October, Thursday 20, 2011

DOW + 37 = 11,541
SPX +5= 1215
NAS – 5 = 2598
10 YR YLD +=2.18%
OIL - .66 = 85.45
GOLD –22.50 = 1621.20
SILV - .65 = 30.68
PLAT –22.00 = 1501.00

The European leaders will be meeting tomorrow and through the weekend; they are expected to unveil their Grand Magical Stupendous Super Plan to solve all the problems by November 3. Don’t hold your breath.

Sarkozy and Merkel promise a magic potion. They will probably deliver; the magic potion may be temporarily intoxicating, however I suspect it will prove to be little more than snake oil. France and Germany disagree over the best way to bolster the facility, with Paris fearing its triple-A credit rating could come under threat if the wrong method is chosen. Germany can’t leverage the 50% of the funds they have already committed to the EFSF – that would require a referendum to change their constitution – and that will never get passed. That’s why they’ve called on the IMF to backstop the increased leverage. However, so far the IMF and the US Treasury, the number one donor to the IMF says no, go back into negotiations.

This is the sticking point – How to scale up the European Financial Stability Facility – the $600 billion dollar fund that has already been used to bailout Portugal and Ireland. Failure to agree on leveraging the EFSF will further damage confidence in the euro zone.

In July, banks and insurers agreed to contribute 50 billion euros to reducing Greece's debt via a debt buyback and swap agreement, which equated to a 21 percent writedown. That is now seen as insufficient to make Athens' debts sustainable. One area of agreement has been to recapitalize the Euro banks to the tune of $140 billion dollars. The main reason for this is simple – to get a jump on bank failures and possibly forestall or minimize the impact of bank failures. The other reason is not so obvious – the banks demand recapitalization before they will accept a haircut on Greek debt. They won’t really take a hit – they’ll get paid before the hit even comes. Remember the one big lesson learned form 2008 – the banks will fight tooth and nail to avoid taking losses; they will demand that losses be socialized.

Likewise, this probably also explains why Bank of America has been dumping their derivatives from their bank holding company onto their retail banking side – just trying to get out in front of the coming wave of bank failures, and to socialize the potential losses by way of FDIC insurance.

Greece has lined up to get their share of the next bailout tranche. The Greek government voted for more austerity and more taxes and no more bargaining and no more listening to the people in the streets, even if they hit you over the head with a chunk of marble, even if they lob a Molotov cocktail at your feet, even if It is quite evident that Greece can never repay its debt no matter how much bailout funds they receive.

You’ve heard about the protests and rioting and violence in Athens; not so much about the demonstrations and violence that erupted in Rome over the weekend. Meanwhile, last weekend, the G-20 met and recommended increasing the size of the EFSF, the bailout fund. The unanswered question is where would the money come from?

The liquidity that once came from money market funds has frozen. The leverage needed to cover-up the European sovereign debt problem will likely come from the Federal Reserve. No matter how big and important the Euro and the Eurozone has become, the U.S. dollar is still the global reserve currency. The USDX rose 6.3% in September, the most in three years. A federal Reserve backstop ultimately means US taxpayers will pay – one way or another – and in case you’re wondering – one way we’ll likely pay is through inflation.

Greece will eventually default and then the other five insolvent European countries ill demand more bond purchases and lower interest rates. If they don’t get what they demand – they will default. When these countries fail, their banks will fail and they will be nationalized, and they will have more money pumped in to keep them viable, and more credit will be created. The Bank of England and the ECB did this last week – they’re following the Federal Reserve formula, and that means crank up the printing press and embrace inflation. One way to goose the monetization process is for the ECB to cut interest rates. Money and credit has to be available from solvent governments to keep their domestic banks functioning.

It will be interesting to see if gold and silver can hold their current levels. My guess is there will be downward pressure on prices – and if we see that then it may represent one of the great buying opportunities we’ve seen in years.

The Government Accountability Office, the GAO, released the result of an audit on the Federal Reserve – no it was not a complete and full audit – just a report on scenarios in which executives pose apparent conflicts of interest by serving on boards that regulate financial houses where they also have business relationships. The results are shocking, shocking I tell you. It turns out the Federal Reserve is full of backscratching, well connected, crony capitalists – shocking.

The Federal Reserve banks need to better prevent conflicts of interest. All 12 reserve banks should more "clearly document the roles and responsibilities of the (board) directors.

An example, it notes, occurred when then-chairman of the New York Fed's board of directors Stephen Friedman owned shares in the investment firm Goldman Sachs, but in September 2008 provided it and other banks billions of dollars in federal funding in response to the unfolding financial crisis.

Friedman was granted a waiver by the Federal Reserve Board in January 2009, the report said. But the board was unaware that he had purchased additional shares in Goldman Sachs through an automatic stock purchase program.

The GAO, meanwhile, said that "without more public disclosure of governance arrangements, such as board of director bylaws and director eligibility and ethics policies, there may be continued concerns about Reserve Bank governance and the integrity of the Federal Reserve System." It did not identify actual conflicts of interest. However, it indicated the appearance of a conflict could cast broader concerns about the health of the overall reserve bank system.

Seriously – that’s what the report concludes. Nothing to get rid of corruption or actual conflict of interest – just try not to make it look so bad. I mean we don’t really mind corruption, just don’t stick it in our face. The GAO has created a new policy for the Federal Reserve  - don’t ask, don’t tell.

And that reminded me of a quote from John C. Calhoun – a former Vice President and Senator who said: “The banking system concentrates and places the power in the hands of those who control it. Never was an engine invented better calculated to place the destinies of the many in the hands of the few, or less favorable to that equality and independence which lies at the bottom of our free institutions.”

The Pacific Institute has come out with another of their regular reports on global water usage. No, I don’t really have any idea who the Pacific Institute is but the report has some interesting points. It reminds us that clean water is vital to life and more than more than 2 million people die each year from preventable water-related diseases — and that on the whole, we're not doing a very good job of husbanding that resource. There's even a risk here that parts of the U.S., especially the arid West, may have passed "peak water" — the point at which it becomes essentially impossible to increase supply. The world's population is expected to pass the 7 billion mark by the end of this month, and more people will need more water. The report says:  "New thinking about solutions and sustainable water planning and management, better data, case studies and efforts to raise awareness, are all needed," 

 Then I saw the federal Climate Prediction Center released its winter forecast. It expects a continuation of the multimillion dollar drought across the Southern Plains through the rest of the winter. The Pacific Northwest and the Great lakes are likely to be both colder and wetter than average. The primary climate driver for the USA's weather this winter is La Niña, a periodic cooling of ocean water in the Pacific Ocean. As is typical during a La Niña winter, precipitation is most likely to be below average along the southern tier of the nation all the way from southern California to Florida. Most of Arizona is supposed to be warmer and drier this winter.

Seven American makers of solar panels filed a broad trade case in Washington against the Chinese solar industry, accusing it of using billions of dollars in government subsidies, Chinese government subsidies, to help gain sales in the American market. The companies also accused China of dumping solar panels in the United States for less than it costs to manufacture and ship them.

The trade case seeks tariffs of more than 100 percent of the wholesale price of solar panels from China, which shipped $1.6 billion of the panels to the United States in the first eight months of this year.

If you were thinking of going solar, prices are probably as cheap as they will be for a while.

And Finally:  the Social Security Administration comes out with annual reports on jobs and pay based upon payroll taxes. The results are in for 2010 and they’re ugly:

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.  The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

http://m.npr.org/story/141510617?url=/blogs/money/2011/10/20/141510617/what-if-we-paid-off-the-debt-the-secret-government-report