1. There Will Be No Recovery in the US: Just like last year, we as a nation will {again} borrow $1.6 trillion between the Federal and State Governments, about half of it via Bernanke's printing press. The US Government will {again} borrow about 40% of all the money it spends. This can't last forever-- but it can last much longer than you might think. This year, Japan's central government (4th year in a row) will borrow above 50% of it's total spending.
2. Greece will default-- hard: Greece's government will finally give up on being bailed out and hire a firm to represent it in a bankruptcy type scenario. This will cause a few ugly things for the Greeks-- their banking system will collapse to begin with, and the problems will reverberate throughout the EU banking system. Greece will immediately have to balance it's budget and will go back to the Drachma. Since the civilian government is unable to make the hard decisions, a military government will take over.
3. European Banking System Will Be Rescued: Last week, the ECB engaged in what was called an LTRO-- it was, in short, a sly way of providing cash to it's very cash strapped banks. This operation was just under $500 billion. These people are amateurs. Bernanke did this for US banks to tune of over $7 trillion. Between Draghi and Bernanke, they'll make sure the system itself will survive Greece's default and any other major problems by additional LTROs. There will be rumors of some very large European banks close to collapsing, most of which will be true. France's Agricole was near collapse a month ago.
4. Deflation: Thanks to the Basil III agreement, European banks need to raise a substantial amount of Tier 1 cash-- some estimates are $400 billion, to meet the Basil III capital requirements. They have already started to curb loans and sell assets in an effort to meet Basil standards. Also, European nations will need to borrow and roll over a huge amount of money. This, in combination with losses from a slowing economy and Greece, will create a serious cash crunch. Perversely the Euro, which is on it's last legs, will rise in value vs the USD. It'll hit $1.50 this year at some point. Gasoline in the US will go below $2.50/gal. In the US, deflation will come about for many of the same reasons.. bank losses due to a slowing economy & losses in Europe. This will bring about..
5. QE3-- Bernanke Unleashed: With a friendlier group of Fed governors, The Bernank will not hesitate to unleash the printing presses in the form of both MBS and Bonds. I look for it in the first half of this year. There will be criticism from Republicans, but Obama will give him the cover he needs as the money velocity measurement plummets.
6. Bernanke's EU Rescue: I look for one of the big two EU problem kids.. Spain or Italy.. to get into some very real trouble this year. As of this writing, Italy looks like the weaker of the two, but Spain has some very real issues and an ongoing Depression to begin with. I think the ECB and the EFSF will have to be given a quick assist from The Bernank as the situation looks as though it will get out of hand. Bernanke will purchase the bonds of an EU sovereign this year directly or through a 3rd party such as the EFSF. Republicans will use this to crucify both Obama and Bernanke.
7. EU Treaty Changes: At the last meeting between Merkel and Sarkozy, there were some drastic changes proposed to the EU's constitution, the most radical of which is a balanced budget amendment which must be added to each members' constitution. Most of this will not get done this year. But something else is afoot-- last week, it came out that only nine of the 17 members of the Euro currency nations need pass this for it to become law. By this year's end, at least three of these current members will reject the changes. It will leave them in an akward position to be in a currency union, yet having rejected the changes. It is, at it's heart, a backdoor way to invite nations to leave the Euro currency. At least one nation {other than Greece} will take the hint.
8. Bashar Assad Overthrown, War in Lebanon : There is much more going on here than meets the eye. What is not being reported here in the West is the extent that the Saudi Crown is involved in supporting the Sunni Syrian rebels against the Alawite Assad regime. They're also involved in supporting Sunni insurgents in Iraq, which has slowly become an ally of Iran right under Obama's nose. As Syria's economy begins to implode and rebel attacks increase in intensity, Syria's junior Sunni officers will overthrow the Alawite regime by seizing control of company and battalion level units. As Assad begins to falter, Iran's Hezbollah friends in Lebanon will launch attacks in Israel, hoping to ignite a regional war to save the Assad regime. Israel will not take the bait, and will only retaliate sporadically. Iraq will again run the risk of civil war as the Saudi supported Sunni rebels continue with their terror campaign to destabilize and weaken Al-Maliki. Unfortunately for Israel, Syria's new regime will be no friendlier.
9. Israel, US, Saudi Attack Iran: It will be a combined air, naval and missile attack. Unfortunately, it will be too late as most of Iran's nuclear facilities are hidden too far underground. Iran's air force and navy are destroyed, as well as a number of nuclear related sites. Crude goes up slowly, hitting $150 before the US declares victory. The Saudis will quietly give financial, military and other support-- even to Israeli planes. They'll also pump more oil to ease the pain. Obama will go along with this as he realizes that America hates a wimp and he needs the Jewish vote if he wants any chance to win. Look for this nearer the election.
10.Mitt Romney wins US Elections: Between the stalled economy and Bernanke's bailout of Spain instead of California, the Republicans will emerge with the Presidency and the Senate by the slimmest of margins.
PS: Japan's Fukushima reactor is still a very dangerous situation, and will be very expensive to fix. It could still go very wrong, but I think it will be OK.
1. There Will Be No Recovery in the US: As a nation, we will borrow about $1.8 trillion at all government levels (Federal, State and Local), of which roughly half will be by way of money printing. Simply put, the answer to a problem of debt is not more of it. One day soon enough we will have to live within our means.. and we will not do it voluntarily but at the point of a bond market's spear like Greece. The American people will begin to understand in 2011 that the only recovery thats happening is on Wall Street. Look for the U6 measurement of unemployment to stay above it's current 17%.
A-. The U6 measurement today is still above 16.5%. Unfortunately, most people also know that Wall Street bonuses are still spectacular and realize that Wall St. is the only place (other than North Dakota) experiencing some sort of recovery.
2. Muni Bond Implosions: With the end of the Build America Bonds program.. which was an important financial tool for local governments.. and the election of a Republican House, it seems that pretty much all Federal aid to state and local governments will end. With this, look for states to balance their budgets by cuts to local governments. I think dozens of cities and counties will bite the dust financially this year, either with a formal declaration of bankruptcy or by simply falling dramatically behind on their bills. California, Illinois, Michigan, Florida, Nevada and New Jersey cities and counties look particularly vulnerable. Look for Obama to try.. but fail.. to throw them a lifeline. Bernanke may also begin purchasing Muni's. Muni's will lay off at least 200,000 employees. These failures will shake ordinary Americans.
D+. There were a few big name muni busts, but nothing like what I was expecting. The muni bond market held up relatively well. I did, however, get the 200,000+ layoffs correct.
3. Euro Crisis v2.0.. the Spanish Flu: The EU/ECB/IMF plans to deal with the cascade of bad debts, overleveraged banks and overindebted governments is suspect. The EU's central bank, the European Central Bank, has essentially reached the limits of what it can do. Look for Spain, which needs to borrow $400 billion this year.. much of it in the first quarter.. to hit the wall and need to be bailed out. Belgium and Portugal are also in trouble. I forsee the EU/IMF fumbling the ball and asking Bernanke for a backstop, which I believe he will do.. and will catch holy hell back in Wash DC, but I do think the financial system will not crumble. If this one is mishandled, it could be exceedingly dangerous very quickly. In general, the economic conditions in Europe scare the bejesus out of me. The EuroBond is one possible and real answer, but I doubt Germany will agree to essentially co-sign all of Southern Europe's debts.
