December, Wednesday 21, 2011

DOW + 4 = 12,107
SPX +2 = 1243
NAS –25 = 2577
10 YR YLD +.04 = 1.97

OIL +1.78 = 99.02
GOLD - .20 = 1616.00
SILV -.24 = 29.42
PLAT – 4.00 = 1434.00


For the past few months you’ve been hearing me telling you the Europeans were going to follow the Federal Reserve Playbook. I’ve told you there were lots of bright boys and girls who believe they have learned valuable lessons from the near collapse of 2008, and they would apply those lesson in Europe, with subtitles. And yet, for the past three months you’ve also heard stories about how the European Central Bank, the ECB has claimed they won’t be the lender of last resort, they won’t act like the Federal Reserve. You’ve heard how the ECB does not have a mandate to do the things the Fed does.

Today, the ECB reported that it had doled out almost half a trillion euros, or about $640 billion dollars, in low-cost three-year loans to 523 Euro banks to keep credit flowing at a time when European banks are finding it all but impossible to finance their operations through normal market channels.

I told you a little about this yesterday, and today we are getting confirmation. Here is how it works: in exchange for collateral, lenders borrowed at the ECB’s benchmark interest rate, currently 1 percent; then they use the funds to purchase the debt of euro zone governments, pocketing the difference as profit. Spanish bonds, for example, yield around 3.4 percent to 5%; in Italy rates are even higher.

This is exactly what happened in the United States with the Fed in 2008. They bought toxic assets and withdrew them from the market, and gave the money they printed to the banks, who put that money into the government bonds that were sold to fund TARP. What kind of collateral is required? Pretty much anything will fly; toxic trash is being accepted So, even banks that didn’t need liquidity are thinking “why not?” This is the bazooka, and it’s a pretty big bazooka. It’s happy hour for Euro banks.

And so the next question is whether this will work.  We know that these cash for trash operations can provide liquidity and we know that liquidity is important right now, and we know that this will be fun for the banks, and the banks will turn around and buy sovereign debt… but it doesn’t solve the bigger economic and political problems in the Eurozone. It also means the Euro will not collapse today.

The next question is whether this will be inflationary. Not exactly. The Eurozone is seeing an economic downturn, GDP is contracting, consumers are tightening their belts, businesses are retrenching, and the banks have their heads buried in the sand, or somewhere. Higher inflation would require the banks to actually make loans to the private sector. No, this is a gift among bankers, freebies to allow the banks to build up profits and clean out dreck. Eventually, some of that money will make it into the broader economy. Eventually there will be inflation, but not soon, or at least it won’t be obvious soon.  The immediate effect is that the Euro, the currency, has been devalued, but it has been devalued within a partially closed system.

And then the next question is whether the Fed is exporting more than its Playbook? Is the Federal Reserve backstopping the ECB? Is the Fed really the lender of last resort? Maybe we can go to court and request info under the Freedom of Information Act, and maybe in 2 or 3 years we’ll learn the answer.  There is no question that the Eurocrats would have absorbed every last bond and bank loan on a bank balance sheet that is traded at a discount. If it was within their power, they would do it. The Eurocrat Central Bankers can only dream of the power of Ben Bernanke. They know that when the Fed Chairman is in a similar position to theirs he will beckon $7.7 trillion dollars or more out of thin air, and after he tosses it from his helicopter, a Congressional committee will thank him for saving the financial system, and he will be Time’s Man of the Year even if inflation tops 20%.

Let’s also remember that the Federal Reserve Playbook represented the biggest theft in history. We are watching the next round unfold. At some point, you’ve got to think that going down this same road, again and again is going to get old. The can being kicked down the road has a unique physical property – it gains mass; every round of quantitative easing gets bigger and bigger. And just in case you are wondering who controls the governments in the US and in Europe, the ECB is using all this money to save banks – not countries, not citizens. The banks throw a tantrum; the central bankers open the vaults and shovel taxpayer money onto the whiny bankers.

The central bankers are rewarding banks’ bad behavior and punishing the public. If you think we have free markets, if you are crazy enough to think that free markets apply to the United States in 2011, please, wake up.

It turns out the housing market crash was worse than you thought. How much worse? 14%. The national Association of Realtors says they made a little mistake in their calculations of existing home sales. Between 2007 an 2010 there were average annual sales of about 4.42 million existing homes, not  5.16 million as the NAR previously reported. The NAR characterized the revisions as “drift”. Consistently lying in a way that benefits your members and largely getting away with it is actually clever...sociopathic...but clever, if you catch my drift.