Excerpt from Stock World Weekly
We ended last week’s newsletter explaining why we were not betting on an announcement for more quantitative easing by the Fed, although “consensus” economists claimed to be. We argued that additional QE was unlikely, citing our friends (Bruce Krasting, Lee Adler of the Wall Street Examiner, and Jon Hilsenrath - with his direct line to Bernanke). This week, those expecting easing were disappointed; there was no mention of launching any new program for large-scale asset purchases.
But the Fed did extend the period it anticipates keeping interest rates at or near zero percent (ZIRP). (See Wednesday’s press release here) The Fed also plans to continue its program to extend the average maturity of its holdings of securities, Operation Twist, and to maintain its policy of reinvesting principal payments from its existing holdings, including mortgage-backed and Treasury securities. It is currently holding nearly $3Tn in total assets. The returns from those assets are significant, and the Fed’s balance sheet is continuing to grow even after the end of its asset purchase programs.
In response, Bill Gross (co-chief investment officer of PIMCO) tweeted that this announcement was the equivalent of “QE 2.5,” while Bruce Krasting wrote, “Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s ‘full speed ahead’ according to the Chairman. He's pushed things off until 2014 - a very long time from now.” Bruce goes on to explain the major flaw in Bernanke’s reasoning, and how this decision has made him “a slave to a single dopey statistic.” (Bernanke Goes All In)
Phil wrote, “The Central Bank's pronouncements came after a two-day policy meeting from which officials emerged still frustrated at the economy’s slow pace of growth, and a bit more confident that inflation is settling down after climbing last year. Fed Chairman Ben Bernanke signaled in a news conference after the meeting that the combination of persistent slow growth and low inflation, could give the Fed leeway to take more action to support the economy, though he didn't commit to it.”
In Jesse's (of Jesse’s Cafe Americain) words:
“This statement shows a longer term commitment to de facto QE at least. The Fed does not need to further expand its balance sheet just yet, but rather deploy those funds strategically while engaging in swaps with other central banks to counter the financial risks globally.
“I suspect that before they formally announce a further expansion of their balance sheet, the Fed will go 'off-balance sheet' in the easing as financial firms are often wont to do when engaging in opaque accounting. The swaps and noncompetitive bidding for balance sheet assets may be a part of this.
“I do not object to stimulus per se, but rather this type of blunt policy that does not address or repair the problems that led to the financial bubble and collapse in the first place.”
In Jesse's view, and we agree, the “yawning gap between productive labor and mere money manipulation” needs to be closed, and hard choices are required to resolve the unsustainable concentration of both power and risk.
“Demagoguery and deception in support of the status quo seems to be the rule of the day in the financial sector and its associated professions and exclusive clubs.
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“Therefore self-regulation, restraint, and reform are a thin bet to say the least. The crisis is more like to continue to expand, and the taint of corruption and crime continue to spread.” (FOMC Statement - Targets 2% Inflation - Highly Accommodative Monetary Policy Until ‘Late 2014’)
One problem with large, public programs such as QE2 is that everyone jumps into the same side of the trade, e.g., going long equites in the famous “Tepper Put” that dominated the markets while QE2 was operating (buy stocks, you can’t lose). Using more low-key, less blatant ways of injecting liquidity into the financial system, Bernanke is continuing to provide stimulus while pretending to be an inflation hawk.
On Friday, Fitch downgraded Italy, Spain, Belgium, Slovenia and Cyprus. Ireland was affirmed at BBB+, but received a negative outlook. Fitch maintained that the European leaders’ “gradualist” approach in tackling the crisis means that Europe will continue to face periodic episodes of severe financial volatility, and this will erode the governments’ ability to repay their debt obligations. “The eurozone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration.” (Fitch downgrades 5 eurozone nations)
Greece has been struggling with hard decisions as it attempts to negotiate a “haircut” with creditors. Russ Winter of Winter Watch at Wall Street Examiner commented,
“I spotted some interesting commentary on the maturing March 2012 Greek bonds. After buying at 40-45 cents, it seems the hedge funds are trying to unload in a bid-less 35-cent market. The ECB has the largest stake, bought at 70 cents. This official holder’s dominance of this market, and refusal so far to participate in haircuts, is making the whole exercise futile and severely subordinating any potential non-official holder or future buyer of European sovereign debt.
Reuters reports that the ECB is split and confused on this issue. The IMF’s Lagarde says, ‘If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors will also have to participate.’ Apparently, the IMF was also confused as this was retracted or denied. As I wrote in “Stick it to the Local Issued Bond Holders,” this is one of two serious subordination fiascos, the second being a slew of UK-law non-local issues that restrict collective restructuring actions.” (Pushing Non-Official Holders of Local-Issued European Debt into Subordination) (Zero hedge/Bloomberg chart below).
Simon Johnson warned:
“In the event of default (i) any non-official bond holder is junior to all official creditors and (ii) the issuer reserves the right to change law as needed to negate any rights of the nonofficial bond holder.
“We should not underestimate the damage these steps have inflicted on Europe’s €8.4 trillion sovereign bond markets. For example, the Italian government has issued bonds with a face value of over €1.6 trillion. The groups holding these bonds are banks, pension funds, insurance companies, and Italian households. These investors bought them as safe, low-return instruments that could be used to hedge liabilities and provide for future income needs. It was once hard to imagine these could ever be restructured or default.
“Now, however, it is clear they are not safe. They have default risk, and their ultimate value is subject to the political constraint and subjective decisions by a collective of individuals in the Italian government and society, the ECB, the European Union, and the International Monetary Fund (IMF). An investor buying an Italian bond today needs to forecast an immediate, complex process that has been evolving in unpredictable ways.” (The European Crisis Deepens)
People familiar with the story of the MF Global implosion, and the struggles of thousands of people to recover funds from the bankrupt former primary dealer, will have no trouble understanding the problems with recovering assets during bankruptcy proceedings. (MF Global Clients May Lose in $700 Million Bankruptcy Fight) For a recent update, see Zero Hedge's "3 Months After The MF Global Bankruptcy, We Find That $1.2 Billion (Or More) In Client Money Has 'Vaporized.'"
As sovereign nations in the eurozone struggle to acquire funds to service their existing debt obligations and issue new bonds, investors who might be inclined to buy those bonds are finding themselves in an increasingly hostile environment for private bondholders. Non-governmental holders of this debt are likely to find themselves on the wrong side of any negotiated settlement between private creditors and sovereign bond issuers.
Friday saw a stunning development in the Greek drama, with Reuters reporting that Germany “is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package” according to a “European source.”
Tyler Durden of Zero Hedge observed, “Sure enough, earlier today Der Spiegel broke the news that the second bailout, which has yet to be re-ratified, and absent Greece meeting demands to cede fiscal sovereignty, is likely a nonstarter, would be increased to €145 billion ‘citing an unidentified official from the so-called troika.’ So whether or not this is true is irrelevant: what matters is that Spiegel released the article in the same series of posts in which it explained just why Germany has full right to demand (via European enforcement mechanisms or however) virtually anything in exchange for the ongoing endless bailout (such as: Merkel macht Wahlkampf für Sarkozy and Griechenland sträubt sich gegen EU-Aufpasser). Which means one thing only: the great propaganda spin machine is now on, and its only purpose is to provide Germany a buffer of ‘having done everything in its power’ to prevent the now inevitable Greek default. Which, incidentally, means that a Greek default is inevitable.” (Cost Of Second Greek Bailout raised To €145 Billion)
Lee Adler of the Wall Street Examiner reviewed last week’s activity by the Fed, and the potential impact on the Dollar.
“Treasury yields reached the top of the recent range and appeared headed for a breakout when along came Ben, with his mighty arms outstretched he lifts up the playing field and tilts it, and back down yields went, in spite of the big week of Treasury auctions and the market facing a big wad of new paper to settle next week. It didn’t matter. Ben gave the all clear on the carry trade for 3 more years, although I don’t know how much carry you can get when 10 year yields are less than 2%. I guess if you use enough leverage…
“We know this is going to blow up sooner or later. All we can do is watch the chart for signs. For now, the trading range that looks like a bottom in yields is intact. And so is the idea that the Fed at least, can make the market do what it wants, when it wants. But I heard that Bill Gross is loading up on Treasuries again, after missing, or being short, through the whole rally. If that’s not a sell signal, what is?...
"Federal withholding taxes, which were going bonkers, are starting to come back to earth but are still way higher than last January. We still don’t know if this is a new uptrend or just a bulge from sources unknown. The timing coincided with the massive ECB Long Term Refinancing Operation equivalent to $600 billion pumped into the world banking system all at once... Whatever the reason, the unexpected windfall for the Federal Gummit has enabled it to significantly cut the size of the debt offerings for the past month. There’s a question as to how long that good fortune will last, but for now, that’s the story."
Looking ahead to next week, Phil remains skeptical of the current rally. “Of course the headline in the WSJ is ‘US Economy Gathers Pace’ because, as you can see from Cramer's bullish rant last night – they're still herding all the lambs in for the slaughter at the top of the market.”
Courtesy of Michael Snyder of Economic Collapse
Over the past couple of weeks, George Soros, the IMF and the World Bank have all issued incredibly chilling warnings about the possibility of an impending economic collapse. Considering the power and the influence that Soros, the IMF and the World Bank all have over the global financial system, this is very alarming. So are they purposely trying to scare the living daylights out of us? Soros is even warning of riots in the streets of America. Unfortunately, way too often top global leaders say something in public because they want to "push" events in a certain direction. Do George Soros and officials at the IMF and World Bank hope to prevent a worldwide financial collapse by making these statements, or are other agendas at work? We may never know. But one thing is for sure - many of the top financial officials in the world are using language that is downright "apocalyptic", and that is not a good sign for the rest of 2012.
Right now, George Soros is saying things that he has never said before. Just check out what George Soros recently told Newsweek....
“I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”
Later on in that same article, Soros is quoted as saying that we could soon see the U.S. government using "strong-arm tactics" to crack down on rioting in the streets of major U.S. cities....
As anger rises, riots on the streets of American cities are inevitable. “Yes, yes, yes,” he says, almost gleefully. The response to the unrest could be more damaging than the violence itself. “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”
It almost sounds like George Soros is anticipating the same kind of a breakdown of society that many survivalists and preppers are getting ready for.
So how bad are things going to get?
Well, George Soros is publicly warning that the coming financial crisis could end up being even worse than 2008. Just check out the following quotes from him that appeared in a recent Businessweek article....
Billionaire investor George Soros said Europe’s sovereign-debt woes are “more serious” than the financial crisis of 2008 and that the world faces the prospect of a “vicious circle” of deflation.
“We have a more dangerous situation now than in 2008,” Soros, 81, said in response to a question at an event in the southern Indian city of Bangalore today. “The crisis in Europe is more serious than the crash of 2008.”
But George Soros is not the only one issuing these kinds of warnings.
Once again, the head of the IMF, Christine Lagarde, has made a speech in which she openly warned that we are heading for a repeat of the "1930s".
She told an audience in Berlin on Monday that the globe is facing "a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand".
During the speech she called for a trillion more dollars to support financially troubled governments, and she made the following statement....
"It is not about saving any one country or region. It is about saving the world from a downward economic spiral."
As I wrote about the other day, the World Bank has also been using apocalyptic language about the global financial situation. In a shocking new report, the World Bank revised GDP growth estimates for 2012 downward very sharply, it warned that Europe could be facing financial collapse at any time, and it instructed the rest of the world to "prepare for the worst."
The lead author of the report, Andrew Burns, said that the "importance of contingency planning cannot be stressed enough" and that if there is a major financial crisis in Europe the entire globe will be deeply affected....
"An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09."
So should we be alarmed that George Soros, the IMF and the World Bank are all proclaiming that a financial nightmare could be just around the corner?
Of course we should be.
Whether their motives are pure or not, they are telling the truth about the global financial situation in this case. As I have written about so frequently, there are a whole host of signs that indicate that we could be on the verge of a major global recession.
A lot of folks in the investment world are warning that hard times are about to hit us as well. For example, the following is what legendary investor Joseph Granville recently told Bloomberg Television....
Joseph Granville, whose “sell everything” call in 1981 sparked a decline in U.S. stocks, said the Dow Jones Industrial Average (INDU) will drop toward 8,000 this year because of waning momentum and volume.
“Volume precedes prices,” Granville, 88, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on “Street Smart” on Bloomberg Television. “You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.”
Considering all of the warnings out there, it only seems prudent to prepare for the worst.
But unfortunately, a lot of people are just going to leave their holdings sitting out there like a dead duck, and they are going to be absolutely devastated by the coming financial tsunami.
Those that believe that the United States can somehow escape the coming financial storm don't really know what they are talking about.
