Financial market report for the week ending September 9, 2011
1) ...The Associated Press reports Stocks Drop on Euro Debt Crisis Fears, ECB Resignation.
Italy, EWI, Austria, EWO, Ireland, EIRL, Spain, EWP, Germany, EWG, France, EWQ, European Financials, EUFN, Emerging Market Financials, EMFN, Brazil Small Caps, BRF, Brazil, EWZ, Sweden, EWD, South Korea, EWY, Russia Small Caps, RSXJ, Russia, RSX, Netherlands, EWN, Mexico, EWW, Turkey, TUR, India, INP, and European Shares, VGK, led world stocks, ACWI, and World Small Caps, VSS, lower as Daniel Wagner, AP Business Writer, reports “U.S. stocks, VTI, plunged Friday, threatening to erase the week's gains, as rising fears about fallout from Europe's debt crisis overshadowed President Barack Obama's plan to revive the U.S. job market. Shortly after markets opened, the European Central Bank, ECB, said that be a key official had resigned for personal reasons. Juergen Stark, the bank's top economist, is seen as an advocate of higher interest rates. Published reports said he opposed the bank's extensive purchases of debt issued by heavily-indebted member nations. Stark's resignation might be a sign of deepening disagreement over how to solve Europe' economic problems. On Thursday evening, President Obama unveiled a $447 billion package of tax cuts and new spending aimed at boosting hiring. He spent much of the speech challenging Congress to put aside political theatrics and pass the bill. It's not clear whether that can happen. Republicans control the House and many of them oppose any new spending. Some reacted by calling the plan is a rehash of failed strategies.” And Between The Hedges relates that Rasmussen Reports the Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 19% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24.
The Russell 2000, IWM fell 3.0%, the Dow, DIA, 2.7%, the S&P, SPY, 2.5, the Nasdaq 100, QTEC, 2.0.
The chart of the S&P shows a bear flag.
Industrial Metals, CRBI, Solar, TAN, Steel, SLX, Small Cap Energy, PSCE, Copper Mining, COPX, Design and Build, FLM, Energy Services, OIH, and IEZ fell strongly.
The fall in stocks forced base metal commodities, DBB, and timber, CUT, lower. But gold, GLD, traded unchanged. Coffee, JO, fell 4.6%.
Mark Hulbert, founder of Hulbert Financial Digest in Annandale, Va, in MarketWatch article Will Value Stocks Finally Take The Lead, foresees, “in just three weeks' time, the cyclical bias in favor of value stocks will kick in. Note carefully that this historical tendency is most readily apparent in relative terms, value over growth. One therefore can bet on this tendency repeating itself over the coming year without making a bet on the direction of the overall market. The trick is to create a hedge that is long value stocks and short growth stocks. One possibility, using exchange-traded funds, would be with the iShares S&P 500 Value Index Fund, IVE, and the iShares S&P 500 Growth Index Fund, IVW,” Mr Hulbert, is one who has a market timing newsletter to sell, and fails to see that the Great Super Cycle called Kondratieff Winter has arrived.
The Flattner ETF, FLAT, rose in value, as the 10 30 Yield Curve, $TNX:$TYX, flattened on the demand for the longer out US Government debt, which took longer duration corporate bonds, BLV, and corporate bonds, LQD, up. Build America Bonds, BAB, rose strongly. The interest rate on 10-yr treasuries, $TNX, fell to a record low on Friday September 9, 2100, below 2.0%, to close at 1.915. Money flew into the 10 Year US Treasuries, TLT, and the 30 Year US Government Bonds, EDV, as a last safe haven, first from European Sovereign Debt Crisis, and secondly from lack of growth prospects in stocks.
Chart of TLT
Doug Noland relates that the Greek two-year yields ended the week up 852 bps to 53.05% (up 4,081bps y-t-d). Greek 10-year yields surged 194 bps to 19.52% (up 7.06bps). The 300% of the Italian 10 Year Government Bond, ITLT, fell 3.8% and World Government Bonds, BWX, fell 1.8% and Emering Market Bonds fell 0.8%.
