Tuesday, May 08, 2012 - The Situation in Europe Isn't What You Think

DOW – 76 = 12,932
SPX – 5 = 1363
NAS – 11 = 2946
10 YR YLD - .04 = 1.84%
OIL - .46 = 97.30
GOLD – 33.70 = 1605.80
SILV - .62 = 29.57
PLAT – 18.00 = 1517.00

The markets did a double take. We knew what was happening in Europe. Yesterday, the markets acted as if nothing had happened. This morning, the sky was falling. And then as the day progressed, the markets realized the sky wasn't falling, or  perhaps the markets remembered that the Federal Reserve will backstop the markets. And the Fed meets again in June 19^th, and that's not too far away. Of course, before the Fed can make an announcement on yet another round of Quantitative Easing, the sky has to fall, at least a little; stock markets have to wobble, oil prices need to slip, gold prices need to be slapped around. And just when you imagine there is a deep dark deflationary abyss, the Fed can ride to the rescue with another round of cheap money for undeserving bankers.

The euro fell for a seventh straight session against the dollar, dropping below $1.30, which was considered a fairly significant level of support. Today's euro weakness is overwhelmingly tied to Greece's difficulty putting together a government. Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro. Greece's Left Coalition party has a chance to form a government opposed to the country's EU/IMF  bailout after the mainstream conservatives failed to cobble together a coalition. The chances are looking like slim and none. The Left Coalition is trying to back away from pledges made in exchange for a EU/ IMF bailout; this basically means they want to tell the bankers to go to hell and they don't care if they get kicked out of the Euro as a result. The right wing is saying Greece must accept the bailout deal and remain in the EU; the left wing is saying the popular verdict renders the bailout deal invalid. If a government can't be formed, then they will call for another round of elections.

So, the next question is: what happens if Greece exits the Euro? Not much. If you haven't seen this coming, you haven't been paying attention. International banks have sharply reduced their exposure to Greek and other peripheral government debt. If Greece leaves, it is already baked into the cake and it may be the best thing for the Greek people. Except... if Greece leaves, then Spain and Portugal and Italy might consider leaving the Euro or renegotiating their deals. That does not mean there would be no market impact. The premium investors demand to hold peripheral debt rather than German benchmarks would rise and the euro might fall even more. Overall, the situation in Greece is important politically but not financially. France is another story.

François Hollande, the newly elected Socialist French president, demands a change to the EU's economic policies, with a shift from austerity to growth. European Union leaders are to hold an emergency summit; not today; the summit will be held May 25^th. Germany and France are battling over the euro-zone’s "fiskalpakt", signed by 25 EU countries, that enshrines austerity measures into European treaty law and requires countries to change their constitutions to outlaw high levels of state spending. Mr Hollande is refusing to back such a change or to allow the EU courts new powers to strike down national budgets that breach the fiscal pact's "golden rule", and wants to renegotiate it to dilute the focus on austerity in favor of growth.

So, the elections in Europe showed voters were fed up with austerity, and they prefer a growth policy. Well, yes, sort of. There is more to it. The voters were also expressing their disgust with German imposed austerity. Germany is the instigator for austerity imposed on the periphery countries, and even on France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations; the Germans don't want these policies for Germany but they would like to impose this on the southern Euro-countries. And what we have heard is that the southern Euro-countries are lazy, and living off government handouts, while the Germans are hard working, productive, efficient, and thrifty.  What you are not hearing is that this is a Euro version of the 99 Percent movement.

The German version of austerity calls for austerity for the 99%, but not for the wealthiest One-Percent. We've seen this playbook before. It is the Federal Reserve playbook and it calls for an enormous amount of liquidity to be fed into the economy by the central banks. The liquidity is injected directly into the banking system and provides the banks with reserves as the central banks buy up toxic assets in exchange. A zero interest rate policy also provides banks with essentially free loans which can then be used to speculate in various markets. Theoretically, you might think the money injected into the banking system would be circulated throughout the economy to juice growth, but that's not how it works. The banks hoard the money and they gamble with the money. Instead of jobs, growth and stability, the opposite happens; growth is stifled, jobs destroyed, and wealth is redistributed to the small minority known as the one-percent.