In fact, there was very troubling news for the U.S. dollar just the other day. It was announced that India will start paying for its oil from Iran in a currency other than U.S. dollars.
But this is just another sign that the rest of the world is starting to reject the U.S. dollar. For decades, the U.S. dollar has been the reserve currency of the world and this has given us a tremendous advantage. Unfortunately for us, that is now changing.
U.S. newspapers are not talking about what is going on, but mainstream newspapers in Europe are. Right now, some of the biggest countries in the world are working on plans to quit using U.S. dollars for the buying and selling of oil.
The following comes from a recent article in The Independent....
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
This is a very big deal, and if this gets pulled off it is going to have devastating consequences for the U.S. dollar and for the U.S. economy.
But of course when it comes to troubles for the U.S. financial system, there are a whole host of issues that could be talked about.
An environment for a "perfect storm" is developing, and most Americans have absolutely no idea what is about to happen.
Fortunately, there are some researchers out there that are working hard to sound the alarm bells. For example, the following quote comes from a recent interview with Gerald Celente....
I believe that we have to watch out for something along the lines of an economic martial law. The European system is in collapse. The financial system in the United States is just as tenuous, if not more, and I believe they will not admit there will be a financial crash but rather they will use a geo-political issue to get the people in a state of fear and hysteria whereby they'll then call a bank holiday or devaluation of the currency, or a hyperinflation of the currency, and blame it on somebody else.
It would be wise to listen to what experts such as Gerald Celente are saying.
Now is the time to take stock of where you are at and to make plans for the coming year.
Just because things have "always" been a certain way does not mean that they will continue to be that way.
Just because certain things have "always" worked in the past does not mean that they will continue to work in the future.
Our world is experiencing fundamental changes. It is changing at a faster pace than we have ever seen before. The way that we all live our lives five or ten years from now will be vastly different from how we live our lives today.
This will be a very challenging time to be alive, but it is also going to be a very exciting time to be alive.
So what do all of you think is going to happen in 2012?
Please feel free to leave a comment with your thoughts below....
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
Earlier today, the IMF tongue-in-cheekly attempted to make a serious case that Europe and the US could, for the first time since the formation of the Eurozone, decouple, with a worst-case scenario seeing European growth dropping 4% below baseline, or roughly -5% in late 2012 merely as an attempt to stoke Europeans to finally agree to fiscal easing, even as America grew contently on its merry way of monetary easing. While any hopes of a European "spriteness" are a guaranteed dead end, as confirmed by the Luxembourg finance minister who told Spiegel that "Merkel's Fiscal Pact a 'Waste of Time and Energy'", the bigger question remains what happens to the US, once i) Europe does not react aggressively to the threat of the biggest recession since 2008, and ii) its GDP does contract by 4% or more. We don't know. What we do know, courtesy of StreetTalk Advisors, is that whereever the US GDP goes, so does the Eurozone. And vice versa. Think the US won't experience a full blown recession if European growth implodes? Think again.
I quoted from this article by Lee Adler of the Wall Street Examiner in the "Week Ahead" section of Stock World Weekly, so part may sound somewhat familiar. Lee tracks the money flows in the financial system which allows him to focus on the real reason stocks go up and down. Forget those quaint, high-minded concepts such as fundamentals and value. The real driver of the stock market is the printing of money by the central banks. Lee watches what they do and where the money goes. ~ Ilene
I don't like this, but it is what it is. The world financial system is an over manipulated piece of excrement. But sometimes manipulation works; sometimes it has unintended consequences that benefit one party over another; and sometimes the US gets the roses while the rest of the world sinks into the sludge that most of the pundits and government manipulators are worried about. This is one of those times, and herein is its story.
Take this story and do with it as you wish. If you think that it's wrong, I'd love to hear from you as to why. The easiest way to do that is to leave a comment in the comment section of the Wall Street Examiner posting associated with this report.
Liquidity flows in the US branch of the system have been turning more bullish in recent weeks. Several indicators that had been neutral or bearish have turned bullish, joining deposit flows into the US banking system (apparently from EU) which have been the lead bullish sled dog for a while. In this liquidity based model of the market, there is no way the markets can decline as long as this continues. It forces us to assume that the bias will remain to the upside. Meanwhile, the Fed continues to quietly tap the brakes, without explanation or comment, while the money supply explodes. The Fed is transparent only when attempting to jawbone the market higher. Anything that might run counter to that, it shuts up tight as a clam.
The media has been rife with speculation that the Fed is on the brink of another massive quantitative easing. Given the rapid growth of the money supply, the recently strong stock market performance, and the surging Federal withholding taxes, and improvement in other economic indicators, it's hard to see justification for the Fed to make such a move. The Fed is well aware that additional QE would be likely to set commodities off on another tear that would be self defeating for the economy.
I'd have to guess that the pundits looking for another QE at this week's meetings are wrong, but it doesn't matter. The markets follow the money. My guess is that any initial market disappointment in the face of "no new QE" would quickly be shrugged off. If I'm wrong and the Fed announces or hints at additional QE, I'd watch the commodities and hitch a ride if I liked moon shot roller coasters.
In the meantime, the liquidity indicators are strengthening. Bank deposit net inflows continue. Fed pumping of cash to Primary Dealers remains in a bullish trend, and will continue to as long as the MBS replacement program remains in effect, which will be until mid summer unless the Fed makes a course change before that. Those flows will slow drastically if Treasury rates rise, but due to the delayed settlements of the Fed's MBS purchases, the impact of that reduction won't be felt until April or May at the earliest. Meanwhile Treasury supply looks likely to be lighter than expected (See Treasury update - http://wallstreetexaminer.com/
Foreign central bank purchases of Treasuries and Agencies turned bullish last week. Their trend has improved from a bearish to a neutral influence. The trend of reserve and other deposit levels at the Fed have been stable, and are thus a neutral market influence. Banks bought Treasuries last week and the trend of that indicator has turned unequivocally bullish. Bank non Treasury trading accounts were little changed last week, but that trend is also bullish.
The composite liquidity indicator upticked last week, slightly breaking the November peak in the process. The indicator now has a slight uptrend since last summer. The performance of stocks and bonds has been consistent with that. Recent behavior of the components and typical cyclical patterns suggest that some degree of strengthening is likely to continue in the weeks ahead. That should be bullish for stocks, especially if Treasury market inflows begin to wane, as last week's signals suggest they may.
This is just a small sample of the dozens of illustrative charts and analysis that are in the Fed and Treasury updates every week including charts and analysis of each of the components of the macro-liquidity indicator. You can stay up to date with these liquidity flows along with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market in the Fed Report. Try it risk free for 30 days. Get the research and cutting edge analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link to try WSE’s Professional Edition risk free for 30 days!
Courtesy of Mish
Reuters reports Euro zone ministers reject private bondholders' Greece offer
Euro zone finance ministers Monday rejected as insufficient an offer made by private bondholders to help restructure Greece's debts, sending negotiators back to the drawing board and raising the threat of Greek default.World Will Not End
At a meeting in Brussels, ministers said they could not accept bondholders' demands for a coupon of four percent on new, longer-dated bonds that are expected be issued in exchange for their existing Greek holdings.
Greece says it is not prepared to pay a coupon of more than 3.5 percent, and euro zone finance ministers effectively backed the Greek government's position at Monday's meeting, a position that the International Monetary Fund also supports.
The aim of the restructuring is to reduce Greece's debts by around 100 billion euros ($129 billion), cutting them from 160 percent of GDP to 120 percent by 2020, a level EU and IMF officials think will be more manageable for the growth-less Greek economy.
Negotiations over what's called 'private sector involvement' (PSI) have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay 14.5 billion euros of maturing debt, could result in a disorderly default.
Greece in the negotiations to take on debt rescheduling - and even if a voluntary agreement has been reached, the question remains whether enough investors participate in the end, to establish debt sustainability (and only then the IMF will continue to pay money). This raises the question of what to do with their stocks, the European Central Bank in the amount of about 40 billion €.Door Number Three
The answer is: There is no simple solution.
Let us assume that the ECB is involved in a debt restructuring. That would - through reduced distributions from the central bank profits - a burden to taxpayers. And it would ultimately be a form of state funding: The Federal Reserve would have the money made available to Greece. This can be very difficult to reconcile the official justification, that the intervention served only to keep open the monetary transmission channel. Would immediately begin a debate on the risks arising from the purchases of Italian or Spanish bonds. Anyway, it would be difficult for the central bank to defend its bond program arguments.
Let us assume that the ECB is not involved in a debt restructuring. Then you continue the public debate on the program spared - that this program would be less effective. Because de facto central bank would receive the status of preferential creditors, which have fewer resources in the countries concerned for the operation of non-public liabilities. Private investors have to fear that at first the ECB will be served before they have their turn - go on as in the case of Greece the debt section logically deeper in order to achieve a desired debt ratio, if the ECB will cut out. In this case, affect bond purchases by the Fed might not reassuring to investors, but discourages this: Each bond, which the ECB purchases, means greater potential losses for banks and investment companies.
The ECB has a choice: Either your program is not credible - or ineffective.
Separating Fact from Fiction in Selective ReportingHaircut Calculator Revisited
The proposal is for the ECB to sell its bonds back to Greece so that Greece will then take a hit.
With that in mind, look at this preposterous claim by a senior official "The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy."
I see two sentences and two lies. Indeed the entire article is crammed pack with lies made by various IIF and EMU officials.
Hi Mish,The IMF and Germany desperately want a deal that will take Greece to a projected debt-to-GDP ratio of 120% by 2020. Why? Even if the plan worked (which it won't) what good would it do?
Reading that "The IMF wants to put Greece on a path for a debt-to-GDP ratio of 120 percent by 2020." I could not avoid to think this:
For the sake of comparison, Italy is currently at 120% debt-to GDP ratio, with a much stronger economy than Greece, a better capacity to tackle fiscal evasion (there are huge margins for improvement), a deficit below 3% now and targeted to be 0 by 2013 (let's see if they get there, anyway they will not get extremely far from this), and despite all of this, Italy is a big mess and it is almost impossible for them to get decent rates on the bond market.
So, what they can expect with Greece at 120% debt-to-GDP by 2020? Even a kid can understand that it will never work!
Best regards,
Andrea
Courtesy of Jim Quinn, The Burning Platform
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” - Upton Sinclair
I began to write this article in early December. I had just written a piece that attempted to scrutinize how the American public could stand idly by while heavily armed mercenary thugs viciously crushed the Occupy encampments across the country in a Department of Homeland Security coordinated attack at the behest of the ruling oligarchy. Comfortably Numb made a case that the political and economic systems of the United States have been captured by a few evil men and they use their wealth and power to control the message hammered into the psyches of an apathetic, distracted, vincibly ignorant public. I started to tackle the question of why Americans could stand by as the new Greatest Generation was being abandoned, derided, scorned, beaten, tear gassed, and arrested for having the courage and audacity to stand up to a powerful corrupt unholy alliance between Wall Street psychopaths, corporate fascist barbarians, and Washington DC power hungry jackals. But I became overwhelmed with a feeling of disillusionment and hopelessness and was unable to write anything for about a month. I found myself questioning whether it was worth fighting such a powerful foe after seeing how easily they crushed the opposition put forth by OWS. After a month I decided I am not one to love my servitude.
“Most men and women will grow up to love their servitude and will never dream of revolution.” – Huxley’s Brave New World
I owe it to my three sons to keep fighting the good fight. They deserve a future. Day by day we draw ever closer to a showdown with the traitors who have sold this country into debt slavery. I don’t dream of revolution, but my eyes are wide open and I see it coming. I had been trying to wrap my head around what happened with the Occupy Movement since the Department of Homeland Security coordinated destruction of most of the encampments around the country in November. The corporate mainstream media immediately moved onto more pressing issues like the Kim Kardashian divorce and Jessica Simpson’s weight gain. The American public has been instructed by the media the Occupy story is history, just like the BP oil spill, the Fukushima nuclear meltdown, and the Egyptian revolution. In a society consumed by reality TV Occupy Wall Street was just another show. The credulous American populace dutifully turned their attention to Black Friday and whipping out one of their 15 credit cards to purchase remote control pillows, 3D 72 inch HDTVs, a see through tank top from the Snooki line of slutware, or thousands of other ludicrous Chinese crap churned out by slave labor in factories built to support the “efficiency” efforts of U.S. conglomerates.