The currency sensitive Small Cap Pure Value Shares, RZV, fell heavily as the US Dollar, $USD, jumped to a six month high as competitive currency devaluation, that is competitive currency devaluation, intensified this week putting the nail in the coffin to the Beneficial Milton Friedman Free to Choose Floating Currency Regime, which is being replace by the Beast Regime of Neoauthoritarianism.
Bloomberg reports Euro Falls to Six-Month Low on Concern Greece Considers Default. The euro declined to a six-month low against the dollar and yen rallied on concern Greece’s deteriorating financial condition may lead to default, deepening the region’s debt crisis. “There is a lot of chatter right now that Greece may default over the weekend,” said Charles St-Arnaud, a foreign- exchange strategist at Nomura Holdings Inc. in New York. “A lot of investors are reducing their exposure and trying to find cover in case something happens over the weekend.
The U.S. dollar, $USD, surged 3.3% this week to close at 77.19, while world currencies fell strongly:
The Swiss franc, FXF, 10.8%,
the Euro, FXE, 3.9%,
the Danish krone 3.8%,
the Russian Ruble, XRU, 3.6%,
the South African rand, SZR, 3.1%,
the New Zealand dollar, BNZ, 3.1%,
Emerging Market currencies, CEW, 2.2%
the Norwegian krone 2.7%,
the Swedish krona, FXS, 2.3%,
the Mexican peso, FXM, 2.2%,
the British pound, FXB, 2.1%,
the Singapore dollar, 2.0%,
the Brazilian real, BZF, 2.0%,
the Australian dollar, FXA%, 1.8%,
the Indian Rupe, ICN, 1.6%
the South Korean won 1.3%,
the Canadian dollar, FXC, 1.1%,
the Japanese yen, FXY, 1.0%,
and the Taiwanese dollar 0.7%.
Casey Research relates The coming currency crisis
2) … Abigail Moses of Bloomberg reports Credit-default swaps on Greek government debt surged to a record, signaling there’s a 91% probability the nation won’t meet debt commitments, after its economy shrank more than previously reported.
3) … Josef Ackermann, the chief executive of Deutsche Bank, said it was not justifiable for politicians to demand that European banks raise more capital, as Christine Lagarde, the head of the International Monetary Fund, had done.
“It’s obvious that many European banks would not be able to handle writing down the sovereign bonds they hold on their banking books to market levels.”
4) … Open Europe reports
EurActiv reports that the European Commission yesterday rejected calls by the Dutch government for there to be a mechanism by which countries could exit the eurozone. Commission spokesperson Amadeu Altafaj Tardio said, “Neither exit or expulsion from the euro area is possible according to the Lisbon Treaty under which the part in the euro is irrevocable.” A Greek government spokesman echoed these remarks. However, an ECB legal study from 2009 argues that while voluntary withdrawal is legally not possible, expulsion remains “conceivable.” … And Les Echos reports that the IMF will hold an emergency meeting on Tuesday to discuss the Greek crisis, while YLE notes that the Finnish Prime Minister Minister Jyrki Katainen will meet with German Chancellor Angela Merkel and German Finance Minister Wolfgang Schäuble the same day in Berlin to discuss the Greco-Finnish collateral deal. Separately, Richard Sulik, leader of the Slovakian Freedom and Solidarity Party and parliamentary speaker, insisted he would continue with his opposition to the expanded scope of the EFSF, the eurozone’s bailout fund, saying it is “a road to hell.”
5) … Between The Hedges reports The Eurozone Financial Sector and Western European Sovereign CDS Indices are making new all-time highs. The 3-Month Euribor-OIS Spread is surging +8 bps to a new multi-year high at 83.0 bps.
6) … Simons Nixon of the Wall Street Journal reports Athens, Rome Hold Europe to Ransom
Europe is engaged in a high-stakes game of brinkmanship that poses grave risks to the global economy. At last weekend's Villa d'Este Forum in Italy, European policy makers didn't hide their fury at Greece's back-sliding over promised structural reforms and spending cuts. At the same time, Italian ministers undermined the remaining credibility of Silvio Berlusconi's government with a series of complacent speeches. Given such a dangerous breakdown in trust within Europe, investors are right to fear the worst.
