Archives for July 2012

Within Our Mandate (7/29)

Excerpts from the latest MarketShadows Newsletter, July 29 2012

Event Horizons

The S&P 500 rose 3.6 percent on Thursday and Friday alone. The rally was triggered when European Central Bank (ECB) president Mario Draghi said, “Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.”  His statement sent the markets up, UP and AWAY!

The talk didn’t convince former FX trader Bruce Krasting. He wrote in response, “On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, ‘It will be enough.’ From Bloomberg: ‘DRAGHI’S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO [Long Term Refinancing Operation].’

“Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours) of market relief, but they have no chance of turning the EU around.”

These measures cannot turn the EU around because the market based-system is not dead yet, in spite of central bank manipulation. Market forces will prevail. Bruce continued, “Draghi is either bluffing or lying. That, or he is as blind as a bat…

“An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependent on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward.” (Draghi – We Will Continue to Fight Until Everyone is Dead)

Instead of Draghi’s promise to save the euro causing a euro selloff, the euro rose, the US dollar fell, and a massive short squeeze in equities followed. Unfortunately, the words “within our mandate” were neglected in the headlines. Perhaps, they were lost on the high frequency trading computers.

In Wolf Richter’s view, Draghi’s main worry now is Spain. The cost of saving Greece is manageable, but saving Spain is prohibitive.

“Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble … to discuss a bailout. For €300 billion. And hours beforehand, ‘sources’ told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider ‘more forceful measures.’ Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone [for that whole debacle, read…. The Extortion Racket Shifts to Spain].

“It worked! Thursday, European Central Bank President Mario Draghi caved… ‘within our mandate,’ is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.

“Draghi outlined a way around that single-mandate limit… In other words, every time yields go up somewhere in the Eurozone, the ECB is free to ‘do whatever it takes’ to force them down…”

Of course, an important, unanswered question is “Who The Heck Is Going To Do All The Bailing Out?” (War Of The Central Banks?)

Bruce Krasting concluded that Germany would be telling Mario that he “can’t have our cake and eat it too.” He noted an article appearing in Germany’s Handelsblatt: Schäuble denies reports of bond purchases.” Next week, Draghi meets with the Bundesbank Weidmann to hammer out their differences.

Market-Moving Forces

Trading Volume ~ The On Balance Volume (OBV) is a technical analysis indicator that measures buying and selling pressure. When the market rises on low volume, as it has been, it is easy to manipulate market moves in any direction.

Investor Sentiment ~ AAII investor sentiment hit a low last week and has since rebounded a little… The S&P remains elevated – on low volume buying…

 

Sector Exploration

Read MarketShadows July 29 to see what we’re doing with OPK and ABX in our Virtual Portfolio.

 

Charting the Universe

Secret Summits

By Allan Harris of Allan Trends

New Signals

GS Daily —————->LONG

PBKEF Daily ———->LONG

Weekend Market Commentary

Here is the GS Daily Trend Model chart going back six months:

(Click on charts to enlarge)

GS

 

Nice trends: Buying in December @ $100 reversing to short in April @ $116 and riding it down to today’s reversal long @ $100. After three winners in a row, one would expect the next one to be off a bit. But expectations don’t work, even when we think they do – it’s probably more luck than inspiration. I bought September 100 calls today (7/27), even though I “expect” that this market rally is about over.

The same logic applies to the S&P Hourly chart below. Even though I have been pointing out the ominous nature of the April-May TOP pattern, this trading model has a mind of its own:

SPX Hourly

 

It whipsawed in late June, but nailed the short term trends before and after with seven winning signals against two losers.

Intermediate term, here is a chart of the Nasdaq Daily Trend Model:

NASDAQ Daily

 

A trading regimen of using SSO/SDS based on the SPX Hourly Model and QLD/QID based on the Nasdaq Daily Model would have done well over the past few months. There is no reason to think it won’t continue, although as the regulators like to have me say, past performance is no guarantee of future results.

Finally, longer term, the chart that I expect will ultimately make us the most money going into the final five months of 2012, the DJIA Weekly Trend Model:

DJIA Weekly

 

The Perfect Set-Up: As you can see by the last bar on the weekly chart above, the DJIA closed at it’s high tick for the week. If it makes a higher high next week, then closes lower for the week, I intend to act aggressively on the short side of the market. Some definitions of these kind of “Buying Climaxes” require heavy volume and/or 52 week highs to qualify as an orthodox signal, but with yet another European “summit” and news from one of the Fed’s own regularly scheduled, “Secret Summit Among Fiends” due out on Wednesday, if this market can’t finish up by the close next Friday, I’m taking that as a bearish omen.

Full update here.

(Allan’s Trend Following Model is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Risk-free trials: Standard Trial & Active Trader Service. )

 

Monopoly Money

By Springheel Jack

Draghi’s statement, and apparent agreement of leaders in Europe, has caused changes in the technical landscape. Bonds (TLT) and the US dollar have broken their short term rising support trendlines, and SPX made a new high off the June low. Gold broke up from a two month symmetrical triangle. There is a potential double-bottom on gold indicating it might rise to new highs. This may be the start of a bull run on precious metals:

 

 Monopoly Money

 

On the SPX 60min Chart, the failure so far to establish a support trendline from the June low had looked bearish, but not so much any longer. At the low last week, the SPX established a rising channel from the June low. That is potentially bullish and establishes a support trend-line. It would look bullish if the SPX breaks higher.

 

 Monopoly Money

 

Short term, I expect a retracement. SPX hit the upper bollinger band on the daily chart and a perfect bearish rising wedge formed on the 15 min chart from Wednesday’s close. Longer term, earnings and fundamentals are weak, but technicals are bullish. There’s channel support on the SPX in the 1335 area.  So I’m skeptical but leaning bullish in spite of my doubts.

Full update here. 

 

Next Week’s Travels

In addition to more earnings reports, there will be a plethora of data this week including, on Wednesday, the ADP employment report, ISM manufacturing, and the FOMC rate decision. On Thursday, it’s Initial Jobless claims and an ECB meeting.

Describing the recent flow of money through the system, Lee Adler wrote,

“ECB head Draghi came out on Friday and said the ECB would take whatever steps necessary to save the Euro, and the sentiment reversed on a dime. As opposed to all the piling in [to US Treasuries] earlier in the week, suddenly it seemed that everyone rushed for the exits. Actually, it was probably just a few, but that’s all it takes at the margin.

“If European investors stop fleeing that system for the “safety” of the US Treasury market, we will see a sea change in the bond market. All it will take is for the flood of European capital into the US to slow. That should be enough to end the panic driven bubble in Treasuries. Over the next few days and weeks, we should keep a close eye on the bond market technical indicators for signs of the turn.

“The calendar will be very light next week, with just the 13, 26, and 4 week bills. After Monday’s big settlement is absorbed, the market will have it easy for the rest of the week and for the rest of the month, relatively speaking. The TBAC estimate for the mid month note and bond settlement is for less than $20 billion in new paper. That will seem like a piece of cake for a market accustomed to absorbing double or triple that. Overall, August will be a month where the market faces very little pressure from new Treasury supply until the end of the month.

“Whether the greater benefit accrues to stocks or bonds remains to be seen, but Friday’s action suggests that the stock market will be the beneficiary…”

MarketShadows Newsletter, July 29 2012

Please visit us at our Market Shadows website and Facebook page. 

Big Banks Continue To Game the System With Public Money, Aided By the Fed

Big Banks Continue To Game the System With Public Money, Aided By the Fed

Courtesy of Jesse's Cafe Americain

"The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true. 

It really happened. These suspicions are valid.” 

Neil Barofsky, TARP Inspector General

The Fed is not the solution; the Fed is a creature of the biggest banks, and very much a part of the problem.

Once again we hear a lone voice of common sense, and reason for reform, in this case Sarah Bloom Raskin, speak out forcefully for reform.

You may recall 'The Warning' which featured Brooksley Born, who sounded the alarm about the growing dangers of the unregulated derivatives market during the Clinton Administration. And who was thwarted and bullied by team Greenspan-Summers-Geithner.

And you might remember how the Wall Street Banks used the NY Fed and the Treasury's Tim Geithner to block the reforms proposed by the FDIC's Sheila Bair.

I do not think that these men who block reform and serious change are evil. Rather, I think they are just dead wood, who know nothing more than the system of privilege that has elevated them, and rewarded them, and which they are loathe to see change. 

But the times are getting difficult, and so it is time for a change, which is necessary for there to be a sustainable economic recovery. 

And in the election of the President this year the people are being given a choice, as someone so aptly put it, between an ineffective and compromised gamekeeper and one of the worst and greediest of the poachers. Obama was marketed as an independent outsider, but he is not. They are both owned by the system, each in their own way.

And that means change is not going to come from the top. But it will come nonethless.

If this continues the capitalists will eventually destroy themselves, because none of them will want to be the first that calls a stop. And that will be a tragedy.
 

Baseline Scenario
Fed Governor Speaks Out For Stronger Rules
By Simon Johnson
July 28, 2012

A powerful new voice for financial reform emerged this week – Sarah Bloom Raskin, a governor of the Federal Reserve System. In a speech on Tuesday , she laid out a clear and compelling vision for why the financial system should focus on providing old-fashioned but essential intermediation between savers and borrowers in the nonfinancial sector.

