Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
Food for thought. Sentiments supersedes all fundamentals. Reduce equity weightage if you are fully allocated. I'm 12% in equities and am not reducing my weightage. Probably will increase my VXX position (avg cost of $17) if the scenario played out.
Risk/Reward for the VXX trade is around 1:18. If it ever goes to august 2011 low and theorectically , VXX can go to $55, this will be a 300% return. If nothing happens and VXX slumps back to $15, it will be a -12% drop(and I may get rid of it).