7) … Landon Thomas Jr. and Nelson D. Schwartz of the NYT report Euro Zone, Banking Fear Feeds on Itself
In Europe, the worry is that government bonds owned by European banks could fall sharply in value if economically distressed countries cannot pay back their loans. That would saddle the most exposed banks with huge losses. As a result, banks are reluctant to lend money to one another and are hoarding cash. "If sentiment continues to deteriorate, ultimately we’ll see a deposit run," Mr. Finch said. "I’m extremely worried about that."
European banks needed to raise at least 150 billion euros in new capital, even if they do not experience large losses on sovereign debt. With stock prices so low, though, that is difficult to do, and any new offerings of company stock would dilute the value of existing shares. American money market funds, long a reliable financing source for capital starved European banks, have sharply cut back on their exposure — starting in Spain and Italy but now also France — making it harder for European banks to loan dollars.
The 10 biggest money market funds in the United States cut their exposure to European banks by a further 9 percent in July, or $30 billion, after a reduction of 20 percent in June, the Institute of International Finance said in a report issued Monday.
"U.S. investors remain very sensitive to the headlines out of Europe," said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. "The sell-off that we’ve seen in European bank stocks is going to reinforce that and investors are likely to stay hyper-cautious. European banks are not borrowing as much, and they’re not borrowing for as long as they could three months ago."
French banks, which have huge holdings of sovereign debt from countries across Europe, have been among the hardest hit, despite the French government’s efforts to protect them. The authorities imposed a temporary ban on short-selling last month after shares in Société Générale, a bank considered too big to fail, tumbled on rumors it may be insolvent.
But shares of Société Générale are still sliding amid concern that it, like BNP Paribas and other major French banks, is having trouble raising dollars to finance its American and other dollar-based operations. Société Générale officials say that the market’s fears are unfounded. The bank’s chief executive, Frédéric Oudéa, has described rumors that Société Générale was having trouble raising money as "fantasy." The shares closed down 6 percent Tuesday at 18.93 euros. Three months ago the shares were at 40. What is more, French banks, like other European banks, are able to obtain financing from the European Central Bank if necessary.
Meanwhile, problems in Spain were highlighted on Tuesday when one of Spain’s largest savings banks, Caja de Ahorros del Mediterráneo, reported a startling increase in bad loans to 19 percent of overall lending from 9 percent at the end of last year. Still, the huge stockpile of euros that banks have stashed away at the European Central Bank at rock-bottom interest rates — last night it hit a recent high of 166 billion euros — suggests that no bank is close to a Lehman-like failure.
The risk now is that Europe’s resistance to recapitalizing its banks could turn into a broader crisis. Daniel Gros, director of the Center for European Policy Studies in Brussels, had a blunt explanation of why European governments have so far refused to recapitalize their banks. "They don’t have the money and they are in the pockets of their bankers," Mr. Gros said. Policy makers in the United States and Britain, where compulsory infusions of new capital played a crucial role in calming the markets in 2008, have long urged Europe to do the same.
8) … Is a European political breakdown, as well as a global economic collapse imminent?
Greece will be out of money no later than October 17 unless it gets the next trance of money as noted in Kathimerini article Prospect of empty coffers looms large. “The prospect of a freeze in payments appeared even more serious on Thursday, after Greek commercial banks failed to cover the sum of 300 million euros of supplementary, noncompetitive bids for Tuesday’s auction of T-bills, providing only 155 million. The shortfall is interpreted as a clear message by banks to the government that they are unwilling to fund future issues of T-bills. The gravity of the situation is indicated by the fact that the government has frozen all disbursements apart from salaries and pensions.” It is likely that Greece will declare a default, or be declared to be in default, very soon.
Business Insider reports Barry Eichengreen: Europe's On The Verge Of A Political Breakdown.
Yet Mrs Merkel said Euro countries will “only preserve the common currency if there is more integration” in the European Union, The EU “won’t be able to avoid treaty change.” While intensive discussions lie ahead and the path won’t be easy, policy makers “shouldn’t be afraid” of tackling the challenge.