Without a constant irritating presence in the heart of NYC and other large cities, the Occupy Movement appears to have lost steam. I’ve been trying to figure out how and why this happened. The issues that motivated the protests have not gone away. The despicable MF Global crime, committed by a hall of shame member of the .01% – Jon Corzine – has proven beyond a shadow of a doubt the Wall Street/Washington DC criminal conspiracy is alive and well. Unless you have been sitting in line at a Wal-Mart for the last two months to get a $3 waffle-maker, you saw young people across the country tear gassed, shot with rubber bullets, maced, bludgeoned, and brutalized by the paid thugs of the ruling oligarchy on a daily basis. The outrage at the continued looting by the psychopathic Wall Street aristocracy and the horrific police brutality against young people exercising their Constitutional right to free speech and assembly should have ignited widespread anger and mass protest. Instead the reaction has been silence, scorn and smug satisfaction with the government response.
There are a plethora of rationales for the apathy and lack of critical thinking overwhelming our society as we plunge into the depths of a looming economic calamity. They include economic self interest, the power of propaganda to condition the masses, fear of opposing authority, and the perception of a reality that allows you to sleep at night. The Upton Sinclair quote above hit home for me a few weeks ago and explains much of the disdain for the Occupy movement. I was in a high level meeting at my University and during the course of the meeting the Occupy Movement was brought up. A senior executive made a derogatory comment about Occupy and then laughed. I smiled and bit my tongue. In retrospect it shouldn’t have surprised me. I work at one of the top business schools in the world. The person who made the comment has spent his entire life educating students who end up with jobs at Wall Street financial institutions and with America’s largest corporations. It is a natural response for someone whose whole life is reliant upon the existing financial system to psychologically overlook the obvious criminality of the Wall Street fat cats and corporate executives who validate his entire existence and life’s work. He chooses to not understand the message of these protestors because to truthfully comprehend their message would nullify his thirty years of academic efforts. My non-response to the comment about the Occupy Movement was also based upon self-interest and reliance on a paycheck to make a living. I had learned my lesson the hard way during a previous career stop.
It appears older generations have a considerably more negative view of young people protesting the capture of our political and economic system than younger generations. This also makes sense because they have the most to lose and cannot visualize a society other than the one they have created. To acknowledge the validity of the Occupy Movement and the justice of their positions would be to admit their own guilt in the creation of a society that has allowed a chosen few to enrich themselves at the expense of the many. The Baby Boom Generation has been living a lie their entire adulthood. It is true that prior generations created the welfare/warfare state we have today, but the Boomers have had the reins of power for the last two decades in Congress and chose to not only ignore the fact the entitlement promises made by previous administrations could not be fulfilled. They even made further promises in the trillions to their fellow Boomers. Instead of making a budgetary choice between guns and butter, the Boomers chose guns, butter, education, universal healthcare, the right to own a home, the right to a 72 inch HDTV, and zero percent financing on their Cadillac Escalade from government motors. The consequences of these choices are a $15.2 trillion National Debt growing at a rate of $3.7 billion per day and unfunded entitlement liabilities totaling in excess of $100 trillion.
I had the pleasure of meeting Neil Howe, co-author of The Fourth Turning and fourteen other books, in early December. His ground breaking work with William Strauss on generational theory has proven to be uncannily accurate, as their 1997 assessment of what dynamics would drive the course of history over the coming decades have materialized exactly as they presumed. We had a fascinating two hour discussion about various topics impacting the world today and I found that we were in agreement on just about everything, except for the Occupy protests. Neil Howe is an expert on interpreting how generations react to events. I expected him to be impressed by the courage and fortitude of the Millenials leading this protest against Wall Street gluttony and audacious criminality. This is the new GI Generation and I anticipated him perceiving these protests as a prelude to greater feats ahead by this generation. Instead he described them as naive adolescents being led down a phony path by anarchist Boomers. As an example he referenced the fact that many of the protestors were wearing Guy Fawkes masks, the most famous anarchist in history. He found this distasteful and dangerous. My interpretation of the Guy Fawkes masks was more in line with the movie V For Vendetta and the theme of a corrupt evil government keeping the public living in perpetual fear.
“Because while the truncheon may be used in lieu of conversation, words will always retain their power. Words offer the means to meaning, and for those who will listen, the enunciation of truth. And the truth is, there is something terribly wrong with this country, isn’t there? Cruelty and injustice, intolerance and oppression. And where once you had the freedom to object, to think and speak as you saw fit, you now have censors and systems of surveillance coercing your conformity and soliciting your submission. How did this happen? Who’s to blame? Well certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you’re looking for the guilty, you need only look into a mirror. I know why you did it. I know you were afraid. Who wouldn’t be? War, terror, disease. There were a myriad of problems which conspired to corrupt your reason and rob you of your common sense. Fear got the best of you, and in your panic you turned to the now high chancellor, Adam Sutler. He promised you order, he promised you peace, and all he demanded in return was your silent, obedient consent.” – V For Vendetta
Neil Howe’s impression of the movie centered on the terroristic aspects of blowing up Parliament, not on the symbolism of citizens rising up and casting off the yoke of a malevolent oligarchy that has used propaganda, fear and intimidation to manipulate and control the population. Howe is a Baby Boomer and I’m Generation X. We are each viewing the Occupy Movement through the prism of our life experiences and perceptions about the intentions of these protestors. The existing social, economic, and political structure is dominated by Boomers. Neil Howe views the Occupy Movement as a threat to the system he believes in and supports. As a cynical Xer with no allegiance to a corrupt government, a crony capitalist economic system or a greedy self centered society, I see these young revolutionaries as our last great hope.
Neil Howe runs a very successful consulting firm whose clients include Fortune 500 corporations, including Wall Street financial firms. His annual income and net worth is dependent upon the existing corporate dynamic. When your living depends upon not understanding the real reason young people are protesting corporate malfeasance, fraud and corruption, your mind can ignore observable facts and visible truths. Anything can be rationalized when putting food on the table requires you to ignore obvious truths and understandable facts.
“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.” – Edward Bernays, Propaganda, 1928
I was shocked when I came across the above quote a few months ago. Bernays had it figured out 84 years ago before mass media, television, or spin doctors. His vision of a society manipulated by a small number of governing elite who believe they know better than the masses has come to fruition. True republican equality as defined by the founders in the Constitution is considered quaint and a belief of the trusting and naïve masses by the wealthy elite. Manipulation of the masses through a relentless never ending barrage of propaganda disguised as news and unremitting false advertising is designed to control and herd the cattle into the slaughterhouse. We are given the illusion of free choice, when in reality the choices are being made for us by a chosen few who think they know what is best. These puppeteers controlling the strings inhabit the financial, government and corporate halls of power. Their purpose is not to benefit society and its citizens but to protect their wealth and influence, using any means at their disposal. Propaganda to control the minds of a willfully uninformed public has been their most potent weapon.
Source: Mike Kreiger
Most people have never heard the name Edward Bernays. That is the way public relations specialists (manipulators of the truth) like it. They operate in the shadows, subtly influencing public opinion through what Bernays arrogantly referred to as the sinister method of “engineering of consent”. The Governing Elite have no time for messy processes like true capitalism or non-manipulated free elections. The objective for Bernays and his ilk has always been to provide corrupt government power brokers, shadowy bankers and corporate media kingpins with potent psychological instruments of social persuasion and mind control. Edward Bernays is considered the “father of public relations”, and he was the nephew of Sigmund Freud. He pioneered media manipulation techniques.
He understood the weaknesses of the human mind and developed methods and processes for taking advantage of that weakness.
“The average citizen is the world’s most efficient censor. His own mind is the greatest barrier between him and the facts. His own ‘logic proof compartments,’ his own absolutism are the obstacles which prevent him from seeing in terms of experience and thought rather than in terms of group reaction.” – Bernays, Crystallizing Public Opinion
Bernays got his big break during the administration of Woodrow Wilson, the outset of the American interventionist empire bankrolled by an inflation creating Federal Reserve and a tax and spend Congress. During WWI, Edward began work for the Committee on Public Information, the immense propaganda machine ordered by Woodrow Wilson to sway the American public towards a war he campaigned to keep us out of. He became so instrumental he was invited to accompany Wilson to the Paris peace conference. His claims to fame afterward included:
His biggest claim to fame was inspiring the most reviled propagandist in history. Bernays’ techniques were so effective that Joseph Goebbels, the Nazi propaganda minister, made copious use of Bernays’ book, “Propaganda” throughout the Holocaust, often crediting Bernays. That was quite a feather in Bernays’ cap. The German people were gradually indoctrinated by their government through propaganda into consenting and supporting the most horrific crimes in history as described by Milton Mayer in his book, They Thought They Were Free – The Germans, 1933-45:
“This separation of government from people, this widening of the gap, took place so gradually and so insensibly, each step disguised (perhaps not even intentionally) as a temporary emergency measure or associated with true patriotic allegiance or with real social purposes. And all the crises and reforms (real reforms, too) so occupied the people that they did not see the slow motion underneath, of the whole process of government growing remoter and remoter.
“To live in this process is absolutely not to be able to notice it—please try to believe me—unless one has a much greater degree of political awareness, acuity, than most of us had ever had occasion to develop. Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted,’ that, unless one were detached from the whole process from the beginning, unless one understood what the whole thing was in principle, what all these ‘little measures’ that no ‘patriotic German’ could resent must someday lead to, one no more saw it developing from day to day than a farmer in his field sees the corn growing. One day it is over his head.”
Bernays was a master of using psychological techniques to mask the motives of his clients, as part of a calculated strategy aimed at keeping the public unaware of the forces that were working to mold their psyches. Bernays died in 1995, but his techniques have been taken to a new level as our government, media and financial elite use any means at their disposal to keep the masses sedated and content while they are fleeced and herded towards the slaughterhouse. The Big Lie perpetrated upon the masses is the fallacy of America being a democratic society. The anti-democratic and treacherous corporate public relations Madison Avenue maggots manage and manipulate the opinions of the many in order to make sure a true democratic system doesn’t threaten the privileges and supremacy of the governing elite.
I wonder if it was coincidental the creation of the Federal Reserve, implementation of the personal income tax, and virtually non-stop war coincided with the rise of an industry designed to manipulate and control the thoughts and opinions of an easily influenced and willfully unaware populace. Most people want to be led and told what to believe. Critical thinking and taking personal responsibility for your life and your society requires hard work, sacrifice, honesty, and self restraint. Simply believing storylines supplied by authority figures and media pundits allow the masses to continue living lives of debt delusion and hope, occasionally stirred into a frenzy of fear and loathing towards the foreign bogeyman of the moment, chosen by the governing elite. Bernays and his disciples understood this dynamic and have been able to utilize corporate mass media and the human weakness of trusting in the judgments of authority figures to control and manage the vast swath of America without them knowing it.
“If we understand the mechanism and motives of the group mind, it is now possible to control and regiment the masses according to our will without them knowing it.” – Edward Bernays
The propaganda techniques employed to manipulate the masses seemed less abhorrent when they centered upon just consumer products. Convincing women they would look like a gorgeous model if they used a company’s cosmetics or convincing a man he’d be admired by his neighbors if he drove a certain car was small potatoes. In the last few decades the misinformation and outright lies fed to the American public by oligarchy of governing elite has become more manifest and repugnant. The list of abuses is virtually endless.
“The moneyed interests have done quite a successful PR job in refocusing the national discussion on priorities involving social issues, and the reform of the support systems for the weak, the unfortunate, and the elderly. Turning one group against another, and objectifying your intended victims through slogans and stereotypes, has always been an effective method of bending the herd to your will. Score one for Edward Bernays.”
The above list of abuses committed by the ruling oligarchy pales in comparison to the totalitarian like measures that have been executed since September 11,2001. With the country cowering in fear, the governing elite passed an Orwellian like 350 page bill that changed this country forever. The USA PATRIOT Act, which changed the relationship between our government and its citizens forever, was supposedly written, introduced, debated and passed in the space of 30 days in October 2001. I wonder which public relations firm came up with the Orwellian acronym? Uniting (and) Strengthening America (by) Providing Appropriate Tools Required (to) Intercept (and) Obstruct Terrorism Act of 2001. The purpose of naming this bill was to imply that anyone who was against allowing our government to spy, monitor or place under surveillance anyone our government chooses would make you unpatriotic. The American people chose implied safety and security over true freedom and liberty by their deafening silence. The governing elite used fear and propaganda to achieve their goal of more domination over our lives.
Drunk with their new found power, the political elite decided to change the world by using their spin machine to create visions of mushroom clouds over U.S. cities in the minds of a gullible public to craft a believable storyline for the invasion of Iraq. A willingly pliant press corp. spread the misinformation about weapons of mass destruction and Al Qaeda connections to fashion a convincing plot for pre-emptive war on a sovereign country that did not threaten our country. Who benefitted from war with Iraq? The military industrial complex reaped billions in profits and the Wall Street banks bankrolled the invasion with more debt. It only destroyed the lives of thousands of low income American soldiers, killed 100,000 Iraqi peasants, drove the price of oil from $25 a barrel to $100 a barrel, and will ultimately cost American taxpayers $4 trillion. And the great thing about passage of the Patriot Act and invasion of Iraq was the bipartisan cooperation pushing us ever closer to an authoritarian state.
