December, Wednesday 14, 2011

DOW –131 = 11823
SPX –13 = 1211
NAS –39 = 2539
10 YR YLD -.06 = 1.90%
OIL –5.32 = 94.82
GOLD –54.40 = 1577.50
SILV –1.88 = 29.06
PLAT – 53.00 = 1429.00

Last Friday the Europeans held a summit in Brussels and they announced a big plan to create a new Eurozone that would be a bit more fiscally responsible; they did not announce a massive bailout; there was no bond buying bazooka. Yesterday, the Federal Reserve held their final FOMC meeting for the year; they left interest rates at zero but they did not announce QE3; there was no plan for Ben Bernanke to fly his helicopter over Wall Street and toss out free cash for the holidays.

Have the central bankers suddenly found fiscal discipline? Don’t hold your breath. The central bankers will do what the central bankers always do; they will print and spend staggering amounts of money that they don’t have; and they won’t tell you about it. Actually, they did tell us, very quietly and obscurely. Yesterday, I told you about a statement issued by the Bank of International Settlement, the central bank for central bankers. The BIS said it would “supply official liquidity in major currencies in an elastic manner.”

The response to a deflationary depression is to inflate. And the big dog of bailouts is the Federal Reserve. So it should come as no great surprise that the dollar needed to get a little stronger. The only things going up in the past week – the dollar and US Treasuries. Meanwhile, the euro has been dropping, hitting the lowest level in almost a year; today it dropped under $1.30 and the US dollar Index climbed above the old resistance level of 80. If you were planning a bailout – wouldn’t you want to get a big bang for your bailout bucks?

So, the next question – will there be a bailout? Germany’s Chancellor Angel Merkel has refused to issue euro-bonds to deal with the crisis; she has been calling for austerity to force the debtor nations to cut their debts, but she will soon have to admit the limitations of austerity. Debt reduction might work in times of economic expansion or in time of economic normalcy. Debt reduction during a deflationary cycle leads to widespread deflation. Italian bonds are at unsustainable yields, Greece and Portugal are toast; Spain has depression level unemployment; France is on the verge of an expensive credit rating downgrade.

It’s clear that the debt crisis currently brewing in Europe will turn into a full-fledged collapse next year if aggressive monetary action isn’t taken soon.  Europe has received several reprieves in recent months but hasn’t been granted an actual pardon.  The financial markets will judge the eurozone just as harshly in 2012 as the U.S. was judged in 2008 if aggressive policy action isn’t quickly forthcoming. So, what do you think the plan is? The plan is to “supply official liquidity in major currencies in an elastic manner.” Allow me to translate: the central bankers will print lots and lots of cash, as needed to prevent a run on the banks. Specifically, the Federal Reserve will be the lender of last resort and the bailout currency of choice will be the US dollar.

In a couple of months, I would not anticipate the US dollar to be quite so strong, and I would not expect Treasuries yields to be quite so low. And conversely, you would expect gold to jump. You would normally expect gold to jump in an inflationary environment, and make no mistake – bailouts, even during a deflationary depression – bailouts are inflationary. I know there is not an exact correlation between the dollar and gold but I also know that central banks can’t print gold.

What we are seeing now certainly looks like a setup for a bailout. The lessons that policy makers learned in 2007-2008 is that the financial markets are brutal and they will not wait. The central bankers played extend and pretend in 2007 and they ended up staring down the throat of a global financial meltdown. If they learned a lesson from 3 years ago, then we are looking at a bigger and faster bailout. This is the Playbook, inflate your way out of depression and hope to avoid hyperinflation.

Place your bets accordingly.

Time magazine has named its Person of the Year, and the winner is “The Protester”. Of course, it is not just one protester. The Arzab Spring may have started with one man, a vegetable and fruit seller named Mohammed Bouazizi, who lit himself on fire. But the numbers of the protesters are truly staggering. There are tens of millions, maybe more. Armies stand down; dictators run away. In Tunisia, Egypt, Jordan, Bahrain, Morocco, Yemen, Algeria, Syria, and Lybia, millions participated in the days of rage. On May 15, tens of thousands marched on Madrid, Spain. The march turned into Los Indignados, protests that attracted 6 million out of a population of 46 million. By comparison – imagine 40 million Americans all protesting at once. A week later, the protests spread to Greece; a half million camped out in Athens. Then smaller protests in Israel and London. Then finally in late September – Occupy Wall Street camped out in Zuccotti Park in New York.  The Occupy movement has now spread across the globe. The latest protests have been in Moscow.

The protesters will continue to influence the dialogue in the coming year. The sheer numbers are overwhelming. The protesters aren’t going away.

Regulators now have a full picture of money transfers in the final days of bankrupt brokerage MF Global, and are working to sort out which transactions were legitimate.

Jill Sommers, who is heading the Commodity Futures Trading Commission's review of MF Globalsaid, "We are far enough along the trail that we know where all the money went. Now it's just finding out which ones of those transactions are legitimate and which ones of them are illegitimate. We certainly don't want to lead anyone to believe we don't know what happened. We do know, and we see where all the transactions went.”

Sommers told Reuters that just because money was transferred out of a customer account to the broker-dealer account "doesn't mean it was illegitimate."

She declined to reveal details on the fund transfers until investigators have determined the purpose of all the transactions.

Lawmakers have increased the pressure on regulators to provide answers on what happened to hundreds of millions of dollars in missing customer funds.

A trustee liquidating the firm has estimated the shortfall could be as high as $1.2 billion.

MF Global officials, including former chief executive Jon Corzine, have told lawmakers they simply do not know where the money is, and deny authorizing the misuse of customer money.

Regulators have said the firm may have diverted the funds for its own needs as it suffered a liquidity crisis.

Investigators are now trying to back up thousands of transactions with underlying documentation such as a signature or email to determine whether the customer approved the transfer into a broker-dealer account.

Until regulators can determine which transactions were illegitimate, they will not be able to determine the shortfall in customer funds, and how much money will ultimately be distributed back to customers.

Under certain circumstances, futures commission merchants are allowed to take customer funds and invest them in a range of approved securities.

In exchange for using the cash, firms are required to back it up with high-quality collateral such as U.S. government securities.

If you don’t hold it you don’t own it. If you hold a piece of paper – that’s what you own – paper.