luni, 8 august 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Stunning Pictures of Senseless London Riots; Conflagration and Carnage in the Capital and Beyond; London Riots: Live Blog

Posted: 08 Aug 2011 08:49 PM PDT

Boston.Com, The Telegraph, and The Guardian have stunning images of massive riots in the UK.

Sources report the exact cause for massive riots, now in their third day in London, is unknown. While the trigger may be a deadly shooting by police, I believe the cause is social-breakdown fueled by rising unemployment, loss of dignity, and a desperate realization that hope for a better future and for government to do something responsible about jobs and rising food prices is fruitless.

Boston.Com reports on London Riots.
Two nights of rioting in London's Tottenham neighborhood erupted following protests over the shooting death by police of a local man, Mark Duggan. Police were arresting him when the shooting occurred. Over 170 people were arrested over the two nights of rioting, and fires gutted several stores, buildings, and cars. The disorder spread to other neighborhoods as well, with shops being looted in the chaos. Collected here are images from the rioting and the aftermath.
The article displays 26 stunning images. Here are a few of them.



Fire fighters and riot police survey the area as fire rages through a building in Tottenham, north London on Aug. 7, 2011. A demonstration against the death of a local man turned violent and cars and shops were set ablaze. (Lewis Whyld/PA/AP)



A double decker bus burns as riot police try to contain a large group of people on a main road in Tottenham on August 6, 2011. (Leon Neal/AFP/Getty Images)



Fire rages through a building in Tottenham on Aug. 7, 2011. (Lewis Whyld/PA/AP)



Buildings burn on Tottenham High Road in London during protests on August 6, 2011. (Matthew Lloyd/Getty Images)



A shop and police car burn as riot police try to contain a large group of people on a main road in Tottenham on August 6, 2011. (Leon Neal/AFP/Getty Images)

There are 26 images in the article. It is worth a closer look.

London riots: conflagration and carnage in the capital and beyond

The Guardian reports London riots: conflagration and carnage in the capital and beyond
Riot police charge past burning buildings on a residential street in Croydon. Photograph: Dylan Martinez/Reuters



Several large fires engulfed the centre of Croydon on Monday night as the unrest that has gripped London spread to one of the capital's most southerly boroughs.

Residents said the trouble started in outlying neighbourhoods at about 7pm with 200 to 300 youths rampaging through the streets looting and setting fire to shops.

At about 9pm, the trouble had spread to the centre of Croydon where the hundred-year-old Reeves furniture shop was set alight sending flames high into the night. Croydon Central MP Gavin Barwell said: "I'm sickened to see this happening in my town. My first instinct is sympathy for the businesses and residents who have been directly affected by what's happened.

"I have never seen anything like it," said Mary Wright standing on her doorstep watching a burning car at the bottom of her street. "It started at around 7pm and has not stopped since."

By 10.30pm the main fires in the centre of Croydon appeared to be under control although helicopters still hovered over the town and police vans with sirens wailing continued to criss cross the town as the unrest continued.

On London Road just north of the centre, several shops had been smashed and looted and two burning cars were left in the middle of the road.

Groups of young men many with their faces covered with masks and scarf pelted police vans with bottles and rocks as they sped past.

Some had collected mounds of rubble to use against the police, others had armfuls of goods they had taken from looted shops.

Riot police were out in force blockading some roads but did not attempt to stop people attacking shops or setting fire to cars.

The above text was regarding Croydon. The Guardian also highligted major riots in Birmingham, Battersea, Lewisham, Kilburn, and isolated outbreaks in Liverpool.

London Riots: Live

The Telegraph has rolling coverage of London riots: live
Rolling coverage of the third night of violent disturbances in London, Bristol, Liverpool and Birmingham, with widespread arson and looting reported across the capital.



People loot a shop in Hackney
The Telegraph article has numerous video is a "live blog" scrolling format.

Rule of the Mob
Tomorrow's Daily Telegraph Front Page


Fuel for these riots has been building up for some time, and it finally erupted. One has to wonder in a Spring/Summer of riots, what country is next.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Asia Pacific Opens Deep in the Red: Australia -4.73%, Japan -4%, South Korea -4.81%; US S&P Futures -2.5%, Nasdaq -2.6%; Gold +$17, Silver -$.50

Posted: 08 Aug 2011 06:48 PM PDT

Yet another bloodbath is in the making in Asia Pacific. Moreover US futures are solidly in the red, and that is on top of the after-hours session that was in the red.

