Wall Street Goes To The Red After Fitch Downgrades Spain And Italy ... The ECB’s Unlimited Funding Is Not Sustainable … The ECB’s Liquidity Measurs Lay The Groundwork For A European Economic Government
Financial Market Report for October 6, 2011
1) … Greenspan calls for a EU Political Union
The WSJ reports Wall Street Journal referencing a Financial Times editorial reports To Stay Viable, Euro May Need Political Union, Greenspan Says. A full fledged political union might be needed for the euro zone to sustain its common currency and overcome divisions that sometimes reward less responsible members, former U.S. Federal Reserve chairman Alan Greenspan said. In an opinion essay published online by the Financial Times late Thursday, Greenspan took aim at the "failed" Stability and Growth Pact, a mechanism by which euro states are supposed to balance risk by ensuring no one member's debt grows too large.
To constrain "aberrant behavior" by some in the 17-member zone, he added, a stronger bond might be need. "It may be that nothing short of a politically united euro zone, or Europe, will, in the end, be seen as the only way to embrace the valued single currency," wrote Greenspan, who left the Fed in 2006.
"The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all euro zone nations to follow suit" by achieving higher rates of personal saving and lower inflation. He also warned "less collegial and less prudent" euro states could use currency pooling, meant to equalize members' risk from fluctuating exchange rates to their advantage ("as Greece so brazenly did recently") because these arrangements tend to disproportionately distribute value in favor of such members.
2) … The Automatic Earth calls for Operation Occupy to force EU banks to mark assets to market.
Illargi in The Automatic Earth write in article Occupy This: Mark the Banks to Markets. We can't have any more Dexia's, where a bank that passed a stress test mere months ago with flying colors now threatens to bankrupt an entire nation, simply because a huge part of its assets was kept hidden.
Yes, this would send certain banks over the cliff. But if a bank can survive only with repeated infusions of public money, what good does it do to keep it alive?
Greek bonds are now worth maybe 20%-30% of their face value, if that. What are the chances that this value will rise significantly in the near future, to levels where banks would volunteer to reveal their positions? Those chances are either zero or none. Because no-one can buy enough Greek debt to halt the decline in its value. The ECB is already deep underwater on its holdings; it may itself soon need a bail-out.
So how do you get politicians to force mark-to-market on banks that ask for loans and bail-outs? They're not going to do it voluntarily; or perhaps we should put it like this: they sure as hell ain't planning to do it.
That means it will take an "organization" such as Occupy Wall Street, with all its "loose affilates" springing up around the world, to attempt to force them to change their minds and tacks. It's that simple, really.
That means that if the ruling politicians refuse, the bank recapitalizations that are being discussed in Europe, as well as the inevitably forthcoming ones in the US, should be prevented by national parliaments. And if they don't do it either, by courts of law.
Normally, such a process will be dragged out to infinity and beyond. Having enough people in the streets, though, can work miracles to speed things up. It would make your families and friends proud of you to know you stood up for them in the "great revealing". In which you did not rid the world of bankers' greed, but of financially bankrupt institutions and morally bankrupt politicians, and the utterly destructive systems they've come to represent.
In which you put a stop to your children's future being held hostage to hidden losses.
3) … The ECB’s provision of unlimited funding establishes the groundwork for a true European economic government.
Obviously the ECB cannot supply funds to all European financial institutions which present debt. But its October 5, 2011 announcement of unlimited funding rallied French bank, BNP Paribas, BNP.EU, and stocks world wide.
The ECB took out its bazooka and used it. Once again the ECB kicked the European sovereign debt and banking debt can down the road further. But unlimited Eurozone bank funding is not sustainable.
Any number of factors, such as a rating agency downgrade of French sovereign debt because of its exposure to Dexia, or a rating downgrade of BNP Paribas itself, will impair the EFSF monetary authority, as well as cause a capital flight, that will be the basis of both nationalization of all banks by their country of establishment, and propel all nations into a United States of Europe, that is a Federal Europe, with the empowerment of the ECB as the Eurozone Bank, and the establishment of a Fiscal Union as well. A collective future will come as leaders meet in summits, and announce regional framework agreements, waive national sovereignty for the security and prosperity of the Eurozone.
Do you think that is too extreme? Well some articles provide insight into the ECB’s dilemma, as David Case in Global Post writes French-Belgian firm Dexia is in need of rescue. Problem is, it may be too big to save.
And Ninemsn writes Meet Dexia, the Bear Sterns of 2011. The fourth paragraph of the Wall Street Journal's lead article on today's market meltdown includes this zinger: "The fallout from Dexia's troubles could extend across the Atlantic, affecting every region of the US because it is a major player in the $2.9 trillion market for municipal debt".
