What to make of last week? The events were certainly tumultuous and the fireworks haven't ended.
Let's start with Europe. First, we saw coordinated central bank intervention by providing USD liquidity to European banks. As Alistair Osborne of the Telegraph points out, central banks do not take this kind of action unless something is up.
Central banks don’t do that sort of thing unless something is up; and something is most certainly up. In the eurozone, an unfolding Greek tragedy is careering towards its final, brutal act. And, in our joined-up, global economy that spells trouble everywhere, with the odds shortening by the day on a return to recession.
So, are the central banks signalling Credit Crunch Mk 2 and a rerun of all those hilarious jokes (What’s the difference between an investment banker and a large pizza? A pizza can feed a family of four)? Well, yes and no. They could be signalling something worse.
This is a sign of something very, very bad on the horizon. How bad? A recent poll of economists put the odds of a eurozone breakup at 50%.
An even worse sign is how the stock market shrugged off the effects of this coordinated central bank intervention. The chart below shows the price action of the bank sector against the market. One day after the news of the big intervention, banks stocks underperformed the market. Contrast that to the price action of the sector when Warren Buffett came in and bought into Bank of America.
click to enlarge images
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