Sadly , she also explained that she is a dissenting voice within the Board of Governors on an essential piece of financial reform, the Volcker Rule. Her colleagues, according to Ms. Raskin, supported a proposed rule that is weaker, i.e., more favorable to the banks; she voted against it in October. At least on this dimension, financial reform is not fully on track.

Two years after the passage of the landmark Dodd-Frank financial reform legislation, you might imagine that the crucial detailed regulations would already be in place.

But, not so, at least with regard to the Volcker Rule, which is intended to limit the ability of big banks to make large “proprietary ” bets. (Proprietary trading is jargon for speculation – betting on asset prices going up and down.)

The basic idea of this is simple and completely compelling. Paul A. Volcker, the former chairman of the Federal Reserve System, has stressed that this measure will help us move away from an arrangement in which the people who run big banks get the upside when they are lucky – and the rest of us are stuck with some enormous, awful bill when things go awry . Senators Jeff Merkley , Democrat of Oregon, and Carl Levin, Democrat of Michigan, fought long and hard to get meaningful provisions into the legislation. But these still need to be turned into regulations that must be followed.

The final Volcker Rule was due out last week but did not appear. The current expectation is that it will appear at some point in August. (The Fed is one of five regulators involved in setting the Volcker Rule;  the others are the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.)

As Ms. Raskin explained in her speech, “I view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop.”

Our largest financial institutions are bank holding companies, which include both banks and enormous trading operations. These activities are intermingled deliberately by bank management – and typically with the approval of regulators.

In a recent study released by the Federal Reserve Bank of New York, Dafna Avraham, Patricia Selvaggi and James Vickery found that legal and organizational complexity – for example, measured by total number of corporations within a single global financial institution (think Citigroup or JPMorgan Chase) – has increased greatly in recent years.

These structures are intended to benefit from association with federally guaranteed deposits as well as the broader but more nebulous protection that comes from being perceived – by officials and by markets – as too big to fail. A commercial bank gives trading operations huge financing advantages, in part because they have the implied backing of depositors and taxpayers; this is why so many banks have put their enormous derivatives trading operations in their insured banks.

Goldman Sachs this week announced that it will expand its regulated bank as a way to obtain lower-cost financing. The federal insurance on deposits is a great deal for a high-risk trading operation like Goldman’s, lowering its financing costs by perhaps 200 basis points (two percentage points, an enormous amount in today’s markets).

Without government guarantees, creditors to Goldman would want to be compensated for the risks they are taking. As things now stand, Goldman is receiving a large implicit government – and taxpayer – subsidy . The same is true at all the other large banks...

Read the rest here.

Taibbi and Spitzer on Sandy Weill, Romney, LIBOR and Geithner

The choice of Tim Geithner will go down as one of Obama's biggest mistakes – Matt Taibbi 

Taibbi and Spitzer on Sandy Weill, Romney, LIBOR and Geithner

Courtesy of Jesse's Cafe Americain

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least to neglect, persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith

Geithner and his apologists are the credibility trap in action. He epitomizes Obama's failure to reform and address the great financial crimes. While it is is interesting that LIBOR may have been manipulated going back to 1991, what is more alarming is that market manipulation still being committed on a broad scale today. This reminds one of the shocking murder of Kitty Genovese.

Geithner is no innocent anomaly. Obama shows quite a few signs of being a willing servant to the financial interests.

Sandy Weill senses that the tide is turning, and is worried about covering his derrière for the sake of history, and perhaps for the reckoning which may come, rats-and-ships-wise. I have also heard that there is very bad blood between Sandy and Jamie, and this is payback, with more to follow.

It seems almost like a deficiency in the American character that some of these jokers, like Weill, Greenspan, and Cheney, can walk around like big successes, and still be given a public platform and taken seriously when they speak. 

If Charles Ponzi were still alive, I would not be surprised if he had his own show on financial television, with an avid following. 

I suspect that the LIBOR scandal, as bad as it may be, will look like cheating at cards if the scandal of the metals and financial asset markets is ever fully revealed.

 

The Main Driver of GDP Growth: Strong Rule of Law

Courtesy of ZeroHedge. View original post here.

Submitted by George Washington.

Economist Woody Brock says that a nation's GDP growth is based mainly on whether or not it follows the rule of law. 

Economist and investment adviser John Mauldin notes:

I had dinner with Dr. Woody Brock this evening in Rockport. We were discussing this issue and he mentioned that he had done a study based on analysis by an institution that looks at all sorts of “fuzzy” data, like how easy it is to start a business in a country, corporate taxes and business structures, levels of free trade and free markets, and the legal system. It turned out that the trait that was most positively correlated with GDP growth was strength of the rule of law. It is also one of the major factors that Niall Ferguson cites in his book Civilization as a reason for the ascendency of the West in the last 500 years, and a factor that helps explain why China is rising again as it emerges from chaos.

One of the very real problems we face is the growing feeling that the system is rigged against regular people in favor of “the bankers” or the 1%. And if we are honest with ourselves, we have to admit there is reason for that feeling. Things like LIBOR are structured with a very real potential for manipulation. When the facts come out, there is just one more reason not to trust the system. And if there is no trust, there is no system.

Dr. Brock is not alone.  Numerous high-level economists have documented that failure to enforce the rule of law leads to a loss of trust, which destroys economies.  This is true whether it is in the West, in Nigeria or any other country.

We're Number … What?

Economic historian Niall Ferguson notes:

The World Economic Forum’s annual Global Competitiveness Index and, in particular, the Executive Opinion Survey on which it’s partly based … includes 15 measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and the control of organised crime.

It’s an astonishing yet scarcely acknowledged fact that on no fewer than 15 out of 15, the United States now fares markedly worse than Hong Kong. In the Heritage Foundation’s Freedom Index, too, the U.S. ranks 21st in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore.

Perhaps the most compelling evidence of all comes from the World Bank’s Indicators on World Governance, which suggest that, since 1996, the United States has suffered a decline in the quality of its governance in three different dimensions: government effectiveness, regulatory quality and the control of corruption.

Compared with Germany or Hong Kong, the U.S. is manifestly slipping behind.

Indeed – as we've extensively documented – the rule of law is now weaker in the U.S. and UK than many other countries which we would consider "rogue nations".    See this, this, this, this, this, this and this.

This is a sudden change.  As famed Peruvian economist Hernando de Soto notes:

In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

How Did We Slip So Fast?

Of course, the repeal of the basic laws which enforced the rule of law among financial players is a part of the problem. Virtually everyone – other than those currently working for the big banks or on their payroll – is calling for reinstatement of the separation between banks and speculative gambling.

Free market libertarians – like everyone else – are demanding prosecution of criminal fraud using basic fraud laws.  Yet the government has made it official policy not to prosecute fraud.

People have lost trust in the system, because government corruption is as widespread as Wall Street corruption … and those in power in D.C. have the same sociopathic traits as those they supposedly regulate on Wall Street.

And as Professor Ferguson notes, draconian national security laws are one of the main things undermining the rule of law:

We must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage of the 1914 Defense of the Realm Act. Recent debates about the protracted detention of terrorist suspects are in no way new. Somehow it’s always a choice between habeas corpus and hundreds of corpses.

Of course, many of this decades' national security measures have not been taken to keep us safe in the "post-9/11 world": many of them started before 9/11.

And America has been in a continuous declared state of national emergency since 9/11, and we are in a literally never-ending state of perpetual war. See this, this, this and this.

In fact, government has blown terrorism fears way out of proportion for political purposes, and  "national security" powers have been used in many ways to exempt big Wall Street players from the rule of law rather than to do anything to protect us.

Is it any wonder that we're still in an economic crisis?

Eurozone Retail Sales Sink 9th Month; 17th Month of Contraction in Italy; Margins Collapse in France; Germany Barely Above Contraction

Courtesy of Mish.

Eurozone retail sales continue to dive and not even Germany is immune. German manufacturing has been in contraction off-and-on, and retail sales are once again on the verge contraction as well.

Let’s take a look at some reports.

Italy Retail Sales Slump Extends to 17th Month

Markit reports Downturn in retail sales continues in July

Summary:

July data pointed to a further reduction in activity in the Italian retail sector, with sales down markedly both on the month and compared with levels one year ago. The rates of decline in employment, purchasing activity and inventories all accelerated, while profitability continued to deteriorate sharply. Cost pressures, however, eased to the weakest in 20 months amid stronger competition between suppliers.

The downturn in Italy’s retail sector extended to a seventeenth month in July. Furthermore, the rate of contraction in like-for-like sales accelerated from the previous month and was marked. This was signalled by the seasonally adjusted Italian Retail PMI® posting 40.7, down from 41.7 in June.

Italian retailers generally fell short of their targets set for July.

Employment levels continued to fall during July, extending the ongoing sequence of contraction to 55 months. Moreover, after slowing to the weakest in eight months during the preceding survey period, the rate of job shedding accelerated and was
marked overall.

Sales Fall Sharply in France

Markit France PMI shows Record Drop in Retail Margins


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Beer, A Reflection of the World Economy?

Courtesy of ZeroHedge. View original post here.

Submitted by testosteronepit.