Reuters suggested that Dexia's role in financing France's local and regional governments was behind the haste to prevent the company from failing.
So what exactly is Dexia, and why does it matter so much?
Active in four countries (France, Luxembourg, Belgium and Turkey) the company employs more than 35,000 people. All is not gloomy among its three business sectors (retail/commercial, public-sector finance, and asset management). Income in its commercial business is profitable, and grew by 25 per cent in the second quarter to 404 million euros ($A560.72 million). And its retail franchise in Turkey is expanding quickly, according to its most recent quarterly report.
Still, it had invested heavily in subprime mortgages, leading to a 6.4 billion euro bailout by France and Belgium in 2008. Now, it is reeling under the some 20 billion euros in shaky Greek and other European government bonds.
Will Europe trigger another global crisis?
With a balance sheet of a half-trillion euros, Dexia isn't particularly big as banks go. (Citi and Bank of America have nearly two trillion in assets). But "if you look at Dexia relative the size of Belgium's GDP, their balance sheet is almost twice the size of Belgium's GDP. So it's a huge problem for that country," says Paul Simon, CIO at Tactical Allocation Group, a Michigan-based independent investment firm with more than $US1.5 billion ($A1.56 billion) under management. That size means that Dexia's problems are Belgium's problems. Yet Belgium may not be big enough to handle them.
Adding Belgium to the list of baske tcase European governments would be bad enough. The country had a 2010 debt-to-GDP ratio of 100 per cent worse than Ireland and Portugal, both of which have needed bailouts already.
But the real problem is that Dexia isn't alone in dramatically out-weighing its host government. In fact, it could be the first of many institutions that are essentially too big to save.And it's worth noting that Dexia is not among the continent's worst, at least if European officials are to be believed: the bank actually passed last July's EU stress test. Eight banks failed.
So who's next? Time will tell. The main question is which bank could cause a meltdown.
"If you look at the three largest banks in France, their balance sheets are around 300 per cent of the GDP of France," says Simon.
Right now, "French banks are very dependent on short term financing. When the credit markets freeze up you get Lehman and Bear Sterns type situations where there's a massive liquidity problem, and all of a sudden, the governments have to get involved".
But given the extent to which these banks outsize their host government, "you run into limitations in terms of what they can do to help these banks. I believe that Dexia is the Bear Sterns of 2011: the opening act of severe stress in the European financial system".
Of course, the euro zone's troubles are far more difficult to manage given that there is no strong federal government to step in and save the day.
And Lionel Laurent of Reuters reports French mayors rap Dexia "trickery" as rescue brew relates Dexia "tricked" French towns into taking out complex loans that saddled them with crippling interest payments, mayors told a parliamentary hearing on Wednesday, ahead of an expected break-up of the crisis-stricken bank.
With a restructuring plan for the lender expected as early as Thursday, following a pledge from Belgium and France to guarantee its financing in the face of a dramatic share-price slide, some local authorities said now was the time to bring the business of local-government lending under tight control. Specifically, they advocate putting the state back in the driving seat and banning risky, variable-rate products.
Several mayors have sued Dexia over these so-called "toxic" loans, which they say were presented as "fixed" interest-rate products pegged to exchange rates such as the euro-Swiss franc. When the new rates kicked in, the local authorities saw their 4-percent borrowing rates shoot up in some cases to 15, even 24 percent, the mayors told the hearing at France's National Assembly.
Some make the case for breakup of the Eurozone. Edward Harrison wrote in early September in Credit Writedowns breakup of the euro zone is likely. Mike Mish Shedlock in June, wrote “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. Nouriel Roubini wrote the Eurozone could break up over a five-year horizon. And Mr. Shedlock writes: “We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible.” Ambrose Evans Pritchard relates German court curbs future bail-outs, bans EU fiscal union.
I give Austrian Economists credit for communicating that Eurobonds are dead on arrival. They and Ron Paul, have a philosophy fathered by Rothbard and Hayek, who envision a world with sovereign individuals and sovereign nations each with its own currency.
But the world is evolving into greater state corporatism, that the Beast Regime of Neoauthoritarianism come to rule in all mankind’s seven institutions and ten regions, replacing the Milton Friedman Regime of Neoliberalism which ruled from 1971 to July 2011.
Robert Wenzel relates that Libertarian Lew Rockwell says Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police state as the source of order, denies fundamental rights and liberties to individuals, and makes the executive State the unlimited master of society. This describes mainstream politics in America today. And not just in America. It’s true in Europe, too. It is so much part of the mainstream that it is hardly noticed any more.
