Archives for July 2012

Fannie Freddie Cramdowns and the Obama-Geithner Blame DeMarco Shell Game

Courtesy of Lee Adler of the Wall Street Examiner

The independent federal agency that administers Fannie Mae and Freddie Mac said once again on Tuesday that it would not let the mortgage finance companies offer debt forgiveness to homeowners, rejecting the entreaties of congressional Democrats and the Obama administration.

The Federal Housing Finance Agency said it had concluded after months of study that debt forgiveness might benefit up to half a million homeowners, but that the costs – including the cost to taxpayers – outweighed the potential benefits.

Offering debt forgiveness “would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers,” the agency’s acting director, Edward J. DeMarco, said in a statement.

“The choices we’ve had to make are hard but they need to be made,” he told reporters.

The decision is a direct rebuff to the Obama administration, which has pressed Mr. DeMarco for more than a year to reconsider his long-standing opposition. It is also a blow to the administration’s efforts to increase help for homeowners.

via U.S. Agency Bans Fannie and Freddie From Reducing Principal – NYTimes.com.

OK, so here’s the thing. If Fannie and Freddie were to write down all of their owned and guaranteed loans to actual market value of the collateral, the US taxpayer would be on the hook for up to a trillion dollars in losses. OK, maybe only $500 billion, but who’s counting.  If the US wants to back away from the government guarantee, then fine, we can stop pretending the collateral is real and make the bond holders take the haircut.

But they’re not going to to that. So that put that forked tongue tax cheat Geithner out there with a phony letter begging FHFA head DeMarco to reconsider.

The Obama administration is pretty slick on this, although anyone with half a brain can see through their disingenuous act. They can pretend that they really want to do something to help under water homeowners and make themselves look like the good guys and Ed DeMarco look like the big bad bogey man.

Well, I’m calling them on this phony act. If you want to do this, then screw the guarantee and make the bond holders take the haircut. The US Government can walk away from this phony guarantee and stick the loss where it belongs on the sophisticated investors and foreign central banks who bought the paper in the first place. Yeah, I know the Fed holds a bunch of it, so we’ll get stuck on some of it anyway.

But as we all know, they’re not going to do that. They’re going to play this shell game for pretend political gain instead. – Lee Adler

 

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Auto Financing: You Don't Need Decent Credit

“As long as the music is playing, get up and dance…"

Recall: "Under Chuck Prince, [Sandy] Weill’s short-lived successor, Citigroup dove headfirst into subprime mortgages and played all kinds of games with its balance sheet. The only thing Prince will ever be remembered for is his pathetic utterance in defense of his bank’s insane risk-taking: 'As long as the music is playing, you’ve got to get up and dance.'" NY Times

Auto Financing: You Don't Need Decent Credit

Courtesy of Karl Denninger, The Market Ticker

But nobody could have seen this coming!

Sales of bonds tied to payments on subprime car loans are accelerating at the fastest pace in five years as investors seek high yields amid speculation the Federal Reserve will keep interest rates at record lows until mid-2015.

This is amusing.  Truly amusing.  The "attraction" for the issuers of these Frankenstein monsters is clear, if you read a bit further down:

The subprime auto finance business has grown during the past two years as new lenders compete to make loans with rates of about 17 percent annually, while being able to finance themselves at an average rate of less than 2 percent, Moody’s Investors Service said in a July 17 report. With losses ranging from 1 percent to 3 percent, originators collect annual spreads of about 12 percent, according to the New York-based firm.

smiley

Funding costs under 2% and rates charged to borrowers of 17% — on automobiles?!

No wonder auto sales are "up" — fog-a-mirror loans are back, and the consumer is the one getting hosed this time.  Paying 17% for money to buy a car is just plain nuts.

This will seem to work just fine right up until that subprime borrower can't pay, at which point the game will (again) come crashing down around their ears.  The fun with these sorts of deals is that people will generally make their car payment before virtually anything else, since without a car you're not going to get to work.

Bling and "aspirational buying" by people with crap credit is still going on…

Perella’s CarFinance Capital LLC funded more than $100 million in auto loans in its first 10 months of business as it works with more than 1,500 auto dealers serving “non-prime”consumers, who now account for more than a third of U.S. car buyers, the Irvine, California-based company said in an April 24 statement announcing an expansion in Texas.

That's insane.

But you know the old saying from Citibank, right? 

So long as the music is playing you have to get up and dance.

GM, incidentally, is saying something else entirely about its future prospects in its stock price and Ford isn't doing much better…

That's the bell you hear ringing on these deals folks.

Disclosure: No position although it would be insanely delicious to make money on GM going bankrupt twice; I had a monster put-spread trade on the first blowup, and might just have to do another one, even if much smaller, just so when it blows a second time I can say I got both of them.

Auto Financing: You Don’t Need Decent Credit

“As long as the music is playing, get up and dance…"

Recall: "Under Chuck Prince, [Sandy] Weill’s short-lived successor, Citigroup dove headfirst into subprime mortgages and played all kinds of games with its balance sheet. The only thing Prince will ever be remembered for is his pathetic utterance in defense of his bank’s insane risk-taking: 'As long as the music is playing, you’ve got to get up and dance.'" NY Times

Auto Financing: You Don't Need Decent Credit

Courtesy of Karl Denninger, The Market Ticker

But nobody could have seen this coming!

Sales of bonds tied to payments on subprime car loans are accelerating at the fastest pace in five years as investors seek high yields amid speculation the Federal Reserve will keep interest rates at record lows until mid-2015.

This is amusing.  Truly amusing.  The "attraction" for the issuers of these Frankenstein monsters is clear, if you read a bit further down:

The subprime auto finance business has grown during the past two years as new lenders compete to make loans with rates of about 17 percent annually, while being able to finance themselves at an average rate of less than 2 percent, Moody’s Investors Service said in a July 17 report. With losses ranging from 1 percent to 3 percent, originators collect annual spreads of about 12 percent, according to the New York-based firm.

smiley

Funding costs under 2% and rates charged to borrowers of 17% — on automobiles?!

No wonder auto sales are "up" — fog-a-mirror loans are back, and the consumer is the one getting hosed this time.  Paying 17% for money to buy a car is just plain nuts.

This will seem to work just fine right up until that subprime borrower can't pay, at which point the game will (again) come crashing down around their ears.  The fun with these sorts of deals is that people will generally make their car payment before virtually anything else, since without a car you're not going to get to work.

Bling and "aspirational buying" by people with crap credit is still going on…

Perella’s CarFinance Capital LLC funded more than $100 million in auto loans in its first 10 months of business as it works with more than 1,500 auto dealers serving “non-prime”consumers, who now account for more than a third of U.S. car buyers, the Irvine, California-based company said in an April 24 statement announcing an expansion in Texas.

That's insane.

But you know the old saying from Citibank, right? 

So long as the music is playing you have to get up and dance.

GM, incidentally, is saying something else entirely about its future prospects in its stock price and Ford isn't doing much better…

That's the bell you hear ringing on these deals folks.

Disclosure: No position although it would be insanely delicious to make money on GM going bankrupt twice; I had a monster put-spread trade on the first blowup, and might just have to do another one, even if much smaller, just so when it blows a second time I can say I got both of them.

Facebook — Bots Once Again Appear

 

Facebook's datacenter photo.

Facebook's datacenter photo, credit: Robert Scoble at Flickr

 

Facebook — Bots Once Again Appear

Courtesy of Karl Denninger

This has come up before, but the charge just got much more serious.

Any business that advertises on Facebook wants eyes looking at its ads and then fingers clicking on them. Facebook gets paid based on how many clicks that ad receives – effectively, on how many users it can send to a particular brand.

On Monday came an explosive claim that could give pause to brands trying to figure out if advertising works on Facebook. A Long Island start-up company said it was pulling its ads from the social network because it discovered that its ad clicks were far more likely to be coming from Web robots – or bots, as they are known — than human Facebook users.

Um, for Facebook's sake, I hope not.

It's not that difficult to detect this sort of thing either.  See, Facebook relies on Javascript.  A lot.   In fact, turn it off and then see what Facebook looks like.  Be prepared to be amused; all the "hover over" things and similar stop working.

So what did the firm do?  It ran its own analytics and found that most of the so-called "clicks" that it was paying for were coming from something on the other end that didn't have javascript turned on.  While it's possible that some of the users have it off or are "adblocking" in some way, it makes absolutely no sense that 80% of the people allegedly "clicking" an ad are doing so in this fashion.

In other words, most of those "clicks" were almost-certainly a robot.

Facebook isn't necessarily the one doing it; indeed the company was careful to say that it didn't know who was doing it.  In fact, it's entirely possible for someone to "target" an advertiser in this fashion, and it's done from time to time. 

But ad networks such as Google's spend quite a bit of time and effort to identify and put a stop to this sort of misbehavior.  You can't prevent the robot from "clicking" the ad but you can, as an ad network, do your level best to identify what "clicks" are bogus and not charge the advertiser for them.

In terms of damage to an ad network's revenue model (which is what Facebook is, really, when you get down to it) it doesn't make much difference who is doing the scamming.  What matters is that if advertisers are being charged for delivery of ads to robots instead of people then they're being charged for something that didn't happen (exposure of their ad to a pair of eyeballs.) 

Watch this one carefully folks — defections of advertisers over problems like this have the potential to cause real trouble.

CLASS WAR FOR IDIOTS: LIBERTARIANISM = ASSHOLISM

Courtesy of Richard Metzger at Dangerous Minds

 

 

The term “Libertarian” has long been synonymous with “Asshole” in my estimation, and I think it’s safe to say that Jacobin magazine editor Connor Kilpatrick probably feels the same way.

Today is the centenary anniversary of the birth of Libertarian icon, economist Milton Friedlman, so what better day for the publication of the most viciously hilarious takedpown of the Libertarian position that I think I’ve ever read?

Excerpted from the much longer “It’s Hip! It’s Cool! It’s Libertarianism!” which was cross-posted today at both Naked Capitalism and The Exiled:

Libertarianism isn’t some cutting-edge political philosophy that somehow transcends the traditional “left to right” spectrum. It’s a radical, hard-right economic doctrine promoted by wealthy people who always end up backing Republican candidates, no matter how often they talk about civil liberties, ending the wars and legalizing pot. Funny how that works.

It’s the “third way” for a society in which turning against capitalism or even taking your foot off the pedal is not an option. Thanks to our shitty constitution and the most violent labor history in the West, we never even got a social-democratic party like the rest of the developed world.

So what do we get? The libertarian line: “No, no: the problem isn’t that we’re too capitalist. It’s that we’re not capitalist enough!”