Also note that gold is soaring while silver and crude tank.

Here are a couple screenshots.

Asia Pacific Equities



Click here to refresh the Yahoo!Finance list of Asia Pacific Equities

US Futures Rapidly Sinking



The first chart is delayed. The US Futures chart is real-time as of 8:22 PM central. The following charts are delayed.

In the time it took me to finish this post (it is now 8:44) S&P futures are down 29 points (2.5%) and Nasdaq 100 Index Futures are down 53 points, (2.6%) and that is on top of the after hours session which was also down.

S&P: 1083
Nasdaq: 1984

Cash values will be a bit higher.

Energy



Gold vs. Silver



Gold continues to act like a currency. Silver continues to act like a derivatives plaything.

Bear in mind silver has huge industrial usage while gold (not counting jewelry) only has 10% or so industrial usage. Yes, I know all about the reported silver shortages. So does everyone else and so does the market.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List




Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Secretly Broke in Australia

Posted: 08 Aug 2011 05:39 PM PDT

The housing boom in Australia is now an escalating bust. Many Australian homeowners put every cent they had into their homes and they needed double incomes to just scrape by. Unfortunately, those jobs are disappearing in a construction and commercial real estate bust.

I warned about this event for years, but in Australia, like everywhere else "It's Different Here" until it's not.

60 Minutes Australia picked up the Secretly Broke story in "The Big Squeeze". Click on link for a 60 Minutes video. Here is a partial transcript.
ALLISON LANGDON: To the world, Tracy and David Dodd are the very model of Australia's relaxed and comfortable middle-class. They're living the dream – three kids, a mortgage and a suburban family home on an acre block. But Tracey and David have been keeping a secret from their family and friends – they're drowning in debt. No-one to look at you would think that you are struggling.

TRACY: It might look like we have got everything but you don't see the mortgage, you don't see the loans. You don't see everything and nobody wants to talk about it you know, because it is embarrassing.

ALLISON LANGDON: Has it taken a toll on you both?

TRACY: Mmm…sorry.

DAVID: Oh it has – it has taken its toll but you've just got to do it.

ALLISON LANGDON: Like most young couples, the Dodds invested their heart and soul and every spare cent they had into the ideal of home ownership – the biggest mortgage their double income would allow. But last June, Tracy lost her job in the construction industry and David was made redundant. Just to keep money coming in, he's taken a lower-paying job. Ever since, the Dodds, like tens of thousands of middle class families have been going secretly broke in the suburbs.

TRACY: We went from having a really great income including a company car, fuel card, phone – things like that – to basically losing all of that.

ALLISON LANGDON: So do you have more money going out each week than what you've got coming in?

TRACY: Absolutely.

ALLISON LANGDON: How much difference are we talking about?

TRACY: Probably – it's getting very embarrassing – probably about 400 bucks…$400.

ALLISON LANGDON: This is the outskirts of the Gold Coast. When you look around and see the big, shiny new houses, the nice lawns and two cars in the driveway, you can't help but think, 'life must be pretty good here.' But this version of the Great Australian Dream is just a facade – nowhere is mortgage stress being felt more keenly than right here. And the figures are staggering – one in 50 families are at risk of losing everything. The number of Australians behind on their mortgage repayments by more than a month is at an all-time high. Areas of mortgage stress can be pinpointed right around the country. Mostly in areas, that just five years ago, were booming. Families who borrowed to the limit in the real estate gold rush are the ones who are now struggling to pay their bills.
Blame Galore

The story continues with Phil and Sandra Box who claim they never did anything wrong. Of course they did. So did Tracy and David Dodd.

Not only did they pay too much for a house, they had no cash cushion if one or more of them lost their job.

Up until May 2011 or so, I received numerous emails every week from persons in Australia telling me how Australia was different, how China and commodities were a sure thing and would keep housing afloat, and how the Australian stock market would not sink. Those emails continued but at a dwindling pace for another month or two.

This is what the Australian stock market looks like now.

$AORD Daily Chart



click on chart for sharper image

Poof - Just like that 20% evaporated since Mid-April. Moreover, China is clearly slowing which will put a damper on commodities. Indeed the world appears poised for another global recession.

The RBA was actually thinking of hiking last week. I said they wouldn't and it would not matter one iota once the housing bust got underway. The housing bust has now smashed commercial real estate as well.

So who is going to be hiring now?