Fascism also thrives as a distinct style of social and economic management. And it is as much or more of a threat to civilization than full-blown socialism. This is because its traits are so much a part of life, and have been for so long, that they are nearly invisible to us.If fascism is invisible to us, it is truly the silent killer. Mr. Rockwell is describing the stealth and destructiveness of the Beast Regim.
Libertarianism, with its precept of personal sovereignty is now an out of the ball park philosophy, as fate is operating to destroy sovereign nations. Sovereign leaders will be replacing sovereign individuals. Freedom and choice are illusions on the Neoauthoritarian desert of the Real. Angela Merkel and Nicolas Sarkozy are ambassadors of regional economic government, as Kathimerini reports Merkel, Sarkozy and Papandreou will hold talks with Papandreou expected to outline plans for privatisation and further spending cuts.
While Greece and others may be ejected from the EU, fate is operating to destroy nation states, and to provide a Super European Government. Between The Hedges relates Sueddeutsche Zeitung reports Italy is prepared to give up "all sovereignties necessary" to allow the creation of a European central government," citing Foreign Minister Franco Frattini. The European Union's existing contracts should be extended or changed if necessary to incorporate a "stabilizing finance mechanism," according to the report. The ECB should gain a "political role," while remaining an independent institution, Frattini said.
Soon out of a sovereign debt crisis and banking collapse seen, One Leader, the Sovereign, and His Seignior, will arise to speak for and to the Eurozone, and together with his partner, the Seignior, seen in they will provide seigniorage, that is moneyness, based upon diktat of austerity measures and debt servitude.
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 Beast Regime has seven heads, meaning it manifests in all of mankind’s seven institutions; and has ten horns, meaning it rules all of the world’s ten regions.
Charlemagne unified western Europe and recreated an equivalent of the old roman empire. The European Super Government will be a type of revived roman empire, and will feature a Fiscal Union, whose Iron Chancellor, will rule with diktat, enforcing debt servitude and austerity. The people will be amazed by the new seigniorage, that is the new moneyness, and follow after the Beast Regime, giving it their allegiance.
Fate has been operating to provide kings through out history. These have included 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, and as who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’
Eventually, the Beast Regime, that is the Ten Toed Kingdom of regional economic government, 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.
4) … Reuters reports Wall Street Goes To The Red After Fitch Downgrades Spain And Italy
4A) … The world is in both a currency deflation bear market, and in a credit deflation bear market, coupled with the exhaustion of quantitative easing.
A currency deflation bear market is responsible for taking basic materials lower and a credit deflation bear market is responsible for taking financials lower. Bespoke Investment Blog reports materials S&P materials is down 18% and S&P financials is down 26%.
Wall Street leaders MS, BAC, JPM, all manifested bearish engulfing. The investment bankers, KCE, manifested bearish engulfing and traded 4% lower. Financial brokers, IAI, traded 3% lower. Leveraged Buyouts, PSP, traded 2% lower. Does this mean a soon coming end to the securitization of debt?
Banks, KRE, manifested bearish engulfing, and traded 5% lower. Does this mean the end of lending?
Does the hanging man candlestick in the chart of Junk Bonds, JNK, mean an end to the seigniorage, that is the moneyness of debt?
Does the trading of America Express, AXP, at the edge of a head and shoulders pattern, portend the beginning of the end of credit.
Volatility, VIIX, VXX, VIXY, as well as Double Long Volatility, TVIX, rose.
China has been the world’s growth leader. But, Double Short China 25, FXP, rose as China, YAO, manifested bearish harami. Can today’s jump in China Minerals, CHIM, and China Industrials, CHIX, such as Pohang Iron & Steel, PKK, be sustained?
Brazil has been world’s hot money flow center of the world. But, Double Short Brazil, BZQ, rose as Brazil, EWZ, and Brazil Small Caps, BRF, manifested bearish harami.
Basic Materials investing has been the Milton Friedman floating currency regime beneficiary. But, Double Short Basic Materials, SMN, rose as US Basic Materials, IYM, manifested bearish harami as did construction material manufacturer Martin Marietta Materials, MLM. Can the recent rise in fertilizer, SOIL, and POT, MOS, and TNH, be maintained? Can the recent rise in KOL, Arch Coal, ANR, be sustained? Can the recent rise in industrial metals, CRBI, be maintained? Can the recent rise in copper miners, COPX, and Aluminum Manufacturers, ALUM, such as ACH, and, AA, be sustained?
Can the rise in the platinum shares PLTM, silver mining shares, SIL, and small cap gold mining shares, GDXJ, be maintained? Are the small cap gold mining shares going to disconnect once again from the price of gold, as seen in GDXJ:GLD, and are they going to fall strongly lower? Can the recent rise in Rare Earths, REMX, be maintained?