B-. Europe was a huge mess, but it was not Spain but rather Italy which came to the fore. Bernanke did come to the rescue by re-opening the so called "swap lines" in early December. The EuroBond is indeed dead in the water thanks to German opposition.
4. QE 3.0.. the MBS Edition: I look for Bernanke to begin purchases of MBS in fall; look for it to be in the neighborhood of $500 billion. The state of the US housing market will become dire by mid summer, threatening the health of many big banks.
D+. QE3 did not officially happen. A few other operations, like Operation Twist, QE 2.5 and the aforementioned swap lines did occur however.
5. Stock Markets: I don't see a lot changing.. the Dow will continue to be stuck in neutral, bouncing between 10,000 and 12,000. Many thanks will be sent to Ben Bernanke for keeping this casino open.. and sadly, that is what the NYSE has become.
A-. The year ended at a tad over 12,000; the low was a tad above 10,000.
6. US Gov't Bonds: I forsee the US Ten Year Bond, which today is at 3.35%, to touch 4.5% at some point in 2011. If the crisis in Europe plays out as I suspect (or some other crisis abroad) or there is a sharp stock market correction here, look for the yield to go below 2.75% again.
B-. The high was a tad above 4%, but when the problems in Europe occured, the lows plunged below 2%, much lower than I expected. Still and all, not bad.
7. Commodities: I believe commodities will have an up year as the economic surge in Asia continues. If the Euro Crisis is serious enough, it could bring commodities downward as the US Dollar surges. Look for crude to hit $100, silver to hit $35 and wheat to hit $8.50 again. Americans will grumble loudly as gasoline approaches $3.50/gal and grocery bills are higher, due in large part to Mr.Bernanke's printing presses.
B-. Commods did have an up year for the most part. It has begun falling apart in the last month or so for sure. Both silver and wheat exceeded my expectations, but are now well below the highs.
8. Beware of Black Swans: The world is a complex and dangerous place and has an exceedingly fragile economic system. One good shove will likely be enough to send the world's economy over the edge. A new Korean War, a war with Iran, a revolution in Greece or even an angry Mother Earth might be enough to send us all into an economic apocalypse thanks to the monstrous debt levels and credit default swaps. In 2002, the world's total debt was $60 trillion. This year, that amount reached $188 trillion, nevermind the hundreds of trillions more in credit default swaps. As I have always said, one day this will end very badly and very quickly.. but I doubt 2011 will be the year.
A-. Fukushima and the revolutions sweeping Arab nations certainly quailfy, though they did not cause any major financial problems. Yet.
Overall I'll give myself a B-. Fellow prognasticators Mish & Krasting outdid me; Gonzalo Lira not so much. 2012's predictions will be up next weekend. It's going to be a wild one. Perhaps the Mayans were right after all.
I knew the EU Summit yesterday would end with nothing concrete getting done. I thought they would at least announce some grand bailout scheme that was all smoke and mirrors. They not only could'nt get even that done, they doubled down on their own stupidity. Here's a recap:
* No EuroBond or any form of debt co-signing.
* No additional bailout money
* No ECB loans for IMF's plan
* No banking licence for ESM
* Restrictions on ECB sovereign debt purchases
This summit was something very different. This one was an attempt to begin the process of making changes to the European Union Treaty itself. These changes would require that nations to:
1. Balance their budgets
2. Enact a Balanced Budget Amendment into each of their Constitutions
3. Enact specific penalties for those who cross the line.
It all has to be done by March when another summit is to be held. These changes would have to be approved by all 27 member states. If this was not possible, "Plan B" is to have the 17 nations who use the Euro currency approve the measures. Its' here that the problems began.
Some of the measures in this new EU treaty could curtail London's financial markets. It also calls for a minimum tax rate on corporations, which most saw as a direct slap at Ireland, who maintain the EU's lowest corporate tax rate. British PM David Cameron immediately said "no thanks" to the deal, as did Sweden's Prime Minister. Others are soon to follow. For me, the worst move of all {one very under reported in newspapers} was the move to force Ireland's hand on the corporate tax issue. Lets not forget that the Irish Gov't is backstopping about $700 billion in loans to Irish banks from EU Banks. Is this who you really want to kick to the curb? So even before the Summit was over, Plan A had failed. As the Summit was ending, Brit PM Cameron extended a handshake to French President Nikolas Sarkozy, who turned away. It was called "Le Snub" by the British papers. Ambrose Pritchard put the blame squarely on Sarkozy for the anti London and anti Irish laws in the new Treaty and rightly called him petulant for his snub of Cameron. But wait.. it gets worse. These changes are to be accomplished by March. Merkel and Sarkozy apparently were not around to remember that it took years and years to get the original EU treaties written and approved. Worse, there is zero chance it will be approved by Greece, Spain, Portugal and Italy even if the timeline is extended because these peoples won't allow their countries to be run in part by EU bureaucrats, especially ones speaking German. Everyone-- including Merkel and Sarkozy-- know this. The markets were essentially unchanged after this catastrophe was introduced to the press as a victory. My guess is that very soon, the markets will give the Summiteers it's answer-- and it's going to be the middle finger. There is a fair chance the Euro won't even make it until the March summit. Here's a well written summary of this fiasco: http://blogs.reuters.com/felix-salmon/2011/12/09/europes-disastrous-summit/
So.. why even bother ? I think we just caught a glimpse of how it all ends in Europe: Sign & Comply or Bye.
In the last month or so, European banks have had trouble getting loans, especially ones in US Dollars. In essence, US financial institutions were voting "no confidence" in EU banks-- not unrealistically given that European banks are very badly overleveraged and have heavy exposure to Greek and other types of scary debt. According to an article in Forbes magazine, Wednesday nite there was a very large European bank that was unable to meet their USD denominated obligations the next morning. Zerohedge believes the bank was the giant French bank Credite Agricole, a bank roughly the size of Wells Fargo and Citibank. The last time an institution of anywhere near this size went under, it was named Lehman Brothers-- and Lehman was about a third the size Agricole is. Needless to say, something had to be done, and quickly. I have no doubt that Ben Bernanke did not sleep that night.
On Thursday morning, Bernanke's Federal Reserve acted, in coordination with other central banks, to provide nearly unlimited loans to the ECB (which then loans to EU banks like Agricole). Over the next year, EU banks will need to roll over $2 trillion in USD denominated debt. Bernanke's action provides the ECB with access to US dollars needed to do this rollover. This action will also allow European banks to continue on, though not really saving them. It will help European banks lend to businesses and individuals-- which over the last month had been greatly constricted.
This action does not make any of them any more solvent than they were before mind you, nor does it make European nations any more solvent or less indebted than they were before this-- The Fed is just loaning them money nobody else will. The problems behind this interbank lending freeze are still with us. All this action really did was replace normal US bank lending to European banks with the Fed lending to them via the ECB.
