Cracks Beneath the Façade

Stock World Weekly: Cracks Beneath the Façade

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The Week Ahead

China 

On Thursday, Qu Xing, director of the China Institute of International Studies, a Foreign Ministry think tank, told reporters that China doesn’t want to see debt restructuring in the Eurozone and is working with the IMF and countries involved with the debt crisis in an attempt to avoid it. Speaking at a press conference during a visit to Hungary, Premier Wen Jiabao said, “China is a long-term investor in Europe’s sovereign debt market. In recent years we have increased by a quite big margin holdings of Euro bonds. In the future, as we have done in the past, we will support Europe and the Euro.” (China to remain long-term investor in Europe’s debt). Sunday, on a tour of the Chinese-owned Longbridge MG Motor factory in Birmingham, Premier Wen told BBC it will lend to European countries, and also has plans to stimulate domestic demand and reduce its foreign trade surplus. (Reuters)

China’s stated position prompted Zero Hedge to ask, “Will the third time be the charm for the Chinese ‘white knight’ approach to Europe, where it has so far sunk about $50 billion in bad money after good?” Saturday, Zero Hedge reported that China's European Bailout (And TBTF) Bid Hits Overdrive, As Wen Jiabao is Now in the Market for Hungarian Bonds. "It seems China has learned from the best, and either knows something others don't (except for the SHIBOR market of course) or is actively preparing to become Too Biggest To Fail by making sure that if something bad happens to it, literally the entire world will follow it into the depths of hell.  Sunday, ZH wrote, "As expected, China is the new IMF... All this means is that China will do everything in its power to prevent the ECB from launching an outright unsterilized monetization episode, which will double the amount of importable inflation (plunging EUR) to hit the Chinese domestic economy, and destabilize the already shaky stability, so critical for the Chinese communist party." (China Says It Will Bail Out Insolvent European Countries.)
 

It's good to know that China has its problem with inflation now solidly under control. 

Greece

Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece’s travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. Data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman’s leverage at the time of its collapse was 31-1. U.S. Banks are paragons of sanity by comparison, with an average leverage of only 13-1. (Europe’s sickly banks) France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure (chart below). 

Derivatives present another potential minefield. As Louise Story wrote in the NY Times,

“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate... The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.” (Derivatives Cloud the Possible Fallout From a Greek Default)

Michael Hudson explored the differences between what happened to Iceland and its debt crisis, and what is currently happening in Greece.

“The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury)...

“The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect...

“One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world had learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. ‘Good accepted practice’ is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style, while wealth is siphoned up to the top of the economic pyramid.

“My friend David Kelley likes to cite Molly Ivins’ quip: ‘It’s hard to convince people that you are killing them for their own good.’ The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?

“One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up..." (Michael Hudson’s Whither Greece - Without a national referendum Iceland-style, EU dictates cannot be binding for more.)

Stocks & Treasuries

Lee Adler of Wall Street Examiner appears somewhat more bearish than he had been recently. In Rigor Mortis Market, he warned, “The market was in prime time for a 13 week cycle upturn last week, and it failed miserably. The up phase is now in imminent danger of an early abort that could lead to a severe short term decline. At best it looks like they would only be able to hold the trading range for a couple more weeks. A weak bounce or two could be the rigor mortis rallies...”

Lee also discussed the Treasury market in Treasuries - Look at ‘Em, Dey Panickin!:

“The Treasury calendar was light this week with a paydown on Thursday sending $9 billion in cash back to the holders of the maturing paper. The Treasury market panic continued, but there were cracks beneath the façade. The indirect bid fell apart on the 4 week bill and was very weak on the 30 year TIPS. Considering the paydown, the weak indirect bid suggests that smart money is still fleeing the Treasury market, and it looks like the smart money, or maybe scared money or just short of money, is the foreign central banks (FCBs). That continues a year long trend, and it’s very bearish for stocks and ultimately will be for Treasuries as well.