Will the recent rise in Steel Manufacturer, SLX, Commercial Materials, CMC, hold? Yahoo Finance In Play reports that the company announced its decision to exit the CMC Sisak mill in Croatia, a steel pipe manufacturing operation, by way of a sale and/or closure. A trade war is likely to ensue after the upcoming protectionist trade legislation is signed by President. Protectionism will add vigor to disinvestment out of steel plants that were built or improved using yen carry trade investments from the Bank of Japan at 1% interest. Are steel manufacturers MTL, and AKS, headed sharply lower? Are natural resource behemoths, RIO, and VALE, destined to fall lower due to competitive currency devaluation and a rising US Dollar?
Austria, EWO, Germany, EWG, France, EWQ, Italy, EWI, Spain, EWP, French Bank, BNP.EU, and Siemens, SI, manifested bearish harami. The ongoing Yahoo Finance chart of EWO, EWG, EWQ, EWI, EWP, shows a rally being turned back as the downgrade announcement came forth.
European Financials, EUFN, traded 1% lower today and Dexia, DEXB.EU, traded unchanged today.
Breakout writes Why Americans Should Care About Failing European bank Dexia. Atlantic International weighs in and asks Want To Solve Europe's crisis? Reboot the IMF An inquiring mind asks, does the International Monetary Fund have any assets?
4B) … Bespoke Investment Blog reports Earnings Reports By Day This Earnings Season. Will investors, better termed speculators, stay invested to November 13th, let alone the end of the month?
Will investors stay invested in oil, $WTIC, traded by USO, to keep the small cap energy shares, PSCE, and energy service companies, IEZ, up in price? Can today’s jump in Seadrill, SDRL, be maintained?
Will investors hang in there with the small cap revenue, RWJ, Will the recent rise in small revenue company Western Union, WU, hold?
Is Financial Preferred, PGF, about to fall sharply lower?
The US small cap shares, IWM, are highly dependent upon credit, and we are in a credit deflation bear market. Their chart shows a bearish harami today. Might they fall lower? Banks KRE, manifested bearish engulfing at 200 day moving average.
The small cap pure value shares, RZV, are indicative of the currency market, and we are in a currency deflation bear market. Their chart shows a dark cloud covering candlestick today. Are these headed lower? I suggest so, as the currency yield curve weekly, RZV:RZG, manifested massively bearish engulfing nine weeks ago when Angela Merkel and Nicholas Sarkozy proposed a true European economic government. The recent rally in BHP Billiton, BHP, is an example of a currency plan, that is a risk trade, in the Australian Dollar, FXA. Have we gone back into a risk off mode, that is risk adverse mode, where regional banks, such as Banco Santiago, SAN, and Bank of Montreal, BMO, succumb to debt deflation? Will hot money flow quickly out of emerging market basic material companies such as SQM?
Will the small cap real estate shares, ROOF, continue to go up?
Will the solar recent rise in solar stocks, TAN, hold?
Will Sprint’s 20 Billion contract with Apple to buy iPhones prove to be valid? Sprint, S, fell 20% today. Are we witnessing the failure of the seigniorage, that is the moneyness, of Apple’s iPhone?
Will the recent rise in the small cap technology shares, PSCT, and the small cap discretionary shares, PSCD, hold? Will the recent rise in Align Technology, ALGN, and Plantronics, PLT, hold? Yahoo Finance Short Stories reports that Wunderlich upgrades Quantum, QTM, to buy from hold, and sets target price at $3; the stock jumped to 2.17. Is its price objective at $3 reasonable?
Yahoo Finance Tech Stocks reports Corning, GLW, declared a 50% increase in the company's quarterly common stock dividend. Will Corning’s, GLW, recent sharp rise hold due to the dividend increase.
Will bank service company Fiserv, FISV, which has risen to 200 day moving average, continue to rise?
Can the recent rise in Nasdaq Telecom, Ericsson Telephone, ERIC, be sustained?
Can today’s rise in warehouse club PriceSmart, PSMT, be maintained?
Is the rally in consumer discretionary stocks such as Time Warner, TWC, over? Beam Inc, BEAM, had a positive write up in the news, does the massive hanging man candlestick in its trading suggest that its rally is over?
Can the recent rise in agriculture stocks, CRBA, be maintained?
Is that an evening star in the chart of information technology company ServiceSource International, SREV? Yahoo Finance Story Stocks reports The Company raised its full year 2011 revenue guidance, expecting revenue greater than $195 million, reflecting at least 28% year-over-year growth and which compares to previous guidance of $190 to $192 million for the year, Capital IQ consensus $191.9 million. The Company said that it expects to raise guidance for adjusted EBITDA, net income and non GAAP earnings per share when it announces final results for the quarter. Can this tech leader, continue to soar?