There is a new plan afoot to deal with the European insolvency issues. This one was leaked to the media mid-week, and it involved the IMF providing huge loans to the {badly underfunded} EFSF, Europe's yet to be born rescue fund. But on Friday, US Senator Tom Coburn {R-OK} got whiff of this plan and promptly announced that he was going to introduce legislation into the defense appropriations bill that required US Congressional approval before allowing US participation in an IMF bailout of Europe. If this passes in the defense appropriations bill, it will be the kiss of death for any large scale IMF participation in European bailouts. Madame Lagarde at the IMF must be fuming and will no doubt give Coburn an earfull of threats of The Abyss, with US Treasury Secretary Tim Geithner assisting. Coburn won't budge an inch."We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending ?"
There is a meeting on 12/9 to finalize yet another EU rescue plan. This will be the sixth or seventh such rescue plan this year. Unless Germany magically agrees to let the ECB print money like a monsoon or agrees to the Eurobond {exceedingly unlikely, despite the pressure being put on her to do so} this meeting will also be a failure. Germany's answer is for these nations in trouble {namely Italy and Spain} to balance their budgets before Germany coughs up huge amounts of money-- a reasonable proposal. The problem is, balancing the budget is politically impossible for either Spain or Italy. I look for more of the same from this meeting-- a big number to wow the press, but precious little in the way of hard facts.
Lets give Bernanke credit this week for a stick save of the European banking system anyways. Given the ugly opposition Coburn displayed on Friday and the political cost to Obama when it gets out that we're possibly bailing out Italy, some are saying that Bernanke's artillery has run out of shells. I say never underestimate a desperate banker's willingness to print money and bypass the laws of the land. It's a weird irony that the ECB, which does follow their laws, is being bailed out by a central bank that shamefully obeys no one.
Did a little light reading tonite and came across a few things that are quite unsettling. First on the list is a report from a top Kuwaiti newspaper that some Arab states, along with Turkey, are preparing to impose a no fly zone over Syria. If this turns out to be true-- a big if-- this has the chance to light up the Middle East quite quickly. Syria will activate it's Hizb'Allah ally in Lebanon to begin launching missiles into Israel in the hopes of drawing Israel into this mess and kicking off another round of Israeli-Arab war, though this time with much more devastating consequences. Likewise, Iran has a mutual defense pace with Syria and will not stand idly by. In addition, it appears that Russia has sent a fleet to sit off the coast of Syria to help the Syrian regime. http://www.zerohedge.com/news/no-fly-zone-over-syria-imminent
The other, more insidious thing is that in Egypt, the people are again in rebellion against the Egyptian Army government, demanding their ouster immediately. In response, the Egyptian Army has announced elections will be moved up to June, but this does not appear to be appeasing the protesters. The protests are growing very serious, with dozens killed and hundreds injured. As it turns out, Egypt actually has a more serious problem than their own Army-- their economy. And they're not alone.
It appears that Egypt's military government has been defending the worth of their currency instead of letting it float and possibly devalue. Why ? Probably because many of Egypt's military officers have enormous holdings in the local currency. Their government is trying to hold the value of the currency so that many of these officers can have time to move the money outside the country. Their Army appears to be looting the nation six ways from sunday. Egypt is running out of cash reserves in the attempt. When it does, their currency's value will collapse-- and the price of rice, which the government heavily subsidizes, will skyrocket. All of this is happening alongside the aforementioned riots against the Army. Hunger and instability go hand in hand, feeding off each other-- Satan's Handmaidens. Take a look at my last post in regards to capital flight.
It's not only Egypt. Turkey's economy is also overheating and due for an ugly correction. I'm in a hurry and cant post as much as I'd like, but I will post a link to a must read article on Middle East economies. This will, likely very soon, again be the driving force behind the ongoing upheavels: http://pjmedia.com/spengler/2011/11/22/egypt-and-turkey-middle-east-basket-cases/
In my normal readings this weekend, I came across something quite disturbing.... it seems that there has been a run on Greek banks for the last month or so. People who have large amounts of money in Greek banks {shipping magnates, industrialists and other wealthy folk} are closing their accounts and setting up savings accounts in Swiss banks, which have always been seen as a safe haven. This run on Greek banks has the potential to force them to collapse. These people are rightly fearful of what may happen to their money with the Greek government essentially insolvent and increasing rumors that the Greeks might re-introduce the Drachma {their old currency}. In response, I found this:
"BRUSSELS—The European Commission is helping Greece negotiate an agreement with Switzerland to repatriate as much as $81 billion believed to be hidden in Swiss bank accounts, a high level European Union executive body official said Nov. 17"
This type of response, if it's actually enacted, could set off a chain reaction these officials don't want. Other nations-- Spain, Italy and Portugal specifically-- are slowly stumbling towards insolvency. If I were a Spanish business owner with a large amount of money in a Spanish bank and I see what happened to the Greeks, I'd think long and hard about moving my money-- very quickly-- and out of reach of EU bureaucrats. Banco de Bolivia anybody ? If enough people do this, Italian and Spanish banks could very quickly find themselves in even more trouble than they already are. The most important thing in today's banking world is confidence. If the guy in the street feels his money is about to be taken, he panics and withdraws. As always, those with the most money are the first to see it coming and they move very, very fast at the first whiff of trouble. Then we come to the delightfully complex problem of what these moves to do bank leverage ratio's.
We also need to take a look back in history at what might happen when a banking system collapses and the government moves to stem the outflow. In 2001, investors and others began to lose faith in Argentina and began withdrawls from Argentine banks. The richer members of Argentine society saw something bad coming down the road and they also began mass withdrawls from Argentine banks, setting up accounts in Switzerland, the US, and other nations. The Argentine government, rightly fearing a banking collapse, enacted a set of laws designed to stop this. They were called "corralito" laws, and they limited withdrawls from Argentine banks to $250 per week. The people of Argentina, rightly fearing for their money in the bank, began a series of disturbances called "cacerolazos", which were mainly peaceful marches accompanied by wives banging pots and pans out of their balconies. The disturbances grew in size and intensity, with much of the anger being directed at banks and big foreign {mainly US} companies, who responded by erecting metal barriers at their gates after rioters set them alight. Increasingly violent confrontations between rioters and police eventually led Argentina's President, Fernando De La Rua, to declare a state of emergency. This did nothing to stop the mayhem, and on the night of December 21, 2001 De La Rua himself fled the Presidential Palace by helicopter, leaving Argentina without a government. Within a few weeks, the leader of the Senate leader Adolfo Saa officially defaulted on Argentina's external debt.
Argentina shortly thereafter ended their policy of pegging their currency to the US Dollar and let the Argentine Peso float, which resulted in the Peso being devalued and the price of most goods doubling or tripling overnight. The money in Argentine banks was also switched to the new Peso, resulting in them being worth far, far less. The common people in Argentina paid a fearful price over the next two years as unemployment skyrocketed. Tens of thousands of people were reduced to scavenging, with copper and cardboard being the scavengers' favorite items. In 2003, Argentina elected Nestor Kirchner as President, who wisely kept the previous finance minister Roberto Lavagna in his job. By the end of 2003, Argentina's economy roared back from the precipice, growing some 8% after Kirchner's election.