Flashback January 2, 2011: Australia Heads For Economic Crunch; Similarities Between Australian and Chinese Stock Markets; Global Property Bubble Cycles
The party is over in Australia. Many anti-dollar investors and Pollyannas living down under just don't realize it yet. Nonetheless, Australia faces an economic crunch as family finances collapse under the burden of record debts, rising interest rates and utility bills.
Flashback January 10, 2011: Australia's "Tulip Mania" About to Crash; 44% Jump in Property Listings Proves the Proposed Housing Shortage is Gargantuan Myth; Playable Actions
For years I have been hearing about a housing "shortage" in Australia. That myth has been shattered by latest stats that show a 44% jump in property listings.

I rather doubt those interest rate hike are coming. I would guess there is one more hike at most. Then at some point there will be panic cuts by the Reserve Bank of Australia.

History suggests it will not matter one bit once.

Remember the housing "shortage" in Florida? People stood in lines overnight and entered lotteries for the right to buy condos. Others were going door to door making offers on homes that were not even for sale.

From that aspect, it sure looked like there was a shortage. There wasn't. It was nothing more than a speculative mirage much akin to the shortage of quality tulip bulbs in the year 1635 during Holland Tulipmania.

Playable Actions

The day of reckoning has finally arrived for Australia. A day of reckoning awaits Canada, China, and the UK as well. It's too late now to do much of anything except

  • Exit the Australian stock market
  • Get out of the Australian dollar
  • Pick up some popcorn
  • Stay on the sidelines and watch the collapse unfold
I am curious, did anyone down under reading that post exit the stock market and pick up some popcorn?

Flashback April 13, 2011: Housing Denial in Australia Feeds Off Same Myths We Heard in the US
It is amusing to watch Australian analyst after analyst cite the same silly myths regarding housing that we saw in the united states.

Five Facts

  1. It's Not Different in Australia
  2. There is Not a Shortage of Housing
  3. Australia is in a Bubble
  4. Now is Not a good time to Buy
  5. It's Better to Sell Now than Next Year
May 13, 2011: Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions
Those looking for bad news can find plenty of it in Australia, which in my opinion is soon headed for recession and rate cuts.

RBA Calls For Unemployment Rate to Drop

What the hell is it that the RBA sees that I don't? The property bust is underway and going to accelerate, retailers are going under, and consumers are tapped out.

How exactly does that translate to lower unemployment rate?'

Norris Way to Optimistic

I disagree with the CBA chief executive Ralph Norris on nearly every point.

  • I highly doubt the RBA hikes twice more.
  • I expect cuts as the Australian economy slumps into a big recession.
  • I expect delinquencies to rise further.
  • I expect profits at CBA have peaked or will soon do so.

Except for my economist friend Steve Keen, I have to ask: Has anyone down under learned anything from the property bust in the US?

May 16, 2011: Australia Real Estate Bulls Trot Out Every Cliché Known To Man
Select Clichés from the Article

  • "It's definitely a buyer's market" - Richard Wakelin, director of Wakelin Property Advisory
  • "This is a really good time for people to be trading up" - Richard Wakelin, director of Wakelin Property Advisory
  • "Buyers should be sitting back and watching for opportunities, looking for properties that have been passed in on the weekend" - Mark Armstrong, from Armstrong Property Planning
  • Century 21 director Charles Tarbey suggests buyers focus on the $400,000 to $600,000 range in coastal and tourist properties.

Alternative Mish Suggestions

  1. Trading up now will greatly increase losses
  2. Tourist properties will be especially hard hit
  3. Now is a poor time to buy in general
  4. Wait 5 years, then see what prices are
  5. In the meantime, rent

Australia's bust has just started. Expect a 5-year decline minimum. As a point of reference, the US housing bust will be 6 years old this summer.
July 10, 2011: Permanently High Plateau Theory Touted for Australia Housing; Real Estate Agents Refuse to Disclose Sale Prices
At the height of every boom, bullish clowns inevitably come out of the woodwork touting the "permanently high plateau" prices will not drop much theory.

Such a theory is presented in the Herald Sun although one might not quickly spot it because of the headline Decade of pain for Melbourne's property market
August 4, 2011: Eighty-Five Australian Building and Construction Firms Go Under in a Month; Crazy to Buy a House in Australia Now
The implosion in Australian housing is now in full swing as Eighty-five building and construction firms go under in a month.

Uncertainty? What Uncertainty?