Genius.

At a time in which our society has never been more interdependent in every possible way, libertarians think they’re John fucking Wayne looking out over his ranch with an Apache scalp in his belt, or John fucking Galt doing…whatever it is he does. (Collect vintage desk toys from the Sharper Image?)

Their whole ideology is like a big game of Dungeons & Dragons. It’s all make-believe, except for the chain-mail–they brought that from home. Elves, dwarves and fair maidens for capital. Even with the supposedly “good ones”—anti-war libertarians—we’re still talking about people who think Medicare’s going to lead to Stalinism.

So my advice is to call them out.

Ask them what their beef really is with the welfare state. First, they’ll talk about the deficit and say we just can’t afford entitlement programs. Well, that’s obviously a joke, so move on. Then they’ll say that it gives the government tyrannical power. Okay. Let me know when the Danes open a Guantánamo Bay in Greenland.

Here’s the real reason libertarians hate the idea. The welfare state is a check against servility towards the rich. A strong welfare state would give us the power to say Fuck You to our bosses—this is the power to say “I’m gonna work odd jobs for twenty hours a week while I work on my driftwood sculptures and play keyboards in my a chillwave band. And I’ll still be able to go to the doctor and make rent.”

Sounds like freedom to me.

Standing ovation!

Read more of Connor Kilpatrick’s “It’s Hip! It’s Cool! It’s Libertarianism!” at eitherThe Exiled or at Naked Capitalism. Trust me it’s a fantastic, totally worthwhile read.

Predictably, the reddit thread about Kilpatrick’s article is fascinating, too!
 

CLASS WAR FOR IDIOTS: LIBERTARIANISM = ASSHOLISM

The High End Is Done (COH)

More thoughts from Karl Denninger, The Market Ticker: The High End Is Done (COH)

The crooners have all said that "high end is immune" to the economic mess.

Today, they're wrong.

Coach Inc. (COH), the largest U.S. luxury handbag maker, tumbled as much as 17 percent in early trading after reporting fiscal fourth-quarter revenue that trailed analysts’ estimates amid slowing North American sales growth.

Coach fell 16 percent to $50.75 at 7:55 a.m. in New York after declining to $50.32. The shares had dropped 0.8 percent this year through yesterday.

Sales at North American stores open at least a year advanced 1.7 percent, compared with a gain of 10 percent a year earlier. Jennifer Davis, an analyst at Lazard Capital Markets, projected an increase of 5 percent. Coach, facing competition from Michael Kors Holdings Ltd. (KORS) and brands such as Tory Burch and Kate Spade, is working to attract consumers who have curbed spending on discretionary purchases amid slow economic growth.

IMHO KORS may be the short of the year on this.  Competition?  No, the fact of the matter is that the economy sucks donkey balls.  Coach has a P/E of 18 while KORS has a P/E of 53!

Gee, what do you think the odds are on this working out well?  Granted, the price on KORS has come down a lot of late, from $50.69 a few months ago, but it remains ridiculously overpriced compared to its competition and while Coach is trying to blame the slowdown on competitive pressures, I think the answer is simpler — the well is running dry on $500+ handbag buyers.

When you start talking about an "increasingly promotional environment" (and Coach did), you've got trouble afoot.

Disclosure: No position in either firm at present but I am eying KORS as a potential short target based on these results.

Pic from Coach Outlet Web Factory

JC Penny — Short To Zero?

Karl Denninger of Market Ticker is contemplating: JC Penny — Short To Zero?

Hmmm….

The company is claiming that it will be basically eliminating the traditional "checkout stand" model, using RFID tags and more of a "self-checkout" model. 

Will it work?  One wonders.  Part of the drive to make this change is labor cost, but the claim is that this is really about what the customer wants.

I don't know about that.

One thing I do know — when I am shopping in a department store if you make it a pain in the butt for me to pay and go when I've made my selections, you run the risk of me abandoning the items and walking out without buying anything.  But I'm a guy — and more gals than guys are the target market here.

This much is certain — the stock has lost about half of its value over the last six months and the firm is losing money. It currently sells over book value but at 0.3x sales.

If — and that's a big if — they can turn losses into profits — the stock is a screaming buy.

But quarterly revenue has been in the tank and the company has $800 million in cash against $3.1 billion in debt.  Debt to equity is well into the "kaboom" range.  Add to that a generally-soft consumer along with the cost of implementation of this strategy shift and you've mixed up a very nice jar full of nitroglycerin and started your juggling act.

With these facts and figures it's no surprise that 36% of the float is out short.  The question is whether you should join those who are betting on this company being a zero.

High stress means you have to step up your game, and that's what JC Penny is attempting.  "Break the glass" strategies are what's called for when you're in this sort of position, exactly as I called for Sprint to do by putting high-end phones on prepaid.  They did it, they broke the model that everyone else was using, they're being rewarded and what looked like a bankruptcy candidate six months ago now looks like a turnaround story in-process, with bankruptcy off the table.

Can JCP do the same?  I'm not sold.  At the same time I'm skittish as hell shorting something that has 35% of the float out already — a nasty short-squeeze trap would be very easy to fall into.  (Note that Sprint, as of a couple of weeks ago, only had 6% of the float short.)

My intuition says that the stock is a zero — but I'm not convinced enough to put money behind it.  Unfortunately by the time I get to see an actual store "made over" it'll probably be apparent in the price whether they're going to survive or not.

Disclosure: No position

Pic credit: at Wikipedia, by Aranda56

US budget deal avoids pre-election showdown

US budget deal avoids pre-election showdown (via AFP)

Republican and Democratic leaders in Congress announced a deal Tuesday to keep funding the US government through next March, avoiding a potential partisan shutdown fight ahead of November's election. Harry Reid, the Senate's Democratic majority leader, said the deal on the so-called continuing resolution…

[Read more…]

LIBOR, Lies and Derivatives

LIBOR, Lies and Derivatives

Courtesy of The Automatic Earth

 

Three weeks, ago, I wrote LIBOR was a criminal conspiracy from the start. An avalanche of articles have been written on LIBOR since, and I think an update is in order, which also gives me a chance to delve a little further into the bold statement in that title.

It's not that I'm a big fan of using terms like conspiracy, not at all, but then again, neither am I a fan of constantly being lied to.

The average Joe and Jane and Jack and Jill in the street should be able to rely on the fact that those who they vote in office represent them and their interests; it's the very definition of the essence of our democratic systems. What they get instead, and increasingly so, are lawmakers and regulators who collude with private industries, which due to their size have grabbed an enormously bloated hold on political power. In the US, the UK and EU the actual say a voter gets to exercise from the ballot box has been reduced to something that fast approaches the freezing point.

The story of LIBOR is an excellent example of the inner workings of this process, and of the consequences that follow. Of course, when I label it criminal, I make a moral judgment, knowing full well at the same time that it's the lawmakers themselves who in the end define what's legal or not, and what's criminal or not.

There is no segment of private industry that has grabbed more power than the banking industry. Indeed, it would be hard to find any lawmaker or regulator left at all in the western world willing to stand up to it in more than fleeting soundbites. We will see this exemplified in the upcoming procedures in the LIBOR rigging scandal.

Banks will offer up individual traders as lambs for the sacrificial chopping block, and lawmakers will declare that justice has been done. The traders can protest as much as they will that they were not operating in a vacuum, and that their superiors were very much aware of their machinations, if not outright demanding them, but it will make no difference. Bob Diamond was thrown to the wolves so Mervyn King could stay where he is. King himself made sure of it.

I don't think that back in 1986, when LIBOR was initiated by the British Bankers Association in light of the advent of new financial instruments such as interest rate swaps, everything that has happened between then and now, 26 years later, was foreseen and consciously instigated. I do believe, however, that the conditions were consciously set to allow for it to happen. It all just got a lot bigger than those who were in charge back then, politicians, bankers and regulators, could ever have dreamed.

Still, the underlying idea for LIBOR was always: "by the bankers, for the bankers". And if anyone involved in setting up LIBOR back in the day now wishes to claim that they had no idea that allowing banks to make up the rates which they borrowed at out of thin air, might have led to manipulation, that would insult everyone's intelligence including yours and mine. The problem is that in today's climate, this doesn't keep them from making precisely such claims. And that is very much part of a trend. It has increasingly become acceptable for bankers and politicians alike to deny anything flat out and see what happens, knowing their friends have their backs.

I don't know that US Finance Secretary Timothy Geithner said it in exactly so many words, but he did at least strongly imply that he didn’t know about LIBOR manipulation until the spring of 2008. And then proceeded – along with the likes of Hank Paulson and Ben Bernanke – to base the rates for the bailout programs such as TARP, six months or so later, on that same manipulated rate, saving the banks tens of billions of dollars.

Bank of England Governor Mervyn King did him one better: he stated he didn’t know anything about LIBOR manipulation until 2 weeks prior to his Parliamentary hearing on July 17, despite receiving correspondence from Geithner telling him about it, over 4 years ago. Geithner declared he had been very clear, and even went to the unusual step of putting his warnings to King in writing. King claims he never saw any warning sign.

Let's put it this way: If there is even a whiff of truth to King's statements, he's so spectacularly unfit for his job (or at least for what his job should be), it's not funny. Still, he's been in the job since 2003.

Some – pretty nauseating – quotes by King from that Parliamentary hearing: "No-one saw it because the game wasn't fixed", and "There were concerns about the accuracy of LIBOR during the financial crisis but that is not the same as proof that the figures had been manipulated for private gain," [..] "That is my definition of fraud.". King then accused bankers involved in LIBOR rigging of "fraud motivated by personal greed". Mirror, mirror on the wall…

By the way, in November 2008 King described LIBOR to the UK Parliament like this: "It is in many ways the rate at which banks do not lend to each other, … it is not a rate at which anyone is actually borrowing."

Let's be bluntly honest here, why don't we: both Geithner and King are simply lying. And even if we can't prove they are lying, we can certainly state that their words lack all plausibility. That is because LIBOR is arguably the most important number in the financial industry of the past two decades, and people who reach positions such as the ones Geithner and King hold, MUST have known for a long time what was going on with LIBOR.

Along the same lines that you don't win a Nobel prize in physics if you don't know that E=MC squared, you don't get the world's top jobs in overseeing banking and finance if you don't know what and who is involved in LIBOR. If only because it would make you a potential threat to those profiting from it.

The reason LIBOR was used as the foundation for TARP and other bailouts despite the fact that in the fall of 2008 everyone in the field knew it was rigged (well, except for Mervyn King) was not because there were no – potentially more reliable – alternatives that could have been used. No, it was the very fact that LIBOR was the rate that could most easily be manipulated. And was. Had been for years. The proof is there for all to see. Emails and letters are there to show this, no matter what denials are issued.