Office REIT, LSE, traded lower today, taking all the other office REITS lower: chart of LSE, OFC, KRC, BXP, DLR, ARE, LRY, MPG, FSP, DKE, HPP.
Retail REIT, CBL, traded lower today, taking all the other retail REITS lower; chart of CBL, IRET, DDR, IRC
Industrial REIT, PLD, traded lower today, taking all the other industrial REITS lower: chart of PLD, PSB, DCT, STAG, FR, BMR; the Industrial REITS are traded by FNIO which traded 1% lower.
Residential REIT, CPT, traded lower today, taking all the other residential REITS lower: chart of CPT, AIV, AEC, MAA ; the residential REITS are traded by REZ which trade 3% lower.
Can the recent rise in premium REITS, KBWY, be sustained?
An inquiring mind asks are ABCS, FNIO, WREI, and ENY preferred investments for short sellers? Chart of ABCS, FNIO, WREI, and ENY I do not know, as I am not a short seller, I’m just asking, as I am a gold bug and recommend that one take possession of gold bullion. With the 10 Year US Treasury Note interest rate, $TNX, going in an Elliott Wave 3 Up, rising to 200 moving day average. I sure would not be invested in a Money Market Funds, MMF, as I am concerned that it will break the buck.
Can the recent rise in networking, IGN, be maintained? Can the recent rise in homebuilding, XHB, be maintained? Can the recent rise in Indonesia, IDX, and Turkey, TUR, be maintained?
Is the rally in International Paper, IP, over? Is the rally in small cap industrial ROLL and KDN over?
Is the rally in metal manufacturing, XME, as well as RS, and MUSA over? Sims Metal Management, SMS, reports it will establish an on-market share buy back as part of its capital management strategy; its shares jumped manifesting a dark cloud covering candlestick; will its strategy prove helpful? Will any buy back strategy help in the current Kondratieff Winter bear market?
In a bear market is investment in automobile manufacturing, such as American Axle, AXL and ship builder, SB, sustainable? Is the rally in railroads, BNR, UNP, CNP, NSC, GWR, CSX over?
Is the recent rise in gaming and vice stocks, BJK, as well as consumer discretionary, Callawy Golf, ELY, sustainable? Is the rally in apparrel retailer DSW, and Saks, SKS, over?
Investors Business Daily reports Polaris Makes Vehicles For Work And Play. Polaris Industries was favored as a risk trade in the Age of Leverage. But the world has entered into the Age of Deleveraging, and wise traders might consider selling it short. The chart of PII shows it manifesting a questioning doji at 54 today. Like an ant climbing a hill, it sure looks like it is loosing traction to me.
Can investment in wood and packaging industries, WOOD, be sustained? In the commodities, DBC, can the recent rise in timber, CUT, be maintained? and can today’s strong rise in tin, JJT, be sustained? Does the hanging man candlestick in commodity currencies, CCX, suggest an end to the rise in commodities?
5) … Neoauthoritarianism is replacing Neoliberalism … Both credit and moneyness will come from Diktat … And the people will marvel, and follow after it, and give their allegiance to it.
The global tectonic plates have shifted. First, the economy is in recession. The Wall Street Journal reports ECRI Weekly Leading Index Still Drilling Downward. The Economic Cycle Research Institute, which has declared that a recession is coming , and, like the whacking of Tommy DeVito in Goodfellas, “we couldn’t do nothing about it”, offers up another piece of evidence this morning. Its weekly leading index fell again this week, and its rolling growth rate dropped to -8.1%, the lowest in at least a year . Second, stock investments turned sharply lower in July when investors sold when they became aware a debt union has formed in the Eurozone. Third, a political coup d etat is underway as Neoauthoritarianism is replacing the Milton Friedman Free To Choose Currency Regime. This new regime is manifesting at the Ten Toed Kingdom of regional economic government. Angela Merkel and Nicholas are its ambassadors, as they have called for a true European economic government in the Eurozone. The result is that Neoauthoritarianism is replacing Neoliberalism.
Dexia’s success came from its guarantees. Michael Corkery of the WSJ repots): “Dexia SA's troubles in Europe have extended to the U.S. in recent months, lifting borrowing costs for many cities and towns. When times were good, the Belgian-French bank gave governments across the U.S. easy access to cheap financing by agreeing to ‘backstop,’ or purchase unsold bonds, in the $2.9 trillion municipal-debt market. As investors grew concerned about Dexia's ability to make good on the municipal guarantees, the bonds' interest rates rose.”