“The Treasury market buying continues to be driven by fear and loathing of everything else, which is entirely rational, but ignores the fact that Treasuries are no safer than the paper that investors are fleeing. The only thing keeping the Treasury game going, as with any Ponzi scheme, is that people are still buying the stuff. It sure has nothing to do with the fundamentals of US government finance, which is a joke. The US government uses the incoming funds from its debt sales to pay off earlier investors, and it skims the cream to pay its bills. We all know where this is headed, but first there’s a real likelihood that yields could head lower for a few more weeks.

“I’m not sure what will drive it after QE ends on Thursday, but panic usually begets more panic. Part of the problem is that the Primary Dealers are right in the thick of those panicking. ‘Look at dem! Dey panickin! My God Mortimer! He’s right! They are panicking!’ Apologies to Eddie Murphy and Ralph Bellamy...

“Next week’s calendar will be a real challenge, with a heavy slate of notes settling on Thursday and only $18-20 billion in POMO left to go to support it. This will be a critical test. If the market doesn’t hold up well, and in particular if the FCBs again show a pattern of weak buying indicated by the indirect bid, it will only get worse with the Fed out of the game. The technical indicators say that the Treasury rally will continue. That’s very bad news for stock market because it’s likely to be the source of much of the cash driving yields down.” (Wall Street Examiner)

European Debt & Credit Default Swaps

In an interesting article, Brian Edmonds wonders whether the U.S. is too big to fail, linking the debt crisis in Greek to U.S. money market funds holding large quantities of European debt.

“While many investors are focused on the precarious situation surrounding Greek debt, and whether the rest of the so-called PIIGS (Portugal, Italy, Ireland, and Spain) might follow closely behind, there is a less-publicized yet equally dangerous element in the mix:

“If Greece defaults, who will be holding the bag?... Recent publications have pointed, as one example, to the exposure of big U.S. money market funds that hold large amounts of short-term European bank debt.

“The biggest way that the risk of default is mitigated is through credit default swaps, in a largely unregulated, over-the-counter (as opposed to exchange traded) marketplace where investors buy and sell protection against default on outstanding debt of corporations and countries. Sovereign debt swaps are the gorillas in the PIIGS room, but no one really knows if they are just 800-pound gorillas (large but manageable) or King Kongs (think AIG).

“Only if, or when, Greece defaults will we know who ultimately has sold insurance against that default.” (The U.S. is too big to fail, right?)

Week Ahead

The U.S. Dollar bounced off of a high of 76.3 on Friday and settled at 76.1, reminding us that our levels are more like trampolines than like walls. We currently believe the Dollar is apt to go down next week, which should be bullish for the markets. However, we are cashy and cautious again. Based on the premise that oil may be strong into the July 4 weekend, and the dollar may be weak, Phil suggested a trade idea for going long USO:

The next week $35/36 bull call spread is $0.61 and you can sell July $34 puts for $0.48 so that is a net $0.13 on the $1 spread. If USO makes it to $36 and holds it to next Friday, this can turn $650 cash into $5,000 (USO is now $35.83 with oil at $91.11).

We’ll be closely watching the Dollar and our Big Chart levels that have been working as support and resistance.

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Comments

[CustomersMan]

     My memory is still fairly good and I remember that a couple of years back the FED took away the guarantee that had been used to support the money-market funds during the 2008 crisis. The guarantee of the "funds" was taken away somewhat quietly with not a lot of explanation.

[InvalidID]

 What explanation was needed? It was never meant to be permanent anyway. The idea was that it would calm the markets and life would go on.

[r101958]

U.S. Banks are leveraged 13-1?.......yes, using mark to fantasy accounting.

[ilene]

Good point.

[oldmanagain]

When you define "small business" as anything over 250k you lose any credibility.

The only facism in the room is Austrian.

[ebworthen]

Please clarify and expand.

[Stuck on Zero]

And this just in from Tim Geithner:

Treasury Secretary Timothy Geithner told the House Small Business Committee on Wednesday that the Obama administration believes taxes on small business must increase so the administration does not have to “shrink the overall size of government programs.”