The lesson here is that artificially attempting to halt the flow of money in any way, even forced repatriation, usually leads to problems that are far worse than the ones they're attempting to resolve. The EU's pressure on the Swiss is both wrong and will most certainly backfire in places like Spain and Italy, possibly leading to a chain of events nobody wants.
Update 11/22pm: It seems that last week's post in regards to Syria might've been quite prophetic: it seems that the Arab League, along with Turkey, might be applying a no fly zone over Syria: http://www.zerohedge.com/news/no-fly-zone-over-syria-imminent
Underneath all of the news about the European debt crisis and the Penn State mess, there were a couple of events in the Middle East that warrant some attention.
The first was in Syria, where there has been large, mostly peaceful protests for the last six months. The regime of President Bashar Assad has met these protesters with tank and artillery assaults and arresting and torturing thousands of its own citizens. During these attacks, dozens of soldiers have deserted the army and have turned to fighting the Army. These deserters refused to mow down their own people. Lately, the number of deserters has risen to the hundreds. There are also rumors that the Saudis, Turks and Jordanians are beginning to arm some of the deserters and protesters. This is how the Libyan civil war began, with foreign powers arming civilians. A significant event took place this week as the Arab League, a collection of Arab nations, threw Syria out of it's little club. Ominously, they also threatened to "take steps to protect the citizens of Syria". It did'nt outline these steps of course. But this is a dangerous step indeed, one that was under reported here in the west but was widely reported in their region.
Meanwhile in Iran, {Syria's most ardent ally} there was a series of explosions that apparently killed Iran's top missile expert as well as 32 Revolutionary Guards. The blasts shook the capital Tehran, with many wondering if it was an Israeli or American attack. Foreign businessmen were fleeing the country after this. There was also a report from the International Atomic Energy Agency that essentially said Iran would have the ability to build a nuclear weapon by the end of next year. War rumors increased, and the blasts in Iran seem likely to have been caused by foreign powers, further rattling nerves.
About two weeks ago, the US announced that they had foiled an Iranian plot to blow up the Saudi Ambassador to the US, who is also a prince of the royal family. The Saudi's are known to despise the Iranians and would be most happy to see Iran attacked, perhaps even participating in it themselves. The Saudis are very afraid of Iran getting nukes as well as having Iran's brand of Islam {Shia} spread to other nations in the area.
It's my guess that Israel's hard line leader Netanyahu is also looking for a way to attack Iran-- he is very adament about not letting Iran get nukes. But his military is probably not up to the task of attacking a nation some 1500 miles away. He would need US support to pull it off. Problem is, he and President Obama have a testy relationship. Another thing that came out last week in the news was a comment by French President Sarkozy to Obama, in which Sarkozy said that Netanyahu was a liar and a cheat, and Obama responded with something like "you don't have to deal with him every day like I do". At the end of the day, the last thing Obama wants is a war in the middle east; it risks sending oil prices rocketing up in an election year. He is also personally friendly with a number of Arab leaders.
But since 2012 is an election year, Obama needs the Jewish vote solidly behind him. A wholesale turnaround by Jewish voters {and campaign contributors} could mean important swing states like Florida, New Jersey and Pennsylvania might swing to the GOP. A large Jewish voter abandonment would be a serious blow to Obama's re-election chances. If Netanyahu were to launch an attack on Iran on his own, Obama would have to support him. Failure to do so would not only alienate the Jews, but many middle of the road voters would compare him to Jimmy Carter during the hostage crisis. Americans hate a wimp.
These tensions have existed for a while, and no regional war has occured in the last 30 years. There is a good chance that none will occur anytime soon. But recent events are certainly ratcheting up the chances of a war.
In terms of recent economic meltdowns of various nations, there are two important road signs that indicate that the markets believe a nation is insolvent. The first is when a nations ten year bond goes above 7%. The second is that their short term bonds.. most commonly the two year and five year bonds.. begin to pay more interest than the ten year bond does.. this is called an "inverted curve" or "flattened curve". Both of these events occured in March, 2010 for Greece, which caused {after a few tense weeks filled with deep denial} Greece to request a bailout from the IMF and EU on April 23rd, 2010. Ireland's bond curve flattened in November 2010, which led her to announce a bailout agreement with the IMF/EU on November 29th.
The nations that have melted down so far are relatively small nations-- Greece's population is 10 million; Ireland's is only 4 million. Think of Greece as Arizona and Ireland as Kentucky. The Euro survived these meltdowns.
But yesterday it was Italy that saw it's yield flatten. This was followed by a utter meltdown which saw the yield on their ten year bond rise from 6.75% to 7.24%. For most of us, this isn't too drastic. But in the bond markets, given the amount of money Italy owes {over $2.5 trillion} this is a pretty drastic move, and at one point it reached 7.48% before calming down. Italy today reached the point where both Greece and Ireland cried uncle. Adding to the problem is Italy's Prime Minister, Berlusconi, who's gigantic pride is standing in the way of Italy recognizing the danger they're in. Certainly Berlusconi does'nt see it-- he made a comment yesterday that people were still buying coffee and clothes in Rome. He's also a crafty political survivor, though yesterday he agreed to step down at some undetermined date in the future. He's played this card before. So far, Italy has stubbornly resisted any changes to their overly generous welfare state, though yesterday they did pass a few measures. Tomorrow Italy is going to have a bond auction-- if they don't sell them all or they do but it's at a very high interest rate-- tomorrow could be really ugly. If it goes well, there will be a dead cat bounce rally.
The problem is that Italy is a very large country-- they have 60 million people. Thats essentially everything west of the Rockies, including those mountain states. As I write this, there is no possible way Europe alone will be able to rescue Italy. Today we reached the point where this has become a global banking problem. All of the things I've warned about over the life of this blog are beginning to happen.
Can Italy solve it's own problems ? Absolutely and immediately. If we woke up tomorrow morning and the Italian government agreed to live within its means and enacted a few labor reforms, this problem would be over by the time you finished the morning joe. But as of now, the political will isnt there-- and the Italian people don't want to tighten the belt. Nobody does.
What will happen ? IMHO, the gaping hole in Italy's ship is pretty much fatal if left alone. The EFSF {Europe's bailout fund} is not even close to being big enough. Ultimately someone needs to come up with at least a trillion, and probably two, to keep Italy's ship from sinking-- and soon. Here's a list of the choices--
1. ECB: Europe's Central Bank is capable of printing enough money to solve the problem. Germany, however, is not allowing this to happen because debasing the currency will lower the value of their savings-- and worse, it still does not solve the problem of nations living beyond their means.
2. US Fed: If there comes a moment when the markets are in a suicidal meltdown, I believe Ben Bernanke will step in with a cool trillion of freshly printed American money.
3. China: The Chinese have the money to bailout Italy and the rest of Europe's problem children. But many of China's powerful leaders wonder why China {who's people are still pretty poor} should bail out a relatively rich continent who has lived beyond their means and who seem incapable of changing this.