Peter Jones at Master Builders Australia is blaming "uncertainty". The irony is that it would make far more sense to blame "certainty".

It is quite certain that Australia's housing bubble is now in crash mode. It is equally certain there is not a damn thing the Reserve Bank of Australia or any of the home builders can do about it.

Crazy to Buy a House in Australia Now

If you live in Australia and are thinking about buying a home, here is everything you need to know in a single sentence: It's still a crazy idea to buy a house in Australia at the current prices.
This story is so sad because Australians had every warning in the world. All they had to do was watch the US housing bubble burst. However, you cannot explain anything to anyone with a firm conviction "It's Different Here".

Australian homeowners are now finding out they do not own their home. Instead, their home owns them.

Addendum:

Here is a 9:27 PM Central snapshot of Asia-Pacific Equities from Yahoo!Finance.



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Butt Ugly Close; Futures Selloff Continues After Equity Close

Posted: 08 Aug 2011 01:42 PM PDT

Mercy! What a close!

However, being the ever-optimist, I prefer to look at the bright side of things. Get your party hats ready. Another DOW 10,000 party may be on the way.

Equity Closing Snapshot 3:00 PM Central



click on chart for sharper image

Notes:

ES = S&P 500 Futures
NQ = Nasdaq 100 Index Futures
$COMPQ = Nasdaq Composite Index
$SPX = S&P 500 Cash Index
$NDX = Nasdaq 100 Cash Index
DUG =Double Inverse Energy ETF

S&P 500 Cash Index was down 5.34%
Dow Cash Index was down 5.44%
Nasdaq Composite Index was down 6.86%
Nasdaq Cash Index was down 6.07%

Futures Closing Snapshot 3:15 PM Central



click on chart for sharper image

Nasdaq Index Futures sold off another 19 points in the extended futures trading session. 147.25 points total.

Good News: S&P 500 futures only sold off an additional 5 points in the extended session. Optimists like me can always find something to cheer about.

Today's Recap

Obama Saves 100 Dow Points

I am pleased to report that I am not the only one who looks on the bright side. InstaPundit comments ...

"Dow Finishes Down 634 Points. Obama's speech certainly did nothing to slow the drop, though I suppose the White House will argue that it would have been 734 without the speech, meaning that Obama saved or created 100 Dow points . . . ."


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List





Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

In Vote of "No Confidence" Bank Stocks Hammered Mercilessly - Why Shouldn't They Be? Citigroup, Bank of America, Wells Fargo Bankrupt

Posted: 08 Aug 2011 11:56 AM PDT

Bank stocks were murdered today, but why shouldn't they be? They are capital impaired, still hiding questionable assets off their balance sheets. All of them hide behind postponement of mark-to-market rules that would show one thing if enforced: they are bankrupt.

Citigroup Down 17% on the Day, 42% on the Year



click on any chart for sharper image

JP Morgan Down 7% on the Day, 17% on the Year



Wells Fargo Down 7% on the Day, 23% on the Year



Bank of America Down 17% on the Day, 50% on the Year



Those are intraday snapshots, actual results on the close will vary.

It's high time the market take Fed comeuppance, analyst bullshill, and bank CEO arrogance to task, and today the market did.

For the last two years banks should have been raising capital. Instead they wanted to start or increase dividends.

Now they are going to have to raise capital while trading at 52 week lows, some down 50% or so on the year. Good luck with that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Email From "An Irate German" Over the Transfer Union; German Bank Exposure by Country; Harvard Economist Seeks "Transfer Union" and US Inflation

Posted: 08 Aug 2011 10:07 AM PDT

An "Irate German" sent an Email this morning about the European Nanny State and more specifically about the EuroZone "transfer union" that will strip Germany of wealth to bailout the rest of Europe.

Before we get to the Email, let's first take a look at the size of German bank exposure to the rest of Europe and a call from an economics professor just today for exactly the kind of "transfer union" my reader opposes.

Risks to German Banks

Der Spiegel has interesting graphs and commentary in a German-to-English translation Merkel's rescue experts reject Italy

According to SPIEGEL, experts doubt whether Italy could be rescued by the European EFSF rescue - even if the fund tripled. There are currently 440 billion euros in the fund, after deduction of the Greek aid, and that is insufficient to support possible future shaky candidates.

That is my modified translation. Here are a couple of charts.