Meanwhile the timeline for who knew, or should have known, what about LIBOR rigging keeps being pushed back.

Whereas Mervyn King, according to his own words, was as innocent as he was ignorant until early July 2012, and Tim Geithner found out in early 2008 (can we hear them both under oath next time, please?!), and other voices mentioned 2005, former Morgan Stanley trader Douglas Keenan wrote in the Financial TImes last week (My thwarted attempt to tell of LIBOR shenanigans) that when he came to the bank in 1991, his colleagues, who had been there longer, found him humorously naive for not knowing that LIBOR was actively being rigged.

That takes us smoothly back a good part of the way to 1986, LIBOR's year of birth. If and when in 1991 it had been manipulated for long enough to have Keenan's colleagues snicker at his ignorance, it seems safe to say that it has been rigged pretty much ever since its inception.

And how could it not have been? LIBOR requires no real data, no real rates at which banks lend and borrow. It merely asks banks to state every working day at 11.00 am GMT at what rate they think they can borrow. Ergo: anything goes. This was done on purpose. LIBOR was built to be rigged. And here's what is was built for:

1986 was the time when the derivatives industry was starting to take off for real. An interest rate was needed to "guide" them. But not one that would be neutral or impartial, not if the bankers had any say in the matter. They had all the say they wanted and needed. Still, as I said, I don't think it was a conspiracy in the sense that in 1986 anybody knew exactly how big it was all going to get (not that it matters; it's about intent).

Derivatives "languished" for a while around the 1x global GDP level. Then they came into their own and rose to ten times that or more. The industry began to clue in on the virtually limitless possibilities.

 



Graph: Analoguni

Interestingly, Douglas Keenan writes that in his time at Morgan Stanley, the head of interest rate trading was nobody else than Bob Diamond, who 20-odd years later was forced to leave as CEO of Barclays, because of the LIBOR scandal, by Mervyn King, who claims he did not know, until mere days before that, what for all intents and purposes he should have known for a long long time. The interest rate trade gave birth to some of the earliest new financial instruments that led to the inception of LIBOR. By value, the vast majority of derivatives today consists of interest rate swaps.

The first half of the 1990s brought us Credit Default Swaps. They are habitually – and flatteringly – presented as instruments with which to hedge investments, an innocuous and benign form of insurance. Still, even if they once were invented and intended that way (which I think is highly doubtful), that's not what CDS are used for these days. They have instead become instruments to hide (gambling) losses and allow the investor/gambler to circumvent reserve requirements.

You invest an $X amount of capital, leverage it Y times, buy a default swap on what you invested in, and do it all over again. Rinse and repeat. You don't need to keep anything in reserve, since you have bought insurance at every step of the way. Given that the notional value of the derivatives market is somewhere between $500 trillion and $1 quadrillion, we can all get an idea of the leverage involved.

The entire mortgage investment based universe, CDOs, MBS, was/is based on LIBOR as well. Banks could go nuts, and do so all the way to the bank; not only could they insure themselves for a pittance against failure on highly leveraged wagers, through LIBOR they even controlled how much the insurance would cost. AIG stands out as the biggest counterparty; it insured anything under the sun.

From AIGs point of view, it didn't matter what it insured, or what the rates were: CDS were never supposed to be triggered. They were – and are – merely a way to hide losses in plain sight. The AAA ratings that Moody's and S&P gave them made it all even better: interest rates could be kept that much lower. All for the sake of the next, and preferably larger, wager. We know how this ended for AIG. It was given our money, so it could keep on hiding losses.

There are reports on plans to change LIBOR into a better, reality-based, standard. But these plans are once again being drawn up by the same people who have for years at best maintained a see no evil hear no evil attitude. If we want a real turnaround, if we want the lies to stop, the last thing we should do is to allow the same old same old crowd of politicians, regulators and bankers, to even come within a mile of negotiations for a new standard. The problem there is of course that there's no one else left. The rot has spread to all corners of the industry that count. Innocence exists in name only.

The "resolution" of the LIBOR scandal (which will probably never be completed) will show us once again that we have a choice to make between either saving the banks or saving our economies and societies. We can't do both. But in all honesty, I doubt that the prospect of such a choice is real. It looks to me like the choice has long since been made by a succession of unrepresentative representatives we elected with our empty votes, and who have left us with a runaway crossover between Frankenstein and the Sorcerer's Apprentice. I wasn't kidding when I said the other day that if you want your vote to count, you'll have to get out into the streets to do so.

The LIBOR affair is one in a series of things laid bare by the ongoing financial crisis that will inevitably, at one point or another, force us to confront the moral bankruptcy that has come to control our societies.

Image top: Sabine7 String of Lies 2005

More on Draghi’s “The ECB is All In” Bluff

More on Draghi’s “The ECB is All In” Bluff

Courtesy of Yves Smith of Naked Capitalism

The more news comes out, the more it looks like Mario Draghi’s pledge that the ECB would do all it would take to save the Euro was a bluff. The best guess is that he hopes to appease the market gods until September 12, when the German Constitutional Court will render its decision on whether the “permanent” rescue mechanism, the ESM, is permissible. The assumption, of course, is the the ESM will be approved. I’d be delighted to be proven wrong, but in parallel to the lack of a Plan B when a private bailout of Lehman failed, there does not seem to be any Plan B in the works if the German Constitutional Court nixes the ESM. And the odds of that are not trivial.

The headfake earlier today was a photo op between Geithner and Finance Minister Schaeuble which was touted by Bloomberg as Germany supporting the Draghi move, when a more level headed reading would see this as a non-endorsement. Here is the opening para of the article:

U.S. Treasury Secretary Timothy F. Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece.

Um, that’s already qualified. And then we get to the critical part:

In a joint statement issued after they held talks on the German North Sea island of Sylt today, Geithner and Schaeuble “took note” of comments made last week by European leaders to “take whatever steps are necessary to safeguard financial stability” in the 17-nation currency area.

“Took note”? That actually a remarkable formulation. It’s an acknowledgment of Draghi’s remarks, not approbation. There is nothing concrete in the Bloomberg story that would lead a reader to conclude that Schaeuble had changed his position from the one he took over the weekend, that the existing facilities were adequate and that additional action was not warranted. My readers of the German press take this to mean that the ECB might intervene, but its game is to do as much as possible with happy talk and as little as possible with real action. The Draghi statement likely does indicate a willingness to buy bonds if absolutely necessary, but not on any real scale. The idea is to tide this all over through the low trading volume/Euroholiday month.

An article in Der Spiegel confirmed the skeptics’ reading. It depicts Draghi as having make his commitment without getting the support of the ECB council. One assumes he might have hoped to present them with a fait accompli, but that kind of approach can backfire. Per Der Spiegel:

Meanwhile, experts at the central banks of the euro zone’s 17 member states had no idea what to do with the news. Draghi’s remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

It isn’t hard to see where this is going. It’s not likely that the Fed will announce anything major this Wednesday; while the economy is softening, most Fed mavens think the deterioration is not clear cut enough to warrant pulling out the big guns. Markets expect the ECB to announce something concrete after their meeting this Thursday, but given that Draghi ambushed its Governing Council, and the northern country members remain opposed to bond buying, it’s probable that if any commitments is made this week, it will be underwhelming. And tellingly, Draghi is looking like a leader whose command of the situation is faltering.

A big source of discord is that the ECB’s past bond buying was, like pretty much everything the Eurocrats have done thus far, a temporary band aid. As we noted, the LTRO, which was a back door sovereign bailout, provided relief for a mere few months, when even its harshest critics assumed it would take pressure off for a year to eighteen months. Similarly, a Spanish bond buying program that began in August last year was only a short term palliative. While interest rates fell over 100 basis points initially, when the ECB stopped buying last November, yields were higher than when the program began. From the Der Spiegel account:

If the ECB starts buying up the government bonds of highly indebted euro countries again, it won’t just be yielding to the pressure of European politicians. It will also be resorting to a tool that, in the most recent past, has primarily produced one outcome: discord within the ranks of the ECB. As Germany’s central bank, the Bundesbank, noted last week, Draghi’s proposal is a “problematic” instrument.

If Draghi puts his concept into practice, the climate in Europe’s monetary authority could sink to a new low. The representatives of the northern European creditor countries fear that the ECB, out of consideration for the crisis-ridden south, is willing to sacrifice even the most sacrosanct principles to monetary policy. Representatives of the Mediterranean countries, on the other hand, suspect that the Bundesbank, in particular, doesn’t even want to defend the euro anymore and is secretly contemplating a return to the deutsche mark.

At this point, as Draghi acknowledged in his statement last week and we’ve been highlighting for some time, a big driver of the crisis now is defensive actions in anticipation of a possible Eurobreakup of some sort. Banks are increasingly lending only to the extent they have deposits and can secure funding from central banks. Funds are no longer flowing from the surplus countries to the deficit countries; what we have instead is a slow motion bank run via deposit flight to the core. So increased distrust of central bankers for each other is not noise; it feeds into this process and will reinforce their belief that ring fencing the banks in their countries is a prudent move.

And the particular program that Draghi apparently has in mind is contentious:

According to plans that were circulating among Europe’s monetary watchdogs last Friday, the ECB might buy the bonds of the threatened Spanish government again as a supplement to the purchases by the EFSF.

The plan envisions having the Luxembourg-based temporary bailout fund buy bonds directly from the governments because the ECB is not allowed to make such purchases on the so-called primary market. However, under Draghi’s plan, the monetary watchdogs will buy the securities of banks or investment funds in the so-called secondary market so as to drive down yields. This would double the firepower of the euro zone’s crisis weapons while simultaneously preventing Spain itself from having to resort to the bailout fund and accept stricter constraints on its reform programs.

But it is already clear that the plan will encounter resistance. Many monetary watchdogs — including Weidmann and, most of all, central bankers from the Netherlands, Belgium and Finland — have already been very outspoken in recent months about their opposition to new bond purchases.

The Der Spiegel summation is apt:

That’s the tragic aspect of Draghi’s rescue idea: What is intended to keep the monetary union together could actually drive it even further apart.

One telling theme in the article was Draghi becoming uncharacteristically angry when colleagues told him the ECB might be exceeding its legal authority. Draghi appears to be far along in the “this is an emergency, we must break glass thinking, which means he may eventually take radical action. But given how vocal the northern countries have been in making their objections known, that may not happen until a full blown crisis allows him to override them.