Now that default of Greece is imminent, will there be a breakdown of coordinated political authority in the Eurozone? Will the European Leaders come up with both a political and investment default plan? Will Greece be forced out of the EU and thus return to the drachma? Or as I have been suggesting for months.out of Gotterdammerung, that is a clash of the gods, specifically the investors and European leaders, such as Angela Merkel and Nicolas Sarkozy, will regional framework agreements be announced by leaders, which waive national sovereignty and establish a Eurozone Fiscal Union where seigniorage, that is moneyness, comes from diktat?
Steven Erlanger of the New York Times in Europe Steers Into a Zone of Uncertainty relates Edwin M. Truman of the Peterson Institute for International Economics said: “You either go forward to more European economic governance or backward ... And if you go backward, you go backward pretty far, to the fragmentation of Europe.”
Neoliberalism provided fortune to sovereign nations and sovereign individuals. One was free to choose what nation one lived in and what one invested in. Once could have chosen Tax Free Municipal Bonds, such as Eaton Vance National Municipal Income C, ECHMX, or an Intermediate Government Funds, such as PIMCO GNMA C, PCGNX, or Distressed Investments, such as Fidelity Capitol And Income, FAGIX, or dividend stocks such as Exxon Mobil, XOM, or a precious metal mining stock, such as Barrick Gold, ABX, or gold, GLD. Anarcho capitalists found their hero in Lew Rockwell of the Mises Institute, and Tea Party adherents found theirs in Glenn Beck, who according to Bloomberg Debuts A Web TV Network to Leverage His Fame After Fox.
The Free To Choose Regime of Neoliberalism was built upon one; it was fathered by Milton Friedman whose call was to investing in floating currencies and carry trade lending.
Anarcho Capitalists, such as Ron Paul, whose fathers are Rothbard and Hayek, envision a world with sovereign individuals and sovereign nations each with its own currency. But the world is evolving into greater state corporatism, that is statism.
The Beast Regime of Neoauthoritarianism is built upon many; it is fathered by the 300 luminaries of the Club of Rome, whose 1974 Call is clarion, compelling, and comes with authoritarian imperative for regional economic government as an answer to the chaos coming from unwinding carry trades and deleveraging stocks as well as the failure of sovereign debt. The Club of Rome’s Call is very timely, as Doug Noland of Prudent Bear writes in Crumbling Pillars “The eurozone is unraveling, as global market de-risking and de-leveraging intensifies … Whether it’s monetary or fiscal policy - at home or abroad – there seems to be confirmation everywhere that policymaking has become largely ineffectual and, increasingly, incapacitated.”
Yes, Greece may be ejected from the Eurozone as a pariah nation, and have an economic experience like North Korea. But as general principal, a Ten Toed Kingdom of regional economic governance is forming. European socialism is now history.
The people of Greece were literally pulled up from a pony and cart economy to experience the fastest rise in standard of living in Europe. Their prosperity cam from a fall in the interest rate on Greek Treasury Debt, which funded Greek Socialism, and the rise of the state worker. The Economist magazine reported the Greek experience was one of “patronage and pork”. Most all jobs came via the state, and were doled out based upon union membership; even pharmacy technician lobs came via the government; and capitalism was nonexistent. Farmers were subsidized and received tractors. Everyone from taxi cab drivers to physicians considered it patriotic to not pay taxes. It was a socialist utopia.
Now, WSWS.org reports German Finance Minister Wolgang Schäuble completely dismisses the notion of using further tranches of state funds and instead recommends more austerity measures, even when they are “politically painful”. In a column in the Financial Times, he insists that “austerity is the only cure for the eurozone”.
European Economic Government is the future, and its ambassadors are Angela Merkel and Nicolas Sarkozy, who issued the Call for a true European Economic Government in August 2011 in a joint communique. WSWS.org continues. German Chancellor Angela Merkel has spoken out in favour of the euro. It was “much, much more than a currency”, she said. It was “the guarantor of a united Europe”, she explained in the budget debate in the Bundestag. “If the euro fails, Europe will fail.” Even Finance Minister Schäuble defended the euro as the only alternative. “What we need in a globalised world is a common European currency”, he said.