Dexia may become a bad bank. Anne-Sylvaine Chassany and Jacqueline Simmons of Bloomberg report: “Dexia SA may be left with the lender’s worst assets under plans that would allow the French and Belgian governments to avoid injecting more capital into the bank, two people with knowledge of the talks said. Under the option most favored by the French, the two governments would guarantee Dexia’s borrowings before splitting up the lender. Belgium may then assume Dexia’s assets in that country, while France’s state-owned La Banque Postale and Caisse des Depots et Consignations would buy Dexia’s French municipal-lending unit, leaving Dexia as the ‘bad bank,’ the people said.”
Credit is evaporating. Tim Catts of Bloomberg reports: “Corporate borrowers are pulling back from markets for everything from overnight commercial paper to the longest-maturity bonds as global economic growth is threatened while Europe struggles to contain its fiscal crisis. The market for short-term IOUs in the U.S. slipped below $1 trillion for the first time since February in the week ended Oct. 5. Bond issuance worldwide fell 47% to $21.5 billion this week.”
Liquidity is evaporating. Shannon D. Harrington and Sarah Mulhollan of Bloomberg report: “Europe’s crisis of confidence is crippling credit-market trading as banks shrink bond inventories to the least since the depths of the last recession. Federal Reserve data show U.S. primary dealers cut their holdings of corporate debt by 33% to $63.5 billion since May, bringing stockpiles to within $4 billion of the five-year low reached in April 2009. Trading in investment-grade company bonds has dropped 27% since February. Evaporating liquidity is contributing to the biggest junk bond losses since the failure of Lehman Brothers.”
Credit is tightening, and debt deflation, that is currency deflation is deleveraging stocks, as yen carry trades unwind, as is seen the ongoing chart of LATM, BRF, BZF, FXM Ben Bain of Bloomberg reports: “Foreigners are cutting holdings of the shortest-term Mexican government bills to a three-month low as the peso’s plunge erodes dollar-based returns. International investors owned 26% of the securities, known as Cetes, on Sept. 26, down from a record high of 37% in March. The peso has tumbled 14.2% in the past three months, the biggest slump among Latin American currencies after the Brazilian real. Foreigners who piled into Cetes to profit from gains in the peso earlier this year are now shunning all but the safest assets as Europe’s debt crisis fuels a global sell-off in emerging-market currencies.”
National debt sovereignty is being both challenged and compromised by investors who use Credit Default Swaps or FX currency markets against the most fragile countries, with the result that fiscal authority and capability is being diminished. Camila Russo of Bloomberg reports: “The cost to insure Argentine debt against default is soaring relative to Venezuela, the world’s riskiest credit after Greece, on concern the country will struggle to weather a worsening global economic crisis after defaulting on $95 billion of bonds in 2001. The cost of five-year credit-default swaps on Argentine bonds has more than doubled from Aug. 1 through yesterday to 1,200 bps” ….. And Monika Rozlal and Piotr Skolimowski of Bloomberg report “Poland, a bond-market darling in the second quarter, is leaving foreign investors with the third biggest losses worldwide as the euro region’s debt crisis slows growth in eastern Europe’s biggest economy. Polish bonds tumbled 15.7% in dollar terms during the third quarter.”
Credit is simply not available. Jack Ewing and Stephen Castle write in NYT article In France and Germany, Divergence On How To Recapitalize Banks grave problems at the French-Belgian bank Dexia, which is on the verge of its second taxpayer-financed bailout in three years, have dashed any illusions about the health of European banks. It was only in July that Dexia breezed through an official stress test that was supposed to expose vulnerable banks. No one has provided even rough details of how to compel banks to raise money on open markets if they can, and to provide government financing if they can’t. “Our experience is that if no one is talking about the details of something, it is because they do not exist,” Carl Weinberg, chief economist of High Frequency Economics, wrote in a note to clients Friday. “Let us just agree that there is no plan.” Banks have been unable to sell bonds to raise money. The danger is that European banks will run short of cash to lend to businesses and consumers, amplifying a recession that may already be under way. And in a vicious cycle, the threat of recession is further undermining faith in banks. The problem is not just bank capital, but first and foremost that of sovereign debt crisis intertwined with slow growth,” the Institute of International Finance, a banking industry organization, wrote in its monthly assessment of global capital markets. The report noted that shares of United States banks had begun to suffer because of perceptions that they are exposed to their European peers. On Thursday, the European Central Bank expanded its aid to banks that were having trouble raising money. It said it would allow banks to borrow as much money as they wanted for about a year at the benchmark interest rate, currently 1.5 percent. But, as Jean-Claude Trichet, the departing president, warned, the central bank can provide only temporary aid. The central bank is addressing banks’ liquidity problems, their need for cash day to day. But the E.C.B. cannot fix banks’ solvency problems, the lack of adequate reserves to absorb a big hit to their holdings of government bonds or losses from nonperforming loans. Before money market funds and other investors will start risking money on European banks again, they need to believe the banks are bulletproof.
