Friday, September 23, 2011

Black Thursday v2.0

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:

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:

Sunday, September 18, 2011

Kyle Bass & Ray Dalio videos on Europe

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.

The following article is another man's {very likely accurate} version of "The Day Greece Dies" and is very much worth a read. In the comments section there is a response that has to do with Argentina that is also a must read:

Sunday, September 4, 2011

Orange Alert

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.