisis and it's effectively, if not theoretically, unsolvable) but several. The question is, what crisis is likely to cause the big euro problem?
Looked at this way, the time that has been wasted on Greece is almost criminal. As Aardvark points out, Germany could have solved the Greek problem, probably without anyone noticing, if it had got in there before it became a political issue in both Athens and Greece.
However, even if this had been done, it would not have solved the Irish and Spanish problem (property bubble, bust banks) or the Italian problem (sclerotic growth, a long-term Ponzi scheme), or the Portuguese problem (the Greek problem, but a bit bigger).
So, the Irish problem would still have erupted, and so would the Spanish problem. The Italian problem was always there. It's no more of a "real" problem than the "pensions time bomb". Provided confidence remained, the Italian situation would not blow up for 30 years or more. It will still blow up eventually, but the only reason for it to blow up now is one of lack of confidence.
Spain is different. There have been many analyses of how the Caja/Caixa system went wrong. The technicalities abound. Spain has many layers of government. The cajas/caixas were mutuals. But the root cause was simply interest rates that were too low and credit that was too easy. If the management of a caja could pay themselves more if they lent more and had a larger book of loans, it would take a very experienced, tough and ascetic man at the top to say "sorry chaps, I know that you want to earn more money by lending more money, but I think that it will all blow up in our faces eventually". meanwhile, those caja senior managers look at the other caja guys living in bigger houses and buying bigger cars and sending their children to nicer universities. Their wives are telling them that they and the kids DESERVE a better way of life, that the manager himself deserves a better life. Indeed, how could he live with himself if his child turned into a failure just because someone says that lending money on a property might, not even "will", for christ's sake, but just MIGHT, turn out to be a bad idea?
And so the money got lent, and it did blow up, and the manager lost his job, and his wife left him anyway. Damned if he did, damned if he didn't.
Today, most of the cajas have gone. Those that remain are not mutuals, but banks. All that largesse handed out to museums and other stuff for the benefit of the region in which the caja operated. That's gone. It was false money anyway. "Profit" built on loans to developers who can't repay, with collateral that is unsaleable.
Or is it? Now, here's an interesting thing. Many of these developments have now moved into the ownership of the banks. You might think that there is a credit crunch. But there isn't if you want to buy one of these properties. These properties, perhaps sold for €200,000 before the collapse, are on sale at €150,000, with a 100% mortgage attached. How about that?
But the funny thing is, as Iain Adams pointed out to me, there might be a privately owned property just down the road, of a higher spec, up for sale for €130,000. Suppose you had €30,000 in cash, so you only want a €100,000 mortgage. Well, try getting a loan for that from the self-same bank. Not a hope. So, what's going on?
Well, if the bank can lend you €150,000 to buy one of their properties, two things happen. The first is that it turns a non-performing loan (in the sense of a dead piece of property that's sitting on its books, seized as collateral from a bankrupt developer) into a performing loan. That does wonders for the bank's capital requirements.
Secondly, if anyone questions whether all of those 195 flats in that development that remain on the bank's books are "really" worth €150,000 each, the bank can point out that, say, five of them have been sold for €150,000, which is surely indicative that they really are worth that amount. So not only does the bank turn a non-performing loan into a performing loan for five of the flats; it also gets the regulator and accountant off its back when it comes to a valuation of its property portfolio.
This, of course, is smoke and mirrors. The banks are using small losses to avoid the writing to book of larger losses. The losers are the people who own houses/apartments that they want to sell (because no-one apart from a cash buyer will be able to play in that market) and the people who are slightly cash-rich, but not quite rich enough to pay all cash. Because these people would get a much better bargain buying privately with a 70% mortgage.
I'll be honest, I've been slightly tempted by this, in that there's nearly always a way to make money out of such market disconnects. Walk in there. Borrow the €150,000 and buy the apartment on the 100% mortgage. Rent out flat in London. Live in Spain in one of these new exurbs, walking through the liquidity crisis in the mortgage market, and enjoy a happy retirement.
The downside is that I don't want to live in Spain, although some of these apartments (one development is outside of Madrid) do look remarkably good quality and, if you ARE a cash buyer, can be picked up for about half the price that the banks "pretend" they are worth.
Will this smoke and mirrors trick for the banks work? Well, it kind of depends. I've seen multi-billion dollar reinsurers set up with capital that turned out to be Weimar bonds. But everything went fine until there was a bad year for catastrophes. If everyone pretends stuff is worth twice what people will pay for it, effectively the Capital requirements are halved. That's fine, until the banks actually need 70% of their capital requirement. At that point, they turn out to be insolvent, and crisis (real crisis, not this half-assed "crisis" that we have at the moment (unless you happen to be in Greece, or some of the unlucky individuals in Ireland and Spain)) ensues.
So, no position at all at the moment. I'm just a little bit out of my comfort zone at £300 a cent (I find myself checking the rate rather more often than I ought), but £200 is no bother. Perhaps I should have kept £150 a cent open, but I was a bit dispirited about my ability to get any decision right.
Fundamentally, in the long term, my feelings are unchanged (although the Merkel compromise acceptance caught me a bit by surprise). But in the long run we are all dead, and you can go very broke waiting for the markets to see things from your point of view.
