Friday, June 29, 2012 - It's Almost Like Free Money, Woohoo!

It's Almost Like Free Money, Woohoo! - 
by Sinclair Noe


DOW + 277 = 12,880
SPX + 33 = 1362
NAS + 85 = 2935
10 YR YLD + .08 = 1.66%
OIL + 7.18 = 84.87
GOLD + 47.10 = 1600.10
SILV + 1.17 = 27.59
PLAT + 58.00 = 1454.00


All right gang – what do the markets love? 


Free money. 


When central banks give free money to the banks (and let's be clear, they only give free money to banks not to regular people) the bank traders grab the loot and scamper off to the casino or to the trading desk (same difference), and it's risk on.  Next thing you know the Dow is up 277. Woohoo, this economics stuff is easy. 


Sometimes, just the promise of free money is enough.


The past couple of days the big wigs in Euro-land held an emergency summit in Brussels. This was their 20th emergency summit, so expectations were diminished. And just when it looked like an unproductive weekend full of waffles and chocolates; they announced a blockbuster deal (think John Carter, not Avatar). 


They have a plan for long term fiscal union, and a plan to save Spain and Italy from contagion. They’ll use the ESM, the European Slush Mechanism to directly inject capital straight into the banks, just like junkies on the mainline. And this bailout money would not be senior to existing debt. You may remember that caused  a problem for the Greek bailout, when the ECB forced Greek bondholders to take big haircuts but the ECB debt was not discounted at all. This should result in a more integrated fiscal union, they might even start buying up some bonds; and the ECB would be in charge of the new banking union. 


The ECB meets next week, and they might cut their target for interest rates from 1 percent down to three-quarters. German Chancellor Angela Merkel reaffirmed her opposition to common euro zone bonds. French President Francoise Hollande demanded a renegotiation of the fiscal pact to switch Europe's focus from austerity to promoting growth. Everyone was happy. The bank traders scampered off to place their bets, and nobody seemed to notice they haven't actually passed out the free money just yet, but the concept of free money was good enough for today.


What could go wrong?


Which may or may not be a direct quote from Jamie Dimon. Actually, Dimon is quoted as called the trading losses of the CIO, the London based trading unit of JPMorgan, Dimon called the losses a “tempest in a teapot”. That was back before he realized it was $2 billion in losses, then it was estimated that it might be $3 billion. Now the losses have grown to $9 billion. He's going to need a bigger teapot.


You may have noticed that Congress is a bunch of dysfunctional, corrupt, pathetic bums controlled by their corporate puppet masters and incapable of accomplishing anything beyond stuffing campaign contribution checks in their pockets. And while this is the rule, there is always an exception to the rule. Today, both houses of Congress approved measures authorizing transportation funding for the next two years, kept interest rates low on federal student loans for another year, and reauthorized a flood-insurance program for five years. In the House, the combined measures passed 373 to 52. Only Republicans, spurred on by fiscally conservative activist groups, voted "no." In the Senate, the measure passed 74 to 19, again with only Republicans in opposition.


Interest rates on student loans will hold steady at 3.4% and not double to 6.8%. This was just a fun way to pillage from students. On flood insurance, the Federal government is the only flood insurance provider; Congress has let the program lapse 6 times in the past four years. Rand Paul  wanted a flood-insurance vote to include a vote on an amendment regarding a so-called “personhood” measure, defining life as beginning at conception. Somehow, they managed to agree on a 2 year, $109 billion transportation bill; I'll spare you the details of negotiations but it is paid for by baking in 10 years of new revenues and spending cuts to pay for only two years of highway construction. At the end of the two years, Congress must face the question anew: How do we pay for transportation in the long term?






And there will be an election in Mexico this Sunday. The PRI, the old Institutional Revolutionary Party has a good shot at winning back the presidency. The conservative National Action Party, or PAN, pushed the PRI out of power in a 2000 election but its two presidents have struggled to get reforms passed and growth has been weak. Now PAN is running in third place, and Lopez Obrador, considered a leftist is polling in second place and already accusing PRI of voting fraud. Poor Mexico, so far from God, so close to the United States.






The Bank of International Settlements (BIS) is the central bank for central banks; kind of like the clearing house for the Federal Reserve, The European Central Bank, the Bank of Japan, and pretty much all the other central banks. The BIS is recommending that the different central banks, can consider gold, held in their vaults, physical gold, not allocated or hypothecated,  can be treated as cash and therefore risk-weighted at 0%.


Basically, this would put gold on the same level as cash and treasuries; in other words, it could lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of golds value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger. Banks would not be penalized for holding gold.  It would be a major endorsement of its role in preserving wealth and as a store of value, and gold would be a baseline for establishing value.  Essentially gold would be treated the same as it has been for the past 5,000 years, excluding the past 40 years.