The Eurozone is increasingly looking like a zero sum exercise to its members: that there are no win-win strategies, only dividing up a fixed pie. And with austerity on in full force, it’s actually worse than that: the power that be are haggling over a pie that is shrinking before their very eyes. There’s declining trust and no willingness to consider alternatives that would put economies on a better trajectory. There’s now lip service being given to the need for growth, but the neoliberal budget-cutting religion is very much intact: the only alternatives under consideration are delaying the wearing of hairshirts, not considering completely different options.

It’s hard to see any happy outcomes from this situation, but Mr. Market is convinced there is. I wish him and the Europeans luck.

We’ve Always Been At War With Eastasia

Courtesy of George Washington

In George Orwell’s novel 1984,  the country of Oceania has been in a war against Eurasia for years.

Oceania suddenly switches sides, naming Eastasia as its enemy and making its mortal enemy, Eurasia, its new ally.

The government uses propaganda to convince people that, “We’ve always been at war with Eastasia”.  The dumbed-down public doesn’t even notice that they’ve switches sides, and blindly rallies around Eurasia as its perennial friend and ally.

The same thing is happening in real life with Al Qaeda.

Western governments and mainstream media have admitted that Al Qaeda is fighting against the secular Syrian government, and that the West is supporting the Syrian opposition … which is helping Al Qaeda.

Similarly, the opposition which overthrew Libya’s Gadaffi was mainly Al Qaeda … and they now appear to be in control of Libya (and are instrumental in fighting in Syria.)

The U.S. also funds terrorist groups within Iran.

Of course, Al Qaeda was blamed for 9/11, and the entire decades-long “War on Terror” was premised on rooting out Al Qaeda and related groups.

So the fact that we now consider Al Qaeda fighters to be allies in any way, shape or form is positively Orwellian.

Of course, as Jimmy Carter’s National Security Adviser admitted on CNN, we organized and supported Bin Laden and the other originators of “Al Qaeda” in the 1970s to fight the Soviets.  (he also told the Senate in 2007 that the war on terror is “a mythical historical narrative”. )

As professor of strategy at the Naval War College and former National Security Agency intelligence analyst and counterintelligence officer John R. Schindler documents, the U.S. supported Bin Laden and other Al Qaeda terrorists in Bosnia.

But obviously we lost control and they turned against us … and then took us years to hunt down and kill Bin Laden.

Maybe, but:

  • A retired Colonel and Fox News military analyst said:

    “We know, with a 70 percent level of certainty — which is huge in the world of intelligence — that in August of 2007, bin Laden was in a convoy headed south from Tora Bora. We had his butt, on camera, on satellite. We were listening to his conversations. We had the world’s best hunters/killers — Seal Team 6 — nearby. We had the world class Joint Special Operations Command (JSOC) coordinating with the CIA and other agencies. We had unmanned drones overhead with missiles on their wings; we had the best Air Force on the planet, begging to drop one on the terrorist. We had him in our sights; we had done it ….Unbelievably, and in my opinion, criminally, we did not kill Usama bin Laden.”

  • A United States Congressman claims that the Bush administration intentionally let Bin Laden escape in order to justify the Iraq war

The shenanigans started even before 9/11:

  • Attacks on the Twin Towers with planes were foreseen for years, but the U.S. did nothing to stop them.
  • A high-level military intelligence officer says that his unit – tasked with tracking Bin Laden prior to 9/11 – was pulled off the task, and their warnings that the World Trade Center and Pentagon were being targeted were ignored
  • The CIA may have helped many of the 9/11 hijackers get their visas to the U.S.

Indeed:

We’ve always been at war with Eastasia …

ESM Banking License? Not Happening as Merkel Allies Harden Opposition

Courtesy of Mish.

So far it’s been nothing but hot air and no action from ECB president Mario Draghi after he pledged to do whatever it takes to save the euro.

One of the highly-touted ideas as of late has been a ESM banking license. However, the idea is not really new, and has been shot down repeatedly already. Nonetheless eurocrats like Jean-Claude Juncker, chairman of the eurogroup, keep bringing the idea up as if the answer will change. 

It won’t. Bloomberg reports Merkel Allies Harden Opposition to Granting ESM Bank License

German Chancellor Angela Merkel’s coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license, as the Finance Ministry said it saw no need for any such move.

The rules of the European Stability Mechanism don’t provide for refinancing through the ECB, the ministry in Berlin said today in an e-mailed response to questions. The ministry isn’t holding talks on the topic nor are secret meetings taking place on such proposals, it said.

France and Italy are building support for a previously floated plan to allow the permanent backstop to wield unlimited firepower courtesy of the ECB, Germany’s Sueddeutsche Zeitung newspaper reported today, citing a European Union official it didn’t name. Leading ECB governing council members are among those who now back the idea, the newspaper said.

Lawmakers from all three parties in Merkel’s coalition immediately repudiated the suggestion. It is a “dangerous attempt” to bypass the ban on the central bank financing states directly, said Hans Michelbach of the Bavarian Christian Social Union. The Free Democratic Party’s Rainer Bruederle told Die Welt newspaper such a mechanism is a “wealth-destroying weapon,” while Norbert Barthle of Merkel’s Christian Democratic Union said it won’t happen.

“Those who try to circumvent their own rules through the back door lose their legitimacy in the eyes of the public,” Michelbach said in an e-mailed statement. “Financing debt by means of the printing press leads to growing inflation dangers.”

One would hope this message would sink through the thick heads of the eurocrats, but it probably won’t.

 OK Mario, ball is in your court. What are you going to do?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Charting Europe's Broken Transmission Channels

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The catalyst for the major turnaround in markets last week was comments from ECB President Draghi that he was prepared to do whatever it takes to preserve the Euro and ensure monetary policy transmission. While this is nothing more than stating his mandate (and that water is wet), the focus on 'transmission' caught the attention of many and Barclays provides a succinct flowchart of just where those transmission channels are broken. However, with SMP empirically a losing proposition for sovereign spreads, LTROs having had no impact on loans to non-financial corporates, and rate cuts not reaching the peripheral economies (and in fact signaling further divergence); it seems that short of full-scale LSAP (which JPM thinks will need to be a minimum EUR600bn to be in any way effective), whatever Draghi says will be a disappointment and perhaps that explains the weakness in European sovereigns this week as exuberance fades (or is the game to implicitly weaken the EUR to regain competitiveness).

[SMP = Securities Markets Programme]

The transmission policy channels of central bank largesse are failing…

 

as giving free money to banks is not reaching the economy…

 

and cutting rates didn't reach the areas it needed…

 

and the SMP may have an initial reaction but does nothing short-term to reduce sovereign spreads which are now even more interlinked with banking systems…

 

so maybe, just maybe (as JPMorgan notes) the game is to weaken the Euro to aid in competitiveness broadly – but be careful what you wish for…

So if currency weakness is an implicit ECB policy objective, the quickest path toward that end is to foster persistent sovereign stress by delaying approval of banking union, reviving the EMU exit debate, or pressuring the ECB to avoid further LTROs or direct asset purchases. Such delays and constraints could easily push EUR/USD to 1.15 or below. Of course such malign neglect would mark a pyrrhic victory since overall financial conditions will tighten through wider credit spreads and lower equity prices. Conversely, the policies that are most helpful to sovereigns, such as the SMP and LTRO, risk arresting the euro’s decline unless the Fed is on hold (possible) or tightening (impossible). So as obvious as the normative argument seems, it isn’t so helpful in thinking through the range of factors in play as the ECB moves into uncharted territory.

 

Source: Barclays, JPMorgan

Charting Europe’s Broken Transmission Channels

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The catalyst for the major turnaround in markets last week was comments from ECB President Draghi that he was prepared to do whatever it takes to preserve the Euro and ensure monetary policy transmission. While this is nothing more than stating his mandate (and that water is wet), the focus on 'transmission' caught the attention of many and Barclays provides a succinct flowchart of just where those transmission channels are broken. However, with SMP empirically a losing proposition for sovereign spreads, LTROs having had no impact on loans to non-financial corporates, and rate cuts not reaching the peripheral economies (and in fact signaling further divergence); it seems that short of full-scale LSAP (which JPM thinks will need to be a minimum EUR600bn to be in any way effective), whatever Draghi says will be a disappointment and perhaps that explains the weakness in European sovereigns this week as exuberance fades (or is the game to implicitly weaken the EUR to regain competitiveness).

[SMP = Securities Markets Programme]

The transmission policy channels of central bank largesse are failing…

 

as giving free money to banks is not reaching the economy…

 

and cutting rates didn't reach the areas it needed…

 

and the SMP may have an initial reaction but does nothing short-term to reduce sovereign spreads which are now even more interlinked with banking systems…

 

so maybe, just maybe (as JPMorgan notes) the game is to weaken the Euro to aid in competitiveness broadly – but be careful what you wish for…

So if currency weakness is an implicit ECB policy objective, the quickest path toward that end is to foster persistent sovereign stress by delaying approval of banking union, reviving the EMU exit debate, or pressuring the ECB to avoid further LTROs or direct asset purchases. Such delays and constraints could easily push EUR/USD to 1.15 or below. Of course such malign neglect would mark a pyrrhic victory since overall financial conditions will tighten through wider credit spreads and lower equity prices. Conversely, the policies that are most helpful to sovereigns, such as the SMP and LTRO, risk arresting the euro’s decline unless the Fed is on hold (possible) or tightening (impossible). So as obvious as the normative argument seems, it isn’t so helpful in thinking through the range of factors in play as the ECB moves into uncharted territory.

 

Source: Barclays, JPMorgan

This Is What 670 Million People Without Power Look Like: Pictures From Blacked Out India

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

First thing today we reported that India just suffered what may have been the biggest blackout in history, after half of the country's population of 1.2 billion, or just under 700 million was without power, as the electric grid of more than a dozen states suffered an epic collapse. Below we shares some pictures courtesy of Times of India giving some sense of what it means for two Americas worth of people to live without electricity indefinitely. Of note: the calm, peace and order despite the epic traffic jams and crowds. One wonders what would happen in the US if the entire country was without electrcity for even just one hour. Finally, one wonders what the impact to the Indian, Asian, and Global economy will be as a result of the complete halt that at least half of India – one of the world's core marginal economies – has ground to do.

A road is packed in heavy traffics following power outage and rains in the central part of New Delhi, India, Tuesday, July 31, 2012. India's energy crisis spread over half the country Tuesday when both its eastern and northern electricity grids collapsed, leaving 600 million people without power in one of the world's biggest-ever blackouts. Traffic lights went out across New Delhi.

