Archive - Oct 25, 2011

A relatively subdued overnight session which has seen the futures spike only modestly from their lows, on yet another forced squeeze in the EURUSD which hit a high of 1.3960 after hitting a low of 1.3877 around 3am Eastern, has seen a rumor of a Chinese Reserve Ratio cut as one of the main drivers of action, which has also pushed gold to over $1660 and silver to $32. If validated, and if China is indeed welcoming inflation with open arms, counterintuitively following the completely irrelevant PMI beat, look for these two to resume their antigravitational glidepath. As for other key developments watched by the market, here is a succinct overview from Bloomberg.

Whenever you come across a mystery in finance there always is an explanation. Like the question why the ECB would so ferociously resist any “haircuts” on Greek debt. Despite all the evidence that current debt, now expected to peak at levels exceeding most calculators’ capacity, is unsustainable. Why would the ECB, the largest single holder of Greek debt, not set an example by accepting the 21% haircut orchestrated by the banking lobby in July? (In order to still reach the 90% acceptance rate, the ECB was simply to be excluded from the calculation). Instead, the ECB promised Sodom and Gomorrah in case of a haircut (“Greek restructuring would be a disaster” – ECB’s Bini Smaghi, July 20th).

The economy has become and will continue to be more volatile and less robust for the foreseeable future as wealth is concentrated in the wealthiest segment of the country. This concentration is a direct result of the Fed's boom and bust monetary policy that steers capital into the financial markets instead into more productive uses. We are running on fumes as the top tier gambles. Instead of wealth being distributed widely throughout the economy as capitalism has done historically, we are now becoming an economy of winners and losers.

We are far enough away from the onset of the Great Recession that another down-wave in the depression (or a new recession if you go by NBER) is either here or due soon.  It may not be a severe downturn, as housing and autos would be falling from first- or second-floor windows in that case, but it would be occurring on the backdrop of a weakened structure, and thus the financial effects could be more severe than the economic effects (which could be severe or mild). Here is what you need to do.