Archive - Nov 27, 2011

If the mid-summer sell signal of 2011 plays out similarly to the one in 2008, there may be a long, dramatic decline straight ahead. 

Our guess is they were hoping for a little more than a 30pip lift out of the gate...Have no fear though...

*SCHAEUBLE SAYS HE'S `CONFIDENT' 'EURO CAN BE SAVED

*SCHAEUBLE SAYS EURO WILL BE `THE STABLE WORLD CURRENCY'

"There are four indicators today which show as clearly as anything can be shown the state of our global debt-based monetary and financial system. Any one of them alone should be all the evidence one needs that the system is unsustainable. Put them together and much more than the canary is singing."

Something big has to happen soon, or else...

Everything that 'deluded' orthodox economists have done so far has been designed to aid the creditors (who remain the problem) while Steve Keen, the most familiar face of the non-orthodox economists, sees the only solution to this crisis as aiding the debtors. His interview with BBC’s HardTalk this week covers a great deal of ground from modern debt jubilees (and how they should be structured), the Tea-Party and Occupy movements (and his growing fear of historically repeating the endgames of previous economic and social disenfranchisements), and the parasitic nature of our existing financial sector.

He is unequivocal on the outcome of the status quo, as he has been for many years, citing politicians as reactors not leaders with the view that the youth movements we are seeing will force change of leadership to enable non-orthodox solutions to our simple problem – too much private debt. “Write off the private debts, nationalize the banking system, and start all over again” is his starting point but his ideas on implementation warrant some attention as he attempts to promote creative instability and reduce the destructive instabilities of capitalism – recognizing that our world is not in equilibrium as every Keynesian economist would believe but inherently cyclical and unstable.

Just when Europe thought it would only have to worry about an Italian bailout, we get news that not only is Greece about to renegotiatie its entire debt haircut, but that Ireland suddenly finds itseld out of bailout cash. From the Independent: "As EU leaders dither, the European Financial Stability Facility (EFSF) -- the limp pan-euro bailout fund -- may struggle to raise enough money to fund the payments to Ireland agreed under the €67bn IMF/EU bailout package. There is "genuine fear" that the fund may not be able to access the markets as investors shun the euro region, according to UBS." As noted earlier, the EFSF's rates are soaring at an alarming pace: "every 1 per cent rise in funding costs for the EFSF costs Ireland about €200m, according to calculations by Goodbody Stockbrokers' economist Dermot O'Leary." All is good though according to UBS because should the EFSF fail in even its existing duties which do not involve being levered at an X multuiple to rescue Italy, others will step in: "But UBS indicated that there was no "immediate funding threat to Ireland" as money may also be available from the IMF and through bilateral loans from the UK, Denmark or Sweden." We wonder if the UK, Denmark or Sweden are aware that suddenly they are on the hook to rescue Ireland, which up until recently was considered the A+ student of the European bailout. If not, we are confident the bond market will shortly remind them.

In the off case that this weekend's Italian bailout rumor roundup does nothing to quell the ongoing European collapse, the status quo is already working in diversion Plan B. Enter the Arab Leage and the announcement that it has approved sanctions against Syria, including an asset freeze and an embargo on investments, effective immediately. And while the screenplay is for now a carbon copy replica of what happened in Libya, with the imposition of a "No Fly Zone" over Syria as reported previously as the most likely next step, what is unique is the response that will follow from not only Syria, but Iran (which followed in Russian footsteps and announced it would attack NATO member Turkey missiles if provoked) as well as Russia and China, all of which have made it clear that any unilateral, US/Europe-backed agression against Syria will not stand. BBC reports: "League foreign ministers adopted the unprecedented sanctions at a meeting in Cairo by a vote of 19 to three. The move came after Syria refused to allow 4,000 Arab League monitors into the country to assess the situation on the ground. Syria, one of the founder members of the Arab League, condemned the sanctions as a betrayal of Arab solidarity. Syrian Foreign Minister Walid al-Muallem accused the league of seeking to "internationalise" the conflict." We expect developments to move quickly at this point as the chaos in the developed world is hitting a fever pitch and the only logical outcome is some "localized" regional warfare here and there.