The administration’s plan to raise the tax rate on small businesses is part of its plan to raise taxes on all Americans who make more than $250,000 per year—including businesses that file taxes the same way individuals and families do.

Geithner’s explanation of the administration's small-business tax plan came in an exchange with first-term Rep. Renee Ellmers (R.-N.C.). Ellmers, a nurse, decided to run for the U.S. House of Representatives in 2010 after she became active in the grass-roots opposition to President Barack Obama’s proposed health-care reform plan in 2009.

When Ellmers finally told Geithner that “the point is we need jobs,” he responded that the administration felt it had “no alternative” but to raise taxes on small businesses because otherwise “you have to shrink the overall size of government programs”—including federal education spending.

(http://www.cnsnews.com/news/article/geithner-taxes-small-business-must-rise)

http://www.youtube.com/watch?feature=player_embedded&v=H4bYNkXu5qs

[Commander Cody]

The fascists are actively engaged in squeezing every last drop from the middle class and small business.  When there is nothing left, what becomes of the almighty?

[White.Star.Line]

Perhaps "Timmy the G" could use a few returning vets for positions at the IRS.

[Yen Cross]

 I'm trying to knock a "OPOSSUM" obumma off my Facade!

[florence3]

i dont know what to say but i guess america could

never be the same old peacebful USA..

http://www.onlinecheck.com/business_loans.html Business Loan

[Old Poor Richard]

If US money market funds are in trash paper, people need to go to prison.  "Investing" the archetype "safe" dock for cash in garbage bonds of garbage economies?

But of course there will be no jail.  There will just be victim customers, victim US taxpayers.  Banks will never be punished, nor left holding the bag.

[Tic tock]

...the power of the dollar..!? in that it is backed by an independant unaccountable institution that is the largest Monetary Agency, but there are limits to the use of shuffling nmbers across a screen. Yes, the problem of Toxic Assets can be dealt with by pushing monetary expansion, that forces interest rates to zero and if expanded into Consumer Borrowing would goa long way to alleviating the current problem. But the required monetary expansion is in the hundreds of Trillions. Keeping that much money locked up is not feasible, more importantly, the population will not feel like working for a few hundred thousand a year, when the Banks are sitting on Balances of tens of Trillions (for screwing up)...it, to put it simply, is too unfair. Thus the economy and the government, severely collapses.

At the moment, prices are being shuffled around by 'speculative central bank capital', in an effort to maintain a semblance of economic pricing. These are not Inflationary effects - it's manipulation - the question is, should the Federal Reserve be active at this point, since further Monetary policy is rather pointless.

One way or another, for Finance and the Economy to work there has to be trust. We don't trust the numbers, we don't trust the government and we don't the Banks - not after last bonus season - so..ipso facto, we don't trust fiat currency.

Meanwhile, the Banks and the government prevent any alternative form of money being developed. The power of the Dollar...comes out of the barrel of gun, or the threat of incarceration...not out of the Federal Reserve. Followed by the Euro and increasingly, the Yuan. The scale of the crisis is, quite unbelievably, growing...    

This is going to bring down the Constitution of the US. Where I am, we are implementing  building codes that include urban agriculture because that seems to be the future urban requirement.

[InvalidID]

 The power of the dollar is the WRC status it has. Anytime there is real fear everyone runs to the dollar. That's the power Ben has to exploit. Provided he doesn't blow it it's a pretty big deal.

 Now, saying we've lost faith in fiat currency is fine and well. Fact is the rest of the world, banks, and world governments haven't. Until they do, the Fed Reserve has a lot of sway in how the world works.

[InvalidID]

I would like to point to an alternative hypothesis. This is pure speculation on my part and it gets a little tinfoil hat-ish, so hang on tight.

Bernankie is either a blithering idiot that's running the world economy into the dirt... Who gains from that? If everyone suffers then the wealthy have no place to go and enjoy all the wealth. Of all the money in the world isn't worth squat if you devalue it to nothing, and there is nothing to buy.