The erroneous notion that Americans have a choice between two political parties that offer distinct and clear opposing policies addressing the major issues facing our country is still perpetuated by politicians and the corporate media. It is untrue, as we have seen the Obama administration employ the same repressive methods instituted by the Bush administration. Military spending rises. Wars of choice proliferate and grow. Obamacare is virtually identical to a plan created by the leading GOP presidential nominee. Further restrictions, regulations and laws are put forth to keep the masses controlled, sedated and fearful. The governing elite and their propagators of misinformation are again formulating a false storyline to convince the easily fooled ignorant public that a sovereign country 7,500 miles from our shores is actually a threat to their lives. While our government has already committed acts of war against Iran (sanctions, assassinations, cyber warfare, and using drones to spy), the public is being worked into a bloodthirsty frenzy of nationalism. Bipartisanship worked so well with Iraq. How could it possibly go wrong with Iran?
In the last six months cracks have begun appearing in the fascist façade masquerading as a democratic republic. The rise of the Occupy Movement, increasing pain and discontent among the middle class, a small but vocal irate minority utilizing the internet to organize, inform and spread knowledge, and the growing support among the liberty minded for Ron Paul’s candidacy are the opening salvos in a coming revolution. The volleys being traded between the forces of the American aristocratic elite and the leading forces of this revolution are only the opening shots on par with Bunker Hill. The oligarchs have won the initial skirmishes with the Occupy Movement through their control of superior mercenary fire power and ability to falsify the message and nature of the protestors. The corporate mass media propaganda machine convinced an apathetic, non critical thinking public the protestors were nothing but dirty, lazy, college students looking for government handouts organized and led by George Soros. Journalist Robert Fisk reveals the true nature of the protests and rage:
“And that is the true parallel in the West. The protest movements are indeed against Big Business – a perfectly justified cause – and against “governments”. What they have really divined, however, albeit a bit late in the day, is that they have for decades bought into a fraudulent democracy: they dutifully vote for political parties – which then hand their democratic mandate and people’s power to the banks and the derivative traders and the rating agencies, all three backed up by the slovenly and dishonest coterie of “experts” from America’s top universities and “think tanks”, who maintain the fiction that this is a crisis of globalization rather than a massive financial con trick foisted on the voters.
The banks and the rating agencies have become the dictators of the West. Like the Mubaraks and Ben Alis, the banks believed – and still believe – they are owners of their countries. The elections which give them power have – through the gutlessness and collusion of governments – become as false as the polls to which the Arabs were forced to troop decade after decade to anoint their own national property owners. Goldman Sachs and the Royal Bank of Scotland became the Mubaraks and Ben Alis of the US and the UK, each gobbling up the people’s wealth in bogus rewards and bonuses for their vicious bosses on a scale infinitely more rapacious than their greedy Arab dictator-brothers could imagine.” – Robert Fisk, Bankers are the Dictators of the West
The mounting desperation of the oligarchs is palpable. They have circled the wagons as one of their leaders – Jon Corzine – was caught stealing $1.2 billion directly from the accounts of his customers after making reckless bets that went wrong and bankrupted his firm. The Department of Homeland Security coordinated brutality unleashed upon peaceful protestors in cities across America opened the eyes of more people to the approach of an increasingly oppressive state. The media lapdogs have come out in force with an organized smear campaign designed to derail the presidential campaign of Ron Paul, the only candidate talking about real change and a real downsizing of the American empire. Ron Paul’s platform of liberty, freedom, non-interventionism, sound money, and a government not controlled by bankers and corporate interests is anathema to the ruling elite of both parties. A vote for one of the hand selected candidates offered by the moneyed interests is simply a vote for the special interest status quo. As our economic system becomes more saturated with debt by the day a tipping point approaches.
Obama’s signing of the NDAA, overwhelmingly supported by politicians of both parties, now gives the ruling class the ability to track down and imprison indefinitely any American citizen they consider a threat to their power, without charges. The only remaining thorn in their side is the internet. The internet has allowed critical thinkers to share information, organize resistance to the oligarchs, create communities of like-minded citizens, and allow individuals the opportunity to turn the tables and perform surveillance on the state. The state does not like an unfettered internet because it allows citizens to find the non-manipulated truth and undermines their mainstream media propaganda machine. Young people are less able to be manipulated. The introduction of abominable legislation like SOPA and PIPA are a blatant attempt by the governing elite to crush dissent by locking down the internet and eliminating sites that question their version of reality.
Humans are a flawed species. Our minds are easily manipulated. We don’t like pain. We prefer instant gratification. We are susceptible to mass delusion. We will often choose hope over critical thought. Those with higher IQs will regularly attempt to take advantage of those with lower IQs. Fear and greed are the two motivations used by the minority in power to control and manipulate the majority. The American people have been led astray by a small group of powerful men. We were herded through a door in the wall of perception that promised an American dream of material goods, entitlements and pleasure with no obligations or responsibility to future generations. There is only one choice that can save this country from ruin. Each individual must make a choice to either to continue supporting the manipulative, corrupt status quo or coming back through the Door in the Wall.
“The man who comes back through the Door in the Wall will never be quite the same as the man who went out. He will be wiser but less sure, happier but less self-satisfied, humbler in acknowledging his ignorance yet better equipped to understand the relationship of words to things, of systematic reasoning to the unfathomable mystery which it tries, forever vainly, to comprehend” – Aldous Huxley
Switzerland is vote crazy. It has a referendum on most issues. There is a vote coming up that I’m sure will pass. This time around, the Swiss are going to vote themselves a big salary increase. As a result, Switzerland will have the highest minimum wage on the globe. That’s nice for the Swiss.
The annual minimum wages of Switzerland’s neighbors: (Link)
Being on the top of the list of minimum guaranteed income is a positive reflection on the Swiss economy. But it will also bring envy. It is an embarrassment of riches. I don’t think it will go unnoticed. The country is surrounded by economic problems, yet it's flourishing.
Switzerland has insured that its domestic companies are insulated from the economic chaos of its neighbors. It has achieved this with a currency peg. This appears to be a simple solution. So far, the peg is working. But there are consequences to this policy. In order to maintain an artificially low value for the Franc, the Swiss Central Bank (SNB) has had to absorb a huge chunk of official reserves, the bulk of which has been in Euros.
An argument has been put forward by the SNB, economists and bloggers, that there is no reason why the Swiss can’t continue to absorb foreign reserves. They argue that it doesn’t matter if it is E260b today, it would not matter if it were E500b in six months. I disagree. The SNB has investment restrictions. It only invests its Euro reserves in the debt obligations of France and Germany.
At some point we will see headlines like these:
Month #1
Finance Ministers of France, Germany, Netherlands
Call on Switzerland to Invest excess reserves in
Bonds of ECB.
Month # 2
Swiss Finance Minister Rejects Calls for Reserve Diversification
“The investment policies of the SNB are not for discussion”
Month #3
Merkel travels to Bern to discuss direct
investment in EU Central Bank
Month #4
Swiss Parliament Rejects Pressure from Neighbors
Swiss President: “The Swiss people have no ability to influence the SNB”
Month #5
EU leaders threaten economic sanctions against Switzerland
French President, “We can have Beggar my Neighbor policies too!”
Month #6
EU Considers Tariffs on Swiss Agricultural Products
Farmers Protest
Month #7
Swiss Tourist Industry in Slump
Hotelier: “We have a bad image, so people don’t come”
Month #8
Belgium’s rail road Cancels Purchase of Swiss Locomotives
Pressure from government responsible
Month #9
Swiss Politicians Raise Possibility of Referendum
on Independence of the SNB
SPP Leader, “Let the people decide”
Two Days Later
SNB Reverses Stance On Investments. Will Invest 10%
of Euro Reserves in ECB Debt.
Major concession. Threat of vote forced
change in policy.
Month #10
Swiss Reserves Rise to New Record
Up E100B in Six Months
One Week Later
Italian Finance Minister Calls on Swiss
for Direct Investment in
Italian Bonds – Swiss say, “No”.
One Week Later
Italian Parliament Considers New Laws
on Swiss Bank Accounts.
Severe restrictions, penalties to equal 50% of account balances
Two Days Later
SNB to Hold 10% of reserves in direct obligations of
Italian government bonds
Italian Press: We put a gun to their head; they said
“Si.”
Two Days Later
Spanish Finance Minister Travels to Bern to Discuss Bond Sales
The question for the SNB: “Is Portugal next to visit?”
This is a bit whimsical, but I hope you get the point. I doubt the Swiss can hold unlimited amounts of reserves without pressure on them to diversify those huge holdings to some of the governments (and the Supra-nationals). I’m surprised that this has not happened already. Possibly Switzerland’s neighbors will look at the results of the upcoming vote on the minimum wage, and start asking those questions.
This very rich country may end up being the banker for some of its neighbors. What comes around, often goes around.
Courtesy of Phil of Phil's Stock World
More Free Money - OR ELSE!
That's the rally cry from the new IMF chief (appointed under mysterious circumstances). Lagarde gives the cry in Berlin this morning as she warns that the world will descent into the 1930s without - among other things - greater resources being devoted to various bailout mechanisms - the EFSF, the ESM, and of course, the IMF.
As we turn the page on a turbulent year, a year in which so much of what could go wrong did go wrong, many look to the future with trepidation and foreboding. They worry about uncertain economic prospects, dwindling job opportunities, and rising inequality. About what kind of future awaits their children.
Indeed, in the economic outlook that the IMF will release tomorrow, we will lower growth forecasts for most parts of the world. Even these lower forecasts assume a constructive policy path that is by no means assured.
In too many places, uncertainty is holding back demand and the willingness to lend. A legacy of high public and private debt is hurting economic prospects. The global financial system remains fragile.
In an interconnected world like ours, these forces are feeding each other across borders. Capital flows to emerging markets have already dropped off, and growth is expected to slow even in the most vibrant parts of the world economy. Low-income countries are especially vulnerable.
This speech was, of course, delivered in German. I believe the translators at CNBC quoted Ms. Lagarde as saying "BUYBUYBUY!" I know, you were too busy focusing on the warning that the IFM will lower growth forecasts for most of the World. I believe CNBC translates that part of her speech as "record oil demand projected." It seems that if I want to get behind this market rally, I will have to give up both reading AND thinking for the New Year.
I understand the pain felt in those European countries that need to adjust, and the difficulty of sharing the burden in a way that is socially fair. But I also understand the feelings in countries that have been thrifty, asked to help those who could have managed their economies more prudently.
But what we must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand.
The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it.
This,
I believe, was translated by CNBC as Lagarde saying Netflix was a bargain at $100 a share and CMG would hit $400 after earnings. Well, I guess if you want to participate in this Wonderland Market, you should get used to believing 6 impossible things before breakfast every day.
Speaking of impossible things - Iran said this morning that they will "definitely" close the Strait of Hormuz if the EU Embargo (now officially scheduled for July) disrupts exports. That sent oil flying from the lows of $97.50 last night all the way back to $99.50 (and we caught part of that ride in Member Chat this morning!) but now back to $99 as people remember they might have heard this threat 20 or 30 times before in the past month.
If you are going to threaten to disrupt global fuel supplies, you have to carry out your threats sometimes - like CHK, who run the US Natural Gas Cartel and have cut of 500,0000 cubic feet a day (8%) of their production and are threatening to cut off 500,000 more - sending natural gas prices flying up from $2.25 to $2.50 (/NG) - now THAT's how you run a ruthless cartel and put the squeeze on American Consumers!
Speaking of market manipulation - Goldman Sachs put out a note today telling it's clients to get short 10-year Treasuries as yields below 2% will be difficult to sustain (currently 2.05%) - gee ya think? It's not the fact of the note I find odd but the timing as they are VERY late to the party (we've been short TLT from the low $120s) and I'm pretty sure the Fed is going to support $117 (now $116.55) into the auctions so this is really about GS chasing more money out of TBills and into their market top so they can make that exit most expeditiously.
Like any good magician, the Wizards of Wall Street are happy to show you what's in one hand - as it distracts you from seeing what they are doing with the other. Goldman needs a big payday as they have reportedly invested $3.5Bn of their client's money in SHLD 4 years ago at about $100 per share according to the WSJ.
It's going to be another exciting week and tomorrow we get Obama's State of the Union Address and an FOMC Rate Decision on Wednesday along with their more "open" language - what a time for this experiment!
I'm still thinking that without MORE FREE MONEY, we're doomed. Hopefully I'm wrong this time but, until then, just imagine we're all walking around in the dark and I just said "I THINK there's a cliff just ahead." You don't have to believe me and, if I'm right - you'll be doing the rest of us a favor by confirming it.