Heavy traffic moves along a busy road as it rains during a power-cut at the toll-gates at Gurgaon on the outskirts of New Delhi July 31, 2012. Grid failure hit India for a second day on Tuesday, cutting power to hundreds of millions of people in the populous northern and eastern states including the capital Delhi and major cities such as Kolkata.

Commuters wait for buses outside a Metro station after Delhi Metro rail services were disrupted following power outage in New Delhi, India, Tuesday, July 31, 2012. India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving more than 600 million people without government-supplied electricity in one of the world's biggest-ever blackouts.

Commuters wait for buses outside a Metro station after Delhi Metro rail services were disrupted following power outage in New Delhi, India, Tuesday, July 31, 2012. A massive blackout hit northern and eastern India on Tuesday afternoon, leaving 600 million people without electricity in one of the world's most widespread power failures. The outage came just a day after India's northern power grid collapsed for several hours leaving cities and villages across eight states powerless.

Commuters wait in line at a Metro station after Delhi Metro rail services were disrupted following power outage in New Delhi, India, Tuesday, July 31, 2012. India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving more than 600 million people without government-supplied electricity in one of the world's biggest-ever blackouts. The city's Metro rail system, which serves about 1.8 million people a day, immediately shut down for the second day in a row.

Passengers sit on a platform for their train to arrive as they wait for electricity to be restored at a railway station in New Delhi July 31, 2012. Grid failure hit India for a second day on Tuesday, cutting power to hundreds of millions of people in the populous northern and eastern states including the capital Delhi and major cities such as Kolkata.

Passengers rest on a platform for their train to arrive as they wait for electricity to be restored at a railway station in New Delhi July 31, 2012. Grid failure hit India for a second day on Tuesday, cutting power to hundreds of millions of people in the populous northern and eastern states including the capital Delhi and major cities such as Kolkata.

A passenger looks through the window of a train as he waits for electricity to be restored at a railway station in New Delhi July 31, 2012. Grid failure hit India for a second day on Tuesday, cutting power to hundreds of millions of people in the populous northern and eastern states including the capital Delhi and major cities such as Kolkata.

Commuters crowd a busy road outside a Metro station after Delhi Metro rail services were disrupted following power outage in New Delhi, India, Tuesday, July 31, 2012. Indian officials say the nation's northern and eastern power grids have failed, leaving about half the country without power. The collapse of the grids Tuesday afternoon came a day after the northern grid failed and left eight states without power for much of the day.

Indian stranded passengers wait on a platform and some of them on rail tracks for the train services to resume following a power outage at Sealdah station in Kolkata, India, Tuesday, July 31, 2012. India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving 620 million people without government-supplied electricity for several hours in, by far, the world's biggest-ever blackout. Hundreds of trains stalled across the country and traffic lights went out, causing widespread traffic jams in New Delhi.

Stranded passengers wait on a railway tracks for the train services to resume following a power outage at Sealdah station in Kolkata, India, Tuesday, July 31, 2012. India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving 620 million people without government-supplied electricity for several hours in, by far, the world's biggest-ever blackout. Hundreds of trains stalled across the country and traffic lights went out, causing widespread traffic jams in New Delhi.

Passengers sit in a train as they wait for power to get restore, at a railway station, in New Delhi, India, Monday, July 30, 2012. A major power outage has struck northern India, plunging cities into darkness and stranding hundreds of thousands of commuters. Trains across eight northern Indian states and metro services in New Delhi were affected by the outage that struck at about 2:30 a.m. local time.

Commuters wait for a metro train, in New Delhi, India, Monday, July 30, 2012. Northern India's power grid crashed Monday, halting hundreds of trains, forcing hospitals and airports to use backup generators and leaving 370 million people – more than the population of the United States and Canada combined – sweltering in the summer heat.

Muslim girls study in the light of candles inside a madrasa or religious school during power-cut in Noida on the outskirts of New Delhi July 30, 2012. Grid failure left more than 300 million people without power in New Delhi and much of northern India for hours on Monday in the worst blackout for more than a decade, highlighting chronic infrastructure woes holding back Asia's third-largest economy.

GM’s Channel Stuffing Goes to Germany: Is Europe’s Largest Economy a Fraud?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We have long argued that auto manufacturers have been channel-stuffing (and subprime-lending) themselves back into a disaster and as such class-action lawsuits have begun. Recently we also pointed out the epidemic of dealer-inventory-stuffing in China (and again this morning the Chinese luxury car market's over-stuffing). So today's report from Reuters that German auto manufacturers have been stuffing dealer channels just like the rest of the world as Europe's largest car market is in recession even if few outside of the industry would know it. "Essentially, the carmakers are deceiving their shareholders, since they make it look as if the vehicles were actually sold. They want to pull the wool over their eyes," as three in every ten new vehicles in Germany are sold not to customers, but to carmakers and their dealers – a type of automotive industry pump priming known as "self-registration". At nearly half a million such registrations in the six months through June, the total is greater than the entire new car market in Spain. Is Germany's economy really what it is reported to be given all this fake demand pull-forward – or is it a total fraud?

Via Reuters

Reality versus 'official' figures:

So while official figures show a 0.7 percent rise in German car sales for the half year, figures from auto market research firms Dataforce and BDW Automotive show private demand fell 5 percent in the period, which would mean all the growth had been manufactured by the manufacturers.

Leaving dealers with major problems:

manufacturers across the board are paying dealers cash bonuses that can be worth 3-4 percent of a vehicle's listing price to reach targets linked to the number of new cars registered as officially sold…

A tactic that can have a "devastating cost" for dealers, as they end up caught in a vicious circle:

"If you push at the end of one month, you start the next one in deficit because you've registered a car you still have to sell," he said. And when dealers can no longer keep it up, carmakers do it themselves. As a result, the two account for a combined 30 percent of the new car market, making the industry the second largest source of demand behind only private customers, who account for 39 percent.

and the reaction:

"It seems that people are burying their head in the sand."

but dealers end up footing the bill as:

"If employed over a long period of time, this is an enormous danger since they completely erode all pricing power, and manufacturers can no longer expect customers will pay more for a car in the future,"

which further distorts reality:

"If you stripped out those distressed vehicles registered only so they can gather dust on the parking lot of a dealer or manufacturer, then the size of the German new car market would have been below 3 million vehicles last year (instead of 3.17 million)," ZDK President Robert Rademacher told Reuters.

"And it's not only irresponsible but also counterproductive to use force to jam these vehicles down the market's throat, since it doesn't lead to higher sales in the end. It only creates distortions down the road."

and if Zee Germans are doing it, you can imagine the rest (who are in real trouble) are at it too:

"It's incredibly difficult getting statistics on what the number of self-registrations actually is. I don't know of any for Europe as a whole," said JATO's Hession, himself a former DaimlerChrysler sales planning manager.

but pleas to carmakers to "accept reality" and stop stuffing the market appear to be falling on deaf ears.

"We can only appeal to the reason of the manufacturer, something we do at every possible opportunity. But unfortunately reason is a rare commodity in this world,"

100,000 Workers in Spain Will Not be Paid Because Regional Government of Catalona is Broke

Courtesy of Mish.

The crisis in Spanish regional governments continues to escalate. El Pais reports Catalona Will Not Pay Hospitals or Private Centers and 100,000 workers are affected.

This month, the Government of Catalona cannot tackle  payments owed to hospitals, schools, residences, social organizations, and children in care centers and workshops. These are the services provided by entities, public and private, funded by the Government but managed not depend on it.

The move affects up to 7,500 associations and some 100,000 workers, according to the third sector.

The news that the Government could not meet its commitments this month was confirmed on Monday after several days of negotiations with the affected entities. Sources from the Departments of Health and Welfare explained ten days ago it “could not meet the payments this month.” Welfare, however, has ensured that other non-contributory pensions paid or the minimum income.

The federations that warn-grouped after an emergency meeting with Social Welfare that many of them are on the verge of “collapse” in a situation “unprecedented”. And is that the default is added to other cuts that have affected the sector this year, as 56% of the budget on labor market policies.

The Catalan Association of Relief calculated that 63% of companies cannot meet the payroll this month. To alleviate this choke, Acra has asked for help from families, proposing that advance a couple of months of contributions.

This is not the first time that the Government is obliged to defer payment of the concerts. It happened last September when he could only address 65% of the amount and the rest was paid by the end of the year.

The idea that Spain can avoid a complete sovereign bailout seems pretty absurd at this point. The solution, of course, is a combination of default, a eurozone exit, work rule reform, and pension reform, but so far there is no rational discussion of those ideas at the highest levels.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Barofsky Book: Goldman Sachs and Morgan Stanley Would Have Failed Next

Courtesy of Pam Martens.

Bailout by Neil Barofsky

They’re everywhere – on 60 Minutes, peeping out of the display window at Barnes and Noble, going out on internet news feeds.  I’m talking about insiders who want to fill in the cracks and voids of Wall Street’s criminal wealth transfer system that has had an iron grip around our country’s throat since at least 1996. 

Neil Barofsky, the former Special Inspector General of the Troubled Asset Relief Program (SIG-TARP), has penned a humdinger.  Titled Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, it confirms what we’ve suspected since U.S. Treasury Secretary Tim Geithner appointed Mark Patterson, a Goldman Sachs lobbyist, to be his Chief of Staff – that the U.S. Treasury Department has become Wall Street West.   

Barofsky was minding his own business dealing with drug cartels and mortgage fraud (a cakewalk compared to Wall Street) as an Assistant U.S. Attorney for the Southern District of New York when the George W. Bush administration picked him to oversee the outflow of what would become trillions of dollars in taxpayer bailouts to Wall Street.  

Barofsky has meet and greets with his fellow colleagues at the Treasury Department and other Inspector Generals in their lavish and expansive offices – then he’s led to his new quarters in the Treasury building: a literal stink hole next to the cafeteria.  Next Barofsky is delivered a crystal clear message from Herb Allison, a Wall Street retread from Merrill Lynch who was plucked by Geithner to be Assistant Treasury Secretary.  Allison warns:  “Out there in the market, there are consequences for some of the things that you’re saying and the way that you’re saying them.”  Then Allison invokes the Wall Street code: “Well, is it an appointment you might be looking for? Something else in government? A judgeship?” [An office that’s not a stink hole?]  

I’ve always suspected that Goldman Sachs and Morgan Stanley were miraculously anointed as bank holding companies during the height of the crisis because they were about to fail.  Barofsky weighs in on that.  Then Treasury Secretary Hank Paulson told Barofsky “that he believed that Morgan Stanley was just days away from collapse, and Ben Bernanke, the chairman of the Federal Reserve, similarly confided that he believed that Goldman Sachs would have been the next to go.  After that, all bets on the country’s financial system would have been off.” 