Wolf Richter   www.testosteronepit.com

Good news first. Despite the financial crisis, the Eurozone debt crisis, the housing collapse, the endless series of taxpayer-funded or central-bank-engineered bailouts, and despite various bubbles inflating or blowing up, worldwide beer production has increased year after year. In 2011, it rose by another 60 million hectoliters to 1.9 billion hectoliters (1 hectoliter = 26.418 US gallons), and was a very respectable 38.3% higher than in 2000, according to the annual beer and hops report by Barth-Haas Group.

 

The bad news was regional. In most developed countries, production dropped. In the US, it edged down 1.6% last year and 5.7% since 1990—despite a significant increase in the population. In Germany, it stabilized recently, but had plunged 20.5% since 1990. Production in the UK had skidded 27.5% during that time, though it ticked up last year. No glimmer of hope for Japan: production is down 14.7% since 1990, and down 3.6% from 2010, the seventh straight year of declines. Only 442.39 million cases were shipped, the lowest ever in recorded Japanese beer history.

But Asia was on a tear. Well, except Japan. And India, the only major country that hasn’t yet discovered a taste for beer. The driver in worldwide beer production growth was China, up 9.3% in 2011, and up an astonishing 600% since 1990. Of the 60 million hectoliters in growth worldwide last year, 42 million where brewed in China. Vietnam made huge strides; in percentage terms a 2,680% melt-up since 1990. Beer production also grew in Africa and Latin America.

Russia is a special case: in the Soviet Union in 1990, beer production was zero (the chart below shows the percentage increase since 2000). By the time I went to Russia in 1996, Russian beers and Heineken were available, but hard to find in smaller towns or on trains, though vodka (served in water glasses or by the bottle) was everywhere. Since then, Russia has shot up to third place in beer production, knocking off Germany and a slew of other countries, only to get itself knocked off by Brazil last year. Production tapered off, not because of a decline in per-capita consumption—it’s still increasing despite a government crackdown on alcohol consumption—but because imports are making some headway.

 

 

When I was a kid in Germany, I engaged in what in the US would be considered underage drinking. I was too young to drive, and so it didn’t bother anyone, except me the next day. It was the time when German beer consumption peaked at 151 liters per capita, the highest in the world. But then I went to America … and German beer consumption began a multi-decade decline that may finally be leveling off at 107 liters per capita. Enough for a second place in 2010, but not in 2011, when Austria knocked Germany down to third place.

Within any country, there are regional differences. But they’re particularly strong in Germany. Bavarians are still swilling it at a rate of 155 liters per capita, whereas Germany’s wine regions are down to 69 liters, an outright scandal. My grandfather, who was born and raised in the Kingdom of Bohemia, which was part of the Austrian Empire at the time, and is now part of the Czech Republic, would turn over in his grave.

Today, the Czech Republic and Austria are the top two beer-drinking nations in the world with 143 and 108 liters per capita respectively. By comparison, in the US, we drink 75 liters per capita, on par with Russia.

Note the last country on the list: India. 2 liters per capita! Just imagine Asian beer production if India’s 1.2 billion people discover—unlikely as this may seem—just how good a cold one can be after a hard day at work, or with their favorite meals!

Every beer has a right to exist. Tastes vary, and one guy’s favorite brew is the next guy’s window sweat, as my uncle used to say. A while ago, I handed a California IPA, one of my favorites, to a friend of mine, who then told me that its flavor was reminiscent of rusty nails. So it goes. But in 2011, 51.8% of the world’s beer was produced by six mega-brewing groups. 

It’s getting worse: in June, ABInBev announced that it would acquire 7th ranked Grupo Modelo, giving the company a 21.5% share of the worldwide market. Without further acquisitions, the top six will brew 54.7% of all beer in 2012. But the more these mega-groups acquire each other, and the more they produce the same stuff, the easier it is for scrappy outfits with extraordinary beers to elbow their way into the market.

Germany still has about 1,250 breweries, a far cry from the many thousands it used to have—but almost four times as many as in the rest of the EU combined. They range from brewpubs to mega breweries. About half of them are in Bavaria. And they sport about 5,000 brands, some of which are truly awesome, and they're doing well.

In the US, the industry has been more than morose, with mega-brewers battling each other tooth and nail over declining sales. And yet there are astonishing winners. Read…. The Beer War on American Soil.

***

Goldman Sachs’ Paywall to Your Democracy

Courtesy of Pam Martens.

The word paywall is typically used to describe web sites which make you pay to gain access.  But viewed with the added perspective of the image below, that’s what representative government in the U.S. has become – a paywall to access. 

The following chart is provided through the courtesy of the Center for Responsive Politics. The Center calls it the list of Goldman Sachs heavy hitters from 1989 to 2012 — those employees of Goldman Sachs making the largest political contributions.  (It should be noted that not all individuals listed on the chart continue to work for Goldman Sachs.) 

The first entry on the list is Todd J. Christie – brother to the current Governor of New Jersey, Chris Christie, who said last week he plans to run for President in 2016.  Todd J. Christie is the former CEO of Spear, Leeds &  Kellogg, the New York Stock Exchange specialist firm which Goldman Sachs purchased in 2000 for $6 billion.  Todd Christie received $60 million in the deal. 

The SEC brought an action against Todd Christie in 2005 for cheating customers out of thousands of dollars in the trading of IBM and AOL Time Warner.  In 2008, Christie settled the charges without admitting or denying the findings (the despicable curse of the SEC in this lost decade of America).  The SEC took separate actions against other traders at the firm. 

One remarkable aspect of the chart below is that if you click on the individual names, such as Christie, then click on “Itemized Contributions,” you find a really dirty little secret about which few Americans are aware — the sums that can be contributed to committees by the individual, above and beyond candidate contributions.  On April 22, 2002, for example, Todd Christie made a $225,000 lump sum contribution to the Republican National State Elections Committee.  

Over years of using data at the Center for Responsive Politics, I have never found an error.  But I couldn’t believe the size of this contribution from a single individual so I checked it out myself at the Federal Election Commission.  The dollar amount was memorialized in a receipt at the commission. 

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Geithner And Schauble Release Joint Non-Statement

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The U.S. Department of the Treasury, in conjunction with the German Finance Ministry, today released the following joint statement at the conclusion of Secretary Timothy Geithner’s meeting with German Finance Minister Wolfgang Schäuble:

“Timothy Geithner and Wolfgang Schäuble today met on the island of Sylt to use the informal atmosphere for an open exchange of views on global, U.S. and European economies. They emphasized the need for ongoing international cooperation and coordination to achieve sustainable public finances, reduce global macroeconomic imbalances, and restore growth.

“Both expressed confidence in Euro area member states’ efforts to reform and move towards greater integration. They welcomed the Irish example of placing successfully longer term bonds last week and Portugal's continued success in meeting program commitments.  They discussed the considerable efforts undertaken by Spain and Italy, to pursue far-reaching fiscal and structural reforms. The U.S. and Germany will continue to cooperate closely with their partners when advancing the policy agenda in autumn to further stabilize global and European economies.

“While again stressing the need for policymakers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence, Secretary Geithner and Minister Schäuble also took note of statements from European leaders last week to take whatever steps are necessary to safeguard financial stability in the Euro area.”

* * *

In other words, a big steaming pile of nothing.

For those of you who don't know who Tim Geithner is, he is the man who 4 months before the US downgrade said there was "no risk" of the US being downgraded.

Dallas Fed Plunges Most in Over 7 Years to 10 Month Low; Biggest Miss in 14 Months

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

With expectations for a muddle-through slight positive print, the headline Dallas Fed index just printed at -13.2 (exp. 1.9). This is its lowest level since September of last year and the biggest miss of expectations since May of last year.

The headline index is teetering on the edge of its worst levels since 2009 as the month to month change in the general business activity index dropped a massive 19pts – its largest drop since April 2005. Specifically it appears the outlook for capital expenditures was among the largest sub-index to have its hope crushed – and this strongly suggests (and confirms) a sub-50 ISM print.

The Dallas Fed general activty index plunged its most in over seven years…

 

to last summer's levels…

 

which goes to confirm the sub-50 ISM print that appears to be looming large… (h/t @Not_Jim_Cramer)

 

Charts: Bloomberg

51% of Germans Believe Germany Better Off Outside Eurozone, 71% Favor Greece Leaving; Implications on Constitutional Court Ruling

Courtesy of Mish.

A recent poll says 51 percent of Germans now believe Germany would be better off without the euro.

The Emnid poll for the Bild am Sonntag mass circulation weekly showed 51pc of Germans believed Europe’s top economy would be better outside the 17-country eurozone. Twenty-nine percent said it would be worse off, AFP reports.

The survey also showed that 71pc of Germans wanted Greece to leave the euro if it did not live up to its austerity promises.

Economy Minister Philipp Roesler told Bild am Sonntag there were “considerable doubts whether Greece is living up to its reform promises.”

Implications on Constitutional Court Ruling

That poll, with only 29% believeing the euro is a good thing, suggests that if the German constitutional court forced Merkel to put the euro to a referendum, that Germany would vote to leave the eurozone.

On September 12, the German constitution court is expected to rule on the ESM as well as the fiscal treaty chancellor Angela Merkel signed in March.

Is it any wonder ECB president Mario Draghi is loathe to do anything but talk before the court meets?

Should the court rule both are OK, eurocrats like Jean-Claude Juncker will immediately seek to change what the ESM can do, including the use of leverage.