'Some European Countries Are Fundamentally Bankrupt'

In an interview on Der Spiegel, Kenneth Rogoff, a professor of economics at Harvard University, makes the case 'Some European Countries Are Fundamentally Bankrupt'.

My comments are embedded inline.
SPIEGEL: With the turmoil on the global stock markets, is the world staring into a new financial abyss?

Rogoff: Mainly, the markets are simply adjusting to the reality of a continuing slow and halting recovery. They realize there will be no boom anytime soon. Wall Street forecasters, and many central banks, had been starting to think that there was going to be a sharp uptick in the recovery. But they have got this wrong again and again because they keep wanting to use normal postwar recessions as a frame of reference. But this is a post-financial-crisis recovery, a rarer and very different animal.

Mish: So far so good. In fact it is perfect.

SPIEGEL: What effect has that perception had?

Rogoff: The mentality that this is just a big recession, "the Great Recession," has led to wrong policy decisions, such as the premature end of quantitative easing by the US, and the belief in Europe that there is a brisk recovery around the corner that will save the day and enable policymakers to avoid tough decisions on periphery country debt. In reality, this was a different kind of downturn, which would have been better termed the "Second Great Contraction," because it involved a prolonged shrinking of overextended global balance sheets and a tightening of the credit system. Right now, the recovery from this needs more monetary stimulus, especially in the US.

Mish: The idea we need more monetary stimulus is patently absurd. There is $2 trillion in excess reserves parked at the Fed and banks simply are not lending. Increase base money supply by another $2 trillion and they will not lend that either. Banks are capital constrained not reserve constrained. Moreover, credit-worthy businesses do not want to borrow in the first place.

SPIEGEL: Is that likely? The current debate in the US is focusing on cutting back government expenses and reducing debt. Would higher inflation be a way out?

Rogoff: If you happen to be on the board of a central bank, you have to be willing and able to stand up to popular opinion. Many people even consider moderate inflation heresy. But we are in a perfect storm here. I am not saying we should have hyperinflation or double-digit inflation, but I believe that central banks should accept somewhat elevated core inflation for several years, higher than the normal 2 percent. Whereas I believe monetary stimulus is coming, I am worried that it will not be forceful enough to have any material effect on balance sheets.

Mish: Monetary stimulus will not do anything good for reasons noted above. However, it will make the Fed's exit problem far bigger down the road.

SPIEGEL: Does the US also need another stimulus program? Larry Summers, a former top adviser to President Barack Obama, says that cutting back on government spending in the middle of a downturn will kill economic growth and employment.

Rogoff: People asking for a fiscal stimulus are looking at the wrong model. They think this is just a big, but typical, recession. But it is not. Policymakers need to focus on relieving overextended private balance sheets in the short run, and stabilizing public debt in the long run. A fiscal stimulus cannot be the main solution. It may provide temporary relief, but there will be no traction without some normalization of private debt levels. In Europe, of course, government debt itself needs to be sharply written down in some countries. The US will eventually come to the realization that something similar has to happen to some mortgages. Homeowners who accept this relief will have to make some significant concession, perhaps giving away some future appreciation if home prices go up.

Mish: Fiscal stimulus will not work, nor will monetary stimulus. Has anyone learned anything from Japan? The idea of homeowners giving up future appreciation is complete silliness. The best thing for deeply underwater homeowners to do is walk away. Many have. More will. Why give up future gains when you do not have to? It's better to walk. Moreover, there are numerous problems with even attempting such a program. For starters, securitization gets in the way.

SPIEGEL: What have politicians done wrong on both sides of the Atlantic during the latest financial crisis?

Rogoff: I just cannot understand how President Obama made so many concessions in the latest negotiations over the debt ceiling. He was holding all the cards and he was still stared down by the Tea Party. He should have said: "I do not negotiate with terrorists. If you want to bring down financial markets, it will be on your head. I am going to behave normally and responsibly." Instead, he got gamed into making giant concessions, and this has weakened the presidency. Perhaps the damage will not be lasting, but then next time the president may have to prove him or herself willing to accept a short technical default rather than give in.

Mish: Contrary to popular belief no cuts were made, rather nonbinding promises to make future cuts were made. Obama got exactly what he initially asked for: a debt ceiling hike with no strings attached. Thus, one can easily argue Republicans caved in, not Obama.

SPIEGEL: And the Europeans? Chancellor Angela Merkel was very reluctant to agree to a bailout for Greece.