Ambrose Pritchard of the Telegraph today called for the US and China to lean on Germany and force them to allow the ECB to print it's way out of the mess. Paul Krugman has seconded the motion that the answer lies with the ECB and it's printing presses. China so far has done little except lecturing Europe and throwing a few pennies their way. Tim Geithner has also urged the Germans to relent and let the ECB print its way out.
Today there was an article that come out that might give us a clue as to where we're going with all of this: there are apparently some talks between Germany and France on setting up a framework under which some nations will be able to leave the Euro currency, though keeping them in the European Union.
Kowalski's Fearless Forecast: I believe that Bernanke's Fed and the ECB will attempt to print their problems away, taking care to recapitalize European banks. I look for this coordinated action to take place within weeks. Italy and Greece will be given the choice of accepting socially dangerous budget cuts or leaving the Euro. I believe both will accept the deal. Lets see if their societies hold together as they both enter deep Depressions and their social programs are sliced like a provolone. Soon enough, Portugal & Spain will share Greece's fate.
First and foremost, lets start with the Euro Summit: A deal did indeed get done as the German Parliament {the Bundestag} passed a measure allowing the EFSF {Europe's rescue fund} to be leveraged up-- there is some question as to how much; the early reports are that it will be $1.4 trillion. Of this, about $135 billion will be used to recapitalize banks, some of this is already committed to Greece, and the rest is to be used as a backstop for other EU countries in trouble, notably Italy and Spain. Greece's creditors will be taking a 50% "haircut". This haircut should trigger credit default swaps.. and while the IIF has determined that this is not a "credit event", I actually believe that they will allow this event to trigger the CDS's because there is only a few billion dollars of these on Greece. Overall, this buys them some time, likely well into next year. Greece's haircuts are a first step in the right direction as this is, at it's heart, a problem of too much debt. Up until now, their answer has been more debt. But the bigger problems remain-- way too much debt, especially in Italy, Spain and Portugal. The next country in line on the plank is Portugal, but the EFSF should have enough money to cover this. Further down the road, Italy looks to be in the worst shape and seems at this point pretty resistant to any form of austerity.
Update Sunday 10/30 2pm: Apparently the new agreement is pretty much like the previous ones-- full of holes. Here's the Telegraph's Liam Halligan with some of the devils in the details:The question of who will lend to the EFSF, on whose collateral, and who will ultimately repay the loans, was barely addressed last week. Such tricky questions will apparently be answered at the next European summit in December. Meanwhile, the fundamental disagreement between France and Germany regarding who should take the biggest losses – eurozone governments or private creditors – remains unresolved. Since Thursday's announcement, though, Germany's powerful constitutional court has issued an injunction requiring the country's full Parliament to approve any EFSF bond-buying.\.
Onto the topic du jour-- megatrends. We as humans, alone amongst the creatures that crawl upon the earth, are fascinated about the future. It's in our DNA; we're hot wired this way. In the late 1990s and early 2000s, I myself traded commodities, also known as futures. To be successful, you need to anticipate market moves, whether they be up or down. This is called "futures trading". For centuries, the kings and courts of the middle ages had their court astrologers who looked to the skies for answers and signs from the Gods. Nostradamus was the most famous of these, making startling predictions. Other less known seers from that time have made even more startling accurate predictions; chief among these is the legendary witch Mother Shipton.
Here in the digital age, our curiosity with the future has taken on a more sophisticated approach. Two attempts in our own age spring to the forefront. The first one was known as the "web bot project", which used website searches as a way of measuring human consiousness-- what we collectively are thinking. After the 2008 crash, the terms "economic collapse" rushed to the top of the list. In my opinion, this is more of a backward looking method. The project did score some hits, but many more were not so accurate.
The second was by a gentleman named Bruce Bueno De Mesquita, a Stanford mathematician. He developed a sophisticated algorithmic computer program used to predict certain events when inputed with certain variables about a certain situation. The CIA hired his firm and gave him a series of scenarios, which the CIA then ran by their own analysts simultanously. The CIA determined that Mesquita's programs were far superior, and as I understand it they continue to consult him. His accuracy is pretty good, though not perfect. His program also suggests policies that might positively affect outcomes. His work determined that the top priority of the North Korean regime was self preservation and that they were terrified of being taken out by the US. He therefore suggested a policy that would allow the North to keep their ability to produce nukes, but would require they dismantle any they have already produced in return for economic aid, primarily oil. Most of his predictions are not well known; you have to pay a pretty penny to get this information.
A lot of what Mesquita predicates his predictions on is mega trends and the affect these will have on nations and their peoples. While we don't have Mesquita's computer algo's, we can take a look at a few of the biggest issues facing the planet and it's people and perhaps come to our own conclusions thereof. I've hereby present six megatrends that, for good or bad, look like they will take large parts in shaping our future.
1. Climate Change: While at this point there is some dispute about the causes of it, there is no doubt that the planet is getting hotter and that the ice sheets at the North and South poles are rapidly melting. The effects of this are not entirely understood, but what there is is rather disturbing. Weather will become more extreme, especially heat. This will affect crop production as crops wither in the heat and lack of rain. In other regions, it will produce more numerous and more violent hurricanes and tornadoes. Another, more disturbing, trend is that with the sheer amount of water shifting from the polar ice caps to the oceans, ocean levels are slowly rising. Given enough time, cities like New Orleans and Amsterdam are likely to be lost to the sea. Another disturbing problem this brings is that this extra water puts extra pressure on tectonic plates, which will likely produce more (and more violent) earthquakes.