Good luck!
Check out Stock World Weekly here.
Courtesy of Michael Snyder of Economic Collapse
If you increased your credit card spending by a couple thousand dollars per month would your lifestyle improve? Of course it would. By going into large amounts of debt, it is possible to live a lifestyle that you can't really afford, at least for a while. But if you keep racking up huge amounts of credit card debt every single month, eventually it gets to a point where it is extremely difficult to even keep up with the minimum monthly payments and the credit card companies will not lend you any more money. Well, on a larger scale it is the same thing with government debt.
Right now, the U.S. government is spending more than a trillion dollars more than it takes in every year. Even if the U.S. government spends all of that money on incredibly stupid stuff, it still gets into the pockets of ordinary Americans. In turn, those ordinary Americans use that money to pay the mortgage, buy food, shop at the mall, etc. All of this borrowing and spending by the U.S. government has created a "false prosperity" bubble that is not real. It may feel real to you right now, but it is unsustainable by definition. If the U.S. government suddenly started spending only the money that it actually brought in every year, our economy would be doomed and all of this "false prosperity" would rapidly disappear. But if the U.S. government continues to rack up debt at this pace we are doomed as well. In fact, every dollar that gets borrowed makes our eventual collapse ever worse. We are heading down the exact same road that Greece has gone. Eventually the rest of the world is not going to lend us gigantic mountains of super cheap money anymore. When the flow of cheap money stops, it can be extremely painful. Anyone that has ever seen the interest rates on their credit cards go above 20 percent knows how this feels. If we had addressed these problems as a nation a decade or two ago, perhaps we could have found a solution. But now there is no way out under our current financial system and a devastating economic collapse is on the horizon no matter what we do.
If there was a Hollywood movie where some crooks successfully stole 150 million dollars, what would you think of those crooks?
Would you have admiration for them?
Would you be disgusted with them?
Would you feel like your intelligence was insulted because nobody could ever steal 150 million dollars and get away with it?
Well, right now the federal government is stealing approximately 150 million dollars from our children and our grandchildren every single hour.
That's right - the U.S. government is borrowing an astounding 150 million dollars an hour that our children and our grandchildren will be expected to deal with.
It is a theft so vast that it is almost unimaginable.
So what should be done?
A lot of people out there think that our problems would be solved if the government would just quit borrowing so much money.
Well, it is just not that simple.
Look at Greece. They were forced by the EU and the IMF to dramatically reduce government spending. But when Greece reduced government spending, that caused the economy to shrink rapidly and it caused tax receipts to go down more than expected. So Greek budget deficits were even larger than anticipated and so Greece was forced to cut spending even more. But that created even more economic problems.
A recent article by John Mauldin described the nightmarish effect that this cycle has had on Greece....
And as Greece began shake and bake its way to "austerity," the very act of cutting deficits pushed the country into recession, which lowered tax revenues and increased expenses, putting the elusive goal of a balanced budget even further off. We should quickly note that this is not just a Greek problem. Spain's "draconian" cuts have meant that its 6% deficit target for the year has this week been raised to a more likely 8%, making it harder to get back to even.
For country after country, this is the Endgame. It is the end of the Debt Supercycle. Debt has grown to the size that it cannot be sustained. The market will not lend any more money on terms that can be afforded, and any efforts to cut spending and raise taxes will result in an even worse economy, in various degrees of recession, with falling revenues and rising costs.
This is what happens when a country that has been spending far beyond its means is forced to dramatically cut back.
Those that are convinced that balancing the federal budget in the United States will be relatively painless should take a close look at what is happening in Greece.
As I have written about previously, the Greek economy has been plunged into a 21st century "Great Depression". In Greece, 20 percent of all retail stores have already shut down, the unemployment rate for those under the age of 24 is sitting at 39 percent, and one third of the entire nation is living in poverty.
And this is only just the beginning for Greece.
Things are going to get even worse.
Unfortunately, many believe that the United States is destined to experience far worse pain than Greece is currently experiencing.
For example, Peter Schiff insists that the United States is in worse financial shape than Europe at this point. Just check out this video....
Anyone that attempts to downplay the U.S. debt problem is making a serious mistake. Yes, we are still able to borrow trillions of dollars for next to nothing, but that is going to come to an end.
Remember all of those "suckers" that signed up for mortgages at "teaser rates" that later got jacked up dramatically?
Of course you do.
So what happened to them?
When the rates went up many of them ended up losing everything.
Well, we have gotten ourselves into the exact same kind of a position. All of this cheap money has enabled us to live very nicely for now, but when the cheap money ends the nightmare will begin.
Right now, our debt is growing much, much faster than our economy is. Between 2007 and 2010, U.S. GDP grew by only 4.26%, but the U.S. national debt soared by 61% during that same time period.
What would your household finances look like if your total debt grew by 61 percent next year but your income only grew by 4 percent?
When I was a little boy, the U.S. national debt was considered to be a huge national crisis. Politicians from both major political parties were promising that they would fix things.
But what has happened since then?
Well, when Ronald Reagan took office the U.S. national debt was less than 1 trillion dollars. Today, the U.S. national debt is over 15.2 trillion dollars.
During 2011, the federal government went into more debt than the U.S. government accumulated from the time that George Washington became president to the time that Ronald Reagan became president.
That may be hard to believe, but it is true.
During fiscal year 2011, the U.S. government spent 3.7 trillion dollars but it only brought in 2.4 trillion dollars.
That is utter insanity, and yet most Americans have become convinced that this is "normal" and that there is nothing to worry about.
It is hard to grasp how much money a trillion dollars is.
If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.
That is how much money a trillion dollars is.
And things look even worse when you look at the balance sheet of the U.S. government.
The U.S. government has total assets of 2.7 trillion dollars and has total liabilities of 17.5 trillion dollars. Those liabilities do not even count 4.7 trillion dollars of intragovernmental debt that is currently outstanding.
But it is not just the federal government that has been living a fantasy.
The chart posted below shows the growth of total debt in America over the past several decades. Consumers, businesses and government officials have been on a debt binge that is absolutely unprecedented....
The scary thing is that even with all of this borrowed money, our economy is still in the dumps.
So what in the world is it going to look like when the debt bubble totally bursts?
Even with all of this "borrowed prosperity", anger at the government is rapidly growing. A recent Gallup poll found that "satisfaction with government" in the United States is now at an all-time record low of 29 percent.
So how angry will the American people be when all of this "borrowed prosperity" disappears?
When this whole thing comes tumbling down, a lot of people are going to blame our problems on "capitalism".
In fact, it is already happening. Just check out what the founder of the World Economic Forum is saying....
"We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations," said Klaus Schwab, host and founder of the annual World Economic Forum.
"Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole.
"We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual," the 73-year-old said, adding that "capitalism in its current form, has no place in the world around us."
But capitalism is not the problem. Capitalism has produced the greatest eras of prosperity that the world has ever seen.
No, the real problem is our debt-based financial system that is managed and run by the central banks of the world.
You see, debt-based central banking is not capitalism. But way too many people equate the two.
A lot of people cannot even imagine this, but theoretically you could have capitalism without any debt whatsoever.
But what we have today is a financial system that has debt as the very foundation. And such a system is inevitably going to fail someday.
As I have written about so many times before, the Federal Reserve is at the very heart of our economic problems here in the United States.
The Federal Reserve was designed to be a perpetual debt machine. And it has performed that task very well. The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created.
So yes, even though things seem somewhat "stable" for the moment, there are all kinds of reasons to be concerned about the viability of our economy and our financial system in the years ahead.
The other day, I was quoted in a Reuters article about our coming economic problems....
"Most people have a gut feeling that something has gone terribly wrong, but that doesn't mean that they understand what is happening," he said. "A lot of Americans sense that a massive economic storm is coming and they want to be prepared for it."
Of course the Reuters reporter did not even bother to spell my name correctly, but at least he got the quote right.
A great economic storm is coming.
Don't let this false prosperity and this "calm before the storm" fool you.
We are living in the greatest debt bubble the world has ever seen, and no matter how it plays out there is going to be a massive amount of pain.
You might want to get yourself and your family prepared for that.
Apple has released a report on working conditions in its suppliers’ factories. It highlights a form of control fraud that criminology has identified but rarely discussed. I write overwhelmingly about accounting control fraud because it drives our recurrent, intensifying financial crises. The primary intended victims of accounting control frauds are the shareholders and the creditors. Other private sector control frauds target customers (e.g., George Akerlof’s 1970 article on “lemons”), and the public (e.g., the unlawful disposal of toxic waste, illegal logging, and tax fraud).
Anti-employee control frauds most commonly fall in four broad, but not mutually exclusive, categories – illegal work conditions due to violation of safety rules, violation of child labor laws, failure to pay employees’ wages and benefits, and frauds based on goods and loans provided by the employer to the employee that lock the employee into quasi-slavery. Apple has just released a report on its suppliers that shows that anti-employee control fraud is the norm. Remember, fraud is hidden and is often not discovered and Apple did not have an incentive to make an exhaustive investigation. Apple calls its inquiries “audits” and it is apparent that most of its information comes from reviewing written and electronic records at its suppliers. That is exceptionally revealing. The suppliers know that they can defraud their employees with such impunity that they don’t even bother to get rid of records that prove their frauds. Apple has resisted making public its suppliers and the report refused to identify which suppliers committed which violations – often for years despite repeated, false promises to end their anti-employee control frauds. Two other facts are evident (but not reported). First, Apple rarely terminates suppliers for defrauding their employees – even when the frauds endanger the lives and health of the workers and the community – and even where Apple knows that the supplier repeatedly lies to Apple about these fraudulent and lethal practices. Second, it appears unlikely in the extreme that Apple makes criminal referrals on its suppliers even when they commit anti-employee control frauds as a routine practice, even when the frauds endanger the worker’s and the public’s health, and even when the supplier repeatedly lies to Apple about the frauds. Apple’s report, therefore, understates substantially the actual incidence of fraud by the 156 suppliers (accounting for 97% of its payments to suppliers).
“The company said audits revealed that 93 supplier facilities had records indicating that more than half of their workers exceed a 60-hour weekly working limit. Apple said 108 facilities did not pay proper overtime as required by law. In 15 facilities, Apple found foreign contract workers who had paid excessive recruitment fees to labor agencies.And though Apple said it mandated changes at those suppliers, and some facilities showed improvements, in aggregate, many types of lapses remained at levels that have persisted for years.”
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
“The calls for Apple to disclose suppliers became particularly acute after a series of deaths and accidents in recent years. In the last two years at firms supplying services to Apple, 137 employees were seriously injured after cleaning iPad screens with n-hexane, a toxic chemical that can cause nerve damage and paralysis; over a dozen workers have committed suicide or fell or jumped from buildings in a manner that suggests a suicide attempt; and in two separate blasts caused by dust from polishing iPad cases, four were killed and 77 injured.”
“Apple found that 62 percent of the 229 facilities it inspected were not in compliance with the company’s maximum 60-hour work policy; 13 percent did not have adequate protections for juvenile workers; and 32 percent had problems with the management of hazardous waste.One supplier was caught dumping wastewater at a nearby farm. Another had a total lack of safety measures, creating “unsafe working conditions,” the report found. Five facilities employed underage workers.The company in the past had refused to divulge its full supplier list even as it became standard practice for multinational corporations to do so after the public outcry in the 1990s over labor problems at Nike factories in developing countries.Apple’s change of heart follows a highly publicized string of factory worker suicides in 2010 and deadly explosions in two Chinese factories in 2011.”
The WSJ emphasized this chillingfinding:
The article does not make this point explicitly, but these firms conduct these tests in order to unlawfully coerce their pregnant employees to have undesired abortions in order to obtain and keep their jobs.“The report also found 24 facilities conducted pregnancy tests and 56 didn't have procedures to prevent discrimination against pregnant workers. Apple said that at its direction, the suppliers have stopped discriminatory screenings for medical conditions or pregnancy.”
Photo Credit: deejayres on Flickr
Courtesy of William K. Black at New Economic Perspectives
“Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.
A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.
“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.””
“That’s because nothing like Foxconn City exists in the United States.
The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.
Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.
“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?””
Yes, “convince” them to live them in dorms complete with anti-suicide netting at no extra charge. Foxconn truly is convincing. It’s probably the pork and rice. Alternatively, it could be the fact that rural China is still extremely poor, the rule of law is a fiction in China, and it is a crime to start a real labor union. It could also be that the “300 guards” have broader duties than guiding traffic flow.
“Foxconn, in statements, declined to speak about specific clients.
“Any worker recruited by our firm is covered by a clear contract outlining terms and conditions and by Chinese government law that protects their rights,” the company wrote. Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment.”
