December, Monday 05, 2011

DOW =78 = 12097
SPX +12 = 1257
NAS +28= 2655
10 YR YLD +.01 = 2.05
OIL –3.16 = 97.80
GOLD – 22.10 = 1724.20
SILV - .56 = 32.18
PLAT – 27.00 = 1526.00

Well, I survived. My apologies for missing our regular Friday get together. Throat and sinus. I survived.

That is my segue to the situation in Europe. The Euro has survived. A couple of weeks ago, it looked like the end was near. The headlines warned of Financial Armageddon. I told you not to underestimate the strength of the bankers and the powers that be; I told you they were bright boys and girls and they had a game plan. But the financial markets wobbled. There was the threat that contagion would spread from Greece to Portugal to Italy to Germany to London to New York, and eventually right into your pocket book. The bankers cried ‘Havoc!” and let slip the dogs of debt. The bond vigilantes prowled the markets and pushed demands that the hoi poloi must pay the hoi oligoi; the great unwashed were indebted to the bankers; the demands were simple and constant from at least 3 years past: the profits were privatized but the losses must be socialized. The Greeks and Italians did not vote for the governments that now run their countries, just as we did not vote for the Federal Reserve and their grand bailout here in the US.

Germany’s Merkel and France’s Sarkozy demanded change; apparently Sarkozy is too young to remember the definition of Vichy. The bankers seized control of Athens and then Rome and installed their puppet regimes to run the economies of the former sovereign states. 

Change did not come quick enough and the bond vigilantes threatened to call down destruction on all who still refused to embrace austerity. And then the great collaboration of Central Bankers stepped in last week to restore order and impose further conditions on the herd. We don’t know what those specific conditions were, just as it took years to learn specifics of the deals our Federal Reserve made 3 years ago. It is just a touch ironic that Freedom of Information Act revealed last Monday that the Fed, which had told us the 2008 bailout was about $700 to $800 billion, actually had passed out more than $7.7 trillion dollars to their banker buddies. Europe hurting for cash, particularly US dollars, brought England, Japan, Switzerland and Canada and ECB into their latest money creation scheme. They will lower prices on dollar liquidity swaps and extend these swap subsidies for a year.

Eight of the world’s central banks moved to prevent another financial meltdown or worse; their solution was familiar; whether you call it swap lines or liquidity, it is ultimately debt. Additional liquidity is a stopgap measure, which not only deceives, but also is injurious in the long run. The result is the Fed will continue to prop up European financial markets with no solution in sight moving from one calamity to another until the systemically insolvent conditions take the system down. The Central Bankers – and really it is the Federal Reserve acting as the backstop - passed out free money, your money, and that money is debt and it will eventually have to be repaid by the hoi poloi.

If this sounds just a tad bit inflationary – give yourself a gold star; better yet, give yourself a gold coin. Every time the Federal Reserve cranks up the printing press, every time they create more money out of thin air, it takes the dollar down a little lower. Look at a chart of the dollar over the past ten years; it is a classic downtrend. Today, the Dollar Index stands at 78.7, slightly lower than September of 2008. Look at the chart of gold over the past ten years; it is a classic uptrend. In a speech today, Federal Reserve bank of Chicago President Charles Evans said the Fed might have to tolerate a higher than desired inflation for a time, that this was the price of restarting economic growth in the US. What a croc! The Fed has passed out trillions to bankers over the past few years, and now they promise to pass out trillions more to the bankers on the international stage, and it hasn’t created jobs and it hasn’t restarted economic growth in the US, but if you don’t want the economy to stall out and fall down – be prepared for some inflation. If you want the Federal Reserve to save you, they will have no choice but to let slip the Dogs of Debt.

The Fed cries Havoc and they will continue to prop up the Euro banks and financial markets with no specific solution; they will pass out trillions in secret but the liquidity is a stopgap measure – and they will employ whatever measures they need to keep the system from failing outright. But there is a bigger problem – the debt of Europe, the UK, and the USSA can’t be paid – it is too big. This is a problem that will not be solved but will be dealt with on a day-to-day basis.

So, let’s see where we stand today.

Italy’s new technocratic leader Mario Monti – and maybe we should stop calling them technocrats and start using the more descriptive term: puppet regime. Anyway, Monti unveiled a sweeping austerity package. Monti’s decree was dubbed “Save Italy” (Orwell would be so proud) and it aims to raise about $13 billion dollars – That was good enough for yields on 10-year Italian bonds to drop to just over 6 percent, around a full percentage point lower than last week, while the risk premium over benchmark German Bunds fell below 400 basis points, levels last seen in October.