Doug Noland in article Tuesday relates The ECB further heartened markets with its move to purchase $53bn of bank (“covered”/backed by assets) loans and to re-open long-term bank funding facilities. An analyst was quoted by the Wall Street Journal: “They’ve opened the floodgates with liquidity” With central bankers in crisis management mode and European policymakers said to be working diligently on a plan to recapitalize euro zone financial institutions, markets were in the mood to hope that there was finally sufficient resolve to contain the crisis.
I was struck by a further comment from the BOE’s Mervyn King: “We’re creating money because there’s not enough money in the economy.” Dr. Bernanke has over the years used similar analysis in describing a central cause of the Great Depression. He is convinced that the Fed during that period was derelict in its responsibilities for failing to expand the money supply. It is his view that had the Fed only “printed” sufficient money and recapitalized the banking system much of the pain of the depression would have been avoided. The markets will now watch anxiously as participants try to gauge the efficacy of money printing and bank recapitalizations in arresting the global sovereign debt crisis.
I have posited that conventional analysis has it wrong: a paucity of “money” during the Great Depression was not a cause - but only a consequence. The Fed was not so much derelict in its duties in the early-thirties as much as it was from accommodating the “Roaring Twenties” Bubble episode. Yes, the Fed could have “cut a check” and recapitalized the banking system in the early-thirties, but it would have made little difference. A fateful post-WWI Credit inflation had inflated price levels throughout what had become a badly maladjusted “Bubble Economy” structure. The U.S. and global economies had been so distorted by Credit and speculative excess – and through the Bubble process had become hooked on ongoing Credit expansion and speculative leveraging. When the speculative Bubble burst, systems could not withstand de-leveraging dynamics. The financial apparatus buckled and dragged economies down with it. The critical issue was not a lack of money, but a collapse in confidence in Credit instruments and faith in financial intermediaries and policymaking.
Bernanke and others have over the years argued that bank recapitalization in the early-thirties would have had a profound systemic impact. Some have argued that an operation by the Federal Reserve to create $4bn of additional capital would have been sufficient to stem collapse. These days, analysts make estimates of the amount of additional capital required to stabilize the European banking system.
In the grand scheme of major Credit Busts, calculations of necessary additions to depleted bank capital basically become meaningless. The critical issue is not some quantifiable (and “plugable”) hole in banking system capital but, instead, the overall Credit needs of maladjusted Bubble economic structures and inflated system-wide prices levels and spending patterns. This is a critical distinction. In the U.S., for example, I have argued that a period of prolonged Credit excess created a financial and economic structure requiring in the neighborhood of $2.0 TN annual net non-financial Credit growth to keep the economic wheels rotating and (speculative) asset markets levitating. Post-2008 crisis bailouts threw hundreds of billions (Trillions?) at the financial sector, although this changed little with respect to the economy’s requirement of massive Credit creation on an ongoing annual basis. This is an enormous festering problem that goes unnoticed with attention fixated on European carnage.
From the European experience, we now appreciate that the little, almost inconsequential Greek economy is quite an impressive financial black hole. And as things have progressed, critical Credit Bubble Dynamics have been illuminated for all who want to see. The market has witnessed how the “money” from Greek Bailout One was soon vaporized. Dexia’s 2008 bailout: vaporized. Greek Bailout II, when it arrives, will be similarly vaporized. European bank capital: poof. The potential amount of “money” to be vaporized if Italy succumbs to the highly contagious path of Greece, Portugal and Ireland: Unfathomable Black Hole. Well, everyone knows this is not an option. So incredible effort will be exerted to present the European crisis in terms of some quantifiable, manageable, solvable problem – some quantifiable cost that might, with the euro at risk, be tolerable to, say, the German voter.
The markets are somewhat relieved to see policymakers now completely engaged. Yet I don’t foresee an increasingly enlightened marketplace really buying into any notion that policymakers are getting their arms, minds or pocketbooks around the problem. Seeming at times in lonely isolation (and I’m not referring to either their AAA debt rating or manufacturing-based economy), the Germans appreciate the unfolding “financial black hole” and monetary “slippery slope” nature of how things are progressing. Meanwhile, on a more daily and hourly basis, the market focus seems to be whether policy pronouncements are sufficient to engender another “rip your face off” short squeeze.