The company disputed some details of the former Apple executive’s account, and wrote that a midnight shift, such as the one described, was impossible “because we have strict regulations regarding the working hours of our employees based on their designated shifts, and every employee has computerized timecards that would bar them from working at any facility at a time outside of their approved shift.” The company said that all shifts began at either 7 a.m. or 7 p.m., and that employees receive at least 12 hours’ notice of any schedule changes.
Foxconn employees, in interviews, have challenged those assertions.”
The NYT ombudsman has heaped derision on the concept, formerly known as journalism, that its reporters should inform the reader that they have strong reason to doubt the veracity of a source’s statement. This may explain why the reporters felt there was no need to inform the reader that the quoted claim that Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment” is demonstrated most graphically by its provision of anti-suicide netting in its dormitory complex.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
How does the current recovery compare to those of the past? The following charts from the Council on Foreign Relations puts the current (un)recovery in context and despite some apparently bright news recently, the pictures underline the economy's weakness since the NBER's recovery began in June 2009.
The x-axis shows the number of months since the end of the recession. The dotted lines are composites of prior recoveries representing the weakest and strongest experiences of the past. The recovery's start date is set using the recession dates established by the National Bureau of Economic Research's Business Cycle Dating Committee. By the committee's methodology, the current recovery began in June 2009.
Real GDP is growing, but weakly compared with the postwar average recovery.
The recovery from the 1980 recession was even weaker at this stage, but that reflected a double-dip recession in 1981.
The economy would have to grow at a 7.6 percent annualized rate in order to catch up with the average postwar recovery by the end of 2012.
The consensus forecast for 2012 growth as reported by Bloomberg is 2.1 percent, up just slightly from a forecast of 2.0 percent as of last October.
Soft home prices have been central to the weakness of the recovery.
The continued weakness of nominal home prices is a postwar anomaly.
In every previous postwar recovery, the stock of household debt has risen as the recovery has begun.
In the current recovery, the collapse in home prices has severely damaged household balance sheets. As a result, consumers have avoided taking on new debt.
The result is weak consumer demand and, hence, a slow recovery.
The slow recovery is obvious in the labor market, where job growth remains painfully sluggish compared to the average recovery.
The recent uptick at the end of the Current Recovery linev(red) is the result of encouraging payroll data announced on January 6th 2012.
Because of the depth of the recent recession, one might expect stronger-than-average improvement in industrial production.
Despite the predicted snapback, the increase in industrial production during this recovery is actually slightly slower than in the average postwar case.
Capacity in manufacturing, mining, and electric and gas utilities usually grows steadily from the start of a recovery.
However, during the current recovery, investment has been so low that capacity is actually declining. Plants and machinery are depreciating faster than they are being installed.
The growth in world trade exceeds even the best postwar experiences.
However, this reflects the depth of the fall during the recession.
The federal deficit since the start of the recovery has been much higher than in previous postwar cases.
Although the deficit has shrunk slightly, its level creates significant challenges for policymakers and the economy.
The traditional American enthusiasm for the road has been dulled by a combination of weak recovery and high fuel prices.
When compared to other postwar recessions, total vehicle miles traveled in this current recovery has not only lagged the average, but has registered no growth whatever.
All-in-all, not a pretty picture but given the incessant rally in stocks, we should all believe that a real recovery is right around the corner (or is it simply a fully priced-in QE-driven nominal recovery in equity prices as the real economy sags further?). As the following chart (courtesy of John Lohman) indicates, we have however got a little over-excited at the prospect of the above charts morphing into something real...
Courtesy of Mish
Citing the latest report on "Debt and Deleveraging" by the McKinsey Global Institute, Ambrose Evans-Pritchard proclaims America overcomes the debt crisis as Britain sinks deeper into the swamp.
Britain has sunk deeper into debt. Three years after bubble burst, the UK has barely begun to tackle the crushing burden left by Gordon Brown. The contrast with the United States is frankly shocking.
US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus.
One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.
In hindsight, the US property boom was remarkably modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America’s ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.
Personally, I am coming to the conclusion that the US crisis in 2008-2009 was largely a case of botched monetary policy and could easily have been avoided. The growth of M3 money -- which the Fed stopped tracking thanks to a young Ben Bernanke -- was allowed to balloon in the bubble, then collapse in 2008.
US Did Not Overcome Debt Crisis
There is a big difference between alleged "light at the end of the tunnel" and "America Overcomes Debt Crisis" as Pritchard claims. US consumers may be one-third of the way through, but US debt-to-GDP ratios are low only because unsustainable government spending has taken up the slack.
The US has not started government debt deleveraging and until that is nearly finished there will not be light at the end of the tunnel, let alone the end of the crisis. Optimistically, the best one can possibly assert is one can possibly see light at the end of the "consumer tunnel". The government tunnel immediately follows.
Moreover, one should not be "tempted to ask what all the fuss was about in the US". Just because other nations are worse, does not mean the US had no problem.
Five-Pronged Solution
US monetary policy and ECB monetary policy is partially to blame for these crises as Pritchard says. Reckless fiscal policies by governments everywhere is another part of the problem. The five-pronged solution which Pritchard does not mention is ...
Please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited for a discussion of how a gold standard can fix trade imbalances.
Eurozone Structural Problems
The European crisis now was foreseen in advance by many, including Pritchard.
Certainly the ECB's "one size fits Germany" interest rate policy fueled the property bubbles in Spain and Ireland, as well as imbalances in Italy, Greece, and Portugal.
Unlike the US, the eurozone has the structural additional problem of being a monetary union without a fiscal union. Not one such currency union in history has ever survived.
Bailing out Greece and Portugal and Ireland will not fix structural problems including the ECB's "one size fits all" interest rate dilemma.
Debt and Deleveraging
Here are some excerpts from the McKinsey Global Institute PDF.
Click on any chart below for a sharper image.
Executive Summary
The deleveraging process that began in 2008 is proving to be long and painful, just as historical experience suggested it would be. Two years ago, the McKinsey Global Institute published a report that examined the global credit bubble and provided in-depth analysis of the 32 episodes of debt reduction following financial crises since the 1930s. The eurozone’s debt crisis is just the latest reminder of how damaging the consequences are when countries have too much debt and too little growth.
In this report, we revisit the world’s ten largest mature economies to see where they stand in the process of deleveraging. We pay particular attention to the experience and outlook for the United States, the United Kingdom, and Spain, a set of countries that covers a broad range of deleveraging and growth challenges.
Deleveraging Only Just Begun
1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.
2 Defined as an increase of 25 percentage points or more.
3 Or latest available.
The United States: A light at the end of the tunnel
Since the end of 2008, all categories of US private-sector debt have fallen relative to GDP. Financial-sector debt has declined from $8 trillion to $6.1 trillion and stands at 40 percent of GDP, the same as in 2000. Nonfinancial corporations have also reduced their debt relative to GDP, and US household debt has fallen by $584 billion, or a 15 percentage-point reduction relative to disposable income. Two-thirds of household debt reduction is due to defaults on home loans and consumer debt. With $254 billion of mortgages still in the foreclosure pipeline, the United States could see several more percentage points of household deleveraging in the months and years ahead as the foreclosure process continues.
[Mish Note: notice the key phrase "months and years ahead"]
Even when US consumers finish deleveraging, however, they probably won’t be as powerful an engine of global growth as they were before the crisis. One reason is that they will no longer have easy access to the equity in their homes to use for consumption. From 2003 to 2007, US households took out $2.2 trillion in home equity loans and cash-out refinancing, about one-fifth of which went to fund consumption.
Without the extra purchasing that this home equity extraction enabled, we calculate that consumer spending would have grown about 2 percent annually during the boom, rather than the roughly 3 percent recorded. This “steady state” consumption growth of 2 percent a year is similar to the annualized rate in the third quarter of 2011.
US government debt has continued to grow because of the costs of the crisis and the recession. Furthermore, because the United States entered the financial crisis with large deficits, public debt has reached its highest level—80 percent of GDP in the second quarter of 2011—since World War II.
The next phase of deleveraging, in which the government begins reducing debt, will require difficult political choices that policy makers have thus far been unable to make.
That last sentence, coupled with the fact that consumer deleveraging is only 1/3 finished is precisely why the headline title by Pritchard that "America Overcomes the Debt Crisis ..." is quite inaccurate.
Not only that, but growth assumptions remain absurdly high as do earnings forecasts.
The McKinsey study is certainly supportive of my employment thesis:Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation
Moreover, and importantly, risks are all skewed to the downside because the European recession is going to prove to be a major disaster as noted in Italy Faces 2-Year Recession says IMF; European Recession Neither Mild Nor Short
Spotlight on UK and Spain
10 Largest Economies Composition of Debt
1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.
2 Q1 2011 data.
UK household debt, in absolute terms, has increased slightly since 2008. Unlike in the United States, where defaults and foreclosures account for the majority of household debt reduction, UK banks have been active in granting forbearance to troubled borrowers, and this may have prevented or deferred many foreclosures. This may obscure the extent of the mortgage debt problem. The Bank of England estimates that up to 12 percent of home loans are in a forbearance process. Another 2 percent are delinquent.
Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States. Moreover, around two-thirds of UK mortgages have floating interest rates, which may create distress if interest rates rise—particularly since UK household debt service payments are already one-third higher than in the United States.
Spain: The long road ahead
The global credit boom accelerated growth in Spain, a country that was already among the fastest-growing economies in Europe. With the launch of the euro in 1999, Spain’s interest rates fell by 40 percent as they converged with rates of other eurozone countries. That helped spark a real estate boom that ultimately created 5 million new housing units over a period when the number of households expanded by 2.5 million. Corporations dramatically increased borrowing as well.
As in the United Kingdom, deleveraging is proceeding slowly. Spain’s total debt rose from 337 percent of GDP in 2008 to 363 percent in mid-2011, due to rapidly growing government debt. Outstanding household debt relative to disposable income has declined just 6 percentage points. Spain also has unusually high levels of corporate debt: the ratio of debt to national output of Spanish nonfinancial firms is 20 percent higher than that of French and UK nonfinancial firms, twice that of US firms, and three times that of German companies. Part of the reason for Spain’s high corporate debt is its large commercial real estate sector, but we find that corporate debt across other industries is higher in Spain than in other countries. Spain’s financial sector faces continuing troubles as well: the Bank of Spain estimates that as many as half of loans for real estate development could be in trouble.
Spain has fewer policy options to revive growth than the United Kingdom and the United States. As a member of the eurozone, it cannot take on more public debt to stimulate growth, nor can it depreciate its currency to bolster its exports. That leaves restoring business confidence and undertaking structural reforms to improve competitiveness and productivity as the most important steps Spain can take. Its new government, elected in late 2011, is putting forth policy proposals to stabilize the banking sector and spur growth in the private sector.
Note how Spain was massively skewered by the ECB's "one size fits Germany" interest rate policy. That structural problem remains in spite of all the can kicking by the US and ECB with lending schemes and the LTRO.
Let's return to the report for one more chart from the report.
US Household Debt Ratios
There are a lot of optimistic assumptions in that report. The above chart highlights one of the biggest assumptions.
Certainly one can make a case that the change from single-household worker families to dual-household worker families (both husband and wife working), accounts for the rise is sustainable debt loads from 1955 to 1985.
How much of the rest is sustainable? I suggest little to none of it is. The stock market boom of the 90's followed by housing bubble in the 2000's is what made families "feel" wealthy.
Negative Stock Market Returns for another Decade?
With global growth slowing, coupled with an enormous change in boomer demographics, combined with massive amounts of deleveraging still to come in the top 10 economies, the likelihood the stock market puts in another sustainable boom as it did in the 90's is highly unlikely. When households feel wealthy they are apt to take on more debt.
In a debt deleveraging cycle, not only does feeling wealthy go away, so does the likelihood of strong returns in the stock market. Indeed, I have made the case for Negative Returns for Another Decade
For the sake of argument let's assume an optimistic case of 4-5% annualized returns for another decade. Is that enough to keep that household debt trend intact?
Of course not. The idea the trendline itself should go up over time is complete silliness unless there is a structural change as there was in the 60's and 70's when women went to work en masse.
Nonetheless, the McKinsey Global Institute report is well worth a look in entirety. Click on the first link at the top for an opportunity to download the full 64-page report.
Obvious flaws aside, the report is a great read containing a wealth of information on debt levels of countries and what has been done to address the issues so far.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Courtesy of The Automatic Earth
Tyne & Wear Archives and Museums Just watch me June 9 1902
Fron album of prisoners brought before the North Shields Police Court in England between 1902 and 1916.