Let Voters Decide

Given that Germany is better off outside the eurozone, and the eurozone is arguably better off without Germany, hopefully, the constitutional court will say it’s time to put all of this to voters, including whether Germany should stay in the eurozone.

Unfortunately, I expect the court will OK both the ESM and the Merkozy treaty, but give further warnings to Merkel and the ECB that 500 million euros is the limit.

Mike “Mish” Shedlock…

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Big Part of US Rental Housing Market: Poor People

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

THE US RENTAL MARKET: Poor people

446.5 million Americans live off food stamps, a 222,157 increase in the last month.  Americans on Social Security disbility: 8,753,935. 42% of the population doesn’t work.

 

 

 

 

For additional analysis on this topic and related trades subscribe to Russ Winter's Actionable – risk free for 30 days.The subscription fee is $69 per quarter and helps support Russ.s work on your behalf. Click here for more information.

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to The Wall Street Examiner.

JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout; End of JCPenny? How Many Jobs At Risk?

Courtesy of Mish.

By 2014 JCPenney PLans to Eliminate All Check-Out Clerks, and instead use self-checkout machines and RFID chips.

Struggling retailer JCPenney is making some big changes that will affect customers and its clerks. The store is getting rid of its check-out counters.

CEO Ron Johnson said it will remove check-out counters in stores and replace them with a system that won’t require clerks. It’s all part of an effort to return the department store chain to profitability.

Shoppers will be able to use self check-out machines, similar to those found in grocery stores.

JCPenney is also planning to replace traditional bar codes on price tags with high-tech radio frequency identification, or “RFID” chips to make purchases faster.

Johnson told “Fortune” magazine he hopes to phase out check-out counters by 2014.

End of JCPenny?

My first thought was a question: Will this work?

A move to entirely self-service is a risky bet-the-company type of move.

Given that many large grocery stores have both self-checkout and manned checkout lanes, I suspect in reality that JCPenny will not go big-bang with this concept but instead will use a series if trials to see how customers respond.

How Many Jobs At Risk?

I personally loathe self-checkout but it’s not my opinion that counts. If there are enough who think like me, and JCPenny does go big-bang, this move will the death of JCPenny.

However, If I am wrong, then note that JCPenny has 1100 stores so we are talking about the elimination of lots of jobs. Also note that if the move by JCPenny is successful, other stores will follow….

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Monopoly Money

Monopoly Money

Courtesy of Springheel Jack

In the game Monopoly, when you’re sent to jail, you can leave for free with a ‘Get Out Of Jail Free’ card. In a sense the ECB can do the same to escape its sovereign debt problems. All it has to do is “print” money, and the problems go away; temporarily, at least. They will be replaced by negative consequences, such as inflation.

The Germans have been adamantly against the ECB printing money on a large scale. In Weimar Germany, in the 1920s, hyperinflation was triggered by the German central bank funding deficits by printing money and the Germans remember the pain of that era. However the ECB Chairman Mario Draghi suggested this week that the ECB might do exactly that, and Germany’s Merkel pledged, with France’s Hollande and Italy’s Monti, to do ‘whatever it takes’ to protect the Eurozone.

Could this be a game-changer? Perhaps for a short while, until Germany qualifies this statement by taking money printing off the table again. Perhaps for longer if Germany is willing to start the printing press. This is political dynamite for Merkel at home, and so far it is just talk.

Nevertheless, Draghi’s statement, and apparent agreement of leaders in Europe, has caused changes in the technical landscape. Bonds (TLT) and the US dollar have broken their short term rising support trendlines, and SPX made a new high off the June low. Gold broke up from a two month symmetrical triangle. There is a potential double-bottom on gold that indicates it might rise to new highs. This is potentially the start of a bull run on precious metals:

 

On the SPX 60min Chart, the failure so far to establish a support trendline from the June low had looked bearish, but not so much any longer. At the low last week, the SPX established a rising channel from the June low. That is potentially bullish and establishes a support trend-line. It would look bullish if the SPX breaks higher.

 

 

In the short term, I expect a retracement. SPX hit the upper bollinger band on the daily chart and a perfect bearish rising wedge formed on the 15 min chart from Wednesday’s close. Longer term, earnings and fundamentals are weak, but the technicals are bullish. There’s channel support on the SPX in the 1335 area.  So I’m skeptical but leaning bullish in spite of my doubts.

 

 

 

Secret Summits & Nobody Said It Was Easy

Nobody Said It Was Easy (8/5)

Courtesy of Allan Harris of AllanTrends

New Signals

SPX Hourly Trend Model————> LONG

NASDAQ Hourly Trend Model——> LONG

TLT Daily Trend Model————-> SHORT

AAPL Daily Trend Model———-> LONG

Weekend Market Comments

Stock Indexes

I really was hoping for, “The Perfect Set-Up” described last weekend: A higher high for the week coupled with a lower close. Instead, all major indexes closed higher for the week, albeit not by much. Since none of the major (or minor) market indexes reversed Long in their Weekly Models, the April-May TOP pattern is still in effect.

[click on charts to enlarge]

DJIA 2011-2012

 

DJIA Weekly Trend Model

 

Note below that the broader Value Line Index (and IWM) did complete, “The Perfect Set-Up,” by closing lower for the week, but, in my view, the major averages needed to confirm and they did not.

Value Line Weekly

 

The VXX Hourly Trend Model has had just a stellar Short Signal from July 26th. As you can see in the Trend Table below, the Hourly Signal is up 11% (in one week) and the Daily signal is up 34% (in one month). As with the indexes, between the Hourly and Daily models, the meaningful trends are covered and trading these trends should be become very straightforward. These changes should make the trend models and this service easier to get and easier to trade.

VXX Hourly Trend Model

 

Commodities

GLD and SLV are acting like a married couple sleeping in twin beds. I am still waiting for one of them to join the other, either Long or Short, before any serious trading commitment. SLV has been very good to us this year, but I don’t care which of these ultimately prevails, I am willing to swing both ways.

USO reversed Long on July 3rd and after a sideways drift, turned up nicely with stocks on Friday. UCO turned up with USO and should outperform by 2X.

 

USO Daily Trend Model

 

UCO

 

Stocks & ETFs

Energy Select Sector SPDR ETF (XLE)

XLE Daily Trend Model

 

If both Oil and Stocks are headed higher, or, if either one of them is going higher, XLE may present an interesting play.

“The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in The Energy Select Sector Index…..Energy companies in this Index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips.” (SectorSPDR)

 

The Trend Model does a nice job of getting out and then back in, which of course is what its designed to do and it has been doing it well with this ETF.

 

Netflix (NFLX)

NFLX Daily Trend Model

 

NFLX is a stock we are actively trading in the Expanded Service and the Daily Trend Model has been almost perfect. Buy at 80, sell at 108, buy back at 75, sell again at 71 and ride it down into the mid-50′s. With the DJIA up 217 points on Friday, NFLX was down for the day.

 

US Steel (X)

X Daily Trend Model

 

If the US economy is turning back up, one would think that US Steel would be leading the way. It’s two days into a fresh Buy signal. Below is a longer-term perspective, a weekly chart showing X being cut in half in about 18 months. Not good.

X Weekly Trend Model

 

Star Scientific (CIGX)

Let’s close this weekend’s update with our new “story stock,” CIGX.  On the chart below prices are hugging onto the middle trend regression line, not falling through to the lower channel as it has in the past, but consolidating along the middle trend line:

CIGX Daily Trend Model & Trend Regression Channel

 

CIGX Hourly

CIGX is beginning to get recognized as developing a disruptive medical technology that will affect diverse medical conditions, some catastrophic  and lacking any effective treatments. This just as the baby boom generation is entering that aging tunnel of afflictions. Below are two examinations of the fundamentals, the first an initiation of coverage by Gilford Securities and the second quite an entertaining bit of hyperbole by Patrick Cox of Agora. CIGX is a Strong Buy & Hold.

(1) Star Scientific, Inc. (NASDAQ: CIGX), A Disruptive Science?

(2) An Opportunity to Hit the Mother Load – Patrick Cox

 

TREND MODELS

 

Editors Note: Our resident pharma/biotech investor is not excited about Star Scientific at all. Here’s what Pharmboy wrote when the stock was trading at $4.85:

1. Products are tobacco related products and dietary supplements. Earnings are horrid compared to valuation. Yes earnings are growing, but at 4.85/share, and revenue of 1M……market cap of 750M…..that is not really sustainable. Things go through fads, and when they end, it comes very quickly.

2. Anatabloc is a supplement that is in GNC stores. I point to other supplements that have gone through fads that are no longer around. If I could remember, that would be great, but since I cannot, I will/cannot invest in something that has no medicinal value. (Oh, yeah….zinc lozenges…remember those?).

I am not a fan, nor will be in the near future…..

 

Nobody said investing was easy. 

Allan’s Trend Following Model is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Learn more about Allan Trends here. 

For a risk-free trial, click here for Allan’s standard service. More active traders might enjoy Allan’s premium service.

******

Secret Summits (7/29/12)

Courtesy of Allan Harris

New Signals

GS Daily——————->LONG

PBKEF Daily————->LONG

Weekend Market Commentary

Here is the GS Daily Trend Model chart going back six months:

(Click on charts to enlarge)

GS

 

Those are some nice trends, buying in December @ $100 reversing to short in April @ $116 and riding it down to today’s reversal long @ $100. Those are especially nice if you are using options for your trading. After three nice winners in a row, one would expect the next one to be off a bit. But expectations don’t work, even when we think they do it’s probably more luck than inspiration. I bought September 100 calls today, even though I “expect” that this market rally is about over.

