The “American Exceptionalism” Paradigm Is Broken

Thursday, June 21, 2012
By Paul Martin

By Jeff Snider
ZeroHedge.com
06/20/2012

There Is Little “Value” Under Untenable Circumstances

Even now, in the third year of the recovery without a recovery, there is still a good deal of mystery as to why and how US investors should be wary of Europe. The intentional opacity of the global banking/financial system contributes to this effect, but all that is taking place in Spain and Italy will directly impact US asset prices at some point. The biggest lesson of the Great Depression was supposed to be limiting the spread of “contagion” through bond market prices, yet the modern interbank wholesale money system of securitization and financialization has gone far beyond what they ever dreamed possible in the 1930’s. The connections between Spanish insolvency and the fallacy of the US dollar safe haven have never been greater, and given the propensity of sovereign euro debt to act as a global catalyst, it pays to at least review why US stock investors should be extremely mindful of monetary flows in seemingly unrelated global pockets.

On one side of the Atlantic, there is the “bull” case for US stocks as a safe haven from the European turmoil, particularly since stocks are supposedly cheap compared to corporate earnings (more on this below). On the European side, there remains faith in policymakers to finally coalesce around a workable and serious solution. But that faith misses what might be the unmovable object in this financial equation, just as the irresistible force of contagion is unleashed, again.

The real worry about the Spanish banks, as it has always been, is not even solvency, per se, it is that 1930’s-style contagion of pricing. With Greek debt, Eurozone banks were afforded the margin to at least unload or even sit tight and take their mark-to-market losses; it was never going to rise to a fatal amount. But Spanish and Italian sovereign and bank debt remains embedded within Euro banks, particularly those in France. These are bonds that are, from what I have seen and given how this unraveled with Greece, currently embedded within “bank books” – not “trading books” – which means free from mark-to-market losses. OECD sovereign debt itself is still considered risk free, and thus not applicable in a mark-to-market structure. That is, until a market “event” which forces banks to recognize and legitimize any impairments. That is the fear of Spain, as a restructuring event akin to Greece would probably destroy several large institutions (how close were we on December 8, 2011?) under the weight of previously “undisclosed” losses that are currently tucked away in “bank books” everywhere. It has been amazing over the past four years just how assets go from perfectly fine, valued at or near par, to serious other-than-temporary-impairments overnight.

The Rest…HERE

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