So, could Ben be an evil genius? We know we are in a currency war with China, Ben called them out a few years ago and world leaders and bankers called on us to not do it. We decided to do it anyway.
We also know that the Euro was created to usurp the dollar as the world reserve currency. Again, this has been published and is public knowledge. While both of these things sound like something a nut would say, I assure you google will show you numerous examples of MSM saying just this.

So, here's the speculation part and where it gets a little crazy. Could Ben be using the power of the dollar to kill the Euro and crush China at the same time?

By borrowing a LOT of money from China we have them on the hook. We've limited the moves they can make without ruining the entire Chinese economy and causing the fall of the Gov there. Anything they do will hurt exports, which is the end for them.

At the same time we loaned a LOT of money to banks. The catch is, most of that money has gone to Europe. This devalued the dollar a lot due to all that printing of FRNs, BUT it also propped up the value of the Euro. The inflation we see here in America reflects the lower buying power of the dollar, but you notice that inflation hasn't hit the levels one would expect it to. All the new dollars chasing the same amount of resources should have caused much higher inflation.

It didn't because all those dollars left America and aren't chasing anything. You'll also notice that the US banks aren't making loans? They are flush with all this cash from the Fed, but they are hoarding it. This in effect stopped the inflationary effects of more dollars being printed, while still allowing the dollar to devalue.

So Europe sees all the inflation because there is more money chasing the same amount of goods there, but with a propped up Euro they don't notice it so much. This is fine and well, until we pull the free money supply.

Lastly, the banks in Europe didn't want to see defaults by Greece and other countries because they would lose a bundle of money. Now that they are flush with US dollars they are more likely to allow Greece to fail. This will kill the Euro and secure the dollar as the WRC for year to come. It will also mean the US will have some level of control over European banks for years to come as well.

So, while I have no idea if this is how it's working out there. I do think it's possible, and it looks like Ben might be an evil genius. Remember, a bad idea that works isn't a bad idea. Time will tell.

[rufusbird]

Let's see if I got all this right...I get the evil part...

"...all the money in the world isn't worth squat if you devalue it to nothing, and there is nothing to buy... we are in a currency war with China...We also know that the Euro was created to usurp the dollar as the world reserve currency...borrowing a LOT of money from China...We've limited the moves they can make without ruining the entire Chinese economy...we loaned a LOT of money to banks... most of that money has gone to Europe...This devalued the dollar ... The inflation we see here in America reflects the lower buying power of the dollar...You'll also notice that the US banks aren't making loans? ... all this cash from the Fed, but they are hoarding it...This will kill the Euro..."

But I don't get any genius out of this...Rufusbird

[InvalidID]

It's pretty simple really. All the money that's magically appeared hasn't hit the economy yet. It's locked away in digital vaults. This means the Fed can easily 'shrink' the money supply and raise the value of the dollar if needed.

If Ben's plan is to crush the Chinese Yuan and the Euro he's succeeding. Both are in a worse way than the dollar because the dollar is the WRC. Anytime there is a 'flight to safety' the dollar benefits.

 So basically, all we need is for the dollar to be the last man standing. Doesn't matter if that last man has been beat to shit, he's all there is.

 Of course I'm writing this before my morning coffee. I may came back later to read this and realize it's incoherent babble.

[rufusbird]

"So basically, all we need is for the dollar to be the last man standing."

In the longer term, I guess, that is what we will all be watcing, and that will effect everything else...Rufusbird

[ZackLo]

The world just hasn't learned yet has it. DON'T ALLOW GOVERNMENTS TO ISSUE DEBT UNDER ANY CIRCUMSTANCE!
Individuals should have the right to borrow not nations. politicians promise everything to their constituints and the snakes spit their toxic debt venom the nations die and the snakes eat all the assets...andrew jackson didn't call the central bank a den of vipors and thieves for nothing...that venom takes awhile to kick in but when it does it REALLY does...nations want revenue? tax more....no more borrowing...the state structure has proven time and time again they can't handle that responsiblility..especially when the bankers will pander to them endlessly.