Despite stringent austerity measures, Greece will run a deficit this year of at least 8.5% of GDP. Without a massive and open-ended commitment from a rapidly depleting European “core,” the situation is utterly hopeless. In a microcosm of the predicament shared by other developed economies, Greece for too long depended on the creation of new financial claims (Credit) and consumption at the expense of investment in real wealth creation (is this type of analysis sounding any less archaic these days?). As much as policymakers will never admit it, impaired economic structures are at the heart of an unquantifiable global Credit crisis of confidence. And as de-risking and de-leveraging empowers contagion effects worldwide, the scope of the unquantifiable grows only more unfathomable. Perhaps this is what Sir Mervyn King, from the BOE, had in mind.
And it all seems to boil down to this: Credit cannot be stable within a backdrop of such extraordinary uncertainty. And, I would argue, no amount of central bank liquidity (“money”) and bank capital is going to engender sufficient certainty to stabilize Global Credit, financial flows and asset markets. Not with the large number of dangerously maladjusted economies; not with such well-entrenched global economic and financial imbalances; and not with today’s unbelievable Credit, derivatives, and speculative leverage overhang. The issue is certainly not a lack of “money” - but rather a lack of confidence and trust – the bedrock of Credit.
I relate that out of Gotterdammerung, that is a clash of the gods, those being the rating agencies and the national leaders, a Credit Bust and Global Economic Collapse, will ensue. An example of this ongoing war is the Howard Mustoe and Michelle E. Frazer Bloomberg report: “Moody’s cut the senior debt and deposit ratings of 12 British lenders including Royal Bank of Scotland, RBS, and Lloyds Banking Group, LYG, saying the government would be less likely to provide support in the event of failure.”
Though this investment flameout, and credit collapse, a new economic and monetary paradigm, construct and matrix will arise to replace Neoliberalism, that being Neoauthoritarianism. It will be characterized by Leaders announcing framework agreements, which waive national sovereignty and establish regional economic government. A Chancellor, that is a Soveign, and a Banker, that is a Sovereign, meaning top dog banker who takes a cut, will establish fiscal sovereignty, as well as a new seigniorage, that is a new credit and a new moneyness. Business leaders and government ministers will promote the interests of state corporatism.
Greeks are not Germans, yet they will soon be one. Greeks, are of the Olive State, which is characterized by a way of entitlement. Germans are of Industrious State, which is characterized by meritocracy. Greeks exemplify Socialism, and promote a Club Med mentality. Germans exemplify Free Enterprise, and promote a hard work mentality. Since the Greeks and Germans cannot speak with one voice to a common debt plight, out of sovereign and bank crisis, one will rise to speak to them and for them.
The word, will and way of the Sovereigns will rule. Thus the rule of the Sovereigns will replace constitutional and historic rule of law and enforce austerity measures and debt servitude. The people will be amazed, and follow after their rule, and give their full allegiance to it; with banks gone, people will place their faith in Diktat.
There will be no jamboree Tea Party political conventions, such as the one sponsored by the Iowa Faith and Freedom Coalition, covered by Tom Bevan of Real Clear Politics, where Tim Pawlenty, the former governor of neighboring Minnesota, touted his accomplishments as a "blue" state chief executive who managed to both balance a budget and focus on faith. "We need to remember this and always remember this," Pawlenty said. "The Constitution was designed to protect people of faith from government, not to protect government from people of faith." And Herman Cain, the former CEO of Godfather's Pizza, roused the crowd by proclaiming the "the United State of America will not turn into the United States of Europe. Not on our watch." The 1974 Call of the Club of Rome is clarion, that is ringing, clear and compelling for regional economic government in all of world’s ten regions. It’s authoritarian imperative will work through the perimeter security talks, to establish a continental government for North America’s security and prosperity. CNB News reports Prime Minister Stephen Harper says Canada is still working on a security border agreement with the United States. Sources told CBC News that even organizing an event to announce an action plan towards a perimeter security deal is proving difficult during the American pre-election season, when U.S. President Barack Obama's priorities lie elsewhere. Fate is working to establish a North American Union, possibly named CanMexAmerica As for Freedom and Choice, these are mirages on the Neoauthoritarian desert of the real.
Debt mania, caused by the Spirit of the Cat in the Hat, to produce such things as the repeal of the Glass Steagall Act, combined with the US Federal Reserve ZIP and quantitative easing policies, as well as 1% yen carry trade lending by the Bank of Japan, has created an investment demand for gold. It is both a currency and a commodity, and while it may loose some nominal value, it is the best means of preserving wealth in a debt deflationary world.