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Recent Gold Hype Sounds Like Grade-School Chant; Five Non-Hype Reasons to Own Gold

Courtesy of Mish.

Reader David emailed a link to GATA, SHAKA ZULU, And The Coming Gold/Silver STORM! with a note “please see fit to write about this!!!

The article is by Bill Murphy, the Gold Anti-Trust Action Committee (GATA) chairman. Here are the key snips.

To get right to the point, three quality sources told me three weeks ago that the gold and silver markets were going to take off in August and I have been pounding the table on such ever since.

It is time for things to happen. As you know by now, I have been jumping up and down for fireworks to happen in August. We shall see. All I can say is that what has been brought to my attention over last three week period from the “best of” sources all points to the same conclusion. It will be nitty gritty time SOON. Perhaps that “soon” is “now” the way gold has traded the past three days.

If what I think I know is correct, it will be time to pour it on our adversaries and send them running for the hills.

Grade-School Chant

As I read that, I was wondering what exactly I was supposed to comment on. Murphy has three sources, all unnamed. 

Worse yet, Murphy will not even state what the news is. The entire posts smacks of the playground chant “I know something you don’t know, a ha, and a hen, and a ho ho ho.

There is no story here, there is not even a rumor. There is only a rumor of a rumor. I am commenting because I was asked.

Seasonality

Murphy has at least one thing going for his call: seasonality. August is generally (but not always) a good time to buy gold.

If nothing happens, Murphy will be on his bull horn complaining of manipulation, singing the same tired chant about gold shorts suppressing the price of gold.

Manipulations

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Shades of 2006: That's What Australia Housing Bubble Looks Like From US Perspective

Courtesy of Mish.

The Australia housing market did not bust when it should of and the delay is going to be painful. The bigger the bubble, the bigger the crash, and the Australia bubble is bigger than we saw in the US.

On a timeline basis, Australia is about where the US was in 2006, essentially  a state of denial.

Developers are offering massive incentives such as cars, furniture, and vacations to move homes while chanting the ever-popular “now is a great time to buy a house” mantra.

Gifts Galore

The Age reports Gifts galore boost flagging unit sales

Developers are slashing apartment prices and handing out tens of thousands of dollars in incentives – including rebates, cars, furniture and holidays – to lure buyers into Melbourne’s new-unit market.

While many industry players say the offers are good news for buyers, others worry that the discounting could fuel a “race to the bottom” that could harm property values.

“There’s no question there are a lot of apartments under construction, so everyone’s trying to attract attention to get people to inquire about theirs,” said Robert Pradolin, general manager at developer Australand.

“It’s probably a very good time to buy because there are a lot of incentives around, but buyers still need to be really careful that they are picking a place based on its location, quality and who the developer is.”

In one case, Maxx Apartments announced a “massive St Kilda apartments sale” in a series of large advertisements. The promotion saw $121,000 cut from the cost of a two-bedroom flat and the price of a $415,000 one-bedroom unit reduced by 18 per cent.

Late last year, a $65,000 Mercedes was offered to the first buyer of one of four luxury apartments that remained unsold in a Brighton development. Rubicon Pacific used the teaser despite already dropping prices by $150,000 to $200,000 on apartments first listed at up to $1.3 million.

Other developers have followed suit, launching campaigns that provided $5000 to $20,000 rebates on top of the $13,000 available to first home buyers before July 1. Some have tried to lure investors with offers of guaranteed rental income for up to five years….

Continue Here

Shades of 2006: That’s What Australia Housing Bubble Looks Like From US Perspective

Courtesy of Mish.

The Australia housing market did not bust when it should of and the delay is going to be painful. The bigger the bubble, the bigger the crash, and the Australia bubble is bigger than we saw in the US.

On a timeline basis, Australia is about where the US was in 2006, essentially  a state of denial.

Developers are offering massive incentives such as cars, furniture, and vacations to move homes while chanting the ever-popular “now is a great time to buy a house” mantra.

Gifts Galore

The Age reports Gifts galore boost flagging unit sales

Developers are slashing apartment prices and handing out tens of thousands of dollars in incentives – including rebates, cars, furniture and holidays – to lure buyers into Melbourne’s new-unit market.

While many industry players say the offers are good news for buyers, others worry that the discounting could fuel a “race to the bottom” that could harm property values.

“There’s no question there are a lot of apartments under construction, so everyone’s trying to attract attention to get people to inquire about theirs,” said Robert Pradolin, general manager at developer Australand.

“It’s probably a very good time to buy because there are a lot of incentives around, but buyers still need to be really careful that they are picking a place based on its location, quality and who the developer is.”

In one case, Maxx Apartments announced a “massive St Kilda apartments sale” in a series of large advertisements. The promotion saw $121,000 cut from the cost of a two-bedroom flat and the price of a $415,000 one-bedroom unit reduced by 18 per cent.

Late last year, a $65,000 Mercedes was offered to the first buyer of one of four luxury apartments that remained unsold in a Brighton development. Rubicon Pacific used the teaser despite already dropping prices by $150,000 to $200,000 on apartments first listed at up to $1.3 million.

Other developers have followed suit, launching campaigns that provided $5000 to $20,000 rebates on top of the $13,000 available to first home buyers before July 1. Some have tried to lure investors with offers of guaranteed rental income for up to five years….

Continue Here

QE3, ECB or Bust

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Well, perhaps not literally, but it is high time that the Central Banks started following up on their statements with action. How many times have we heard “We will do whatever it takes to…” or “We have a number of choices to make regarding getting the economy going ….”  Can we please do one or two of those things?   Right now, getting Europe back on track is mandatory to avoid a catastrophic dismantlement of the euro.  And with withering domestic economic numbers, it is time for more action and less talk from our Fed Chairman.

 Corporate America is still beating the reduced Q2 earnings expectations 66% of the time, but the top line estimate has been missed on more than 60% of those who have filed to date.  If the top line is falling, how do corporations maintain their earnings and hefty bank balances?  Answer: Layoff more people!  Outsource more jobs!  These guys aren’t the villains. They have a duty to make profits for their shareholders.  Of course, they might consider cutting back on hefty executive pay and bonuses.  But that is not a likely solution; we need the government to provide further stimulus to expand business within our country. 

So do it!  Don’t keep giving us words. We need action.

This will be the last big week of earnings announcements with another 800 companies, including 100 S&P companies, reporting.  The FOMC meets on Tuesday and makes its interest rate decision on Wednesday, but more importantly, European Central Bank (ECB) meets Thursday.  Hopefully, the economic reports of the past week will convince them both to act now.

Market Stats. Last week’s market action showed a strong “flight to safety” with Large-cap Value leading the way up, +1.66%, while Small Cap Value was last, at -0.34%.  Financials, having been very weak in the past month due to major issues with Barclays and JP Morgan (JPM), rebounded on ECB President Draghi’s strong promise.  Just keep in mind that most of the options available to Draghi and our Fed are likely to introduce an inflationary bias into the system.  Holders of fixed income instruments beware!   Even though Financials is the highest ranked Sabrient sector due to weakness in bank stocks over the past four months, I would avoid it because of the risks that Barclays and JPM, for example, face and other financial shocks over the past year.  Healthcare, Technology, Industrials and Energy may be more enticing. 

Keep an eye on this week’s economic announcements: Personal Income and Spending tomorrow along with Chicago PMI and Consumer Confidence; Construction Spending and the FOMC rate decision Wednesday; Initial Jobless Claims and Factory Orders on Thursday; and the monthly Unemployment Report on Friday. 

 Finally I would remain hedged, using some combination of the European ETF’s that we have listed in past articles (VGK, IEV, EWP, EWI or FEZ).

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the Insider Buying preset search in MyStockFinder. This search selects stocks with an unusually high amount of recent insider buying activity. Here are four you may find interesting whose earnings announcements are approaching in the next couple weeks:

Chesapeake Energy Corporation (CHK)—Energy

Amicus Therapeutics Inc. (FOLD) — Healthcare

Synta Pharmaceuticals Corp (SNTA)—Healthcare

GP Strategies Corp (GPX)—Industrials

 

Until next week,

David Brown

Salutes to the Homeys

James Howard Kunstler presents a list of his favorite financial blogs. 

Salutes to the Homeys

     Blogger Pater Tenebrarum of ACTING MAN put it nicely today: Since Mario Draghi "bought" European bankers and politicos a summer vacation by promising to pull out all the stops to save the Euro, this blog will take a break (not a vacation) for a week from the nauseating ongoing melodrama of international finance and instead offer reviews of the other bloggers and podcasters out there that I follow.
 
1. Outstanding for consistent excellence, acuity, clarity, and the milk of human kindness is the MCALVANY WEEKLY COMMENTARY. David McAlvany manages an investment company out of Durango, Colorado, with an emphasis on precious metals. His interview subjects are high-caliber figures often outside the posse of usual suspects making the rounds elsewhere on the web. He speaks beautifully in complete sentences, shows enough emotion to come off as sympathetically human, and has an equally intelligent sidekick in Kevin Orrick. Together they present the most coherent view of money and politics on the web. A Christian enthusiast, he admirably keeps religion mostly out of the script.
 
2. For years, THE AUTOMATIC EARTH has presented the most consistently intelligent, wide-ranging, and intellectually rigorous view of the overall ongoing financial fiasco in the written blog format. Until the past year, most of the commentary was written by the droll Raul Ilargi Meijer. Now he is joined by the brilliant energy and finance analyst Nicole Foss and young Ashvin Pandurangi. Their combined point of view is staunchly deflationist. They do immense amounts of homework, cut through all the bullshit to the dense core of our troubled reality, and publish several times a week. The title of the blog comes from a Paul Simon lyric out of Graceland.
 
3. ZERO HEDGE. The mysterious person(s) behind this massive continuous stream of reports and analysis from the loony bin of Wall Street and beyond has a manic edge but accurately reflects the madness of the current situation. Zero Hedge seems to post virtually around the clock, every day. They are relentless and hugely comical, with exactly the right sharply malicious overtones required in these evil times. The characters who infest their comment section are some of the worst vermin in trolldom.
 
4. MISH'S GLOBAL ANALYSIS. I don't know how Mike Shedlock ("Mish") does it. He puts out two or three commentaries a day as well as holding down a regular job. His great service to us is providing the best breaking analysis of breaking news, that is, making sense of events that are often mystifying — since mystification is one of the prime tactics of financial playerdom in these dark, non-transparent times — and getting it done in a very timely way. The upshot is that few of the dodges and ruses emanating from the money world get by this guard-dog, to the huge benefit of us civilians.
 