2. Overpopulation: While some nations have come a long ways in this area, a lot have not. The population of Nigeria in 1980 was 74 million. Today it's 154 million. By 2031 (twenty years from now) it will reach roughly 250 million. Africa is especially problemetic here, and this is compounded by another megatrend I'll discuss below, the declining amount of agriculturally viable land. The most overpopulated nations are also the most destitute. This will result in ever increasing waves of hungry immigrants washing ashore elsewhere, especially in Europe and America, though increasingly Latin America as time goes on. Islamic nations are amongst the worst offenders due to cultural reasons. This will, as we have seen, help to create instability. The problem for the new leaders of Egypt, Tunisia and the others is that their ever growing populations are encountering flat lined world grain production. Here's an article on Nigeria's problems and what life is like for the people in Lagos: http://ca.news.yahoo.com/lagos-centre-africas-population-boom-155558115.html
3. Soil Erosion: Approximately 40% of the world's agricultural land is seriously degraded. According to the UN, an area of fertile soil the size of the Ukraine is lost each year due to deforestation, drought, city expansion, desertification, salination and overuse. In Africa, if trends continue, the continent might be able to feed only 25% of it's ever growing population by the year 2025.. a scant 13 years from now. This should alarm everyone. But in my view, correcting the misuse of land would help quite a bit. I live in Minnesota, and my house sits on what was once a very large corn farm. My uncle sold the family farm near Red Wing to the local Indian casino, who paved it over to expand parking. My house sits on 1/3 of an acre of very fertile soil-- if I wanted, I could plant a few nut or fruit trees and use the front yard to grow corn instead of pretty grass and ugly weeds. But this trend, if left unattended, will cause mass hunger, instability and misery on a global scale. What we saw in this year's "Arab Spring" began as food riots to protest the record prices of grains in Tunisia. Another answer might be to cut down on meat production-- it takes about 15 pounds of grain to produce a pound of chicken. Beef and pork are worse. Putting a halt to America's addition to corn based ethanol would also help, and perhaps quite a bit. http://en.wikipedia.org/wiki/Erosion
4. Technology: In 2008, a Beaverton, Oregon boy of 12 named William Yuan developed a "\Highly Effecient 3D Nanotube Solar Cell for Visible and UV Light". This device, is it were capable of being produced, would be 500 times as efficient as current solar cells. It would, in a single stroke, revolutionize power production the world over and would negate the need for coal, nuclear and other types of power plants. Al Gore's nightmare of global warming would overnight be solved as cars could run on a solar cell on the roof the size of a keyboard. Another energy technology is based on Thorium, which envisions a reactor using Thorium instead of Uranium. It would be much safer than nuclear technology and thorium is incredibly abundant-- here in America, the coal miners extract the stuff and let it lie in useless heaps as they dig out the coal, stepping on it as they go to the coal mines. By 1961, India was on the brink of famine. In 1960 India, with the help of the Ford and Rockefeller Foundations, established the IRRI (International Rice Research Institute), which came up with the IR8 brand of rice. Although IR8 would need pesticides and fertilizers, this new type of rice could produce two crops per year instead of one; rice production in India went from two tons per hectacre to six by the 1980's.. and in optimum conditions upwards of ten tons. It's these types of breakthroughs which can revolutionize life on the planet-- for the better. Just today this came out-- http://www.wired.co.uk/news/archive/2011-10/29/rossi-success
5. Peak Oil: Everything we produce-- including the food I ate for breakfast, uses oil in it's production. Look around you at the number of plastic devices. The problem is, the world's oil production is in decline. Apocalyptic writers such as Michael Ruppert suggest that this decline will be very steep very soon, affecting the world's food production amongst other things. But my view here is that this is a problem that is avoidable due to a number of reasons. First is the aforementioned technology. Due to advances in drilling technology, oil companies are able to extract ever increasing amounts of oil from "oil sands", which are really just glorified tar pits. In the last couple of years, the state of North Dakota and it's Baaken Oil Sands are becoming the next Saudi Arabia. Unemployment there hovers around 2.5% as drilling companies hire any able bodied person willing to locate there. I also believe that technology will develop a new and better biofuel.. with the Pongamia tree taking the lead {video below}. I also believe that if push comes to shove, the people of the world will learn to use less plastics in unimportant things such as toys and plastic milk cartons and go back to the early 1900s when glass and wood {both renewable resources} were used.
6. Debt: In 2002, the world's total debt hovered around $60 trillion. At the end of 2010, this figure reached $188 trillion. Most of this debt was incurred by advanced countries like the US which lived far beyond it's means and much of the creditors were newly industrialized nations like China, which was looking for a place to store their hard earned cash and get a decent return on their investment. The problems have been discussed ad nauseum on my blog and others. At worst, this explosion of debt threatens to collapse the world's monetary system, the means by which we all exchange goods and services. If such an event did take place, the world's living standards would collapse and the instability it produces would be frightening, even in places like the US. As of this writing, there appears to be no political will nor the foresight needed to deal with the problem. What's needed is for the world to come up with a better monetary and banking system, one based on a botton-up credit based system instead of the debt based, top-down system we currently employ. Implementing such a system would be enormously challenging, and would mean that advanced nations like the US and Europe would suffer a decline in living standards at the expense of {mostly Asian} nations that produce more and cheaper. I doubt that America and other advanced nations will willingly enter into such an arrangement, no matter how obvious the need. As I've always said, unless something dramatic and on a global scale changes, the world's economic system will collapse-- and it will be very sudden and total. I myself see this as the most dangerous of all the trends. Here's my article on what happens when this collapse occurs: http://themeanoldinvestor.blogspot.com/2010/05/after-crash.html
For me, and Mesquita from what little information is out there about his future predictions, see is a race between technology and the growing food situation, vastly complicated by an unstable monetary system. I fully believe that better usage of land, conservation techniques and birth control in places like Nigeria can overcome the challenges ahead. A credit based monetary system can be introduced. But will they be implemented on a global scale before the problems become apocalyptic in nature ?
There is a very important meeting going on in Brussels, including the Prime Ministers and Finance Ministers of all major European nations. Their mission is to try to save their banking systems as well as keep insolvent nations like Greece from defaulting in their debts, which might be disasterous for the undercapitalized banks in Europe.
But, we've been here before. And before. And before. And this is part of the problem.. the markets simply bowl over any solution they have come up with previously because they are all too small. The political leaders are three steps behind the markets, and have been since 2008. Their solutions have proved to be nothing more than bandaids placed on an open, sucking chest wound because they refuse to recognize the scale of the problem. Because of interbank lending schemes and credit default swaps, it's actually quite a complicated mess.
This time, however, they seem to realize the scale of the problem. Tim Geithner has proposed a solution that would essentially make Europe's Bailout Fund {called the EFSF} into a bank, and then leverage it up by 10-1. The EFSF currently has about $440 billion.. leveraging it up would put it's power over $4 trillion. The problem with this is that if the "EFSF Bank" loses more than the $440 billion, the European Central Bank {ECB}would be responsible for simply printing the difference. Thats what we here in the US do. In a worst case scenario, the ECB would print a couple of trillion dollars and this would greatly weaken the Euro currency. This plan is backed by France, Italy, the US, Spain and a few others.
The problem is that Germany strongly opposes such a measure. Worse, the German Supreme Court has ruled that this cannot be done without the approval of either the Bundestag {Germany's Senate} or a direct vote of the people. As I type this, neither the Bundestag or the German people will approve anything like this. Nor will they approve simply putting more money into the EFSF. The plan the German Chancellor Angela Merkel is putting forth is threefold: First to force a 50% "haircut" on Greek debts. Second is to use $125 billion from the EFSF to recapitalize some European banks that would be in trouble when these haircuts take place. Third is to use the remaining amount of the EFSF to guarantee that if Italy, Spain or any other European nation's bonds go into default, the EFSF will cover the first 20% of the loss. Overall, it seems the Germans are trying to use the existing $440 billion as wisely as possible without threatening the worth of the currency or committing more money-- which, at this point, it looks like Chancellor Merkel would not be able to deliver anyways-- the German Supreme Court has made sure of that. The German people feel {rightly} that they should not be made to pay or guarantee the losses of other nations problems.. and they are not alone. The Dutch, Austrian and Finnish governments fully stand behind Germany.
Chancellor Merkel has already said that the summit will last until Wednesday.
Here's what I expect-- I think some sort of deal to recapitalize banks will get done by later today; I look for it to be in the neighborhood of $125 billion. From there, I fully expect that the German Plan is what's going to pass-- for no other reason than Merkel cannot deliver anything more, which I actually believe she herself wants to do. Since part three of the German plan will cover 20% losses with the remaining $275 billion, they're going to nerd wrestle the numbers and announce that a $1.375 trillion plan has been agreed on {this represents the $275 billion x 5}. It's hard to say how the markets will take this come the end of the summit. I thought they would be in the gutter over the last two weeks, but the opposite happened-- mostly based on rumors and a couple decent economic reports. Initially I think they'll be up.