The same logic applies to the S&P Hourly chart below. Even though I have been pointing out the ominous nature of the April-May TOP pattern, this trading model has a mind of it’s own:

SPX Hourly

 

It whipsawed in late June, but nailed the short term trends before and after with seven winning signals against two losers. Short term traders should be paying attention to this model, it’s on a roll.

Intermediate term, here is a chart of the Nasdaq Daily Trend Model:

NASDAQ Daily

 

A trading regimen of using SSO/SDS based on the SPX Hourly Model and QLD/QID based on the Nasdaq Daily Model would have made for some nice gains from both models over the past few months. There is no reason to think it will not continue, although as the regulators like to have me say, past performance is no guarantee of future results.

Finally, longer term, the chart that I expect will ultimately make us the most money going into the final five months of 2012, the DJIA Weekly Trend Model:

DJIA Weekly

 

The Perfect Set-Up: As you can see by the last bar on the weekly chart above, the DJIA closed at it’s high tick for the week. If it makes a higher high next week, then closes lower for the week, I intend to act aggressively on the short side of the market. Some definitions of these kind of “Buying Climaxes” require heavy volume and/or 52 week highs to qualify as an orthodox signal, but with yet another European “summit” and news from one of the Fed’s own regularly scheduled, “Secret Summit Among Fiends” due out on Wednesday, if this market can’t finish up by the close next Friday, I’m taking that as a bearish omen.

CHARTS OF INTEREST

USO Daily

 

XLE

 

XLF

 

Allan’s Trend Following Model is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Learn more about Allan Trends here. 

If you’re interested in a risk-free trial, click here for Allan’s standard service, or here for the premium service – for active traders.

A Completely Screwed Up System

Courtesy of Bruce Krasting

The following chart from the Congressional Budget Office shows who pays federal income taxes in America.

 

It should come as no surprise that individuals in the highest income brackets pay the most in taxes (The top 20% pay 94% of all income taxes according to the CBO). It should also be no surprise that the bottom two rungs (40%) of the income groups pay very little taxes. But it was surprising to me to see that the bottom 40% actually pays a negative income tax rate.

How does one go negative on taxes? The answer is that tax transfers to low income groups exceed any tax liability that is due. Two examples of these transfers are the EITC (Earned Income Tax Credit) and ACTC (Additional Child Tax Credit). The following chart from the Congressional Research Service (CRS) describes the effective negative tax rate phenomenon.

The chart show that for those earning up to $26,000, there are no income taxes levied. However, those individuals pay FICA (Social Security taxes). The value of the tax credits available to those individuals is greater than their SS taxes; therefore, as a group, they end up with a negative tax rate.

I favor this type of income redistribution. I think high-income groups should end up supporting lower income groups. I have no problem with negative effective tax rates for individuals and households who are at, or below, the poverty line.

But.

The CRS reported:

individuals who were not authorized to work in the United States received $4.2 billion by claiming the refundable portion of the child tax credit – the additional child tax credit (ACTC).

You might ask, “How is this possible?” How could illegal workers end up receiving federal tax credits? The answer is that the IRS is encouraging the process.

The IRS issues two kinds of tax identification numbers. A traditional SS# is available for all legal residents. Illegal residents can obtain an ITIN (Individual Tax Identification Number). The use of ITIN has exploded 10 fold over the past decade, in 2010 3.2m people used these numbers to file tax returns and obtain refunds.

The use of ITINs is just one component of the problem. The Social Security Actuary has estimated that 75% of illegal workers are using fraudulently obtained SS#s to get work. All of these false tax filings are “eligible” for the tax credits.

Combining the ITIN data with the estimate by SSA, we come up with a number of 12m taxpayers in the system contributing (and getting refunds) that shouldn’t be in the system at all. (Note: the Census Bureau estimated the number of unauthorized aliens at 11.2m in 2010.)

What happens when a cash incentive to have children (ACTC) is made available to people who live in the country? They have babies, of course. That is what has been happening with the illegal workers. In 2010 18% of all children were of families of undocumented aliens. This is down from a whopping 37% in 2006!

Is this legal?

When it comes to refundable tax credits like the EITC and ACTA, the answer is a very clear “No!” But that hasn’t stopped the IRS from allowing it to happen.

It is, however, completely proper for illegal workers to obtain Social Security benefits. Any illegal workers who have contributed to SS (FICA taxes) for a minimum of 10 years are eligible to receive retirement benefits on the same schedule and terms as an individual who works legally.  I was shocked to learn this, but it is true (Link).

How many undocumented workers are there that might be eligible to get Social Security benefits? Pew answers that:

35% of unauthorized adults have resided in the United States for 15 years or more and that 28% have resided for 10 to 14 years. The report also found that the proportion of unauthorized aliens who have been in the country at least 15 years has more than doubled since 2000.

Based on the Pew numbers, 62% of the 11-12m unauthorized aliens will be eligible to receive benefits in their lifetimes. These workers have contributed to SS, so the law says they can get monthly checks. But the reality is that a significant percentage in this group are paying negative effective tax rates after taking into consideration the refundable tax credits described above. In the end, the lower 30% of income groups (including undocumented workers) end up ‘paying’ for SS out of pocket, while getting a similar sized refund check in the other pocket.

What are my points/objectives is bringing up these matters?

1. Our immigration laws (and how they are applied) are completely idiotic.

2. The IRS is facilitating the problem by allowing refunds to be paid to those filing with illegal SS#s (or legally obtained, but fraudulently used, ITINs).

3. Stirring the pot on the issue of illegal workers and their rights to receive Social Security benefits. It now more than two years since the Chief Actuary of the SSN, Stephen Goss, has spoken about this matter (Link). This is a political issue. The country deserves an update on how big a problem this is before November. The candidates should be put on the spot as to what they plan to do about it. Illegal workers have contributed as much as $240Bn to SS (Link).

4. Stimulate a discussion on a very complex and emotive topic.

Notes:

I have a soft spot for illegal immigrants. My father came from Europe in 1939.

I know many illegal families. I like them. They are good parents. They are hard workers. They would be happy to pay taxes as regular citizens do. They want to own property, cars and give their children an education.

But their numbers are too large, and the consequences are too significant. In the end, this about the law.

So I don’t know what to do.

Foreigners Dump Nearly €80 Billion in Spanish Debt; Haircuts Come After More Dumping

Courtesy of Mish.

Through the first half of the year, foreigners reduced Spanish debt by Nearly €80 Billion as banks in Spain gobbled up more of the toxic garbage.

Foreign investment in Spanish public debt has decreased by 7 €78.168 billion in the first six months of the year, standing at  €203.271 billion euros, compared to  €281.439 billion which reached the end of 2011. This is a break of 27.7% over last year.

The largest decreases were recorded in February and March, at nearly €25 billion each month.

Analysts note that Spanish financial institutions that are supporting strongly the Treasury issues and thus raising their level of debt thanks to interventions by the ECB.

Contrary to popular belief, the LTRO and other ECB financing programs that allowed Spain to accumulate more Spanish bonds is not a favor to Greece but rather a favor to foreigners who are now unloading the debt.

Just as happened with Greece, as soon as foreigners dump enough Spanish debt, haircuts on the bonds will come.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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War Of The Central Banks?

Courtesy of ZeroHedge. View original post here.

Submitted by testosteronepit.

Wolf Richter   www.testosteronepit.com

The coordinated confidence-inspiring words from the Eurozone’s fearless leaders yesterday and today about doing whatever it would take to save the euro wasn’t about Greece anymore. Its life support may get unplugged in September. Politicians have apparently given up. The tab isn’t that dramatic: default and return to the drachma would cost Germany €82 billion and France €62 billion (Ifo Institute PDF). Survivable.

The fearless leaders were afraid of Spain, whose vital signs were deteriorating. Unemployment hit 24.6%, worse than Greece’s 22.5%. In the southern region of Andalusia, it rose to a mind-boggling 33%. Youth unemployment (16-24) set a sobering record of 53.3%. Even more worryingly, in a country where family solidarity and multi-generational households are the norm, the number of households where no one worked climbed to 1,737,000. So, in the first half of 2012, over 40,000 Spaniards emigrated—up 44% from last year. Instead of consuming and producing in Spain, they took their education that society had invested in and sought their fortunes elsewhere.

Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble … to discuss a bailout. For €300 billion. And hours beforehand, “sources” told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider “more forceful measures.” Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone [for that whole debacle, read… The Extortion Racket Shifts to Spain].

It worked! Thursday, European Central Bank President Mario Draghi caved: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Emphasis on believe me—as in “I beg you, please believe me”—because the other part of his pronouncement, within our mandate, is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.

Draghi outlined a way around that single-mandate limit: if high borrowing costs for certain countries “hamper the functioning of the monetary policy transmission channels, they come within our mandate,” he said. In other words, every time yields go up somewhere in the Eurozone, the ECB is free to “do whatever it takes” to force them down.

On Friday, with the D-word still hanging heavily in the air, German Chancellor Angela Merkel and French President François Hollande talked on the phone—for the first time? A call that was ballyhooed to the media. They were “fundamentally attached to the integrity of the Eurozone” and were “determined to do everything to protect it.”

