DOW – 250 = 12,573
SPX – 30 = 1325
NAS – 71 = 2859
10 YR YLD - .02 = 1.62%
OIL – 3.20 = 78.25
GOLD – 41.60 = 1566.20
SILV – 1.24 = 26.98
PLAT – 19.00 = 1445.00
Here is the bottom line on today's declines; Wall Street has become addicted to free money from the Federal Reserve. Stimulus from the Fed is like crack for the Wall Street bankers. Yesterday, the Fed refused to pass out more free money. Today, Wall Street got a bad case of the shakes.
One of the concerns when Bernanke and pals fail to act is that they can't really think of anything they might do that would have any real effect, or maybe they're satisfied with 2% inflation and 8.2% unemployment. So what if Bernanke doesn't have any more ammo?
Then we are left to the devices of fiscal policy, in other words; what can the politicians in Washington do to stimulate the economy? The most likely answer is that the politicians can drive the economy over a cliff. While that might seem cynical, it's really just pragmatic.
And then, of course there is the Lehman Brothers event with subtitles looming in Europe. If Europe collapses, the thinking is that Bernanke will find a few more bullets in the form of QE3, and he will once again toss money at the Wall Street bankers. The Wall Street crack whores will fire up their pipes and place “risk-on” trades with the certainty that the Fed will place a put against any losses. The problem with this scenario is that Wall Street won't be ready to go risk-on in the event of a Euro-collapse, they'll just hoard the money and arbitrage against the Fed.
And the bigger problem is that QE3 won't find its way into the broader economy; at least if past performance is any indicator of future results. QE1&2 were abysmal failures for Main Street. The money never went out into the broader economy and never developed any velocity; Operation Twist might have pushed down long term interest rates but it didn't make it easier to get an actual lower rate on your mortgage – that involved fiscal policy and it has be less than satisfying. the money was sucked into that black hole of bad bankster bets; and the banksters can bet more than Main Street can ever produce.
If you forget your history, you can just refer to the playbook as it is happening right now in Europe. A new audit shows Spain's banks would need $64 to $78 billion in extra capital tow survive a serious downturn in the economy, less than the $125 billion aid package offered by the Euro-zone, but far more than the $$27 billion actually allocated for the ESM bailout fund, which has not yet been funded. Spain said it will make a formal request in the next few days but details on how much each bank will need won't be known until September. The important point here is that the money is not going to the Avenida Central, it doesn't create jobs to alleviate the 25% unemployment rate in Spain; the money goes to the banks, and it disappears. Spanish banks need a $64 to $78 billion dollar bailout – for now. How long do you think it will take before they come back and demand more?
I read recently that the bailout money already sent to Greece is more than the amount Germany received under the Marshall Plan. That's an alarming statement, except Greece didn't receive the bailout money; it went to the banks. They didn't build roads and bridges and factories. And it is wrong to imagine Germany can bail out the Euro. The crisis has engulfed three small countries – Greece, Ireland and Portugal – and is now on its way towards Spain and Italy. France might well be next. These six countries’ public debts amount to 200% of German GDP. With its own debt of 80% of GDP, Germany can't stop the inevitable.
It's important to understand which countries were fiscally reckless. In 2007, Greece and Italy both had high debt to GDP (over 100%), Portugal, France and Germany had debt to GDP of a little more than 60%; Spain was in the 30% range; Ireland in the 20% range. The numbers should prove that the crisis is not a debt crisis but a banking crisis. The Greek bailout was a banking bailout and several of the banks were from France and Germany and even the US.
Here in the United States we bailed out the banks to the tune of hundreds of billions and a couple of rounds of QE and the Twist and we still have big problems. Bernanke claims he still has some ammo left. Maybe he is holding it for a Euro-collapse but while he's waiting the US economy might go over the monetary cliff and he'll figure the only thing to do is another round of QE. Maybe the mistake the banksters really made was to have a pleasant little Wall Street rally to start the month of June; maybe Bernanke, in a flash of probity, didn't feel comfy passing out free money during a rally. Maybe he knows that after QE3 he really is running out of bullets.
Moody’s Investors Service downgraded the debt ratings of 15 major international banks and securities firms after the close of trade. The downgraded banks include: Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Royal Bank of Canada, Deutsche Bank, BNP Paribas, Credit Suisse, RBS, HSBC, and Barclays. Morgan Stanley and UBS each took a two-notch cut, not as bad as anticipated. Credit Suisse took a three-notch cut. The downgrades may affect derivatives that aren’t centrally cleared, some policies require the counter-party to maintain an A-rating. The downgrades also may hasten obligations to post additional collateral and termination payments. Moody's said: “All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities.”In after hours, Morgan Stanley moved higher because the hit could have been worse. Is this the canary in the coalmine? It's hard to imagine the financials don't take a hit.
The global economy is slowing. In China, the preliminary HSBC manufacturing purchasing managers’ index dropped to 48.1, the eight straight month of contraction. In Europe, the flash manufacturing PMI fell to 44.8, the lowest in three years. In the US, the flash manufacturing PMI remained in positive ground at 52.9, but the pace of the expansion in the factory sector slowed from May. The Philadelphia Fed said its manufacturing index plunged to negative 16.6 in June. Sales of existing homes dropped 1.5% in May. Oil prices down below $80 is a clear indication of a slowing economy. The number of Americans who applied for unemployment benefits fell slightly last week but remained at a level indicating virtually no improvement in hiring trends or labor market conditions.
It wasn't total gloomy economic news; the index of leading indicators rose 0.3% in May; the FHFA house price index inched up 0.8%; the data points toward a slowing economy, grinding lower without severe contraction.
There are plenty of reasons we can attribute to today's declines, if you need a motive to deal with the move, pick one and wallow in it. We'll probably grind lower through the summer. There will likely be some rallies, like the first half of June, and there will likely be some nasty falls, like the month of May and today. And there will be the overhanging threat of a global financial meltdown, but most likely it will just be a grind it out summer.
Some people think the US economy has pulled out of the recession and the recovery just isn't robust. Some people think the US economy might be headed for a double dip recession. Some people think we came out of a recession and now we're headed for a depression. I've been telling you for a long time that we have been and continue to be in a depression. We've seen some signs of life but not enough to pull us out of the depression. In a depression, even the good times feel like a grind. Enjoy.