The European stress test results are coming out as you read this – and they were not as good as Meg Ryan’s performance in the deli in “When Harry Met Sally.”
Seven out of 91 failed. The total capital required is less than four billion dollars. That is billion with a “b.” That is less than the Greeks will spend on pensions for 50-year-olds in the next few weeks. Remember, it started in Greece -- the Greek crisis pulled back the curtain on the fragility of European banks to due to their exposure to sovereign debt from Greece and other wayward spenders, wayward because they cannot print money the way we do.
The central bankers running the tests have now said, trust us, they are fine, Just a few euros here, and a few euros there, and things are fine. My initial thought -- if they wanted to fake them, c’mon, you needed to whack at least twenty banks and require between 25 and 50 billion in new capital.
Of course, the tests were done by the very same central bankers whose primary job is to defend their national banking system, not the European and world banking systems. When Geithner and Bernanke faked our stress tests, they were defending the entire world banking system and their results were harsh enough to provide some credibility to the process. Plus, they told the world we stand behind our big banks, the printing presses are ready.
What will investors think? Right now, nothing -- markets are wandering, A good many will think this through over the weekend and return to my thought -- if you fake them, it means you cannot do real tests. Why? The banks are in such bad shape that many of them cannot let investors take a look at the books of too many banks, it will cause a run on all the banks. Another group will look more at the math and say wait a minute, any real problems with sovereign debt and that four billion is looking kind of small.
What do I think? I am using Occam's Razor -- I had to read the guy in my Medieval Philosophy course at Georgetown, part of my major - and that is, according to Wikipedia, "is the principle that "entities must not be multiplied beyond necessity" (entia non sunt multiplicanda praeter necessitatem). The popular interpretation of this principle is that the simplest explanation is usually the correct one."
Good enough for me.
Bottom line: it may be time to prepare your short positions on the big European banks. There is probably no hurry, the market needs to play with this for a while. But over time many investors, knowing the ECB cannot print money to back up European banks, will conclude “they must be in bad shape if the tests were faked so blatantly.”
Monday will be interesting.
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