Once again, but it bears repeating, there is not one crisis at work here (well, there kind of is a "meta" problem, that being the fundamental disequilibrium between the net exporters and the net importers, without exchange rate or interest rate weapons to alleviate them on one side, and without financial transfers from country to country on the other, but this is not the problem causing the current crisis and it's effectively, if not theoretically, unsolvable) but several. The question is, what crisis is likely to cause the big euro problem?
Looked at this way, the time that has been wasted on Greece is almost criminal. As Aardvark points out, Germany could have solved the Greek problem, probably without anyone noticing, if it had got in there before it became a political issue in both Athens and Greece.
However, even if this had been done, it would not have solved the Irish and Spanish problem (property bubble, bust banks) or the Italian problem (sclerotic growth, a long-term Ponzi scheme), or the Portuguese problem (the Greek problem, but a bit bigger).
So, the Irish problem would still have erupted, and so would the Spanish problem. The Italian problem was always there. It's no more of a "real" problem than the "pensions time bomb". Provided confidence remained, the Italian situation would not blow up for 30 years or more. It will still blow up eventually, but the only reason for it to blow up now is one of lack of confidence.
Spain is different. There have been many analyses of how the Caja/Caixa system went wrong. The technicalities abound. Spain has many layers of government. The cajas/caixas were mutuals. But the root cause was simply interest rates that were too low and credit that was too easy. If the management of a caja could pay themselves more if they lent more and had a larger book of loans, it would take a very experienced, tough and ascetic man at the top to say "sorry chaps, I know that you want to earn more money by lending more money, but I think that it will all blow up in our faces eventually". meanwhile, those caja senior managers look at the other caja guys living in bigger houses and buying bigger cars and sending their children to nicer universities. Their wives are telling them that they and the kids DESERVE a better way of life, that the manager himself deserves a better life. Indeed, how could he live with himself if his child turned into a failure just because someone says that lending money on a property might, not even "will", for christ's sake, but just MIGHT, turn out to be a bad idea?
And so the money got lent, and it did blow up, and the manager lost his job, and his wife left him anyway. Damned if he did, damned if he didn't.
Today, most of the cajas have gone. Those that remain are not mutuals, but banks. All that largesse handed out to museums and other stuff for the benefit of the region in which the caja operated. That's gone. It was false money anyway. "Profit" built on loans to developers who can't repay, with collateral that is unsaleable.
Or is it? Now, here's an interesting thing. Many of these developments have now moved into the ownership of the banks. You might think that there is a credit crunch. But there isn't if you want to buy one of these properties. These properties, perhaps sold for €200,000 before the collapse, are on sale at €150,000, with a 100% mortgage attached. How about that?
But the funny thing is, as Iain Adams pointed out to me, there might be a privately owned property just down the road, of a higher spec, up for sale for €130,000. Suppose you had €30,000 in cash, so you only want a €100,000 mortgage. Well, try getting a loan for that from the self-same bank. Not a hope. So, what's going on?
Well, if the bank can lend you €150,000 to buy one of their properties, two things happen. The first is that it turns a non-performing loan (in the sense of a dead piece of property that's sitting on its books, seized as collateral from a bankrupt developer) into a performing loan. That does wonders for the bank's capital requirements.
Secondly, if anyone questions whether all of those 195 flats in that development that remain on the bank's books are "really" worth €150,000 each, the bank can point out that, say, five of them have been sold for €150,000, which is surely indicative that they really are worth that amount. So not only does the bank turn a non-performing loan into a performing loan for five of the flats; it also gets the regulator and accountant off its back when it comes to a valuation of its property portfolio.
This, of course, is smoke and mirrors. The banks are using small losses to avoid the writing to book of larger losses. The losers are the people who own houses/apartments that they want to sell (because no-one apart from a cash buyer will be able to play in that market) and the people who are slightly cash-rich, but not quite rich enough to pay all cash. Because these people would get a much better bargain buying privately with a 70% mortgage.
I'll be honest, I've been slightly tempted by this, in that there's nearly always a way to make money out of such market disconnects. Walk in there. Borrow the €150,000 and buy the apartment on the 100% mortgage. Rent out flat in London. Live in Spain in one of these new exurbs, walking through the liquidity crisis in the mortgage market, and enjoy a happy retirement.
The downside is that I don't want to live in Spain, although some of these apartments (one development is outside of Madrid) do look remarkably good quality and, if you ARE a cash buyer, can be picked up for about half the price that the banks "pretend" they are worth.
Will this smoke and mirrors trick for the banks work? Well, it kind of depends. I've seen multi-billion dollar reinsurers set up with capital that turned out to be Weimar bonds. But everything went fine until there was a bad year for catastrophes. If everyone pretends stuff is worth twice what people will pay for it, effectively the Capital requirements are halved. That's fine, until the banks actually need 70% of their capital requirement. At that point, they turn out to be insolvent, and crisis (real crisis, not this half-assed "crisis" that we have at the moment (unless you happen to be in Greece, or some of the unlucky individuals in Ireland and Spain)) ensues.