We have discussed the obvious lack of demand for EFSF paper in the last few weeks and note that Friday saw the longer-dated issue break above 4% yield - clearly indicating the market's unwillingness to 'believe' in the AAA rating (and therefore any explicit wrapper that may evolve from this entity). Peter Tchir, of TF Market Advisors, notes the headlines and rumours are already coming in fast and furious.  The EFSF is starting to put out some data and is discussing tradable insurance certificates as well as very short-dated issuance (further evidence of a dearth of demand). We worry that rolling short-dated EFSF paper will lead from a liquidit crisis to a solvency crisis much faster. European leaders clearly saw how weak the market closed every day last week (futures accelerated to the downside after 4 pm) and are trying to talk up the market. We remain highly skeptical and will continue to use overly optimistic rallies to get shorter.

As I observe the zombie like reactions of Americans to our catastrophic economic highway to collapse, the continued plundering and pillaging of the national treasury by criminal Wall Street bankers, non-enforcement of existing laws against those who committed the largest crime in history, and reaction to young people across the country getting beaten, bludgeoned, shot with tear gas and pepper sprayed by police, I can’t help but wonder whether there is anyone home. Why are most Americans so passively accepting of these calamitous conditions? How did we become so comfortably numb? I’ve concluded Americans have chosen willful ignorance over thoughtful critical thinking due to their own intellectual laziness and overpowering mind manipulation by the elite through their propaganda emitting media machines. Some people are awaking from their trance, but the vast majority is still slumbering or fuming at erroneous perpetrators... The American people are paying the price for allowing a few evil men to gain control of our government... We now unquestioningly accept being molested in airports. We shrug as our intelligence agencies eavesdrop on our telephone conversations and emails without the need for a court order. It is now taken for granted that we imprison people without charging them with a crime and assassinate suspected terrorists in foreign countries with predator drones. Invading countries and going to war no longer requires a declaration of war by Congress as required by the Constitution. The State grows ever more powerful.

The European desperation is palpable ahead of the EURUSD open in a few hours, which has to deal with the aftermath of the Friday afternoon downgrade of Belgium, the junking of Portugal and Hungary, and the prospect of an imminent downgrade of AAA-stalwarts Austria and France. So what does Europe do instead of actually proposing the inevitable debt repudiation that is the only and final outcome? Why more rumors of course. To wit: last night saw the preannouncement of Welt am Sonntag indicating that in order to bypass the lengthy process of treaty changes, Europe would instead proceed with bilateral agreements that would somehow enforce fiscal stability and convince the market that European states would follow the German leader. Well since that is sure to have absolutely no impact, overnight Italian La Stampa is out with a fresh new rumor which cites "IMF sources" according to which the US-headquartered and funded organization would provide a €600 billion loan to Italy at 4-5%. In other words, Uncle Sam, in his role as primary funding agent of the IMF would lose massive amount of money on the "market to fair value" arbitrage, only to bail out the latest European domino. As a reminder, the whole "under market rates" loan from the IMF was implemented in Greece and worked out just swell: at last check the 1 Year Greek bond was trading with a yield of over 300%. Oh, and La Stampa forgot to mention one thing: any changes to the IMF, which currently is massively underfunded and is why the organization was forced to create two new liquidity facilities: a Precautionary and Liquidity Credit line, since it is unable to fund its New Arrangements to Borrow, have to go through US Congress when it comes to expanding funding capacity. Yup, the most dysfunctional, corrupt and criminal thing in the world - the US House of Representatives, where unless everyone is short Italian CDS, this will never pass. In other words: this rumor is dead in the water.

If you really listen to his whining socialist diatribes, Paul Krugman is the enemy of every man and woman who works in the global financial markets. Many of my colleagues on the Street are very liberal, yet Krugman would take all of their money via higher taxes in a nanosecond. How is it that nobody sees that Krugman’s commentaries in The New York Times are almost perfectly predicted by George Orwell in Animal Farm – and Hayek in the The Road to Serfdom?

Don't worry about it, Comrade ... our Great Leaders in the Politburo would never pass a law unless it was good for us.