Sunday, October 16, 2011

October, Monday 10, 2011

DOW + 330 = 11,433
SPX + 39 = 1194
NAS + 86 = 2566
10 YR YLD += 2.07%
OIL +2.77 = 85.75
GOLD + 37.20 = 1675.90
SILVER +.77 = 32.14
PLAT + 29.00 = 1523.00

I must admit, they are rather strange; the little rallies we’ve seen lately. With every little rumor of the day, the markets jump up. There is the old saying: the market climbs a wall of worry.
What’s the worry? The overriding worry has been that Europe will fall over and destroy the world economy.
According to the Sir Mervyn King, Governor of the Bank of England we are in the midst of the most serious economic crisis we’ve ever seen. King holds the comparable job to Ben Bernanke, head of the British Central Bank. King explained why the Bank of England decided last week to pump money into the economy.

And by pumping money into the economy we mean flying a helicopter above the City and shoveling out Pound notes on investment bankers.

That is the only thing England could do, a fresh round of quantitative easing. If not then the entire world would have been paralyzed in fear.

(Obama clip – Fear)

The pure serendipity to survive the most serious economic crisis ever, to not just survive the weekend but enjoy a little football – that alone would be reason enough for a one hundred point gain on Wall Street – but then we got the Daily Rumor.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday their goal was to come up with a sustainable answer for Greece's debt woes. They hadn’t actually found a sustainable answer but it now appears they want to find a goal.

When news of the intent to search for a sustainable answer was trumpeted across Euroland – there was great rejoicing and just a little gnashing of teeth. The markets moved higher in Europe; then the markets moved higher in the good old USA as the traders on Wall Street marveled at the tenacity and boldness there was great rejoicing and just a little gnashing of teeth.

A spokesman for the German government emphasized that the talks are no "miracle cure." He was quickly dismissed as a speculative short-seller and an arrest warrant was issued in Paris.

While the ECB is a central bank in almost all respects, what it isn’t is a lender of last resort for individual euro zone nations, a role that is expressly ruled out by the European Treaty.
A lender of last resort is what stops a bank run on a solvent institution from bringing it down due to a lack of liquidity. In the case of a nation, a lender of last resort, usually the central bank, can simply print money to satisfy debts in its own currency. The fact is that markets take on their own momentum and the ECB is not a backstop.

Now investors are busy driving up the price of even German default insurance.
This is the logic of markets when they view sovereign borrowers as credit risks; it is almost inevitable that they push, and in pushing weaken the un-backstopped borrower and ultimately bring it down. This is a process which needs a circuit breaker, and Europe has no adequate circuit breaker, unlike Britain or the U.S.

Thus Europe is at the mercy of markets, left without a central bank or outside force which can break the cycle and impose order. The ECB has purchased government bonds as a back door means of providing support, but the ECB can’t buy an infinite supply of bonds.

What can we learn form the problems in Euroland? Well, this confirms that if you have a Central Bank, like the Bank of England or the Federal Reserve, it is a blueprint for corruption – you can literally run up mountains of debt. Conversely, if you don’t have a proper central bank you ought to keep your debt profile thin so as not to attract too much attention to your vulnerability. What it also shows us is that central banks are very skilled at hiding debt and suppressing free markets. Without a central bank to cover up the debt trail, the Europeans are going to have to figure out a way to monetize their debt or face default, and watch the domino-style run on government credit becomes self-fulfilling. We’ve already started to see this with Italy being weighed by the markets, and with the failure of the Belgian bank Dexia. Without a Central Bank to obfuscate accountability, Germany might realize they are being forced to pick up the dinner check for France.

But for today, at least, Merkel & Sarkozy were such a lovely couple…, and the markets rallied.

The euro, which was on track for its best daily rise since July 2010, climbed 1.9 percent to $1.3647 after paring some earlier gains.
Crude oil rose on improved optimism. November Brent crude futures settled up $3.07 at $108.95, while U.S. November crude rose $2.43 to settle at $85.41.

Bond markets were closed in observance of Columbus Day, otherwise they would have rallied.

Last Friday during Open phones, a caller claimed that banks weren’t lending because of all the new regulations. I did not agree, but I wanted to find something to back up my position. Over the weekend, I saw this report on CBS News with Russ Mitchell, it was a very good report on small business and their ability to get credit. Listen to this.

Note: Chase did not say they cut Martinez’ credit because of regulations – they said it was standard operating procedure; this wasn’t a government mandate. The Dodd-Frank Act, the sprawling regulatory effort to address the causes of the financial crisis, is the  newest target for what ails the economy. The Act is 848-pages and its rules on, trading derivatives, swaps, and consumer protections have become a symbol of government overreach that is killing jobs.

So far, only a small portion of the law, which was signed by the president in July 2010, has taken hold. Of the up to 400 regulations called for in the act, only about a quarter have even been written, much less approved.

There is an argument floating around that Dodd-Frank is the thing that is most harming the economy right now, not the actual regulations (because those haven’t been written yet, but just the uncertainty) Big business can deal with regulatory uncertainty, but it makes small businesses reluctant to take on risk and expand their operations.

Actually small businesses are pretty good at handling uncertainty. If you are looking for certainty, you don’t start a small business in the first place. Nobody wants burdensome regulations, but we underestimate small business. They can handle uncertainty. They can handle all sorts of craziness. What’s tough is losing a credit line for no reason. What’s tough is dealing with the banks’ standard operating procedure.

Occupy Wall Street just keeps getting bigger and bigger. It is now nationwide, and scheduled to come to Phoenix this Friday and Saturday..


And if only Congress had fought for all Americans, then people wouldn’t feel the need to march in the streets. When it comes to pitting Americans against Americans, the government  is the undisputed champion and they hate competition, especially from a rag-tag group that can’t even come up with an official list of demands. If there was a list of demands, the politicians could tell us we have to accept or reject the demands, and they could pit Americans against Americans based upon which demands they accept or reject.

Hey, what do you call a really, really big mob? Citizens. Citizens engaged in democracy. And this thing just keeps getting bigger and bigger.

Some people are getting nervous about the protests.

This has to be one of the most misunderstood movements anywhere: Video showed one Boston protester holding up a sign that read "No privatization of public education," and CNN affiliate WCVB characterized the event as a protest against university presidents' high salaries. Just think about it. If you think this country is on the right track, you have no reason to protest. If you believe this country is on the wrong track, then you have an obligation to raise your voice, somewhere, somehow.

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