Then it bubbled up that the ECB might take concerted action with the States to lower the cost of borrowing for Spain and Italy, though it might take a few days or weeks to finalize the mechanisms. According to “sources,” the ECB could re-launch its program of buying Spanish and Italian bonds in the secondary market. The EFSF bailout fund and its successor, the ESM, could be used to buy Spanish or Italian debt in the primary markets. And the ECB could take Fed-like action if the ESM were given a banking license. It would allow the ESM to borrow from the ECB and then buy debt in the secondary and primary markets. There would be “no taboos,” Draghi said. Debt crisis solved.

He’d thrown down the gauntlet. The ECB’s moderate bond-buying program last year caused a stir in Germany. ECB President Axel Weber, who’d been overruled, resigned over it. ECB chief economist Jürgen Stark retired in protest. Politicians launched attacks against the ECB, among them Frank Schäffler (FDP) who’d said, “If the ECB continues like this, it will soon even buy old bicycles.” In March, the ECB stopped the bond buying program.

A restart would be “problematic,” a Bundesbank spokesperson said dryly. On the other hand, the Bundesbank considered it “not problematic” if the EFSF fund bought Spanish debt. Hurdles remain. Such action would have to be approved by the Bundestag’s “Group of Nine” whose representatives are on vacation. And Spain would have to formally request a bailout before the EFSF could buy its bonds—but Spain is still denying that it’s even discussing a bailout. It would be the sixth of seventeen Eurozone countries to be put on life support.

In June, Cyprus had held its nose and requested aid. Now, European technocrats are swarming once again over Cyprus to find out how much it would need. And each time they do, billions are added. How can such a small country blow through so much money? Well, read…. The Ballooning Cyprus Fiasco.

And then, there’s the ultimate questions….. But Who The Heck Is Going To Do All The Bailing Out?

$10 Trillion M2 is Now in the Rearview Mirror

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Two weeks ago we observed that the broadest money aggregate tracked by the Fed, M2, was less than $10 billion away from crossing the historic $10 trillion mark. As of this week, this number now officially has 14 digits for the first time ever, or $10,035,100,000,000 to be precise (technically the non-seasonally adjusted number crossed $10T last week, but for some reason bank deposits need to be seasonally adjusted, so waiting for the traditionally fudged data seemed appropriate). And we have a $50 billion increase in savings deposits, aka deferred buying power to those who still have the capacity to save, in one week to thank for putting $10 trillion in the rearview mirror.

Which actually brings us back to a point we have discussed previously, namely that even though M1 may be flattish and declining in direct proportion with the amount of excess reserves held by banks, and currency in circulation is rising at a glacial pace of about $1 billion each week – a key reason why the inflationary animal spirits have not been unleashed yet, it is M2, i.e., total deposits, where the bulk of electronic money is contained, and which is rising at a soaring pace as seen on the chart below. And this is happening even despite ZIRP and soon – NIRP. Because this is real, well technically electronic, money that is just waiting for the signal to be withdrawn and spent on other things. Like bread. And wheelbarrows.

Now as the chart below shows, while the ratio of total deposits (checking, savings, small-denomination time deposits, and other) to currency has declined from a peak of 13.0x in 1987 to just over 6.0x in 2000, this ratio has been increasing since 2000 and is now back to 8.0x.

Which then begs the question: if and when the US currency in circulation starts picking up, due to conversion of reserves into dollar bills, and if the current ratio of reserves to currency persists, then the conversion of another $1.6 trillion in reserves into currency (since the Fed will be absolutely unable to withhold the reserve avalanche from converting into real circulating money without raising the IOER to a level which would crush the stock market, directly in opposition of what the Fed's prime and only directive is) would mean, all else equal, total bank deposits would rise from the current $8.4 trillion to $21 trillion.

What the price of a loaf of bread, or a bar of silver, will be at that point, is anyone's guess. Or a wheelbarrow for that matter.

Mainstream Farming and Rural Communities Continue Rout and It is Global

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

The Rural Mainstreet Index decreased to 47.9 from 56.7 in July to its lowest level since September of 2010.  The farm equipment sales index decreased significantly to 46.1 from June’s 54.7, its lowest level since 2009. The drought has now spread like cancer into the key ag state, Iowa.

 

Bloomberg describes the weather pattern– globally, including in southern Europe where the corn crop is also diminished.

The Ukraine is looking at 20% crop loss. 

The ag rout is ongoing globally as India also faces a diaster. 

The rains were at least 22 percent below normal, several states faced drought and farmers feared grave losses. Some analysts put the rain deficit at 31 percent. A drought would be devastating since about 60 percent of India’s population work in agriculture and that sector contributes 16 to 20 percent of the nation’s gross domestic product. It could also worsen inflation of food prices.

Incredibly photos of Greenland show a rapid slush melt in the course of only four days.  This weather impact situation is just getting started.

 

For additional analysis on this topic and related trades subscribe to Russ Winter's Actionable – risk free for 30 days.The subscription fee is $69 per quarter and helps support Russ.s work on your behalf. Click here for more information.

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to The Wall Street Examiner.

Was That The Treasury Bubble Death Star?

Courtesy of Lee Adler of the Wall Street Examiner

This report covers Treasury auctions, federal revenues, and the outlook for Treasury supply, Treasury yields, and the dollar. Here is a sampling of the 11 key bullet points in this report.

  • Net new Treasury supply for the July 31 settlement will be the heaviest it has been since July 15, 2011. The shift in sentiment on Friday suggests that it will be more of a problem for bonds than stocks.
  • After Tuesday, supply will be light until the end of August. The markets will not have to face that as an obstacle.
  • The 10 year Treasury Yield has been at a major inflection point as it set a minor new low at a key technical level. Friday’s action suggests a turn, but confirmation is needed.
  • Withholding tax collections reached a 4 week average real gain of 3.75% year to year, suggesting for a second week that economic data may come in better than consensus expectations for weak growth. That could be the Treasury bubble’s death star.
  • Withholding tax collections weakened over the past 10 days, but it looks like a normal fluctuation so far. If the 4 week average drops below a 2% real gain, that could be trouble.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Gambling in the House?

Gambling in the House?

Courtesy of John Mauldin

Rick: How can you close me up? On what grounds? 
Captain Renault: I'm shocked, shocked to find that gambling is going on in here! 

– From the classic scene in Casablanca, made in 1942

The latest scandal du jour seems to be about what is now called LIBORgate. But is it a scandal or is it really just business as usual? And if we don’t know which it is, what does that say about how we organize the financial world, in which $300-800 trillion, give or take, is based on LIBOR? This is actually just the second verse of the old song about derivatives, which is a much larger market. Which of course is a problem that was not solved by Dodd-Frank and that has the potential to once again create true havoc with the markets, whereas LIBOR can only cost a few billion here and there. (Sarcasm intended.)

The problem is the lack of transparency. Why would banks want to reveal how much profit they are making? The last thing they want is transparency. This week I offer a different take on LIBOR, one which may annoy a few readers, but which I hope provokes some thinking about how we should organize our financial world.

There Is Gambling in the House? I Am Shocked…

Let’s quickly look at what LIBOR is. The initials stand for London InterBank Offered Rate. It is the rate that is based on what 16 banks based in London (some are US banks) tell Thomson Reuters they expect to pay for overnight loans (and other longer loans). Thomson Reuters throws out the highest four numbers and the lowest four numbers and then gives us an average of the rest. Then that averaged number becomes about 150 other “rates,” from overnight to one year and in different currencies. The key is that the number is not what the banks actually paid for loans, it’s what theyexpectto pay. Also, please note that the British Banking Association, on its official website, calls this a price “fixing.”

Most of the time the number is probably pretty close to real, or close enough for government work. But then, there are other times when it is at best a guess and at worst manipulated.

Back in the banking and credit crisis panic of 2008 the interbank market dried up. No bank was loaning other banks any money at any price. Thus there was clearly no way for the LIBOR number to be anything butfictitious. Anyone who was not aware of this was simply not paying attention.

The regulators certainly knew on both sides of the Atlantic. All along there were clear records, we now learn, that bankers were telling the FSA (the Financial Services Authority) that they had problems. Regulators were worried about what was happening but were pointing out that there was a large hole in the ship that was already admitting water, and they didn’t want to make it any bigger. Timothy Geithner, then President of the New York Federal Reserve Bank (and now Secretary of the Treasury) wrote a rather pointed letter to the FSA, suggesting the need for better practices.

Some banks reported lower rates, to make it appear they were better off than they were (since no one was actually lending to them), and others might have given higher rates, for other reasons. Remember, this was a British Banking Association number. Whether you personally won or lost money on the probably wrong price information depends on whether you were lending or borrowing and whether you really wanted the entire market to appear worse than it already was.

This was the equivalent of an open-book test where you got to grade your own paper. And we are supposed to be shocked that there might have been a few bad“expectations” here and there by bankers acting in their own self-interest, with the knowledge of the regulators? The more amazing proposition would be that in a time of crisis the number had any close bearing on reality to begin with. Call me skeptical, but I fail to see how we should be surprised.

