Meltdown

All you need to read.

Sometime in 2042 the CBO will need a bigger chart to represent US public debt because per the just updated Extended Alternative Fiscal Scenario, which the CBO itself admits " is more representative of the fiscal policies that are now (or have recently been) in effect than is the extended baseline scenario," this is when it literally falls off the chart. And it is to ridiculous debt load that Keynesian lunatics want to add MORE debt? Actually why not, it is not as if the US will ever repay any of these exponentially-rising obligations.

It's one thing for liberals to demand one group of Americans pay for another group of Americans, with a third group's money of course (until it runs out), but when a progressive think tank actually has the temerity to tell Bernanke that Europe is not socialist enough, and thus needs liberal US support, that's when things just get plain old silly. Which incidentally, is precisely what the progressive brains of Mark Weisbrot and Dean Baker, co-directors of the liberal Center for Economic and Policy Research, have done. Naturally, we are all for a humanistic effort; we also believe in leading by example. If Messrs. Weisbrot and Baker would first be kind enough to divest themselves of all their earthly possessions and bank account contents, which should be Fedexed and wired in the direction of Spain post haste, it would make their transparently theatrical pursuit of pseudo-noble causes just that more palatable to the masses who already are on the verge of poverty, and are now being asked to bail out other countries. 

What would the weekend be without at least one rumor that Europe is on the verge of fixing everything, or failing that, planning for a master fix, OR failing that, planning for a master plan to fix everything. Sure enough, we just got the latter, which considering nobody really believes anything out of Europe anymore, especially not something that has not been signed, stamped and approved by Merkel herself, is rather ballsy. Nonetheless, one can't blame them for trying: "The chiefs of four European institutions are in the process of creating a master plan for the euro zone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday. Suggestions targeting a fiscal, banking, and political union, as well as structural reforms, are being worked out..." Less than credible sources report that Spiderman towels (which are now trading at negative repo rates) and cross-rehypothecated kitchen sinks are also key components of all future "master plans" which sadly are absolutely meaningless since the signature of Europe's paymaster - the Bundesrepublik - is as usual lacking. Which is why, "the plan may well mean that the euro zone adopts measures not immediately accepted by the whole of the European Union, the article adds." So... European sub-union? Hardly strange is that just as this latest desperate attempt at distraction from the complete chaos in Europe (which will only find a resolution once XO crosses 1000 as we and Citi suggested two weeks ago and when the world is truly on the verge of the abyss), none other than George Soros has just started a 3-month countdown to European the European D(oom)-Day.

Clusterfukushima ... Part Deux

I am a child of an age laden with illusory wealth, and have benefitted (for a short time at least) from the financial fakery of our economic system, as have many Americans.  Most of us have not had to suffer through the unmitigated poverty, hopelessness, and relentless fear that are pervasive in harsher days.  All our problems could be cured with money, especially government money, and as long as the greenbacks were flowing, we didn’t care where they came from.  Ultimately, though, the ease of our well-to-do welfare kingdom has set us up for a cultural failure of epic proportions.  Anytime a society allows itself to be conditioned with dependency, its fate is sealed. We do not know what crisis really is.  Many Americans barely have an inkling of what it entails.  We imagine it, in films, in books, and in our own minds, but the fantasy is almost numbing.  We lose sight of the tangible grating salty rawness of the worst of things, while imagining ourselves to be “aware”.  Most people today are like newborns playing merrily in a pit of wolves. Preppers, on the other hand, are those who seek to understand what the rest of the public goes out of its way to ignore.  They embrace the reality and inevitability of disaster, and suddenly, like magic, they are able to see its oncoming potential where others cannot (or will not).  The price they pay for this extended vision, however, is high… 

Maybe the electrician-in-chief can send them some of those unused Solyndra solar panels?

Update: sure enough "EU says accommodative ECB has little scope for more stimulus"

In a headline that is far less than meets the eye, we read the following:

• EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
• EURO ZONE SHOULD MOVE TOWARDS BANKING UNION

As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.