[Tic tock]

Monetary policy can fix marginal concerns, use too much of it and the currency re-values to match perceptions: use just enough and no-one notices. The quantity of contracts outstanding can never be absorbed by monetary policy, without the economy being destroyed. The problem is that the Banking Sector cannot survive under a different fiscal scenario than the one we have now, change the roles played by institutions and the Banks become poor. In that way, the Banks are currently dead ducks.
Zombies. What needs to happen is that a system has to be re-built, because this one has stalled - the banks want to tread water for several years, so contracts can revive...or the value of those contracts can match face-value (hyper-inflation). Rebuilding the system, means new banks, new jobs, the first thing that needs to be done is to put some trust into the system: that means divorcing Politics from Money. At the moment, Governments and Banks are literally putting a gun to the head of the population - become Debt Slaves or else. That works in America, where the quality of Life is so pleasant that it isn't such a bad thing to be debt slave, not in the rest of the world, where opportunities are so scarce that Dignity is about the only thing people can really aspire to.
What do you think the next generation will when it comes to Pensions, so not this year, not next, but within ten years - no more deep capital institutions.

[alexwest]

so let me get it straight..
overall Greece debt is 500 bln, so there will be haircut 50%.. so
its only 250 bln.. so it must be monetised somehow.. all right

pardon me, but US goverment PRINTS FUCKING 150 bln per month and dont solve any problems,, SO HERE WE HAVE GREECE EACH AND EVERY 2 MONTH ..

am i correct?

alx

[Vuvuzela]

So lets do a little math

Average leverage is like 25-1

That means with 19.4 billion those banks created 465 billion out of thin air

Now soemone explain to me how is this possible ?

Why is not possible each country to print it;s own currency bypassing those parasites and currencies value to be settle through a Forex xcahnge or something ?

Those bankers think we stupid or what ?

If we do the math for US we will go nuts.

[mt paul]

just bought 2 cases

of dehydrated baklava...

70 % off 

[zorba THE GREEK]

 I said this in another post and I will reiterate: Why doesn't the EU just print a few trillion Euros

 and recapitalize the PIIGS and cut them loose from the EU? The Euro will take a hit but that

 would only help Germany and France with their exports. No CDS's would come into play and

 everyone would be a winner. Maybe it's too simple a solution and therefore invisable like a tree

 in the forest. P.S. If a fat girl fell in the forest, and no one was there to see it, would the trees

 laugh? That's it. I'm flagged. No more rum for me tonight.

[RichyRoo]

That was covered. If they do that, EUR drops and China's inflation problem gets worse. If China falls to popular unrest then the supply chain breaks and no more eating iPads.

[hamurobby]

I think eventually it will happen. I may not understand "all of it" but even Trichet must realise a haircut is better than being scalped.

[lilika]

I wonder why the lack of narrative as to new policy and distribution of the Drahmae. The banksters keep the media saturated with mad max apocolyptic scenes for Greece, when Greece really has the banksters by the arx right now!

Αυτο να μου εξιγησουν.

[Metropolis_Minx]

You're basically right. It's the banksters who are insolvient, and that's why they're so desperate for the people's money and public assets.

Greece. The Cradle of Democracy. And where it will either die or be reborn.

M_M

[DeadFred]

The answer I believe is 'who would do it?'. No one is in charge. No one has that authority and who can you imagine they would put in that place. A German? Their memories aren't that short. A feckless Frechman like DSK, not likely. Certainly not someone from one of the PIIGS. Who? Until they find that person they're screwed. After they find him we're all screwed.

[HowardBeale]

Timmy will do it. Timmy will do anything.

[UP4Liberty]

I call "dibs" on the Acropolis!

[DeadFred]

You can have it. I'm after one of the small islands, white beach, place for a house on the beach, good site for a desalinization plant and a cove for the boat. NO volcanoes, I simply won't tolerate one in my backyard!

[Ahmeexnal]

The Parthenon is already spoken for.  

It will soon be 'transported' to the Pergamon Museum.

[glenlloyd]

PS - if that's supposed to be the Venus de Milo, well she's not even in Greece so they'd have to talk to France about that one.

[glenlloyd]

I'll take the temple of Athena at Priene!