The larger question that really needs to be asked is how in the name of all that is holy did we get to a place where we base hundreds of trillions of dollars of transactions worldwide on a number whose provenance is not clearly transparent. Yes, I get that the methodology of the creation of the numberafter the banks call in their“expectations” is clear, but the process of getting to that number was evidently not well understood and looks to be even muddier than my rather cynical previous understanding of it.

It now seems that there will be a feeding frenzy as politicians and regulators hammer the various banks for improper practices. And they are pretty easy targets: there is just no way you can explain this that does not sound bad.

You’re a big banker. The world is falling down before your eyes. No one trusts anyone. If you put out a bad number (whatever “bad” means in a time of sheer utter blind panic) the markets will kill you even more than they already are and you could lose your job. You have got to come up with a number in ten minutes.

“Hey, Nigel, what do you think we should tell Tommie [Thomson Reuters]?”

“I don’t know, Winthorpe, maybe Mortimer has an idea; let’s ask him.”

Simply fining a few bankers is not going to fix the larger problem: the lack of transparency for arguably the most important number in financial markets. A very clear methodology needs to be developed, along with guidelines for what to do in times of crisis when the interbank market is frozen and there really is no number. Having no number might be worse than having a number that is a guess. But having a number that can be fudged by banks for their benefit is also clearly not in the public’s interest.

The point of the rule of law is that it is supposed to level the playing field. But the rule of law means having a very transparent process with very clear rules and guidelines and penalties for breaking the rules.

I had dinner with Dr. Woody Brock this evening in Rockport. We were discussing this issue and he mentioned that he had done a study based on analysis by an institution that looks at all sorts of “fuzzy” data, like how easy it is to start a business in a country, corporate taxes and business structures, levels of free trade and free markets, and the legal system. It turned out that the trait that was most positively correlated with GDP growth was strength of the rule of law. It is also one of the major factors that Niall Ferguson cites in his book Civilization as a reason for the ascendency of the West in the last 500 years, and a factor that helps explain why China is rising again as it emerges from chaos.

One of the very real problems we face is the growing feeling that the system is rigged against regular people in favor of “the bankers” or the 1%. And if we are honest with ourselves, we have to admit there is reason for that feeling. Things like LIBOR are structured with a very real potential for manipulation. When the facts come out, there is just one more reason not to trust the system. And if there is no trust, there is no system.

Opacity and Credit Default Swaps

Which brings me to my next point. We just went through a crisis where derivatives were a major part of the problem, and specifically the counterparty risk of over-the counter (OTC) derivatives.

Taxpayers had to back-stop derivatives sold by banks (and specifically AIG) that were clearly undercapitalized. That cost tens of billions. Yet the commissions and bonuses paid for selling those bad derivatives went on being paid. Congress held hearings and expressed outrage, but in the end Dodd-Frank sold out.

“Efforts to create an exchange-traded futures contract tied to credit-default swaps haven't yet gained traction after 18 months of talks, but banks dealing in the private multitrillion-dollar market for credit derivatives believe such contracts will eventually appear for a simple reason: They should attract new players.

“Credit-default swaps function like insurance for bonds and loans. Investors use them to hedge or speculate against changes in a borrower's creditworthiness. If a borrower defaults, sellers of the protection compensate buyers.

“The swaps – traded over the phone or on-screen, with prices known only to trading partners – are the domain of asset managers and hedge funds with the sophistication and financial wherewithal to take on complex risks.

“Futures, by contrast, are more routine instruments used by institutions and individual or "retail" investors. Futures prices are displayed publicly on exchanges, and customers can trade them directly with other customers – unlike in the swaps market, where a dealer is on one side of every trade.

“Dealers have long been fiercely protective of keeping the status quo in credit-default swaps or ‘CDS’ because they have booked fat profits from customers not being able to see where other customers are trading.”(Market Watch)

And that is the issue. Bankers do not want transparency, because it will seriously cut into their profits. And while I like everyone to make a profit, the implicit partner in every trade is the taxpayer and, last time I looked, we do not get a piece of that trade. Derivatives traded on an exchange were not part of the problem during the last credit crisis; OTC derivatives were.

An exchange makes it very clear where the counterparty risk is and what the price mechanism is. It creates a transparent rule of law and places the risk on the backs of those buying and selling derivatives and not on the taxpayer. Exchange-traded derivatives do not pose a potential threat to the economies of the world, while we don’t know the extent of the threat posed by OTC trades. JPMorgan has lost around $6 billion on the trading of their “London Whale.” If Jamie Dimon and the JPM board couldn’t guarantee reasonable corporate governance, then why should we assume that in another crisis we won’t find another AIG?

Dodd-Frank needs to be repealed and replaced. The last time, the process was too clearly in the hands of those being regulated and has contributed to their profits. Enough already.

Credit default swaps and any other derivative large enough to put the system at risk must be moved to an exchange, to make clear the counterparty risks.

No Access for Spain

Let me close the letter by noting that Spain has clearly lost access to the bond market, absent intervention by the rest of Europe and more specifically the ECB. Spanish 10-year rates jumped over 7.5%. Then Super Mario Draghi said that the ECB would do whatever it takes to defend the euro, and the market rebounded. Why this was news is not clear, but sometimes the market just needs some hand holding.

Now the ECB is going to be forced to follow through or face a rather violent market correction downward. It will be interesting to see how long the markets will exhibit patience without a clear program from the ECB, while Germany would of course prefer that nothing is done until after its Constitutional Court ruling on September 2.

We are getting closer to the moment when European leaders will be forced to act. Spain is going to need a bailout and not just of its banks. Germany and the other northern-tier nations have not yet agreed on a path.

We will delve further into Europe over the next few weeks. The situation is getting increasingly problematic. There is no plan, and the eurozone lurches from crisis to crisis. One country after another is falling into recession and then depression. Austerity without default (or monetization, default’s cousin) produces misery.

I think France is likely to be downgraded within a few months, putting Germany, the Netherlands, and Finland in a very difficult position. Will they put their own balance sheets and ratings at risk? Because that is what will be needed if the eurozone is to hang together. Stay tuned.

Denver, Maine, and Carlsbad

I am in Gloucester, Massachusetts tonight, spending the night in the museum that my economist friend Woody Brock calls his summer home, which is almost hidden at the end of a dirt road and surrounded by trees and enormous granite rocks. The grounds of the estate are an old granite quarry, itself a work of art, with massive, gorgeous works in stone intermingled among the trees and magnificently lit up at night. The quarry lakes are crystal clear, and the reflections of the trees, stone, and profuse flowers blend together like something out of an epic fantasy. It almost makes me want to grow up and become an economist, if they live like this.

Gloucester is an old fishing town and where the movie The Perfect Storm was based. Woody drove me around and showed me the home where he grew up, and where his sister and her husband still live. The town is an interesting contrast to Newport, where the really rich from New York built huge mansions and sailed their yachts. The summer homes of Gloucester are wonderful, fitted into the land and, for the most part, with a real family feel to them.

I was in Newport for the past week for a symposium on behalf of the Department of Defense. The Net Assessment Office brought together the most eclectic, diverse group of people I have ever been associated with to develop some alternative scenarios for the purpose of thinking about what might be needed in the future. My mind is still reeling. I am processing what I learned and will write about it at some point.

Interestingly, for me, some past worries about potential problem areas were laid to rest and other areas became of more concern. Five straight days of early mornings and late nights have me a little tired – thus the short letter tonight.

I head back to Dallas tomorrow and then back out on Monday afternoon for Denver, to be with my Altegris Investments partners at Financial Advisor magazine's Innovative Alternative Strategies Conference. I’ll then fly back Tuesday evening, only to turn around and fly to New York and then on to Maine with my son Trey, for the annual “Shadow Fed” fishing trip run by David Kotok. There will be so many good friends there again. I think this will be the sixth year Trey and I have gone. David Rosenberg will be there, as will Barry Ritholtz (The Big Picture), Martin Barnes, John Silvia (chief economist at Wells) and the usual Fed types. Quite the cast of characters. Bloomberg TV (Mike McKee) will be there, and I am scheduled for an early hit with Tom Keene and perhaps a comment or two on the employment number on Friday morning.

Then I am home for a few weeks, before heading out to Carlsbad, California, to be at an important Casey Research conference called Navigating the Politicized Economy. It has quite the speaker line-up and would be a great way to kick off your fall thought process. You can learn more athttp://www.caseyresearch.com/V-2012-fall-summit.

It’s time again to hit the send button. Have a great week. And having thought of Trading Placestonight (maybe my favorite movie), I think I will go buy the DVD and watch it one more time!

Your “feeling good, Louis” analyst,

John Mauldin

subscribers@mauldineconomics.com

 

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The State As A Fantasy

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada

The State As A Fantasy

If there were a prize for the best “do as I say, not as I do” politician, the latest winner would be California Senator Dianne Feinstein.  Senator Feinstein, who is currently leading a crusade to plug the White House’s recent spring of classified military leaks, is the Chairwoman of the powerful Select Committee on Intelligence.  Because of her position of power, she has become “deeply disturbed by the continuing leaks of classified information to the media.”  In other words, Ms. Feinstein finds it appalling that the American public is finding out about the not-so-glamorous doings of its own government.  Her scorn for disinfecting sunlight has inspired her to call for the prosecution of Wikileaks founder Julian Assange for espionage.

