Buck the Crowd on Europe

 | Jan 17, 2012 | 7:14 AM EST
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There's a tremendous reluctance to ever admitting that anything better is happening in Europe. It doesn't matter that the borrowing costs for the downgraded Spanish 12- and 18-month paper went for half of the interest rate that it sold at last month. It doesn't matter that you had a darned good trade if you bought last time. It doesn't matter, because all European countries are basket cases and in the end everything must fail.

Admit that's not the conventional wisdom ... it's the only wisdom.

If you have a note that yields 2% and will get paid off, and in the same currency as that with which you get in Germany, you should be hard-pressed to figure out why you accept negative interest rates if you are a corporate treasurer or financial institution that must get a return for your cash. If you are a Spanish bank you can take a three-year line of credit and bet with Spain over a 12-month period. If you are a European hedge fund and you need to have some return, you can buy Spanish paper. If you are an ECB official you can encourage the sovereigns to borrow short. All of these good things can happen, but everyone says they aren't happening and, more important, the ratings agencies are saying you aren't supposed to care.

Unless money isn't all brainless. Perhaps it is time to recognize that if you haven't sold this kind of paper, you should either have the money taken away or you will never sell it. If you buy it, you are being more optimistic and therefore smarter than the "only wisdom" people.

This is the reality. It is what is happening, not what people say is happening. The ratings agencies are simply verifying what everyone knew had to happen, so therefore these markets are free to be profitable ... whether we like it or not.

And we don't like it.

We think it is stupid and unrigorous and chimerical. We think it's wrong that recession and impossible budget deficits can produce anything but a Greece.

We fail to see that the governments there see the problems. We think they are all powerless stupid dopes, instead of recognizing that every time we get to the brink, they do something smart -- although the "only" trade says that's impossible.

We believe that the ratings agencies are somehow supreme and therefore everyone has to dump their bonds because they are going to be cut in half. And we believe that Greece must infect everyone and that Italy is the poison that makes Europe die.

This view has cost you fortunes. But somehow people think the money that's been made is not right or legitimate. That it's kind of like saying that you haven't made money in Chipotle (CMG) or Panera (PNRA) because those prices don't exist.

It's phony profits.

Here's a revelation. The banks you put the profits in don't know that you made it doing stupid and illegitimate things like buying Spanish notes. They may not even realize that you went against the ratings agencies. They just take your profits and put them in the bank. They will not confiscate them because Europe's in recession.

Silly banks. Silly hedge funds. Silly winners.

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