Tuesday, May 11, 2010

Shocked But Not Awed At All By Latest Bailout Fiasco

Exactly. Totally shocked at what they are doing but hey don't listen to me, just read what the experts are saying.

Shock and Awe Part II; Show of Force Rises to $962 billion; Fed Joins the Battle; Short Squeeze Coming, Then What?

  • What's Next?

    To defend the Euro, the ECB now is committed to throw up to $1 trillion at interventions in public and private debt.

    What's next? Direct intervention in the stock market?

    Bear in mind when this fails (which I guarantee you it will but I cannot state the timeframe), these clowns will think the reason was they did not throw enough firepower at it.

    Step back for a second. The problems are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions address any of the fundamental issues.

    Short Squeeze Coming

    Judging from the action in futures this evening, shorts are going to be forcibly ejected Monday, perhaps for several days.

    This will create a huge air pocket underneath. We saw this action once before, in Fannie Mae and financials..... While the timeframe is unknown, these attempts to "defend the Euro" are highly likely to hasten its demise.

And as noted by Mish: "World Needs Dollars To Defend The Euro and the Fed to reopen dollar swap program

In another posting from Mish does a compilation: Voices of Reason in Sea of Insanity

  • John Hussman: Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
  • Meredith Whitney: "Here's a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets - that's loans that haven't paid over 120 days - the size of that is 1.5 times all of the chargeoffs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? .... "There's huge growth in non-performing assets. These are numbers, apples-to-apples, on the four big banks. The issue is when does that stuff that's not paying come to market, and when do banks recognize the chargeoffs? I think you're going to see more of that in the second quarter and the third quarter. Does the supply move in the second quarter and then you report it in the third quarter? The timing may be weighted more to the third quarter. I just don't know. I think you see a huge leg down in asset prices when you see the supply reach the market. So no, it's not factored into valuations. No, it's not factored into bank guidance. And yes, I think it's going to be a big problem for the banks."
  • Bill Cara: If these so-called public servants were schooled in economics and not politics they would understand that shifting a debt burden from one group to another does not eliminate the burden. The owners of capital – the ones who hold unencumbered assets – are today asking themselves how long will such insanity last?
  • Caroline Bum: There is no question we live in an interconnected world. Subprime mortgage defaults by homeowners in Irvine, California, infected banks in Europe and Asia, thanks to the miracle of securitization.... So yes, European banks that hold Greek debt are vulnerable to losses. The interbank lending market is showing signs of stress. And the austerity measures required in Europe’s peripheral countries may spill over into reduced U.S. exports. That’s not the kind of contagion we keep hearing about. On the other hand, it would be a mistake to interpret the flight-to-quality into U.S. Treasuries last week as a sign of immunity. The U.S. is already infected with the debt virus. It’s still in its incubation period.
  • BC: But when private debt growth and associated increasing returns to financial capital have been the primary source of growth since the early '80s to early to mid-'70s, increasing government borrowing and spending to make up for the loss of debt growth in the private sector only results in government debt eventually growing faster than exponential vs. incomes, production, and GDP, setting the stage for fiscal insolvency atop private sector debt-deflation.

From Ambrose Evans-Pritchard: Europe plays its last card to save monetary union

  • No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.
  • German Chancellor Angela Merkel accused the financial industry of playing dirty. "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous," she said. "Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight".
  • For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
  • The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.

    Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust.
    It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.

    The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.

    While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.

Jim Rogers: http://jutiagroup.com/2010/05/10/jim-rogers-on-currency-crisis/

  • What is your sense? Do you think that the Eurozone is going to shrink because of what we are witnessing in Portugal, Greece and Spain?

    Eventually the euro is unfortunately going to break up. I am afraid because it keeps weakening itself from within. If they would let Greece go bankrupt, for instance, it would strengthen the euro, and it would strengthen the Eurozone because people would know you have to maintain a sound economy, you have to maintain a sound currency and everybody would jump in and buy the euro. I would buy more if that would be case. Weakening from within and continuing to lend money and paper over problems is not a solution for a sound currency. I do own the euro, don’t get me wrong, but I do not think this is the proper approach.

    We are also seeing the impact of the crisis on most commodity markets. Do you think that this is just temporary and commodity is still the place for investors to be?

    Yes, gold is making all time highs in some currencies. So some currencies are doing well during this period of time. But to your bigger question, if the world economy gets better then obviously commodities are going to do better because the world would use more and there are shortages developing. But let’s assume the worst, let’s assume the world economies does not get better, the things continue to get there, then I would rather be in commodities in most things because governments are going to print even more money, and whenever you’ve had to print money throughout history, it led to higher prices for real goods whether it is silver or natural gas, whatever it happens to be. So, I would rather own commodities over the next two or three years.

Jesse: http://jessescrossroadscafe.blogspot.com/2010/05/ecb-to-buy-bonds-in-secondary-market-to.html

  • When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.

    Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.

On Washington's Blog: Americans Have Been Bailing Out Foreign Banks for Years ... And We're Getting Ready To Do It Again

  • So not only are Americans bailing out our own too big to fail banks, but we're bailing out foreign mega-banks as well. Even though bailing out Europe might make sense if America was flush with cash, things are different now. As Congressmen Kucinich and Filner wrote last June:
    Our country and this body cannot afford to spend American tax payer dollars to bail out private European banks.

Zero Hedge highlighted this clip: "Goldman Can Create Shorts Faster Than Europe Can Print Money"

  • "Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money."