Nobody likes to have austerity imposed on them, yet most people realize that emerging from tremendous debt will be difficult and require some sacrifice; the voters were saying the burden should be shared by the people who most benefited in the past from this corporatist plutocracy, who are manipulating the system currently to avoid any harm to themselves, and who show not the slightest concern about the burdens imposed on 99% of the population.  The elections were not necessarily a mandate for a new round of massive expansion of government debt, rather it was telling governments to redirect the current government spending away from propping up the corrupt corporate oligarchy. The Greek people are suffering economically. Goldman Sachs played a significant part in making the Greek debt situation worse. Goldman Sachs received hundreds of millions. Goldman Sachs made out like thieves in the night.

So, why not take away the bailouts? Why not stop the equity extraction businesses, the vulture capitalism, the excessive leverage, the stock option programs that reward short term corporate profits at the expense of long term viability and jobs? Why not reinstate discipline that punishes unsound judgment with the loss of jobs and wealth, not with golden parachutes? Why shouldn't badly run companies be allowed to fail? Why shouldn't success in business be predicated on more than the ability to bribe government officials with campaign contributions to grease the way for unfair advantages and special privileges.

Cases in point: a kid steals a 12 pack of beer from the 7-11 and ends up in prison; John Corzine steals $1.2 billion from client funds and we're still waiting for the police to show up. Or what do you think would happen to you if you forged a check and got caught? Prison, followed by probation. Forge tens of thousands of names and create bogus notaries for mortgage notes – no problem for the banksters. A student hacks into Sarah Palin's phone and gets indicted and convicted in a flash. Rupert Murdoch hacks into a dead student's phone and he gets a pie in the face and a slap on the wrist. You give a cop 20 bucks to fix a ticket and you'll be busted for bribery. JP Morgan gives the New York Police Department $1 million dollars and they have their own private security force; better yet, Goldman Sachs coughs up a few million in campaign bribes, or donations, and they get one of their guys appointed as Treasury Secretary. The list goes on, and on, and on.

We hear malarkey about how the voters went for communists and socialists and neo-nazis. The Europeans have dealt with a corrupt corporate oligarchy in the past; maybe they really wanted to vote for capitalism but there isn't anybody representing that ideal. Maybe they just wanted a level playing field. Maybe we shouldn't fear the socialists in France; maybe we should fear what they're replacing. Maybe we should hope they're going to effectuate change, because if they don't get change with their votes, they may move on to more drastic solutions.

Bank of America has started sending letters to thousands of homeowners, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. The principal reduction offers from Bank of America Home Loans are the result the $25 billion dollar multi-state settlement that came about in the wake of the robo-signing scandal. BofA  started making prinicpal reduction offers in March to a narrow group of homeowners who were already in the process of seeking mortgage modification. The bank estimated that the earlier wave of trial reduction offers to about 5,000 people could amount to more than $700 million in forgiven principal. But homeowners have to make at least three timely payments for the reductions to become permanent. This is BofA's punishment for robosigning; of course many of these mortgages being modified might have ended up in default, so it works out pretty good for the bank.., as always.

BofA holds its annual shareholder meeting tomorrow in Charlotte, NC. Expect protesters, maybe quite a few. In response, the city of Charlotte is beefing up police presence in a two-block radius surrounding the bank's headquarters, where the meeting will be held. Earlier in the year, the city deemed it an "extraordinary event," which allows the Charlotte police force to reallocate officers as it sees fit.  The bank also  hired off-duty Charlotte police officers to sit inside the meeting, as well as a private security firm to work outside.

Senate Republicans on Tuesday blocked consideration of a Democratic bill to prevent the doubling of interest rates on some student loans. Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to beat back a filibuster and begin debating the measure.  Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.

Doubts about Europe’s political and economic future drove prices down for a wide range of commodities. Metals prices were hit hard. Gold, silver, platinum and palladium all fell. Energy and agricultural products were mixed. You might think there would have been a flight to safety, but that flight was for Treasuries, not metals. That might change soon.