Will this work ?
For the short term, possibly.
But come 2012, this will not be nearly enough.
Update Sunday 430pm: The Eurozone Summit could'nt accomplish a single thing.. “A broad agreement is taking shape,” Sarkozy said. “Today, we will not undertake any decisions, but will undertake preparatory work,” German Chancellor Angela Merkel told reporters Sunday.
Update Thursday 6am:Looks like a deal has been reached. 50% haircuts on Greek debt + $130 billion to recapitalize banks + $1.2 trillion to backstop Spain & Italy. In the short term, this will work. By next year more will need to be done. You still cannot solve a problem of debt with more of it, but Greece's haircuts were at least a first step in the right direction.
The governments of Belgium and France today came out announced that they were going to stand behind Dexia Bank, and there was talk that Dexia would be split into two entities.. the "Good Dexia" Bank and the "Bad Dexia" Bank, where all of the bad debt will be offloaded to. Nobody's sure at this point how much Dexia's losses will cost; the total might not be known for some time as a lot of their loans were to Greece and other insolvent countries. Belgium and France also said they would be covering most of the losses. Over enough time, these losses could be substantial, possibly as high as $100 billion. There was talk that the bondholders and other creditors would have to take at least a 21% haircut.
Problem is, it's a tad more complicated that this, as we ourselves found out when Lehman Brothers collapsed. Many of these bondholders bought insurance on these bonds, called Credit Default Swaps. Companies who wrote these insurance policies will take an ugly torpedo to the stern.. this is how AIG went under-- writing these insurance policies. Worse, the Belgian and French government debts might be downgraded due to the amount of bad debts they just insured. Many of Dexia's debts were outright loans-- and it's an open question if any of these will be paid, thus damaging those who foolishly loaned to this floating hulk of steamy compost.
Equally important, this will damage confidence in other European banks. Remember, Dexia passed the EU's "stress test" with flying colors. Other major banks in Europe, such as France's Societe Generale and Italy's UniCredit, have already had a couple of near death experiences. This will not help.
At the closing bell on Wall Street approached today, the Financial Times newspaper came out with a rumor that a Europe-wide plan was being developed at the European Commission meeting going on in Luxembourg. There were no details; only a vaguely worded statement from the group. It was enough to send stocks soaring at the close. The markets are getting used to such pronouncements-- most of which are little more than hot air-- and with Italy's downgrade in the after hours, I fully expect the markets to head south again at the opening bell. The upcoming Belgian and possibly French downgrades will only make it worse.
Meanwhile here in the US, here's how things are going with Bank of America, where their website has been down all week long, their stock is crashing, and finally this-- not sure if it's true, but this is a video of a SWAT team in front of a BofA branch in St.Louis.. http://www.youtube.com/watch?v=Db_P0wHsSz0&feature=player_embedded
In my humble opinion, the Final Battle for Europe draws near. Simply put, a good many {if not most} of Europe's biggest banks are essentially insolvent. In addition to the banks, many of the governments are hopelessly indebted, led by Greece, Ireland and Portugal.
Over the last 16 months {since the very unreported but serious crisis in May of last year} the European Union, the European Central Bank and governments have tried one bailout plan after another, each having to deal with a more serious crisis because the previous plan was inadequate. Europe's leaders have been one step behind each and every time, including this week when the Bundestag {Germany's Senate} finally passed a small expansion of the EFSF {Europe's bailout fund}which was proposed in July. Since then, Italy's biggest banks and their government bonds have crumbled apart, making the EFSF passed just this week woefully inadequate.
A week ago, US Treasury Secretary Tim Geithner formulated a plan to essentially leverage the existing EFSF by about five times, from about $450 billion to $2 trillion. This expansion will be backstopped by the European Central Bank, which essentially puts the entire Euro currency at risk-- and the governments thereof, since they have agreed to backstop the currency. This plan demands that the EU nations pass this plan by the next G20 Meeting in Canne, France the first week of November. This week, the markets have risen nicely in anticipation of this massive plan to finally deal with the problems.
The problem is, Germany {Europe's biggest, richest nation} seems to be balking. Chancellor Merkel, the nation's President, the head of their central bank, and the top judge of their version of the Supreme Court has all come out and said this is not only not happening, but is very likely unconstitutional. Worse, the German people themselves are, by large margins, dead set against this.
Geithner's Plan is a bold one, a big one. The problem is that, in proposing a plan this big, you also acknowledge the size of the problem. Worse, nobody has asked the question-- what happens if it does not pass in Germany after finally acknowledging how serious the problem really is ? As noted above, there are serious doubts whether the Germans will pass this. Confidence in the markets {European ones especially} will be crushed.
And here we are. As this month of October progresses, Geithner's Plan will be making the rounds in Europe. I believe that this story will be the prime mover of the markets this month; if there is good news, stocks will soar. Similarly, bad news will cause stock markets to sink. At some point, this plan will reach Berlin and the Bundestag. If there are delays in the vote or legal complications, look out. If the G20 Summit arrives and the measure is not passed, the markets will be in some real danger. Delays in the Bundestag vote will {rightly} be seen as a sign that the votes to pass the measure are not there.
If the markets begin a serious skid as the delays mount, we will quite probably have arrived at what I call the Final Battle. In order to stop the market carnage, I forsee multiple central banks co-ordinating action, including The Fed and probably the Peoples Bank of China. The Final Battle will have arrived. Who will win ? I'm not sure-- but I can tell you who will lose.. us serfs. One clue as to how the Europeans ultimately plan to deal {or not} with this might well come very soon-- Belgium's Dexia Bank, a huge bank, looks like it's going to have to be nationalized. The problem is, Dexia is nearly twice the size of the country it's located in, Belgium. The ECB {well, someone anyways} will have to do something because the Belgian state not only has no government at the moment, but would be completely unable to save Dexia-- it would be rather like a ground squirrel attempting to catch a falling hippo. Keep an eye on this potential mini crisis for clues.
Again another ugly day in the markets, most of which was due to two factors.. the ongoing, yet slow moving, crisis in Europe and secondly the Fed's actions Wednesday, which everyone knows will prove to be ineffective. One measure of that common people can look at to see how things are really going is whats called the "fear index".. the VIX. During the crisis in 2008, it hit 90+.. extremely high. Yesterday it hit 41. It's a good way to measure the stress in the system. Here's a link: http://www.cboe.com/DelayedQuote/SimpleQuote.aspx?ticker=VIX
In plain English, whats happening is that Europe's banking system is teetering on the brink of insolvency thanks to loaning out too much to too many. Many of these loans were to now insolvent countries like Greece and Portugal {and their banking systems} which are utterly unable to pay these debts. So far the answer the European Union officials have offered has been-- you guessed it-- more loans. You cannot solve a problem of debt with more of it. Yet they continue to try this route. While Greece and Portugal are small countries and the European banking system could probably weather the collapse of these loans, there is a new fear: Italy and her banks. The European banking system would not be able to weather this storm.. not even close. Some of the biggest banks knee deep in this mess are some very large French banks such as BNP Paribas and Credit Agricole. The collapse of any of these would be catastrophic.