5. Charles Hugh Smith's blog, OF TWO MINDS, manages to publish keenly insightful analysis practically every day in the form of essays that tend to follow big picture themes: governance, energy, taxation, culture, electoral politics. Smith's penetrating, dogged analysis connects vast constellations of dots between the forces that are shattering late industrial economies. He apparently does it all by himself and has also produced several excellent books that form a rich matrix of understanding for anyone trying to make sense of the epochal changes coming down on us.
 
6. NAKED CAPITALISM is Yves Smith's daily roundup of first rate essays on disasters of banking, including her own forceful callings-out of the ubiquitous misconduct that surrounds her on Wall Street where she works. Her writing is fluent and clear on subjects that would otherwise appear hopelessly abstruse, which is especially valuable where complexity is a cover for misbehavior.
 
7. In an earlier incarnation of this life, CHRIS MARTENSON was a PhD biochemist toiling for da man in the corporate swamps of Connecticut. He literally dropped out and reinvented himself as a blogger / podcaster when the peak oil and debt trap equation startled him into recognizing that the reigning system of political-economy's days were numbered. Since then, he has produced perhaps the best book on the failures of contemporary finance, The Crash Course, and has lately ginned up an excellent weekly interview podcast that should be indispensible.
 
8. THE ARCHDRUID REPORT. To the casual observer John Michael Greer would seem an odd figure, being a long-bearded, shambling, threadbare enthusiast of things druidical (whatever they are), but he's also about the most humane, articulate, and lucid observer of the crumbling economic and political scene from the realm of totally outside the box. He puts out a beautifully crafted essay every Thursday from the backwater of Cumberland, Maryland, and his view of where the human race is headed is sobering, reassuring, and full of authentic empathy for our multiple predicaments.
 
9. Jim Willie's HAT TRICK LETTER AT THE GOLDEN JACKASS REPORT is a deep, complex, often savage dissection of financial reality that always manages to illuminate new angles on the giant hairball of lies and swindles that the money world has become in our time. He writes in a singular telegraphic style that is delightful to read in a way similar to the pleasures of watching certain horror movies. He assumes that his readers already know a lot and can follow the often recondite pathways of financial discourse that he is such an excellent guide to
 
10.  THE KEISER REPORT with Max Keiser and Stacy Herbert. Stacy is the straight-person to Max's antic persona. But no one has flogged the evil-doers of banking as hard and unrelentingly as Max, who worked on the inside of the investment racket until driven by outrage to become one of its fiercest attackers. His perch in Paris gives him a front-row seat on the shenanigans now unraveling civilization in the Eurozone, but he shines his lamp under the rock of Wall Street regularly and loves to put the wicked Jamie Dimon of JP Morgan in the spotlight.
 
11. KING WORLD NEWS. Eric King is the reigning gold bug of podcastdom. While he unabashedly "talks his book," one gathers he does it because he sincerely believes in the arguments for precious metals (as I do) and he brings out around five punchy interviews a week with a revolving cast of fellow gold bugs and other generally intelligent high level players in that world – though I could do without the snide Gerald Celente.
 
12. FINANCIAL SENSE NEW HOUR. Jim Puplava recently expanded his formerly weekends-only massive three hour podcast to include premium-priced weekday interviews with a lineup of insiders. Puplava covers the waterfront energetically, but he has some weaknesses: 1.) his malaprop rate is staggering; 2.) he doesn't challenge guests spouting obvious nonsense; 3.) other than being a staunch inflationist, his views on the markets shift with whatever wind is issuing from a guest's mouth; and 4.) he's a closet John Bircher who does an annual summer show (any week now) featuring an appalling roster of right-wing crazies. In a normal culture, that alone would tend to discredit all his other worthy endeavors. His sidekick John Loeffler sounds more consistently intelligent. Both of them are jesus freaks, of course.
 
13. Added Monday p.m.  I almost forgot the memorable, mordant, and brilliant Dmitry Orlov (sheer brain fart on my part). Orlov is a fantastic writer and a great mind. Visit CLUBORLOV!
 
     I left a few characters off the main list, but shoutouts to CK Michaelson's SOME ASSEMBLY REQUIRED blog, BRUCE KRASTING'S BLOG, Bill Bonner's THE DAILY RECKONINGWHISKEY AND GUNPOWDER, the brave MARTIN ARMSTRONG,JESSE'S CAFÉ AMERICAIN, Barry Ritholtz's THE BIG PICTURECARL DENNINGERPETER SCHIFF, the great, sobering Doug Noland of THE PRUDENT BEAR's Credit Bubble Bulletin, Pater Tenebrarum ofACTING MANDOUG HENWOOD, the savvy and beautiful LAUREN LYSTERBILL MOYERS… and probably several others who I am (unfortunately) too rushed to mention.
 

Mike “Mish” Shedlock Answers: Is Global Trade About to Collapse; And Where are Oil Prices Headed?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

From James Stafford of OilPrice.com

Is Global Trade About To Collapse? Where are Oil Prices Headed? A chat with Mike Shedlock

As markets continue to yo-yo and commentators deliver mixed forecasts, investors are faced with some tough decisions and have a number of important questions that need answering. On a daily basis we are asked what’s happening with oil prices alongside questions on China’s slowdown, which commodities or instruments will provide safety in the current environment, will the Euro-zone split in the future and what impact the presidential election is going to have on the economy and markets?

To help Oilprice.com look into these issues and more we were fortunate enough to speak with the award winning economic commentator Mike “Mish” Shedlock.

Mike’s blog: Mish’s Global Economic Trend Analysis is one of the most popular and informative economic blogs online. His millions of dedicated monthly readers find his advice invaluable and we recommend anyone interested in learning more about the global economy and financial markets to stop in and take a look: http://globaleconomicanalysis.blogspot.com

To find his blog, you can also do a Google search for Mish

In the interview, Mish discusses:

·         Why global trade will collapse if Romney wins

·         Why investors should get out of stocks and commodities

·         Why we have been oversold on shale gas and renewable energy

·         Why oil prices will likely fall in the short-term

·         Why the Eurozone is doomed

·         Why there may soon be an oil war with China

·         How government interference is ruining the renewable energy sector

·         Why we need to get rid of fractional reserve lending

 

Oilprice.com: With oil prices now in the high 80's and news out of Europe getting worse every day, do you expect prices to stay in this range, or do you see them dropping in the short term?

Mish: There are two conflicting forces here. One of them is oil prices over the long-term and the other is oil prices over the short-term.

Even in the short-term you will find there are conflicting forces at play. For example, stress in the Middle-East puts an upward pressure on oil prices. However, economic problems in Europe, a slow-down in Asia and a slow-down in the United States put downward pressure on oil prices. New orders are falling at a staggering rate across the board in Asia, China, Japan, Europe, and the United States which also puts further downward pressure on oil prices.

Long-term, forces such as peak oil and population growth in China are putting pressures to the upside.

One needs to balance all of those factors out when they are about ready to give a prediction on oil prices. My opinion is that over the short to mid-term, oil prices will go down. Long-term, energy is a good place to invest.

Oilprice.com: If your prediction is correct and oil prices do go down – what sort of impact do you see this having on the U.S. economy, if any?

Mish: That's an interesting question. However, the question puts the cart before the horse.

Looking at prices in a vacuum is a mistake. One also has to look at why prices are doing what they're doing. For example, falling oil prices that happen when supply shocks are alleviated are a positive thing. Falling oil prices because of falling demand is another. You seldom see this kind of distinction in mainstream media.

Right now, oil prices are primarily falling because of falling demand, and that is in spite of geopolitical tensions. That is not a healthy sign for the economy.

Oilprice.com: As we have seen with the recent oil workers strike in Norway and subsequent rise in oil prices. Geopolitical risks always remain to keep the markets off balance. Apart from Iran are there any other geopolitical risks you think people should be aware of?

Mish: A key geopolitical risk in the long-term is that China cannot continue at its expected rate of growth. For years, the mantra has been "China, China, China," and many thought China could maintain its 8% to 10% per year growth going forward. That's not going to happen.

I agree with Michael Pettis at China Financial Markets, that China is more likely to see 2% growth than 8% or even 6% growth over the next decade.

2% growth is a shocking reduction, even from the lowered expectations that we've seen regarding China. The implication is commodity prices, especially base metals, are going to be under extreme pressure because of China stockpiles. For further discussion please see "China Rebalancing Has Begun"; What are the Global Implications?

Oilprice.com: What are your longer term projections for oil prices – say 3-5 years out?

Mish: I think it's a fool’s game to make such projections. Most of the projections on the price of gold, silver and oil are ridiculous. They are designed to sell newsletters. The bigger the hype, the greater the sales. On occasion, I will make a call. For example, when crude hit $140+ in the summer of 2008, and others called for $200, I said oil prices would drop to the $45.00 – $50.00 range or so. Oil went to $35.

Moreover, those predicting $200.00 never bothered to think what that would do to the global economy. We saw the same thing in natural gas. People were predicting $25. Look at prices now, at roughly $3.00 NG fell all the way to $2.20, lower than even this staunch deflationist thought.

I'm not willing to go out on the same limb and predict energy prices three years in advance. The reason is we really don't know for sure how central bankers are going to respond. China is particularly important. If there's universal printing of money everywhere, I would expect a lot of that to flow back into prices of gold, perhaps of silver, and perhaps energy, but we really don't know what they're going to do. We don't know when or how the Euro Zone is going to break up. I think it will, but how is as important as when.

In the US, we don't know the results of tax hikes following the 2012 election. Heck, we don't even know who the next president in the United States is going to be. Will it be Republican? Will it be Democrat? Numerous political and economic forces are pulling and tugging in different ways.

I don't believe there's anyone out there that can predict, with any kind of accuracy, what oil prices are going to do. Which is why I believe trying to predict oil prices in the midst of all of these possibilities is a fool's game.

Oilprice.com: What are your views on inflation and hyperinflation.

Mish: Hyperinflation is a complete collapse in currency. It is a political event that kicks off hyperinflation, not a monetary one. Hyperinflation talk hit an extreme when oil prices hit $140. Such talk was silly then, and it is still silly now.

Hyperinflationists in general fail to understand the role of collapsing demand for credit. The total credit market is over $54 trillion. Base money supply is $2.6 trillion and excess reserves are about $1.5 trillion. Seems to me we had huge expansion in credit and Bernanke is struggling to reignite demand. I suggest he will not succeed.

The idea the US$ will suddenly go to zero is ridiculous. The US is the world’s largest holder of gold reserves, and that alone would stop it. Also note that Bernanke, as misguided as his policies are, is still beholden to the banking system. As such he has no desire for it to collapse.

