Cat and Mouse

Quite often these days I feel like I am playing a game of cat and mouse and I am the mouse.  I sneak out of my hole and buy a few stocks that look to me like they are cheap, and I hope that I can make some money with these stocks and get back to my hole in the wall before Europe the cat comes into the room and raises its own form of hell.

This weekend I read another terror inducing installment about Europe from John Mauldin.  What I appreciate about Mauldin’s pieces is that they actually delve into the numbers involved.  I find it difficult to wrap my head around just how bad it is without getting into the numbers that demonstrate that badness.  Of course once you do get into the numbers, it becomes clear that the numbers don’t add up and that, at some point, more numbers are going to have to come from somewhere.  It also becomes clear that if no more numbers do come from somewhere (ie. the ECB doesn’t create any new numbers out of thin air) then the numbers in my portfolio are going to be smaller numbers than they are right now.

Such is this game of cat and mouse.

One new number that I learned from the piece and thought worth mentioning was that of the Spanish banks non-performing assets.  According to Mauldin non-performing assets are about 20% of assets on average.  He actually says capital in the report but I am pretty sure he means assets because 20% of capital is really nothing terrible in the grand scheme of things.  But 20% of assets is and so that scared me quite a bit.  But it seemed like such a high number that I thought I should get it from another source and the best source for all things Europe remains FT Alphaville.  They came through once again with the following chart:

As an aside I wonder if Mauldin looked at this same graph but got the left and right axis mixed up.  Right is unemployment, and it is indeed at 20% plus.  Left is bad loans, and they are at a little over 8%.  8% is less than 20% but 8% is still not very good.  Especially when its the average of all the banks.  And extra-especially when the trend seems to have taken on the look of a hockey stick.

So regardless of whether Mauldin has his numbers right or not, they still don’t add up without help from the ECB.  That was the basic point of Mauldin’s article this week. It basically still comes down to a stark choice between the 3 alternatives described in this old Edward Harrison article that I have brought up in the past.  Harrison stated those three alternatives as being:

1. Monetization
2. Default
3. Break-up

When Harrison wrote his piece in late 2010 he figured the response would be some combination of default and monetization.  He has since tweaked his view with the addendum that Greece will likely have to leave the Eurozone, so now we have a combination of all three.  But monetization has always been the expected route to get through most of the angst, as it is in the easiest one.

Back to Mauldin, he points out that there are signs that the Germans are warming up to the idea of monetization.  There was news this week from the German Bundesbank that the German are expecting (read: grudgingly accepting) higher rates of inflation.  They expect this because they anticipate that higher rates will be necessary to stabilize the Eurozone.  That sounds an awful lot like “we realize that Spanish bonds are going to go back up through the roof if we don’t get the ECB to continue their paper money patch job of the hole in it.”

Anyways that’s what it sounds like, and if its true its good in the short term because if they do then the cat will leave the room for a while and I can come out and actually make some money instead of being on a rollercoaster ride where all I really need to do in  the morning is watch CNBC and check the Spanish stock market quote to know whether my portfolio of regional banks, mortgage originators and servicers, junior gold stocks and the odd oil stock, all of which have virtually no business is Spain, will be up or down.  It gets tiresome.

So I welcome another respite from the ECB.  I would only ask that they do it sooner rather than waiting until the world is back on the precipice as it was in late November.  These last two months haven’t been a lot of fun.