Tuesday, August 9, 2011

Manic Monday

Well another ugly day.. especially here in the US, with the Dow down over 630 points. Why ?

Interestingly enough, the day began with news that the ECB had stepped in and purchased both Italian and Spanish bonds.. and the interest rates on both of these, which had climbed above 6% in recent weeks, cratered back down to the 5.25% area on both. While I'm on the subject, let me say here that while this is impressive, we've been here before. The ECB tried the same thing with Greece, Ireland and Portugal.. and look what happened there. If the ECB has the faintest hope of being successful with Italian and Spanish bonds, they'd better do it in very large amounts. The markets, like a hungry wolf who got kicked in the teeth, will be back, meaner than ever. Ambrose's article today is an excellent read on this subject: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8689824/European-Central-Bank-must-go-nuclear-to-save-Europe.html

Here in the US, the markets tanked badly, supposedly over the S&P's downgrading of US debt. President Obama scheduled a news conference at 11am to speak about the markets.. but he was 45 minutes late. There was hope among many in the pits that he would announce some sort of stimulus. But no-- he was just late, and treated us to nothing but hot air and calls for tax hikes. Thats when the markets really shit themselves, ending the day down over 630 points.

Why ? My guess is that many on Wall St are not liking the bigger picture. Think about it.. since the Lehman disaster in 2008, we've had TARP, QE1, QE2, QE 2.5, the Obama stimulus, cuts in payroll taxes, extension of the Bush tax cuts, record deficit spending... all told, these programs amounted to nearly $8 trillion thrown at the US economy to get it jump started. What have we got for our efforts ? 9.2% unemployment and a crashing stock market. With the S&P downgrade, things like more stimulus packages and other things that would expand the deficit are'nt going to happen. Inflation is also becoming a problem as gas and food prices rise.. and so QE3 is also unlikely in the short term. In short, the money has stopped flowing from Wash DC. That is what scares the hell out of Wall St. Frankly, there is very little Obama can do. Bernanke can do a QE3, but it's becoming more and more clear that QE2 and QE2.5 were not successful. In fact The Fed meets again today.. my wager is that we'll get nothing but hot air. Only when there is serious threat of deflation and rising unemployment will they consider it.. my guess is we'll see it by year's end. But not today.

Where do we go from here ? By week's end the markets will calm down. This is not 2008 again.. at this point, its not that bad. The VIX index, which measures volatility, went up from single digits to 40 yesterday. During the 2008 crisis, it was in the 90's. Its not The End... It's rather the beginning of it. From here, as the money spigots are squeezed shut, we've left the Age of Printing and have now begun the Age of Austerity. I'm going to reference my favorite Ambrose article of all time.. this article describes the Depression and what happened during these times {how many of you knew that then Colonel George Patton charged starving war veterans with sabres in front of the US Capitol ?}.. but it also describes what happened the last time we reached this point.. the Depression: Remember that this article was written two years ago so the news he's describing is rather old: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4339501/Bad-news-were-back-to-1931.-Good-news-its-not-1933-yet.html


  1. Mr. K - I have just come to your site via Shaun Richards of Mindful Money. I like what I read; a clear and concise overview of events "across the pond". Thank you - I shall subscribe by email.

  2. Agreed! Excellent stuff.

  3. "we've left the Age of Printing and have now begun the Age of Austerity" How true it is. Also I had no idea about Patton (was he busted down to Colonel? Maybe he wasn't a General yet?) who I admired greatly. Sometimes I think the wars go on in the middle east as TPTB fear just such an uprising. Excellent article as usual. Sorry for the late comment. I am going to look for a link to the Patton story. Fascinating stuff.