Monday, May 14, 2012 - Problems in Greece, Euro, California, and JPMorgan - No Surprise

DOW – 125 = 12,695
SPX – 15 = 1338
NAS – 31 = 2902
10 YR YLD -.05 = 1.79%
OIL - .70 = 94.08
GOLD – 23.80 = 1557.50
SILV - .71 = 28.28
PLAT – 29.00 = 1442.00

Back in early April I started telling you to heed the old market maxim: “Sell in May and Stay Away”. You are welcome. The Dow Industrial Average has now dropped 8 out of the last 9 sessions; no surprise.

Of course, we had the weekend to think about the shenanigans of JPMorgan Chase; a too big to fail bank acting irresponsibly while simultaneously demanding less regulation; no surprise.

Today's declines started in Europe; no surprise. In Germany, Angela Merkel's Christian Democratic Union Party suffered more losses in a local election for the second straight week. Merkel's CDU party received just 26% of the vote while a coalition of left-leaning Social Democrats and Green party candidates received over 50%. In light of the recent French elections, we are starting to see a trend.

In Greece, the various leaders of the various political parties failed to form a coalition government over the weekend; no surprise. The Greeks will likely need to call another election. And the fate of Greece hangs over the markets just as the possibility of exiting the Euro-Union hangs over the heads of the Greeks. And I think that is the correct application of the metaphor, with Angela Merkel in the role of Dionysius and the Greeks in the role of Damocles. I don't know whether the next Act in the tragedy comes from “The Merchant of Venice”: The quality of mercy is not strained, or “Brer Rabbit”: Brer Fox I don’t mind if you eat me. But, oh, whatever you do don’t throw me in that briar patch; or maybe “Hamlet”: To be or not to be, that is the question. Whether 'tis nobler to suffer the slings and arrows of outrageous austerity, Or to take arms against a sea of troubles, And by opposing them end them?

Which is the long way of getting round to the point that the final chapter has not been writ and so there are infinite options in Euro-land. The Greeks are coming to the realization that the plan of essentially indentured servitude to their northern masters might have shortcomings and they reject this as a false choice, although the alternatives are still a bit vague. The Greeks might like to stay in the Euro-zone and reject the harsh budget-balancing measures Europe has demanded in return for the money Greece needs to remain solvent. That, at least, was the message of the recent election in which the two dominant parties that had signed off on the terms of Greece’s 130 billion euro bailout deal took a drubbing. So, why can't the Greeks increase wages, halt public sector layoffs and repudiate Greece’s debt, and stay in the Euro-Union?

Of course, that is dangerous thinking for the powers that be. If Greece does not buckle under the crack of the bankers' whips, there is little chance the Portuguese and Spanish and Italians and Irish, and then the Union will dissolve and Greece will be shown the exit. This is the claim. The Greeks say it is a bluff. The ECB and the IMF must surely be flustered. They can't even have a good standoff until the Greeks can cobble together a government and the next election won't happen until mid-June.

It appears to be the European hard-liners that have been pushing austerity that has destroyed the political center and radicalized the extreme right and left. What's the worst that could happen? Greece gets tossed back into the briar patch once known as the drachma. They won't be buying new cars or computers or importing much of anything but they'll export like crazy; tourism will flourish; before you know it they'll be standing on the Acropolis, combing the tar out of their fur and laughing at the IMF.

With a month to go until the next election, is it possible the hard-liners will soften their demands? After all, how can you get money out of a bankrupt country? And don't forget who gets the bailout money; it's not the Greeks, it's the Euro-banks. All these billions of dollars of funds aren't going into the pockets of people in Athens, the money goes to the banksters. And the Greeks have come up with the radical idea that they don't care if the banksters get paid.

The threat to kick Greece out of the Euro-Union is very real but it would require the votes of 16 countries to do it. What happens if Portugal or Spain sides with Greece? How long would it take for that vote? Germany may talk tough but they don't have much firepower behind their rhetoric, and the German voters don't seem to have the stomach for discipline.