As far as inflation goes, I am still widely misunderstood. I view inflation as an increase in money supply and credit, with credit marked to market. Deflation is the opposite. If one insists that inflation is about prices, then we are in a state of inflation with 10-year treasury rates below 1.5%.  

For those who woodenly view inflation in terms of prices, well, prices may or may not rise. Price have generally risen, but credit is the key behind housing prices, family formation, hiring, and in fact everything driving the economy. So, where is credit going? Demographics and student debt suggests nowhere. Indeed, credit has gone nowhere in spite of heroic efforts by Bernanke.

Oilprice.com: You just mentioned that we don’t know who the next president is going to be and sticking to this topic how big an impact do you see energy prices having on this year's presidential elections?

Mish: I don’t think energy prices are what's on people's minds. What's on people's minds right now are jobs. Oil prices have kind of stabilized and in the very short-term they are likely to stay stable unless there are some dramatic results in the Mid-East or a dramatic slowdown in the US economy.  Both are possible, but a major US slowdown is arguably more likely. Regardless, I think energy prices are going to be a minor election issue.

Oilprice.com: The message on peak oil seems to be confused. Many are adamant that peak oil is the largest threat to ever face humanity, whilst others believe that with new technologies and new fields being found, peak oil is a myth and we are actually swimming in oil. What are your thoughts?

Mish: The idea that we're swimming in oil is preposterous. Moreover, abiotic oil is a ridiculous pipe-dream. That said, the idea that the global economy is going to come grinding to a halt in the next year or two because of oil is also preposterous (discounting a geopolitical Mid-East shutdown). In general, I would side with the peak oil folks, noting that a global recession will likely pressure prices more than anyone thinks, barring a breakout of war or supply disruptions  in the Mid-East.

Long-term, 8% growth in China is mathematically not going to happen. People really need to get a grip on exponential math and the implications thereof. If China does attempt to grow at 8-10% as some people have predicted, there's going to be an oil war of some kind between the United States and China because there's simply not enough oil.

For a good discussion on the limits of exponential growth, please see Calpers Pension Plan Reports 1% Return; Stunning "What If" Charts at Various Compound Annualized Rates-of-Return Going Forward

Oilprice.com: Shale gas has been generating a great deal of headlines recently. Do you believe it could be the solution to America’s energy challenges? We are also seeing developments in oil & gas extraction technologies. Have we been oversold on such possibilities?

Mish: I think we're oversold on everything. We're oversold on the idea of cheap energy, of free energy, of green energy, of clean energy. We're oversold on the stock market. We're oversold on what Obama can deliver. We're oversold on what Mitt Romney can deliver. We're oversold in so many areas, I can't even mention them.

In regards to new technologies, how much water will it take to extract these reserves in the midst of these droughts? What are we going to do with the contamination, how do we get rid of the waste byproducts? These kinds of projects look good on paper, but are they truly scalable in practice?

I hope I am wrong.

Oilprice.com: What is the role of government in alternative energy sources?  

Mish: The role of government should be to get the hell out of the way and let the free market work. If peak oil really is a problem (and I think it is), the free market will come up with a solution if left alone.

Instead, the government is trying to pick winners. Look at the results. President Obama backed solar panel manufacturer Solyndra and the DOE loan guarantee scheme blew sky high.

Our ethanol program is a total disaster. By government mandate, corn has been diverted to ethanol production smack in the midst of a drought. Corn is not an efficient way to produce ethanol, even if there was not a drought.

Governments seldom back winners. Instead, government bureaucrats back companies that contribute to their campaigns. This is worse than it looks because such activities deprives companies with real solutions a chance at funding.

We need to get government out of the energy business completely and let the free market work.

Oilprice.com: Sticking with the renewable energy theme, do you see them making a meaningful contribution to global energy production over the next 10 years?

Mish: Adding to my previous answer, government subsidies of unviable products and unviable ideas gets in the way of the free market actually producing viable products and viable ideas. Simply put, the more government interferes, the less likely we are going to see advances in the actual direction of a true solution.

Oilprice.com: In regards to presidential elections, how do you think energy will fare under Obama and under Romney? Which sectors will benefit, and which will suffer?

Mish: Mitt Romney has declared that if he’s elected he is going to label China a currency manipulator and increase tariffs on China across the board. That's something that I believe he might be able to do by mandate. If he's elected and he does follow through, I think the result will be a global trade war the likes of which we have not seen since the infamous Smoot-Hawley Tariff Act compounded problems during the Great Depression. Simply put, I think that global trade will collapse if Romney wins and he follows through on his campaign promises.

Unfortunately, campaign rhetoric now is heating up to the point where President Obama and Mitt Romney are trying to outdo each other on who's going to do more to China. Thus, we may very well see a global trade war regardless of who wins.

As an aside, Mitt Romney is pledging to increase military spending. Given Romney’s statements on Iran, it's more likely he would start a war with Iran than Obama. Note that the U.S. military is one of the biggest users of petroleum worldwide and oil price shocks could be devastating.

 

None of this is any good for the world economy at all. I believe that Romney will do what he says. I believe he's more likely to start wars than Obama, but that doesn't make Obama any good. This is the worst slate of candidates in U.S. history running for president, and I'm writing in Ron Paul.

Oilprice.com: As the global economy slows, where do you see the best investment opportunities available to investors?

Mish: At this point, the best thing to do is wait for better opportunities. I am talking my book, but something like 70-80% cash (or hedged equities) and 20-30% gold seems reasonable. I'm telling people, "Get out of the stock market. Get out of commodities except gold and perhaps a bit of silver."

A global slowdown is underway. Actually, I made a Case for US and Global Recession Right Here, Right Now.

Although nothing is certain, central bankers worldwide are highly likely to pump up money supply hoping to counteract the slowdown. If so, I think gold is going to be one of big beneficiaries. Silver may be a huge beneficiary, and I like it here. However, silver is also an industrial commodity, so gold is safer.

Bear in mind, I may seem like a broken record on this thesis given cash and gold has been my call for the last year and a half or so.

In spite of calling the global economy exceptionally well, I've simply been wrong about U.S. equities. They have risen far more than I thought, but I still caution that risk is high.

I'm going to repeat my general message here, that another slow-down, and another big downturn in the stock market is highly likely. Equities are quite overvalued at this point, cash is not trash, and staying liquid now, with a percentage in gold, is a good idea.

Oilprice.com: I was hoping you could tell us your thoughts on the Euro. You mentioned previously, that you think the E.U. will split in the future, why do you think this will occur, and what will the economic and political implications be?

Mish: I think it's pretty clear that the euro's going to split because no currency union in history has ever survived without there being a corresponding fiscal union in place. Right now we're in a situation where Germany’s Chancellor Angela Merkel says that "There should be no fiscal union until there's a political union." Francois Hollande said, "There should be no political union until there's a banking union," and the German Supreme Court will not allow a political union or a fiscal union, nor a banking union without a German referendum.

I did a post on this, and it's called, "It's Just Impossible."

If politicians could not get agreements when times were good, how are they going to get these agreements now, when they're bickering over every little thing, including the amount of the ESM, whether or not the bailout of Spain should be via the ESM or the EFSF, and whether or not the Spanish government should be backstopping this loan.

They can't get an agreement on anything, and the German Constitutional Court is hanging like a Sword of Damocles over the entire thing.

For these reasons, the Euro is going to bust up. What happens to the price of the Euro depends on how it busts up. If the breakup is piecemeal and disorderly, it means one thing. If it's orderly and prepared in advance with Germany leaving and the northern states leaving, it's a completely different scenario. Any point along that line is possible, but piecemeal seems more likely. How disorderly remains to be seen.

For example, if Germany exits the Euro and goes on the deutschmark, the value of the deutschmark will soar, whilst the value of the Euro will decline.

Instead, if we see a break-up by Spain leaving, by Greece leaving, by Italy leaving, and the bulk of what's left is Germany and the northern States, then the value of the Euro can soar. Those are the two conflicting possibilities here. The market has not decided which one of those is more likely.

Meanwhile, the Euro is in a low 1.20 range to the U.S. dollar. A breakout or a breakdown might be a signal that the market is expecting one of those possibilities over the other.

We are in uncharted territory and everyone is guessing.

Short-term I am neutral on the US dollar at this level because the euro is a bit oversold, the idea of a Greek exit is no longer unfathomable, and the Fed is likely to initiate QE3 at some point. This is a change from my previous US dollar bullish stance.

Oilprice.com: We mentioned China earlier, and I was wondering what you think the future holds for China, both politically and economically.

Mish: A regime change in China is coming up. The current regime has been focused on growth. However, I think the next Chinese government already understands that the growth at any cost of the current regime is not sustainable. If so, we're going to see a major shift away from an export-driven production model dependent on investment on roads, on bridges, and more production, to a consumption-driven model. That shift will be one of the major forces in the global economy.

If I'm correct on this, then it's going to be a painful adjustment, regardless of what China does. For example, a Chinese slow-down towards consumption would increase the value of the renminbi, would decrease their exports, would help the balance of trade between China and the United States and Europe, and would put intense pressure on commodity prices. In turn, asset prices and currencies of the commodity producing countries, like Australia, Brazil, and Canada will come under heavy pressure.

Oilprice.com: Mark Faber is not a fan of the Federal Reserve, blaming them for the current US economic situation. He said, “Usually under a gold standard you have a bubble under one sector of the economy but you don’t have it across the board globally and that’s really what the Federal Reserve has done over the last couple of years.” Do you agree? Is the Fed to blame? And what can be done to avoid this in the future?

Mish: I agree with part of it, if not most of it. However, the idea that the gold standard itself causes bubbles is fallacious. The gold standard does not cause huge bubbles. The real culprit is fractional reserve lending. Historically, problems happened when banks lent out more money than there was gold backing it up.

The gold standard did one thing for sure. It limited trade imbalances. Once Nixon took the United States off the gold standard, the U.S. trade deficit soared (along with the exportation of manufacturing jobs).

To fix the problems of the U.S. losing jobs to China, to South Korea, to India, and other places, we need to put a gold standard back in place, not enact tariffs.

Oilprice.com: Mish, thank you for your time this has been a very enjoyable and enlightening conversation for us.

For those of you who haven’t seen Mish’s superb blog and daily economic commentary we strongly recommend you visit his site: http://globaleconomicanalysis.blogspot.com. You can also do a Google search for Mish.

Source: http://oilprice.com/Interviews/Global-Trade-Likely-to-Collapse-if-Romney-Wins-Interview-with-Mike-Shedlock.html

Interview by James Stafford of Oilprice.com