November, Wednesday 02, 2011

Uppity Greeks. Gloomy FOMC

DOW + 159 = 11817
SPX + 17 = 1235
NAS + 28 = 2635
10 YR YLD = 2.00%
OIL +.37 = 92.56
GOLD = 17.50 = 1738.40
SILV =.82 = 34.37
PLAT + 13.00 = 1611.00

Yesterday I told you the Euro powers-that-be would not take kindly to their debt slaves acting all uppity. Today, German Chancellor Angela Merkel and French president Nicky Sarkozy met with the Greek Prime Minister Papandreaou – and they place their boot heel firmly on the throat of the Greeks.

The Greeks were told that if they want a referendum on the bailout package, they must hold it by December 18, maybe as early as December 4th; they were told that if they reject the bailout plan, they will be considered in default and bankrupt and kicked out of the Eurozone; they were told that until such time as they vote, they will not get any more aid. The 8-billion-euro installment that was going to be paid in the next week – not gonna happen. Greece will likely run out of money within the next month, possibly before the December 18^th referendum deadline.

Surveys show the Greek voters overwhelmingly oppose the bailout plan. If the Greeks didn’t like the austerity plan being shoved down their throats, now they get to see how they like running out of money.

Meanwhile, Papandreou is trying to calm politicians in his own party and a no-confidence vote is scheduled for Friday. If nothing else, the Eruoleaders are going to have to sweeten the deal to make it more palatable to the Greeks. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default. And the disruption of a default suddenly changes the calculus of a Euro exit. The incremental short-term damage would not be that much worse, and the longer term benefit of regaining sovereignity, controlling its currency, and as a result, being able to depreciate the drachma would likely more than offset the costs. (Remember, the advantage of Greece staying in is to fund its budget deficit. But with the rescue packages so punitive that the Greek economy is shrinking faster than its debt levels are, the advantages of cooperation look to be illusory).

One of the little tricks to last weeks Grand Plan to avoid Greek default involved forcing the private banks to accept a 50% haircut on Greek debt; public debt, Greek bonds held by sovereign nations such as Germany, France, Austria etc., would only be subject to 20% haircuts. Fitch Ratings said the voluntary haircuts would still amount to default, sufficient to trigger Credit Default Swaps. Meanwhile, Sarkozy was wiping the egg from his face; you may remember he was trying to broker a deal with China to buy a few bonds from the EFSF bailout fund. Not likely, not now. China’s Vice Finance Minister said: “there’s no concrete plans yet, so it’s too early to talk about further investments in these tools.” The whole plan was falling apart. So, why should the Greeks vote for such a deal?

People talk about free markets as if there really is such a thing. The global stock markets are most definitely not free and they are not democratic. We will now see considerable influence exerted on the Greeks to vote for the bailout; but what if they actually vote against it?

Will the European Union collapse? Can they build a firewall around Portugal, Spain and Italy? If Italy falls, will France follow? Is there any chance the Eurozone can avoid a significant slow down in growth? Can the Eurozone avoid a deflationary depression? Look, this whole Euro train wreck was going to happen sooner or later – rip the bandage off the wound in one quick motion or peel it off very very slowly.

President Obama is jetting to Cannes, France for yet another G-20 summit. I don’t know why. It might be interesting to hear something from the President but he most likely will say nothing, or next to nothing. In an essay published in the Financial Times the day after the European leaders’ deal was announced, Obama welcomed it as a “critical foundation on which to build” and urged them to include “a credible firewall that prevents the crisis from spreading.” The official position seems to be that it is a European problem that requires a European solution. In other words, don’t ask us for money, and whatever is infecting Europe; just make sure it’s not contagious.

Oops, too late. MF Global collapsed in part based on bad bets on Italian bonds – well, that and incredible incompetence in controlling risk and a complete lack of integrity and common sense. The latest news is that MF Global may have ripped off more than $1.5 billion from clients’ accounts. You think MF Global was the only brokerage or hedge fund or investment bank making risky bets? I’m thinking it was just one of the first casualties, and maybe one of the first perp walks.

So what are the traders doing?

Even though the Greek move to blow up the latest Eurorescue plan caught the world’s attention, another pushback is underway, this via the blue chip lobbying group, The International Institute for Finance.

The threat, which has surfaced before is that raising capital levels as mandated under the latest version of the Eurorescue plan, won’t take place by selling equity, retaining earnings (which would almost certainly mean constraining pay levels) or accepting government equity injections (which will come with nasty strings attached). Instead, banks will just shrink to meet the targets by selling risky assets. (Note that the targets, which are being met with howls by the industry, are for them to write down sovereign and reach a core capital level of 9% by June 30, 2012).

This is meant to be a threat. “Shrinking assets” implies less lending. Less lending would put a downward pressure on economic growth. Recessionary or near recession conditions tend to lead voters to throw elected officials out. So this sabre rattling is clearly meant to get the officialdom back in line.

There may very well be a rally in the markets. I talked with one analyst today and he was expecting a huge rally. It is a possibility. There is also a very strong possibility that October represented a bear market rally, and that is now finished, and we see a pull back. There is also a very distinct possibility that the entire global financial system could melt down in a week or on December 19^th or in six months. I can’t tell you which way the screw turns – nobody can. What I can say is you should try to make an accurate assessment of your risk tolerance. You could just throw the dice and let it ride. Understand that you are not required to be “in” the market. Understand that if you are “in” the market, there are ways to hedge risk. You have options, but complacency is not one of them.

Every three months, Benny and the Ink jets at the FOMC get together and not only determine interest rate policy, they give an economic forecast.

On the interest rate front – you may want to sit down – the Federal Reserve left interest rates unchanged. Shocking, shocking news – stop the presses – the Fed will do a whole lot of nothing.

Then the Fed put on their cheerleader uniform and their rose colored glasses and looked into their crystal ball and made their projections. The headline says the Fed lowered their outlook for 2012 economic growth, but keep in mind they’re wearing rose colored glasses.

The Fed forecasts unemployment at 8.5% to 8.7% by the end of 2012. The unemployment forecast for next year was higher than participants’ June forecast of 7.8 percent to 8.2 percent.

They predict the economy will grow at a 2.5% to 2.9% clip next year – down from their earlier projections of 3.3 to 3.7% growth; most economists are expecting growth in the range of 1.4% to 1.7%. And those are the optimistic forecasts. The Fed forecasts do not have a track record of accuracy

At a news conference, Bernanke said: “We have taken a lot of actions. Let me be very clear that the Federal Reserve’s monetary policy is highly accommodative now.”

Translation: No more easing – no fresh stimulation – no new juice for the economy.

He went on to say: “I think it would be helpful if we could get assistance from other parts of the government to help create more jobs.” 

Translation: Seriously, how did these morons ever get elected.”

Here is the key line from the news conference:

"The outlook remains unsatisfactory over the next few years," [Bernanke] says, and at the Fed "we'll continue to ask ourselves" whether additional stimulus is warranted. Doing more "remains on the table," he says.

Here is the text of the Fed Statement:

"Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent month. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

About 100 military veterans are joining the Occupy Wall Street protest by marching in uniform through Manhattan.

The march began Wednesday at the Vietnam Veterans Plaza near Wall Street. The protesters planned to end at the Zuccotti Park encampment.

Police separated them from the entrance of the New York Stock Exchange.

The marchers are fired up by what they call brutality against a Marine veteran in Oakland, Calif., whose skull was fractured.

In New York, Marine Sgt. Shamar Thomas went toe to toe with officers policing activists in Times Square recently.

Thomas says soldiers who risked their lives have the right to protest an economy that gives them a slimmer chance of finding jobs than most Americans.