Time has stopped before us
The sky cannot ignore us
No one can separate us
For we are all that is left
The echo bounces off me
The shadow lost beside me
There's no more need to pretend
Cause now I can begin again."Smashing Pumpkins, The Beginning is the End is the Beginning
Ashvin Pandurangi: The latest revolution of the Euro Crisis Cycle has brought us back to talks of restructuring Greek sovereign debt through "Private Sector Involvement" (PSI), which are somehow taking place in a Universe where debt restructuring is not allowed to be confused with "debt default" or "bankruptcy". On Friday January 20, the IIF (representing some of Greece’s creditors) and the Greek government announced that they had finally reached an "agreement" on the basic structure of the restructuring (or the basic restructuring of the structure?).
Here’s the live blog update from The Guardian on Friday, which really stood out to me:
A framework of the deal -- the basic structure of the bond swap that the Greek finance minister Evangelos Venizelos wants to present at Monday's eurogroup meeting -- has been accepted by both sides, "put in place" and I understand committed to paper.
But it would also seem that other aspects of the agreement - be them legal, technical or matters of substance -- remain unresolved and will be discussed at negotiations that resume at 7:30pm local time [6.30 GMT] and look set to continue over the weekend.
If Greece's massive €360 bn debt load is to be made manageable much will depend "on the inter-related role of all the interests at stake" insiders say. Even if a decisive agreement is reached, the proposal will have to be put to technocrats -- given the complexity of the deal -- and they could very likely change it again.
"The outline won't be the end of the beginning but the beginning of the end," said another source again requesting blanket anonymity because of the delicacy of the talks.
That’s how these anonymous blankets, with their linear mindsets and scripts, really think about the process and justify the charade to everyone else who looks on in anticipation. We have not reached the end of the beginning, but the beginning of the end! Or is it really the beginning of the end of the beginning? Let’s just go ahead and say that the end is the beginning, which is also the end. It’s a circle, a cycle, a never-ending series of revolving points; an optical and psychological illusion of mass proportions.
Of course, not more than two hours after the live update from above, I stumbled across another live update from The Guardian that, in combination with all the reports over the course of just one week, was starting to make the Escher Stairs look like a straight, non-stop, round trip flight from Athens to Brussels and then back to Athens… and then back to Brussels.
"At the risk of just adding to the confusion over what is or is not happening with the discussions between Greece and the private bondholders, CNBC is reporting no deal has been reached on the terms of a debt swap. Nor is there apparently a press conference planned for tonight.
However that does not rule out the idea that a framework has been agreed, and further details will be hammered out over the weekend, as we reported earlier."
So now we should just be glad that we can’t "rule out" the possibility that aframework has been established to "hammer out" further details in upcoming days. What all of this really means is that there are way too many vested interests fighting over the pieces of the same wealth pie which is continuously dwindling in size, and it will take way too long for them to actually sign their names to an agreement that is suitable to all interested parties, as opposed to continuously cycling rumors of "progress" being made.
But, alas, even the framework of a deal didn’t last past Saturday, as the parties involved kept making right turns until they came full circle to the point of "stalled talks". Here’s a report from Dow Jones on Saturday January 21, via ZeroHedge:
Greek Bondholder Talks Stalled, Agreement Unlikely By Monday Deadline
Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.
Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released.
Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.
"Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.
And here’s Paul Anastasi and Farry White from The Telegraph with a similar report, except with a slightly more optimistic spin, courtesy of official "spokespersons" from the IIF and Greek government.
Greek debt deal hits setback as talks suspended
Charles Dallara, managing director of the Institute of International Finance (IIF), a lobby group representing private creditors who have lent €47bn (£39bn) to the Greek government, has so-far failed to reach agreement on the key interest rate of the new bonds Greece will issue.
Athens was anxious to strike a deal ahead of a meeting of eurozone finance ministers on Monday, which could have set in motion the paperwork and approvals necessary to give Greece its next tranche of aid, worth about €130bn.
This will prevent a disorderly debt default when €14.5bn of Greek bonds mature in March. However, Greek government officials said on Saturday that the crisis talks had now been postponed for a few days.
A spokesman for the IIF said that Mr Dallara had travelled to Paris for a long-standing social arrangement and his departure was "in no way a reflection on the talks". The talks have made "substantial" progress, the spokesman said, noting that Mr Dallara was in phone contact with the Greek prime minister and could return to Athens at any point.
International private creditors have already accepted a 50pc "haircut" or loss of their investments in Greek bonds, a move that would cut €100bn from Greece's €360bn debt pile. However, the sticking points appear to be the term to maturity of the new replacement bonds and the rate of interest, or coupon, that they will pay.
"We are now expecting a solution in a few days," the Greek government official said. "Nobody expects a failure, as that could raise the spectre of a default. But it would have been convenient to have wrapped things up this weekend, because of the simultaneous presence in Athens of the Troika.
Not much commentary necessary, right? "Back to the drawing board" would imply that they had actually managed to upgrade from the drawing board to some more concrete stages of action, so that doesn’t work. The talks allegedly continue, but the questions of about what, between whom and to what end are all blowing in the wind. These PSI talks, and the Eurozone in general, are still stuck in the depths of an Escher diagram, where every ounce of "progress" is simply a function of some Eurocrat and mainstream media outlet declaring it to exist.
No one wants to accept the fact that, until the entire system is fundamentally transformed (through disorderly collapse or otherwise), this vicious crisis cycle will never end. The Greek PSI negotiations are a perfect example of the hamster wheel that is Europe. In theory, it is both necessary and just for private creditors (mainly banks) to take large haircuts on the net present value of their Greek bond holdings. But as long as the "restructuring" is treated as a means to avoid outright default/bankruptcy, stabilize the structurally imbalanced Eurozone and continue business as usual in the future, it will fail to produce any meaningful results.
You simply can’t satisfy all of the vested parties in a fundamentally broken and collapsing system. After a prolonged period of running around in circles, someone is bound to crash into someone else. The revolutions of the Euro Crisis Wheel are bound to spark an actual revolution that forces the system to do that which is unspeakable - change. It is now starting to look like the disorderly Greek default in March (there is no "orderly" version), which was always inevitable but never until now capable of being marked on a calendar, will be the event that sets that particular ball rolling.
Let’s face it – even after a credit market "rally", the Greek government is paying close to 400% for a year’s worth of money. The hold outs in the PSI right now are the hedge funds who have loaded up on Greek bonds and CDS insurance, as they figure it is better for them to try and get paid out in full on one or the other than agree to "voluntarily" participate in the swap deal and relinquish their rights as bondholders. Indeed, this literal leverage has given them a degree of negotiating leverage that was certainly under-estimated by the mainstream until now.
If they do not take place in the debt swaps, then they can avoid taking a haircut on their bonds, and if they are "coerced" into a restructuring by retro-actively inserted "collective action clauses" (allows a majority of creditors to override the minority), then the CDS most likely get triggered. On top of that, ZeroHedge just produced a lengthy and complex report that describes, among many other things, the various other implications of a retro-active change of local law.
Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World
Before we, like Reuters and like JP Morgan, accept that even the local-law debt can be crammed down, we point readers to a seminal paper by none other than Lee Buchheit, the same one who is currently advising Greece on its bankruptcy negotiations (to call a spade a spade), called How To Restructure Greek Debt from May 2010, in which he says the following:
[Buchheit] 'No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy.
• If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments.
• A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board.
• The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments.
• The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge.
The report also describes how a stripping of the creditor protections offered by Greek bonds issued under U.K. law, which contain CACs and have been accumulated by these holdout hedge funds, will probably have even more severe implications for sovereign bond markets around the world. We should also remember that no one really knows what the knock-on effects of CDS triggers would be throughout the global financial system, since it is entirely unclear how many billions worth of derivatives have been written on Greek debt.
It’s really the space between a huge, jagged rock and a very hard place for just about everyone involved, as it has always been. Besides the two direct parties involved (Greece and its creditors), we also have the European Commission, ECB and IMF, who obviously don't want the Greek government to compromise to the point where no meaningful debt reduction is made and they are simply writing checks (endorsed by Western taxpayers) to both the Greek government and its bondholders for nothing in return. English language Katimerini reports a bit on this angle:
Dallara suddenly leaves Athens
Talks between Athens and the steering committee of private creditors concerning the Private Sector Involvement plan (PSI+) will resume by telephone on Sunday as the committee’s head, Charles Dallara, left Greece unexpectedly on Saturday.
According to reports on Skai radio the International Monetary Fund, the European Commission and the European Central Bank are not happy with the provisional agreement between the Greek government and its private creditors, as they believe it does not secure the sustainability of the Greek debt.
As a result Dallara, who is also the head of the Institute of International Finance flew to Paris on Saturday to discuss developments with lenders and funds which hold the bulk of the privately-held Greek bonds worth 206 billion euros.
Finance Minister Evangelos Venizelos told reporters on Saturday that negotiations would continue on Sunday by phone.
Both the IIF and the government have leaked that there is progress in the talks but any agreement would require the approval of Brussels, Berlin and the IMF.
Sources suggest that the Greek side proposed to private creditors a 3.5 percent interest rate for bonds maturing by 2014, 3.9 percent for those maturing by 2020 and 4.6 percent for those expiring after 2021. There will be a 10-year grace period and the new bonds will be under British law.
Reuters cited an unnamed source saying that "things are complicated, we are getting closer on the numbers but there is still quite some work ahead. An agreement is unlikely before next week, if there is an agreement at all.
For argument’s sake, though, let’s say the Troika, the Greek government and the holdout creditors manage to come back full circle (via telephone conference) to "progress" being made and a deal "nearly within reach" in the next night or two, and then put an actual deal to paper. What will that mean for the Euro Crisis Cycle? Simple – it will continue rolling on in a broader and more devastating fashion. First of all, Greek debt will still not be sustainable in any meaningful sense of that word, as this comprehensive report from Barclays makes clear (via ZeroHedge).
Greek Debt Likely Unsustainable Even With Haircuts, Barclays Complete Q&A On PSI
6) Does the PSI in its current form make the Greek debt sustainable?
The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020.
First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic (c.3.8% average nominal growth and average 4% primary balance).
If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse. As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika.
Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%.
Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.
That's right - even if 100% of private creditors participated in the proposed debt swap arrangement for a 80% haircut to notional value (not going to happen!), Greece's debt would still remain at entirely unsustainable levels for many years to come (and that's assuming a 100-120% debt/GDP ratio is the threshold for sustainability). Secondly, the Greek situation is obviously only one piece of a much larger puzzle in Europe. Peter Tchir remarks on those other debt-swamped Eurozone countries who sure would love to have some "voluntary debt swaps" of their own.
Greek PSI Here We Come? Be Careful What You Wish For
So it looks like we should get an announcement sometime today about the proposed Greek PSI deal. Yes, proposed, not finalized. Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what.
As far as I can tell, no one has given the IIF negotiators any binding power. Obviously some of the institutions that the IIF negotiators are associated would have trouble not approving the "deal", but how many bonds do they really represent?
I think this will be a relatively small portion of bondholders and then the real game begins. The carrot and stick that the EU and ECB can use with other holders and the desire to maximize profits (or minimize losses) on the other side. So far, this news seems to be acting inversely to the "downgrades" price action, as early front-running is meeting sell the news.
If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do. Not only will Greece receive a 50% notional reduction (except from the ECB and other "public" holders), but they will get very long dated money at very low rates. Who wouldn't want that?
Why should Spain be going through semi-legitimate auctions when Greece can get longer dated money at lower rates? Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?"
There is absolutely no way that European private banks can afford to take another 50-100% haircut on the bonds of Portugal or Ireland on top of Greece, let alone Spain or Italy. Any attempts towards such an outcome would be even less "voluntary" than the Greek swaps, and that’s really saying something. And who would even want to buy the bonds of these countries after the most coercive restructuring in history just took place? This time it was a few hedge funds that have brought us to the brink of potentially catastrophic debt deflation, next time (if there is one) it will be a much broader force of resistance.
The economic, financial and political divides within Europe will simply deepen to the point where the internal hemorrhaging overwhelms any and all top-down "solutions". So IF this Greek PSI deal is finalized soon, the IMF bailout money is disbursed and Greece gets through the next few months, the focus will simply shift back to those equally troubled and much bigger debt issuers across Europe (and perhaps the world). We’ll be right back at the end of the beginning or the beginning of the end, depending on which way the crisis propaganda decides to spin on any given day.
Courtesy of The Automatic Earth
Tyne & Wear Archives and Museums Just watch me June 9 1902
Fron album of prisoners brought before the North Shields Police Court in England between 1902 and 1916.
