Game-Changing Scenarios

 | Jan 05, 2012 | 6:57 PM EST  | Comments
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We should be suspicious. We have every reason to be. The correlations we live by, the algorithms that we are programmed for say that you have to sell everything on the CurrencyShares Euro Trust (FXE).

I am postulating, as you know that employment growth is changing the equation. We aren't decoupling. We are getting better, and they are staying the same.

Let me offer two alternative explanations. First, as horrible as the rights deal for one of the worst banks in the world, Unicredit, is, they got the money. They raised the equity. They did it. If they can do it, so can so many of the others. That means the big fire sales are going to lessen. Plus, we know that the ECB is expanding its balance sheet the way Federal Reserve Chairman Ben Bernanke did during our banking crisis.

So we've got employment here and crisis easing there. Of course, the worry is that now it isn't the banks but the countries, with new counties -- Hungary! -- playing whack-a-mole. But the answer is to let them collapse; it will shrink our EPS multiples, but we can live with this as long as there is no Lehman, and you don't have a Lehman with a multi-year backstop and banks raising equity. I know it seems downright foolish to read that the Spanish banks need more capital and then having the largest Spanish banks say they don't, with Santander yielding 9%. But, again, if Unicredit could raise cash, so can the healthier Spanish banks, which are a heck of a lot better off than the Italian bank jobs.

Now, I want to postulate something else. What if the people who did these trades endlessly, the ones who shorted our stocks on Europe in a knee-jerk fashion or sold commodities when the dollar went higher, what if they went away? What if they decided that they weren't going to do that trade anymore? What if they decided to switch strategies? What if they aren't big enough anymore to overwhelm? What if the risk on-risk off correlation, to buy into that silly term, peaked?

Then what?

Look we have to ponder everything from a huge infusion of oblivious long-side capital to the possibility of a big deal being done somewhere -- China? -- to buy sovereign debt. I think these correlations are so strong that to break them decisively means that the game has changed or someone has changed their game.

We will learn more very soon, But right now? It looks like the geniuses who believed that all you had to do was sell on the FXE being down and buy when the FXE is up have at last left the building.

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