French President Nicolas “Vichy” Sarkozy and German Chancellor Angela Merkel have agreed on what they call a “Master Plan” for imposing budget discipline across the euro zone. And really, when has a German “Master Plan” ever worked out well? The proposal includes automatic penalties for governments that fail to keep their deficits under control, and an early launch of a permanent bailout fund for euro states in distress.

Merkel said: "This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability." And Sarkozy said: "Our wish is to go on a forced march toward re-establishing confidence in the euro zone. We don't have time.” Seriously, I can’t make this stuff up.

There was a slight wobble in the stability as Standard & Poors warned Germany, France, Austria, Finland and Luxembourg were on negative credit watch and risked their Triple-A rating.

The revised treaty would permit automatic sanctions against states that breach an existing deficit limit of no more than 3 percent of total economic output, unless a "supermajority" of states voted against the penalty.

That would reverse the current system where a majority of states must vote to launch a disciplinary procedure.

It would also enshrine a budget-balancing rule in national constitutions across the euro zone, although they gave no detail of the proposed wording.

In deference to French concerns about sovereignty, they agreed the European Court of Justice could rule on whether euro zone states had implemented the fiscal rule properly in national law, but would not be able to reject national budgets.

Merkel appeared to have prevailed in her opposition to the issuing of bonds in theory guaranteed jointly by all euro zone countries, but in practice by the bloc's strongest member, Germany.

There will be another summit on Friday. Sarkozy and Merkel said they would present their plan in time for Friday's summit, and made clear their determination to drive through a EU treaty change despite objections from some member states. Sarkozy said: "In this extremely worrying period and serious crisis, France believes that the alliance and understanding with Germany are of strategic importance.”

So, Europe saw a blueprint used by the Federal Reserve 3 years ago. Of course, the plan has been updated and revised, but basically the Europeans are importing the Federal Reserve Playbook, and eventually, the plays that work in Euro land will be exported back to the USSA, because, after all, our cultures share so much.

Cry havoc and let slip the dogs of debt.

We did not get to the Mailbag on Friday. So, we’ll take a few letters over the next couple of days.

Sinclair, glad to have your intelligent commentary back on 1510! 

You mused as to what type of government our Republic has degenerated into on your Dec 1 show. 

Here is my two cents worth: 

Although I might describe our present type of government a "Politocracy", where the political class is privileged, or a "Cronyocracy", where cronyism is the governing mandate, what I actually propose is we are seeing the formation of an "Spinning Oligarchy" where governmental control is dominated by a pernicious revolving door of politicians, lobbyists, and upper level Wall Street  - mostly Goldman Sachs - executives. Kinda gives "Spin" a whole new meaning.

Regards,

Thank you. Those were some great suggestions. I’m going to leave that as an open question – what kind of “ism” do we have, right now, right here in the good ole USSA?

Sinclair,

Given the magnitude of the following question, I wanted you to have plenty of time to

think of a meaningful answer.

If Europe (EU and Euro currency) fail what would be the impact to the US?

Would it have positive or negative implications to the US economy?

In my mind, I could reason for both negative and positive implications and have

thus confused myself!

My first response is that it would be very, very bad for the United States to have a major trading partner like Europe collapse. But then I started thinking about your confusion, and the contagion of confusion spread. I think you are thinking that in the world full of blind people, the one-eyed man is king – but a world full of darkness is not a good thing.

Perhaps you’re thinking that a quick purge of malinvestment is better than the slow, torturous crumbling of the economy. Do you rip the band-aid off or do you peel it off slowly. Debt has destroyed all the major empires in history. Debt matters. It’s possible to delay the inevitable by printing money, but eventually there is a reckoning, a reversion to the mean, a return to normal – or at least a new normal.

If you are in a hole and you want to get out of the hole, the first step is to stop digging. We really should do something about the unfettered power of the bankers. If you didn’t see the 60 Minutes report last night on Countrywide and Citigroup, try to check it out – it’s worth your time. We can’t continue to allow two different systems of justice – one for the corporations and another – far more punitive justice system for the people. We need to break up the big banks – and we need to start by breaking up the Federal Reserve.

As always, your emails are welcome – write to Sinclair@moneyradio.com.