The die has been cast. Fate it seems, yes Destiny is at work, destroying nations, and is forming the Beast Regime of Neoauthoritarianism, in all of mankind’s seven institutions and ten world regions, imposing austerity and debt servitude. Sovereign leaders will be replacing sovereign individuals. Freedom and choice are illusions on the Neoauthoritarian desert of the Real. .
Throughout history great leaders have emerged. This include Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority. Soon ten kings will come to rule, each in his own regional power base. The coming President of the EU will be one knowledgeable with the scheme of framework agreements. A leading individual for this position is Herman Van Rompuy, as he orchestrated the original Greek bailout.
The Telegraph reports that the G-7 meeting of Finance Ministers and Central Bank Governors, issued a Communique stating “Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to . We will take all necessary actions to ensure the resilience of banking systems and financial markets “
Nevertheless, soon out of the soon coming global sovereign debt and banking crisis, a new European Super Government will arise. It will be like a revived roman empire. A new moneyness, will come from the word, will, and way of both the Sovereign and His Seignior. The people will be amazed by this new seigniorage, that is a new moneyness, and follow after the Beast Regime of Neoauthoritarianism, giving it their allegiance.
The Sovereign will have a fierce disposition as he will have deal with a wide spectrum of anger as Howard Schneider of the Washington Post writes Strikes hit Rome, Madrid in midst of debt debate, and James Mackenzie of Reuters reports Italy strikes as race to pass austerity starts.
Eventually, the Beast Regime, being mired in the clay of democracy and the iron of diktat, will crumble. The Sovereign will gain the upper hand, and install a one world government, with a one world bank, and provide global seigniorage.
The Automatic Earth in Watching dreams die writes, “The German Federal Constitutional Court passed a judgment this week that seems to let Angela Merkel and her people off the hook: all EU bailouts to date passed the threshold of legality. For Merkel though, this is as Pyrrhic as it comes, and the same goes for the financial markets. The court, even as it condoned past actions, put very strict limits on future ones. Future bailouts will be very hard to pass, there will no longer be any last minute grand gestures, and a fiscal union for Europe was swept off the table in one fell swoop.
In case anyone still feels even this can be overcome, Slovakia of all places threatens the Euro project with imminent demise. The chairman of the parliament in Bratislava has said there will be no vote on the lift of EFSF funds until probably December. So even if there's a yes vote, no funds will be available until February 2012. Which is more than Europe can bear at this point in time. There are so many leaks in the system, it's already running out of fingers.
Dutch Finance Minister De Jager sent a letter to his parliament yesterday saying the next chunk of Greek Phase 1 bailout funds will be delayed from mid September to end September at the earliest. Greece is not living up to the conditions put on the bailouts. Not enough austerity. Firing 20% of civil servants is apparently what it will take. Not enough austerity in Italy either, or so we hear.
We could go on for a long time pointing out signs that paint the inevitable picture, but it should be clear by now that Europe is a dream we see die before our very eyes. Swiss bank UBS has an idea what that will likely lead to: "We note that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."
The cause of the downfall of the Eurozone? Too much debt. It's no different from that of the people the Reddit commenter evicts from their homes. Too much debt. It's everywhere, and it will devour our societies.
We watch the big dreams die here. But they‘re not what we are most interested in. We care about the dreams of everyday people that are going to be shattered, if they’re not already. In that regard, I often say that what I think is our role can be defined as "minimizing the suffering of the herd". We have no solutions that can carry anyone safely away from the falling debris of our civilizations. The best we can do is to try and point to small ways that might make it all more bearable. But having your dreams broken to bits will never be easy.
The people at UBS seem to realize this when they talk of impending civil war in Europe as a consequence of the break-up of the Eurozone. What they don't mention, for whatever reason, is, as Tyler Durden points out, that this will be the end of UBS, too. That seems sort of symbolic for the way many people view the future: they see a lot of negative developments, but a relatively benign position for themselves.
The best we can do is to continue to tell people to get closer to their family and friends, to establish closer communities. But also to stop making plans for decades into the future, because the future has too many embedded uncertainties. And don't expect too much, if anything, from our existing pension, health care and education systems. There will be no funding to keep them going.
We are watching dreams die. Other dreams will take their place. But, given the way the human mind works, it is going to be an epic struggle that many of us won't live to tell.”