Though this be madness, yet there is method in't.

There is a chance that Greece might find some coalition of pro-austerity parties and remain in a debt purgatory while applying Teutonic discipline, or there is a possibility the Greeks will lead a Euro-revolt against austerity and various elections will serve as happy rapprochment between the debt slaves and the cracking whip. Of course, there is still a huge downside to all of this; global credit markets could freeze, global equity markets could tumble, global capital markets could be trashed, and governments could nationalize, and the banksters could be bailed out again, or not, and we could have a global financial meltdown – you know, almost like the one we had in 2008, and then did nothing to correct.

And make no mistake, we are not immune; it is just a matter of time before the basic problems of Europe come to the United States; it could hit us any day; maybe today.

And that brings us to California, which still has a budget problem; no surprise. Governor Jerry Brown is proposing more than $8 billion in cuts to close the state budget deficit and he is touting a tax hike initiative for the November ballot. And the combo might fill the revised $15.7 billion budget shortfall for the fiscal year that starts July 1. That is up from an earlier estimate of a $9.2 billion gap projected in January.

The Legislature had cut tens of billions of dollars from schools, social services, universities, courts, and health care programs for the poor. The cuts in higher education have sparked demonstrations at regents' meetings and on college campuses.

Brown said the size of the deficit makes it virtually impossible to balance the budget with spending cuts alone, so his budget balances the cuts with the revenue he anticipates if voters approve his proposal to increase the statewide sales tax by a quarter cent and boost income taxes on those who make more than $250,000 a year. Both tax increases would be temporary. Brown's budget proposes $8.3 billion in cuts, $5.9 billion from the tax increases and $2.5 billion in a variety of other solutions.

Jamie Dimon has been trying to gut the Dodd-Frank reforms, specifically the Volcker rule. Apparently JPM was so confident that their interpretation of the hedging exemption would prevail, that they got ahead of themselves and operated as if this loophople were in effect. That is part of what the Too Big To Fail Banks have been doing. Paying the lobbyists and the legislators to eviscerate the reforms, while continuing to act like the rule of law doesn't apply to them. Maybe it doesn't. A new article from Matt Taibbi, How Wall Street Killed Financial Reform. This is a good article, and it really points out just how broken Congress and the electoral system are.

Let me share with you part of what Taibbi wrote:

The giant reform bill turned out to be like the fish reeled in by Hemingway's Old Man -- no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law -- roundly despised by Washington's Wall Street paymasters -- a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes -- by a process usually reserved for things like the renaming of post offices or a nonbinding resolution celebrating Amelia Earhart's birthday.

The fate of Dodd-Frank over the past two years is an object lesson in the government's inability to institute even the simplest and most obvious reforms, especially if those reforms happen to clash with powerful financial interests. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while -- but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again. "It's like a scorched-earth policy," says Michael Greenberger, a former regulator who was heavily involved with the drafting of Dodd-Frank. "It requires constant combat. And it never, ever ends."

That the banks have just about succeeded in strangling Dodd-Frank is probably not news to most Americans -- it's how they succeeded that's the scary part. The banks followed a five-point strategy that offers a dependable blueprint for defeating any regulation -- and for guaranteeing that when it comes to the economy, might will always equal right.

Here's a list of the five ways,. The article gives great detail on how each of these work and were accomplished for the Dodd-Frank legislation. 

STEP 1: STRANGLE IT IN THE WOMB

STEP 2: SUE, SUE, SUE

STEP 3: IF YOU CAN'T WIN, STALL

STEP 4: BULLY THE REGULATORS

STEP 5: PASS A GAZILLION LOOPHOLES

Taibbi concludes this lengthy article, saying, "But money never gets tired. It never gets frustrated. And it thinks that drilling holes in Dodd-Frank is every bit as interesting asThe Book of Mormon or Kate Upton naked. The system has become too complex for flesh-and-blood people, who make the mistake of thinking that passing a new law means the end of the discussion, when it's really just the beginning of a war."