Rogoff: It is not easy for a politician to do what needs to be done if it is unpopular. Greece needs a massive restructuring plan, Portugal as well, probably Ireland, too. Ultimately, Germany has to guarantee all the central government debt in Spain and Italy, and that will be very painful. If Italy and Spain are to be kept in the euro area, then unfortunately the Germans will have to acknowledge that Europe is going to be a transfer union for some time to come.

SPIEGEL: Is there an alternative?

Rogoff: Clearly it was a mistake to accept some of the southern countries prematurely into the euro zone, but there is now no other way to pay for their debt than through transfers. I would like to say it is only a one-time payment, but I do not think anyone in Germany still believes that and they should not. This is a long-term problem. Of course, Germany should extract major political concessions on the way, like the installment of a powerful European president or a European finance minister.

Mish: There you have it. An insane call for German taxpayers to bailout Spain, Italy, Portugal, Greece, and Ireland. Clearly Rogoff has not done any thinking about costs to German taxpayers.
Let's now turn our attention to an email that got my attention.

Email From An "Irate German"
Dear Mish,

I read Your comments on the markets and the economy nearly every day. I appreciate your work.

Today I am very angry. Trichet wants to buy Italian debt. I don't have to tell you that Italy has nearly the same amount of debt as Germany, but you cannot compare the economies. Italy is nothing but "Dolce vita and amore" [Sweet Life and Love].

A big wealth transfer from Germany to southern Europe is now in the works.

From my perspective,

  • German citizens pay for an EU that few want
  • German citizens pay for a Euro that most now wish we did not have
  • German citizens pay for the politicians in Brüssels that nobody wants and we certainly do not need.

All is not all is well in Germany. Sure if you work for BMW or BASF, you are doing O.K. However, if you work for a small business company, without an export component, life is not so easy.

Regards
Marco, An Irate German
Marco is irate, and in my opinion he has every right to be. How dare economist fools like Kenneth Rogoff propose German taxpayers bail out all the rest of Europe without even giving those taxpayers a vote.

Will Germany Leave the Euro?

Last Thursday I asked the question: Another Major Feud Between the German Central Bank and the ECB Over Resumption of Bond Purchases; Will Germany Leave the Euro?
Jean-Claude Trichet is Out, Mario Draghi is In

Greek bonds blew up in Trichet's face and complete fools are clamoring for more of the same.

Bear in mind that Trichet steps down in October. Mario Draghi, head of the central bank of Italy takes over.

Will Germany Leave the Euro?

Will Draghi rebuff Italy's Finance Minister? The answer to that question turns our focus to the major unresolved question:

"Does Germany accept the monetization of foreign bonds at German taxpayer expense or does Germany leave the Euro?"
Ball in Germany's Court
Let's finish with another look at what I said in ECB to Buy Italian Bonds; Italy Seeks Constitutional Amendment to Require Balanced Budget; Ball in Germany's Court

Questions Abound

  1. Will Mario Draghi, head of the central bank of Italy, carry as much influence over the board when he takes over from Jean-Claude Trichet in October?
  2. Can Italy really balance the budget?
  3. Will all the governments ratify the proposed changes to the Maastricht Treaty?
  4. What is the potential cost of this backstop?
  5. How many pledged has Trichet broken in the past 2 years? Does anyone have a count?

That is more questions than I have answers. Moreover, please note that changes to the Maastricht Treaty must be unanimous. Germany and Finland will be very reluctant at best. Germany's constitution may need modification first. This is far messier than it looks, and it looks quite messy.

German Taxpayers on the Hook

Zero Hedge does a good job at question 4 in his post Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe's Bad Debt
Basically what just happened an hour ago, is that the ECB gave a green light to use the SMP program to buy Italian and Spanish bonds. The problem is that the SMP's unsterilized purchasing capacity is de-minimis and it is merely a stopgap until the sterilized EFSF is enacted in its final form.

The question is precisely what this final form will be: will it be €1.5 or €3.5 trillion? Nobody knows yet which is why Rehn refused to answer the question twice already today.

And here is where Germans get angry, because explicitly they end up backstopping everyone in Europe! And the cost to them becomes 133% of their entire economy in a worst case scenario, which of course in this centrally planned world, is now guaranteed.

So the ball is now basically in Germany's court.
Ball in Germany's Court

Without saying so explicitly, ZeroHedge just asked the question I asked yesterday: "Does Germany accept the monetization of foreign bonds at German taxpayer expense or does Germany leave the Euro?"
If the alternative is a transfer union wherein Germany backstops the entire rest of Europe, then yes, Germany should consider leaving the Euro. Bear in mind, should that happen, the rest of Europe would then default on debt owed to German banks. Thus, German taxpayers are going to be screwed one way or another.