The other problem is that the Fed on Wednesday did what was known as "the twist", which means that they are paying off short term loans with longer term loans, thus easing up credit in the short term markets. The problem is that this is not nearly enough to spur on the American economy. Worse, in their statement, the Fed said that there remains "significant downside risk".. meaning they see the economy getting worse. I believe that Chairman Bernanke himself wanted to do more QE {in laymans terms, QE is when the Fed simply prints up money and loans it to the US Gov't}. This would have the effect of having more cash circulating around in the system and hopefully would mean that banks would be more willing to loan. The Fed did not do more QE thanks to three members of their board who dissented. My fear here is that the Fed has reached the limit of what it can realistically do. It's going to mean that loans are going to get harder to come by; it's going to mean less cash flowing into the system. For us serfs, it's going to mean lower gas prices-- which is a good thing for us. But for businesses, it's going to mean that loans are harder to come by and it's going to mean that they are going to have to slash prices to stay competitive. Many won't make it. Look for unemployment to rise.
As for Obama's new stimulus, first off lets just say here and now that it's not going to happen. What he's proposing is to tax the rich and use the money to provide jobs for his Union friends. The House Republicans would rather set their own hair on fire than pass this. Obama knows this. Some of this might pass.. the extension of unemployment and some of the tax cuts might pass. In short, this was a speech he gave simply for the purpose of keeping his Union voters happy. It was a campaign speech, nothing more. Obama is out of ideas on how to grow the economy. Unless things turn around, and drastically, Obama is going to suffer a crushing defeat in 2012.
Until the problems in Europe are permanently solved, these mini crashes will happen with increasing regularity and increasing velocity. As it appears now, the Europeans are proving themselves unequal to the task.
Update Sunday 11am: There are plenty of rumors coming from the IMF Summit currently being held. Unless we see a formal signing ceremony and/or measures introduced into the various parliaments, this is nothing more than hot air. We'll see-- color me skeptical for now. If nothing but hot air emerges from this, I think the markets will begin another downslide come next week. Here's an article from the Telegraph's Jeremy Warner on site for the IMF Summit, describing in detail the fear and dangers we currently face: http://www.telegraph.co.uk/finance/comment/jeremy-warner/8786949/Fear-stalks-the-corridors-at-IMF-summit.html
I'm enjoying my grandkiddies waaayyy too much this weekend and don't have time for any in depth articles; suffice it to say that the coordinated Central Bank interventions in EU money markets were a sign to all of just how bad things in Europe have gotten.
Kyle Bass and Ray Dalio are, in my opinion, the two best economists in America-- hands down. When these two men begin speaking, the rest of the room falls silent, hoping beyond hope to catch a morsel of useful information. Fortunately for the rest of us, this week both have granted interviews that are must watches. The Dalio video is a tad long, but worth the watch since he only gives interviews perhaps once a year. Both talk about the end game in Europe.
There are some disturbing signs that interbank liquidity in European markets has essentially frozen up. The first print of the EUR-USD shows the Euro falling off a cliff. For those of you who are still in the markets, batten down the hatches. Something big is going to have to be done; I look for The Bernank to step in forcefully at some point, quite possibly tomorrow. I expect the Fed's "swap lines" to be used extensively this week. Worse, Angela Merkel's CDU Party was crushed in a bye election this weekend by a German electorate fed up with her endless bailouts, and this will serve to limit her ability to act decisively this week. Look out.
The Obama Administration needs the economy to pickup steam if they want to get reelected. A new stimulus isn't in the cards.. the House Republicans won't go for it. QE3 might happen, but all the Fed can do is loan money; it can't simply mail checks to people, and most Americans either don't qualify for loans or don't need them. The housing market is also in the dumps; housing prices continue to fall, and because of this people simply give up and mail the keys back to the mortgage company shortly before the sheriff arrives. Mortgage rates are at historic lows.. but most people won't qualify to refinance or buy because their home is under water and/or their credit score is not up to snuff.
What to do ? The NY Times gave us a hint.. it's essentially a massive government backed house refinance program. The details are still being worked out, but here's how it might work... it would allow people to refinance at the current 4% rate, which would reduce their monthly payments.. in some cases substantially. It could allow people who are under water to participate if their LTV {loan amount to value of the house} is under 125%. They could reduce the credit score needed from the low 600s to the late 500s, say 575.
In addition to this, there is another plan which is looking into a way to begin renting foreclosed homes and getting them off the market, thus helping stabilize housing price declines and letting people upgrade from apartments to houses. The NY Times suggests that such a plan would save homeowners nationwide about $85 billion a year.
There would be no addition to the deficit. Home prices would begin to stabilize; the foreclosure rate would decline, and people would have more money in their pockets. In truth.. it's far from the worst plan I've heard. It would help us working serfs out for once at the expense of the banks.
The downside ? The first would be for Freddie and Fannie, who would bear the brunt of the losses on the reduction in principle (if this is part of the plan). When word of this idea came to light on Thursday, Fannie & Freddie Bonds tanked. These are ultimately backed by the US taxpayer, so in a weird way it's really us doing ourselves a favor. But for those who invested in them there is a good risk they're going to see their investment sink, perhaps drastically. This is also a slippery slope-- giving government guaranteed loans to * those who don't really qualify for a loan, and *loans for more than the home is worth. This is how we got here in the first place.
I also believe that Obama will further reduce the payroll tax reduction from 2% to 4%.. another boost to the wallets of working serfs as well as employers. This will increase the deficit.. but it might well pass as Republicans always love a tax cut.
Onto my pet peeve, EUtopia. The markets have stabilized thanks to ECB purchases of debt and The Fed's USD swap lines. Still there are signs in the money and credit markets.. the LIBORs-- that all is not well and not getting better. The last time the ECB stepped in like this was in May and June of last year, when they began purchases of Greek and Irish debt in an attempt to hold off default. We all know how that story ended, and this current story of Italy and Spain will have a similar ending-- bad. The only real question is when and how it ends. My guess is that the EuroBond will not happen. But make no mistake.. the European crisis is just getting started. Two weeks ago France and it's banks in particular began to feel the markets' wrath.. and this, I believe, had a big effect on Sarkozy, who finally saw that his own nation might be taken down. My make is that it ends with either the expulsion of Greece, Ireland, Spain etc from the Euro or the ECB goes all in Bernank Style and monetizes the debt. So far the signs seem to suggest that expulsion is whats coming. Here's an article on the {very serious} problems in the EU's interbanking system: http://globaleconomicanalysis.blogspot.com/2011/08/capital-flight-proves-confidence-in.html
As for our own economy, Bernanke said "not yet" to QE3-- and {finally} fired a broadside at US political leaders, in effect telling them that they need to quit bickering and make the hard decisions we all know need to be made. If we get a strong deflationary headwind and/or the job numbers begin going negative again, Big Ben will have the excuse he needs for QE3. We're not there as yet.
