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Going to Cash

There was another fairly high profile figure came out with some less than inspiring comments about Europe yesterday.  The following came from Attila Szalay-Berzeviczy, global head of securities services at Italy’s biggest lender UniCredit SpA. (UCG), as per Bloomberg.

“The euro is beyond rescue,” Szalay-Berzeviczy said in an opinion piece for, a Hungarian news portal, which he signed as former chairman of the Budapest Stock Exchange. “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”

There is getting to be a fairly long line of high placed officials giving extremely dire warnings about the outcome in Europe.  Given the predisposition of people in high places to keep their mouth shut, this is more than a bit concerning.  We also have the unnamed BNP Paribas executive:

“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”

On the analyst side we had the following from Jefferies:

The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks.

And UBS:

It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

I don’t think that this is a time where you can reason out an end game.  And you cannot look to the economy for clues.  I remember saying over and over again throughout September 2008 that the economy looked fine. The numbers were fine, well they suggested slowing but they didn’t suggest a collapse.  Coal imports were ok, ag trade was ok, oil demand was ok.  You can go back and read my posts in Sept 2008 on the Investors Village board and see what I said, how I scratched my head over why there was no sign of what the market was pricing in, and how that turned out to be wrong.

In 2008 the stock market was the first thing to collapse and then the economy collapsed.  There was no foreshadowing.

And remember, the stock market didn’t collapse until after Lehman.  It wobbled and got volatile before Lehman, just like now, but it wasn’t until after Lehman that it really fell hard – I think that was because the market just can’t price in such a tremendous collapse until it actually happens.  Until the probability is 100%.  It would hedge its bets by falling some, but you can’t price in that kind of event until its taken place.

In my opinion this situation has the potential to have a similar outcome.  If one of these sovereigns default and there is not adequate capital provisions and adequate emergency facilities in place then it could turn out badly.  And I’m not so sure the market can price something like that in until it happens.

Of course this might not happen.  If everyone is fully prepared and banks do not lose confidence in one another, then it may be a non-event.  But how can you predict that?  Who has enough insight into the banks in question, into the derivitives of the sovereign debt that they do or do not hold, to be able to conclude how it will turn out?

I sure don’t.

I sold a significant amount of stock yesterday.  I managed to get out of some of the gold stocks before the price of gold fell further, and I managed to sell some Coastal before it began to fall.

I admit I have been wrong about gold.  What worried me is that it is now behaving like a risk asset, like a commodity.  Thats why I sold OceanaGold and some Lydian today.  If the market isn’t going to view gold as a safe haven, then who am I to argue.  I am still persauded by the idea that gold will be a safe haven as this crisis persists, but until it starts behaving like one again (and going up when bad news comes out) I am going to be defensive.

I am now am about 50% cash.  And it could go higher.

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