Friday, June 8, 2012

Friday, June 1, 2012 - Someday the Violence Will End - by Sinclair Noe

DOW + 93 = 12,554
SPX + 10 = 1325
NAS +  27 = 2858
10 YR YLD -.02 = 1.64%
OIL - .47 = 84.35
GOLD + 6.20 = 1595.70
SILV -.06 = 28.63
PLAT – 10.00 = 1437.00

For the week, the Dow advanced 3.6 percent, the S&P 500 rose 3.7 percent and the Nasdaq jumped about 4 percent. It was the best percentage weekly gain for all three indexes since December.

President Obama held a White House press conference this morning. The initial focus of the prepared remarks dealt with the European economic problem, not a Euro-debt crisis as the president noted. Obama went on to talk about the US economy and a few other issues.

Obama tried to explain how the European economic problems could impact the American recovery and pushed Congress to pass parts of his "to-do" list aimed to stimulate economic growth. But during a question and answer session, the president said the private sector is "doing fine," and he referenced the importance of jobs losses in the public sector. Mitt Romney criticized him for being "out of touch,” and so Obama backtracked and said the economy is not doing fine and he said: we've actually seen some good momentum in the private sector... record corporate that has not been the greatest drag on the economy." He once again pressed Congress to provide aid to states to employ public sector workers including teachers and provide small businesses with tax breaks to help rejuvenate a sluggish recovery.

Of course that isn't going to happen.

But first on the agenda was Europe, and with good reason as things are moving fast.

Obama stressed the importance of a strong European economy, saying, "If there's less demand for our products in places like Paris or Madrid it could mean less business for manufacturers in places like Pittsburgh or Milwaukee."  

Obama indicated he believes the Euro-banking system needs an injection of capital, saying: "What we can do is to prod, advise, suggest, but ultimately they're going to have to make these decisions," noting that US solutions to the 2008-09 economic and financial crisis should inspire Europe. And of course, I've been telling you for the last nine months that the plan was to use the Federal Reserve's 2008 playbook to deal with the Euro-crisis.

The next injection of capital into the banking system could be initiated tomorrow morning. Spain is expected to ask the euro-zone for help with recapitalizing its banks. Spain would become the fourth country to seek assistance since Europe's economic crisis began. Deputy finance ministers will hold a conference call tomorrow morning. Later the Eurogroup, which consists of the euro zone's 17 finance ministers, will hold a separate call to discuss approving the request, and an announcement will be made tomorrow afternoon.

Spain had rejected aid, claiming they needed to conduct a full audit before they considered aid. However, yesterday, Fitch Ratings downgraded Spain's sovereign credit rating by three notches. Spain determined that a preliminary audit would do the trick. When the request is made, Spain is expected to ask for help from the euro zone's 440 billion euro bailout mechanism, known as the European Financial Stability Facility. The exact amount is still to be determined but will likely top $100 billion dollars. The process is likely to involve bonds from the EFSF being injected into Spanish banks with no new capital raised. The bonds can then be used as collateral in operations with the European Central Bank, allowing the banks to access ECB liquidity.

Obama said European leaders appeared to be moving in the right direction, saying: "They understand the seriousness of the situation and the urgent need to act." The action is different than earlier bailouts in that it is targeting Spanish banks, not  Spanish sovereign debt; although I'm not sure there is a significant difference anymore.

Obama also said it is in "everybody's interest for Greece to remain in the eurozone," despite the division of public opinion inside the country where austerity measures have been imposed to deal with out-of-control deficits. "The Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the eurozone."

Of course, the Greeks hold an election next weekend, and the extremism that divided the vote in the last election may have gone too far. On a live TV program that featured representatives of the various political parties, the representative for the neo-Nazi Golden Dawn party became upset, threw a glass of water at the socialist on the panel, stood up and started slapping the representative of the communist party, a woman. It was really an ugly incident and will probably be the end of the neo-Nazis in Greece; at least we can hope. The bottom line is that the Greeks want to stay in the Euro-union; they're just tired of the incredibly stupid economics being forced on them.

There are structural flaws with the Euro-union. If any member exits it would destroy the union; mainly due to bank runs as we've seen with Greece and now Spain. So far, Germany has been slow to accept a deal with the periphery countries. Germany demands austerity, ironically assuming the role of Shylock demanding a pound of flesh. And Greece in the role of Portia. Of course, a pound of flesh would be deadly and the Germans can't extract the flesh without spilling at least one jot of blood. In other words, if the Germans demand austerity they will destroy the union and destroy their own economy.

Slowly but surely it appears that Germany is realizing they must come up with some plan that allows relief and a glimmer of hope for the periphery. It is easy and wrong for the Germans or anyone else to blame the Euro-crisis on the laziness of the Greeks or the Greed of the Spaniards, just as it was wrong to blame the plague on human sin. You can be certain that part of the core structural problem is an undervalued deutschmark, which means the German financial-industrial complex is as dependent on the euro as the US military-industrial is on war.

The euro just does not work and the scale of European debt is unmanageable; it will have to be written off or down, or eroded by inflation. Demand will need to be stimulated. The answer is not a "united states of Europe" to force competitiveness on weaker states. This is the current American answer to every world problem – "if only" everywhere were more like America. So, another idea is for Greece and maybe Spain to exit the Euro and they could devalue their currency and adjust prices to reality. The argument here is that it could be quick, 2 to 5 years of pain (maybe more), and then everything would be fine, maybe, except there wouldn't be a Euro anymore.

Here's what needs to happen; the debts of Greece and Spain need to be devalued and prices adjusted to reality; without any country exiting the Euro- forced or voluntary.

I think the Greeks have already figured this out. They are demanding they stay in the Euro and not be required to pay a pound of flesh to the Germans. And the Germans are starting to realize they can't take a pound of flesh without spilling blood and destroying themselves.

Poverty is the worst form of violence, and debt is the worst form of poverty; and all this violence has to end.

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