Yet, from my perspective, ceding sovereignty to a European Nanny State for the sake of the EU would not be a good choice.

However, that is not for me to decide, fools like Kenneth Rogoff to decide, or even politicians like Chancellor Angela Merkel to decide. German citizens should be involved in this decision. The citizens of Iceland chose wisely, I think German citizens would as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

US Dollar, Swiss Franc, Yen Rally; Euro Reverses Gains; Expect Intervention to Fail; Gold Holds Gains in Ocean of Devastating Red

Posted: 08 Aug 2011 07:21 AM PDT

Overnight gains in the Euro were short-lived as an early rally quickly faded. The Euro reached as high as 1.4393 vs. the US dollar but is now solidly in the red at 1.4166.



click on chart for sharper image

The same applies to the US equity indices. Prior to the morning bond intervention, US equity futures were down around 30 points. They rallied to minus 10. However at the US open, futures were once again down 30 points.

Expect volatile action. I am not willing to guess how the day ends. However, I will guess how this intervention ends - and that is badly - in spite of the early apparent success of the ECB's Bond-Market Bazooka Play.

I am sticking with what I said in Gold Cries "BullSheet"
Intervention Cannot Possibly Work

Short of the ECB buying all Italian bonds, all French bonds, and all Spanish bonds how can it? Even then, by what rationale can anyone other than an idiot purport "the system is working".

For more on idiots and how they think, please consider Do These Idiots Realize How Stupid They Sound?
Ocean of Devastating Red

Gold has held on to most of its gains, silver has not.



The $HUI (unhedged mining index), SLV (Silver ETF), GLD (Gold ETF), TLT (the Lehman 20+ Year Treasury Index), and DUG (an inverse energy index) are about the only things "green" on my screen in an ocean of devastating red.

Equity futures just plunged to a fresh low after one attempt at a flagpole rally failed. The day is still early.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Gold Cries "BullSheet"

Posted: 08 Aug 2011 01:46 AM PDT

In an extreme act of extreme hubris over common sense, a "forced rally" has begun. S&P futures that were down as much as 37 points are now down 14 points. It is 2:30 AM Central. I do not know what the actual stock market open will look like. However, I do know "sheet" when I see it.

A few times recently I used the word "BullSweet". One reader objected saying I was too polite. He proposed the word "BullShill".

I like the word "BullShill" actually, when someone is shilling something. However, the appropriate word is not sweet or shill but (well you know what it is).

At any rate here are some charts at 2:45 AM central US.

S&P 500 Futures Night Session Action



S&P 500 Futures Last Two Days



Those charts were captured perhaps 5 minutes apart so they are not perfectly in sync.

Do not be confused by the volume spike in the first chart. It is relative to the illiquid night session.

Both the initial selloff (perhaps manipulated) and the rally (definitely manipulated) are on light volume. Let's also take a look at action in Asia. Here are a couple of snapshots.

Asia-Pacific as of 12:30 AM



click on chart for sharper image

Asia-Pacific as of 3:00 AM



click on chart for sharper image

Taiwan which was down 4.55% is now down "only" 3.82%.
South Korea which was down a whopping 6.5% is now down a mere 3.82%.
China was down 3.68% and is now mysteriously down even more at 3.79%

European Bonds Rally (or Sink) "As Expected"

In the wake of announced intervention, one might expect the bonds of Italy and Spain to rally and the bonds of Germany to sink. That is what happened.

The Bloomberg charts are hopelessly out of date (as usual) but the quotes are accurate. (Can someone at Bloomberg please fix this!) Anyway, here are some snapshots of bond action.

Italy 10-Year Government Bonds



Spain 10-Year Government Bonds



Germany 10-Year Government Bonds



Intervention Cannot Possibly Work

Does anyone seriously think this intervention will work?

Short of the ECB buying all Italian bonds, all French bonds, and all Spanish bonds how can it? Even then, by what rationale can anyone other than an idiot purport "the system is working".

For more on idiots and how they think, please consider Do These Idiots Realize How Stupid They Sound?

Here is one more chart to consider.

Gold Futures



Gold has spoken. It was a one word sentence regarding G-7 coordinated intervention: BullSheet!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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