This talk of super secretive government would be all fine and good for a minion of the security state except for one thing: Senator Feinstein is one of the biggest leakers in Congress herself.  And it just so happens that her husband has benefited financially from contracting with the U.S. military.  For all her talk of protecting the American people, Feinstein is just another well-connected thief in the societal racket known as the state.  As Salon’s Glenn Greenwald trenchantly observes:

That the powerful Senator who has devoted herself to criminally punishing low-level leakers and increasing the wall of secrecy is herself “one of the biggest leakers in Congress” is about as perfect an expression as it gets of how the rule of law and secrecy powers are sleazily exploited in Washington

In the scum filled world of politics, unscrupulous behavior is a permanent fixture.   It’s why the rule makers go out of their way to convince the voting public that its best interests are being taken to heart.  The vision of a righteous government is sold to the people not just on Election Day but everyday thereafter.  As long as voters stay complacent in the fantasy that their elected representatives are fighting the good fight, outspoken critics of the state will remain a minority.  No amount of shoddy logic, guilt tripping, or blatant lies will awake the masses before it’s too late and all previous memories of freedom have been violently stripped away.

The truth is suppressed by the fantasy being continually force fed to the public, not just by politicians and their teleprompters, but by the a vast portion of the media which acts more like a squawk box for the state itself rather than an independent observer.  The New York Times, the supposed great standard-bearer of journalistic quality, recently admitted that its stenographers and reporters allow their writings to be contorted by the same public officials who they claim to cover objectively.  These reporters, so desperate to get a few words with any government official, are willing to give full discretion on what is reported right back to the people whose interest lies in manipulating the information the public receives.  As the Times article reveals:

From Capitol Hill to the Treasury Department, interviews granted only with quote approval have become the default position.

The unconscionable behavior of the political class should be thought of as a contagious disease that infiltrates any industry that comes within influence of the state.  Government contractors, lobbying associations, favored corporations, and even the press all seek to use the monopolized power of government to further their own interests.  Instead of attempting to roll back stifling regulations, many of these firms simply wish to get in on the spoils of the great extortionary scheme.  The results are always the same.  Politicians pretend to be saving the people from cold-natured capitalism while politically-connected businessmen and bankers act as if their commercial success is completely of their own doing.  The hidden truth is both act in tandem to fleece the average taxpayer.

The fantasy then continues unabated.  As F.A. Hayek recognized in The Road to Serfdom, central planners and their intellectual patrons achieve their power by gathering the

“support of all the docile and gullible, who have no strong convictions of their own but are prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently.”

No matter how many times government policy fails to deliver on its promises, the reasoning stays the same:  Politicians just need more tax dollars to spend goods into existence, central bankers need to print more money, human rights must be stripped away to ensure safety, consumers need to spend more and save less, and government will always know best.

Today as most major economies are taking a turn for the worse, news outlets are filled with the pleas of esteemed intellectuals for further monetary stimulus and spending.  Even those economists generally considered in favor of markets are looking to central banks, which are given a totally non-free market government grant of privilege, to induce a boom in lending and demand through printing money.  As Pater Tenebrarum pointed out, it appears that Federal Reserve is close to announcing another round of monetary expansion.  The Telegraph’s veteran economics commentator Ambrose Evans-Pritchard even went as far as to pen an editorial titled “Weimar solution beckons as manufacturing crashes in US Fifth District?”  No one seemed to ask the more important question of “since when does destroying a nation’s currency and setting the foundation for the rise of a murderous regime actually help out manufacturing when all is said and done? “

Even the man on the street, unlike Evans-Pritchard and his money-crankish peers in academia and print media, realizes that adding to the stock of currency does not add to society’s overall stock of wealth.  More paper dollars, euros, yen, etc. isn’t the same as more foodstuffs, personal computers, and cellular phones.  When Zimbabwe’s stock market was skyrocketing to heavenly heights in 2007, the inflation lovin’ crowd must have looked on with delight at the uninhibited fruition of their favored policy.  Grandmothers carrying wheelbarrows full of cash to the supermarket to purchase a few loafs of bread meant nothing in the face of accelerating GDP figures.

But again, the fantasy at play here is the idea that the state can create something out of nothing with the magic of the printing press.  But as history proves time and time again, unbacked credit expansion always sews the seeds of its own destruction as the boom must inevitably turn to bust.  The real beneficiaries of newly created fiat money isn’t society in general but, as Murray Rothbard notes, “the State, State-manipulated banks and their favorites” who are first in line to receive the currency first.   Proponents of central banking must spend a good deal of time concocting nonsensical explanations to ensure the overall public realize how ripped off it really is.

At no place in time were governments ever formed with good intentions in mind.  This is the unvarnished truth as opposed to the fantasy world that is indoctrinated first within public school classrooms and is repeated in various outlets until old age.  The state being a burden on society is a universal principle that transcends through all governmental levels and sizes.  It was recently reported that a thirteen year old had his hot dog cart shut down by city officials in the city of Holland, Michigan.  Because of zoning restrictions aimed at protecting already established restaurants, the boy, Nathan Duszynski, saw his small enterprise succumb to the crookedness of local government officials.

Now just think about this for a minute.  A thirteen year old was savvy enough and had the foresight to purchase a significant amount of capital to start a modest business.  When most kids his age are sitting in front of the television, Duszynski was gaining real world business experience.  His customers didn’t say no to his effort; the government did.  The public is typically told that zoning laws are for their own safety when quite the opposite is true.  Zoning laws, like practically any decree that stems from closed-door dealings of politicians, are to the benefit of some individuals at the expense of others.

Mr. Duszynski, by virtue of his entrepreneurship, has already accomplished more productive-wise than any lifelong bureaucrat or politician.  It is this writer’s hope that the shutting down of his small business will serve as a lesson for him in that he won’t buy into the fantasy that the state exists to provide peace and liberty.

Draghi – We Will Continue to Fight Until Everyone is Dead

Draghi – We Will Continue to Fight Until Everyone is Dead

Courtesy of Bruce Krasting

A week ago I cut a EURUSD short position that was well into the money. (Link)I was concerned that “something” might happen that could make a mess. I listed a number of concerns that might have caused a flip-flop, but Mario Draghi talking, was not on my list. Of course, that is precisely what happened.

I’ve read what Mario said a number of times, I think there is no substance to his words.

“The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”

I’m reminded of an article I wrote more than two years ago titled, Sarkozy Will Get “Stuffed” (link). The occasion was a stupid remark made by then French President Nicholas Sarkozy regarding some new measures that would, once and for all, end the run on the bond markets of Europe:

“We will confront speculators mercilessly. They will know once and for all what lies in store for them.”

This didn’t work out so well for poor old Sarko. The speculators ended up crushing him, and he lost his job. Draghi will suffer the same result. Mario must be saying to himself,

 
“If only I can just get the Spanish Ten-year back to 6%, all will be well again”

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I think he’s nuts. Spain’s problem is its competitiveness. The domestic economy will never recover without a currency devaluation (and debt restructuring). If Mario has his way, Spain will suffer from a decade of recessions with unemployment over 20%. How could he possibly call that outcome a success? On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, “It will be enough”. From Bloomberg:

DRAGHI’S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO

Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours?) of market relief, but they have no chance of turning the EU around.

There is still a market-based system that exists in the world of central bank manipulation. In the end, market forces always prevail. The outcome for the Euro will be no different. Draghi thinks he has the power to thwart the markets. He does not have that power. Draghi is either bluffing or lying, that or he is a blind as a bat.

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FX Note:

An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependent on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward. A week ago I swore (Link)I would be out of FX until we got into late August. The silliness of the last few trading days changed my mind. I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.

 

My thinking is that someone in Germany is going to say:

 
“Sorry Mario, you can’t have our cake and eat it too.”

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As if on cue, this article appeared in Germany’s Handelsblatt today:

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Schäuble Rejects ECB Help for Spain; Full Bailout Still Coming

Courtesy of Mish.

As any clear-thinking person should have expected, Schäuble rejects ECB help for Spain

Berlin – For days, it is speculated that the European Central Bank (ECB) is planning, together with the bailout fund EFSF Spanish government bond buy – so come back to Spain to cheaper capital. The “Sueddeutsche Zeitung” According to the euro countries willing to support this approach . Federal Finance Minister Wolfgang Schäuble (CDU), but has now dismissed the reports in an interview with the newspaper “Welt am Sonntag”.

“No, at this speculation is not true,” Schäuble said the newspaper. The Finance Minister said it was already a sufficiently large aid package for Spain have been laced.

The 100-billion-euro package to recapitalize Spanish banks also close an emergency aid of 30 billion €. “The short-term financial requirements of Spain is not so great”, said Schäuble, “the painfully high interest rates – but the world will not, if you have to pay for some bond auctions a few percent more.”

Full Bailout Still Coming

Schäuble is saying the right things. For starters, ECB backdoor bailouts of Spain are likely against the German constitution. Even if they weren’t, why should German taxpayers accept the risk of any of these leveraged proposals that have been circulated, and recirculated?

It’s important to understand that the near-7% current market rate does not affect interest on prior bonds (only the current value of them). However, high rates do reflect the interest Spain would have to pay to float new bonds or rollover existing ones.

Thus, high rates reflect extreme stress and are unsustainable for the long-term, but they are not an immediate killer for Spain.

Regardless, Spain is deep in recession and there is no way it can meet its deficit targets. A full bailout of Spain is a certainty.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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