While America may be experiencing the occasional zombie apocalypse breakout, probably due to the absence of easily available edible iPads, Greek retailers are preparing for the retail version. "British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot. The planning, says Dixons chief Sebastian James, may look alarmist but it's good to be prepared." Why Dixons? "Europe's No 2 electrical retailer Dixons owns Greece's market leading but loss-making Kotsovolos chain, which has a 25-percent market share selling iPads and laptops as well as washing machines, televisions and air conditioning units." There we go: Bill Dudley's edible iPads. The question is what happens when this easily digestable piece of plastic is thoroughly looted after local rioters dispense with the "shutters" supposedly protecting their wares. What will be on the menu next? Sadly not booze: "Diageo, the world's biggest spirits group and the name behind Johnnie Walker whisky and Smirnoff vodka, has reacted by slashing its marketing spend in Greece, reducing stock levels and pulling cash quickly out of the country after it saw its Greek sales halve in the last three years to less than 100 million pounds." So: no food, no booze, no cheap 99 cent iPad aps: this is the way the world's most miserable monetary experiment ends.

"Just when we think the worst is over - and let's face it we have been in this crisis for five years - we get the second half; are the Europeans about to start the second half our Great Depression with massive bank runs" are the Jaws-music-inspired words that recent media-favorite (yes, us too) Niall Ferguson uses in an interview with CBC. His main concern is that this kind of (bank-run) event can quickly spiral out of the control of even the ECB as he uncomfortably conjures the image of the initial US stabilization that occurred in 1930 to May 1931 only to be knocked back into a greater depression by the failure of Credit-Anstalt, which set off bank failures and eventually defaults in 1932 on many government debts. The deposit run potential is the single-biggest reason to care about Greek-exit - in itself it is not large enough economically to interfere with global growth but it is the message and contagion that it sends that is critical in bringing forth a pan-European banking crisis and implicitly spilling over to the US and Asia via global trade and banking transmission channels. An excellent brief interview that summarizes the exact fears that face Europe and implicitly the US, explains the rather simple solution of fiscal federalism and the fact that today's German politik is very different from 1989's Helmut Kohl-era with regard to their commitment to the Federal outcome. His conclusions are worrisome. Germany is the key - and there is not a good understanding of financial markets in Berlin.

All yu need to read.

Bank Regulatory Capital has been in the news a lot recently - between the $1+ trillion Basel 3 shortfall, the Spanish banks with seemingly their own set of capital issues, or JPM's snafu.  There has been a lot of discussion about Too Big To Fail (“TBTF”) in the U.S. with regulators demanding more and banks fighting it.  After JPM's surprise loss this month, the debate over the proper regulatory framework and capital requirements will reach a fever pitch.  That is great, but maybe it is also time to step back and think about what capital is supposed to do, and with that as a guideline, think of rules that make sense. Specifically, regulatory capital, or capital adequacy, or just plain capital needs to address the worst of eventual loss and potential mark to market loss. Hedges are once again front and center.  The only "perfect" hedge is selling an asset. This "hedge" is also a trade.  The risk profile looks very different than having sold the loan and the capital should reflect that.

All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks.  Projecting current trends is also an erratic and inaccurate method of prediction. The current trend may continue or it may weaken or reverse. "The Way of the Tao is reversal," but gaming life's propensity for reversal with contrarian thinking is not sure-fire, either. If it was that easy to predict the future of markets, we'd all be millionaires. Part of the intrinsic uncertainty of the future is visible in unintended consequences. The Federal Reserve, for example, predicted that lowering interest rates to zero and paying banks interest on their deposits at the Federal Reserve would rebuild bank reserves by slight-of-hand. Banks would then start lending to qualified borrowers, and the economy would recover strongly as a result.

They were wrong on every count.

All you need to read.

Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.

Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.