Time has stopped before us
The sky cannot ignore us
No one can separate us
For we are all that is left
The echo bounces off me
The shadow lost beside me
There's no more need to pretend
Cause now I can begin again."Smashing Pumpkins, The Beginning is the End is the Beginning
Ashvin Pandurangi: The latest revolution of the Euro Crisis Cycle has brought us back to talks of restructuring Greek sovereign debt through "Private Sector Involvement" (PSI), which are somehow taking place in a Universe where debt restructuring is not allowed to be confused with "debt default" or "bankruptcy". On Friday January 20, the IIF (representing some of Greece’s creditors) and the Greek government announced that they had finally reached an "agreement" on the basic structure of the restructuring (or the basic restructuring of the structure?).
Here’s the live blog update from The Guardian on Friday, which really stood out to me:
A framework of the deal -- the basic structure of the bond swap that the Greek finance minister Evangelos Venizelos wants to present at Monday's eurogroup meeting -- has been accepted by both sides, "put in place" and I understand committed to paper.
But it would also seem that other aspects of the agreement - be them legal, technical or matters of substance -- remain unresolved and will be discussed at negotiations that resume at 7:30pm local time [6.30 GMT] and look set to continue over the weekend.
If Greece's massive €360 bn debt load is to be made manageable much will depend "on the inter-related role of all the interests at stake" insiders say. Even if a decisive agreement is reached, the proposal will have to be put to technocrats -- given the complexity of the deal -- and they could very likely change it again.
"The outline won't be the end of the beginning but the beginning of the end," said another source again requesting blanket anonymity because of the delicacy of the talks.
That’s how these anonymous blankets, with their linear mindsets and scripts, really think about the process and justify the charade to everyone else who looks on in anticipation. We have not reached the end of the beginning, but the beginning of the end! Or is it really the beginning of the end of the beginning? Let’s just go ahead and say that the end is the beginning, which is also the end. It’s a circle, a cycle, a never-ending series of revolving points; an optical and psychological illusion of mass proportions.
M.E. Escher - Up and Down
Of course, not more than two hours after the live update from above, I stumbled across another live update from The Guardian that, in combination with all the reports over the course of just one week, was starting to make the Escher Stairs look like a straight, non-stop, round trip flight from Athens to Brussels and then back to Athens… and then back to Brussels.
"At the risk of just adding to the confusion over what is or is not happening with the discussions between Greece and the private bondholders, CNBC is reporting no deal has been reached on the terms of a debt swap. Nor is there apparently a press conference planned for tonight.
However that does not rule out the idea that a framework has been agreed, and further details will be hammered out over the weekend, as we reported earlier."
So now we should just be glad that we can’t "rule out" the possibility that aframework has been established to "hammer out" further details in upcoming days. What all of this really means is that there are way too many vested interests fighting over the pieces of the same wealth pie which is continuously dwindling in size, and it will take way too long for them to actually sign their names to an agreement that is suitable to all interested parties, as opposed to continuously cycling rumors of "progress" being made.
But, alas, even the framework of a deal didn’t last past Saturday, as the parties involved kept making right turns until they came full circle to the point of "stalled talks". Here’s a report from Dow Jones on Saturday January 21, via ZeroHedge:
Greek Bondholder Talks Stalled, Agreement Unlikely By Monday Deadline
Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.
Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released.
Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.
"Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.
Excerpts from this week's Stock World Weekly
This was a good week for the bulls. The major indexes were all up between 2.0% and 2.8%, capping the third consecutive week of gains. Investors saw some powerful signs of positive activity in the economy. For example, initial unemployment claims dropped a stunning 50k in one week. Conversely, the fact that this earnings season has seen the lowest percentage of companies beating expectations since Q3 2008 supplied some powerful ammunition for the bears, although the bulls still had it. (Earnings beats falling behind previous quarters)
We ended last week’s newsletter, “Cracks in the Facade” discussing the possibility of additional easing by the Fed, which would likely prove bullish for the markets. Quoting Phil, “It seems like a lot, but we're back to 760 on the RUT, which was our test line going the other way last week, and we still haven't filled the gap up from Monday's close, about another 1% down. Let's keep it in perspective though – we're up from 1,200 to almost 1,300 on the S&P in less than a month. So a 20-point pullback to 1,277 would not be very bearish in a longer-term trend and, if we get volume and hold it, it's actually a bullish confirmation...
“So, let's look for the gap fills to hold (worst case) at 12,350 (Dow, oops), 1,277 (S&P 500), 2,675 (Nasdaq), 7,575 (NYSE) and 750 (Rut)... Gold was $130 dollars cheaper so we'd like to see $1,550 there, and Doctor Copper was $3.30 and that better hold up. XLF was down at $12.21 last month – I think anything below $13 would be a sign that something is terribly wrong while holding $13.50 (which will be a good trick next week) would be a bullish sign.”
The indexes we track finished this week above Phil’s targets, and XLF finished this week at $14.14. This would normally be very bullish if it wasn’t for the notable lack of volume, which is a warning sign. As the old saying goes, “volume equals validity” in the markets. Without volume a rally becomes difficult to believe in. As thetechnicaltake observed,
“While we can debate the state of the economy and the importance of valuations, we cannot debate the shrinking and absent volume. It is an unarguable fact. So is price, and right now that is all that matters and all that investors see. But the volume will matter someday. It usually does when you least expect it.” (Houston, We Have a Problem)
A possible explanation for this week’s bullish run would be heightened expectations of an additional round of quantitative easing from the Fed (QE3). Rumors this week were pegging the size of the program to be as large as $1Tn. (Fed’s Latest Easing Could Cost $1 Trillion: Economists)...
But perhaps most importantly, liquidity flows are positive. According to Lee Adler of the Wall Street Examiner,
“Liquidity flows in the US branch of the system have been turning more bullish in recent weeks. Several indicators that had been neutral or bearish have turned bullish, joining deposit flows into the US banking system (apparently from EU) which have been the lead bullish sled dog for a while. In this liquidity based model of the market, there is no way the markets can decline as long as this continues.” (Liquidity is Bullish is All)
Greece was back in the news, as Moritz Kraemer, head of S&P’s European sovereign ratings unit, was on Bloomberg TV this Monday claiming, “Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations, I cannot say.” (Europe: They Are Actually Going To Let Greece Default?)
Negotiations continued all week, with negotiators for Greece’s private creditors leaving Athens this Saturday without a deal being made. This makes it very unlikely that an agreement will be completed before the meeting of eurozone finance ministers on Monday. (Greece’s creditors leave Athens, talks to continue)
This week also saw last-minute reversals in a major news story and the (QE) rumor. The news story was reversed when Iran backed down from its earlier threats against U.S. naval forces in the Persian Gulf. The rumor was undermined when Jon Hilsenrath of the Wall Street Journal stated on Friday that the Fed is not planning additional easing. If true, then so much for the one trillion Dollar gift to the banksters that stock market participants may have been looking forward to.
Phil expressed skepticism about the current rally in Wednesday’s article: “Last week I noted that almost half the companies were missing estimates, and yesterday 5 out of 10 reporting companies missed. How is the market up over 20% since the last earnings on these reports? It's because INVESTORS are not playing this market. SPECULATORS are betting on the Fed, the IMF, the ECB, the BOJ, the SNB and the PBOC to flood the World with cash. On that basis alone – they are overlooking overwhelming evidence that the Global Economy is still mired in Recession.”
Investors will be watching next week’s FOMC meeting, with many hoping that Wednesday’s announcement from the Fed will include some form of quantitative easing. However, Fed-watchers Bruce Krasting, Lee Adler of the Wall Street Examiner and Jon Hilsenrath (with his direct line to Bernanke) have argued that additional QE is not coming anytime soon.
Bruce Krasting discussed the Fed’s new policy of providing information to the public regarding the direction of US interest rates and his thoughts on additional easing in “Will the Fed Bring Clarity or Confusion?” He wrote,
“Next Wednesday, between 12:30 and 2PM, we will get a ton of new information to digest and analyze. The Federal Reserve will make a series of statements while unveiling its new communication effort. A portion of the new information will be contained in the revised Summary of Economic Projections (SEP).
“The Fed has worked long and hard on its new communication policy. The question is, ‘What will people think and how will the markets react?’ I believe that there is a very good possibility that the Fed's plan will add to uncertainties regarding monetary policy. Contrary to its objectives, the new "openness and clarity" may end up causing the confusion.
“The Fed will provide information regarding its members’ thinking on the future size of the Fed’s balance sheet (BS). This is critical. We might see a consensus view that the Fed’s balance sheet will grow another 25% over the next 18 months. That would bring this headline:
“Fed Signals Another $1T of QE - Stocks rise sharply. Oil, copper, gold see largest one-day rise in two years - TIPs spreads widen to 2.5%
“We could as easily get a consensus opinion that the Fed’s BS will remain unchanged for the foreseeable future. That would also be a shocker:
“Fed Forecasts End of QE - Global stocks in broad retreat - Next move is to tighten?
“The Fed will provide information regarding its thinking on GDP, inflation and the timing of an increase in the Federal Funds rate (new info). This is all potentially explosive data. The Fed's most recent read on the economy painted a somewhat upbeat picture. Almost all the data since then has been on the positive side. While I doubt the Fed will signal that happy days are here again, it would appear likely that a +2.0% growth forecast for GDP is in the cards. How is the Fed going to square this (relatively) upbeat economic assessment with a loose monetary policy that is currently at biblical historic levels? The answer is, ‘It can’t’ - resulting in this headline:
“Fed Predicts Improvement. To Keep Monetary ‘Pedal on the Metal’ - Global Central Bankers Critical, OECD head says, ‘Reckless’ - Dollar in rout, Gold rises $65
“For the Fed to continue ZIRPing, Twisting and QEing, it has to support the policy with a bleak assessment on the economy. A negative outlook is the only scenario that justifies maintaining, let alone expanding, the existing "emergency" monetary measures.
“I think the Fed will hint that monetary contraction is in our future (about a year away, if not sooner). To me, the only circumstance that would avoid this conclusion is if the Fed were to come out with decidedly disappointing expectations for growth and unemployment for the next 36 months...” (Will the Fed Bring Clarity or Confusion?)
Lee Adler of the Wall Street Examiner discussed how the situation in Europe is affecting U.S. stocks. The European Central Bank’s (ECB) pumping activities have caused money to flow into the US, and Lee is uncharacteristically bullish based on that trend. In his Professional Edition and in personal communication, he wrote,
“Those who don’t know me well have sometimes accused me of being a permabear. Those of you who do know me via these reports know that I always strive to be just like Faux News, ‘fair and balanced.’ I think this week’s report exemplifies that high ideal. It’s as bullish as I’ve ever been, and yes maybe I should be faded when I start ‘pounding the table.’ But I’m only pounding on what the indicators are showing. There’s certainly no personal bias in this direction...
The world financial system is an over manipulated piece of excrement. But, sometimes manipulation works; sometimes it has unintended consequences that benefit one party over another; and sometimes the US gets the roses while the rest of the world sinks into the sludge that most of the pundits and government manipulators are worried about. This is one of those times, and herein is its story...
“The media has been rife with speculation that the Fed is on the brink of another massive quantitative easing. Given the rapid growth of the money supply, the recently strong stock market performance, and the upturn in Federal withholding taxes and other economic indicators, it’s hard to see justification for the Fed to make such a move. The Fed is well aware that additional QE would be likely to set commodities off on another tear that would be self defeating for the economy.
“As the chart of the SOMA and ECB assets versus the markets shows (above), the markets follow the money. Stocks usually follow the Fed, but this time when the ECB pumped, so much of it flowed into the US that not only Treasuries, but also stocks, got a lift.
“The current conditions with evidence of economic strengthening do not seem to warrant additional Fed easing, and the Fed has been tightening since December 21, possibly to counter the tremendous money supply growth. Right now, the ECB has the game board and all the pieces.
“The market has been rallying on the FACT of more money in the US system... I’ve been bullish because I’ve been following the money and the technical signs. The first projections that the market would rise over 1300 were a month ago. The technical indicators pointed the way, and the monetary indicators confirmed. All that’s left to do is follow those trends one week and one day at a time, and stay with them until there are signs of change. That’s what I endeavor to help people to do. Show them the money!” (Liquidity is Bullish is All)
Note: Russ Winter of Winter Watch, Aaron Krowne of ML-Implode.com, and Lee Adler of the Wall Street Examiner discuss their take on the recent market melt-up, the possible reasons behind it, and the Fed's false transparency in “Fed Transparency Lies and Market Melt-Up Mean No QE Coming.” (Click this link to visit Radio Wall St. and listen to their free podcast.)
We have a few buy-write ideas from Phil and Pharmboy, click this link to sign up to try Stock World Weekly. For info on the buy-write strategy often used at PSW, visit here.
Have a great week!
p.s. We shared a number of trade ideas in Stock World Weekly, January 8, 2012, from Sabrient’s“Baker’s Dozen” list, including some buy-write ideas from Scott (here)... Sabrient’s report on the Baker’s Dozen 2012 is now available.
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