Saturday, May 8, 2010

Dirty Little Secrets

The market activity this past week only further reinforces many dirty little secrets that DC and Wall Street wants to keep on the down low. Many of these things are quite well known to the non CNBC, Lost, American Idol, and Big Brother brethren, but when the feces hits the fences hopefully all of the country can watch as Rome burns.

1-The US is effectively morally bankrupt as the Brown/Kaufman Bill to shrink TBTF institutions failed. This bill would have massively shrinked the financial sector, reduce leverage and maintain adequate capital for futures crisis. The audit the FED measure was also gutted so that the GAO can only onetime audit certain aspects of the FED. The Dodd bill that is making the rounds and probably will be put into law effectively placates Wall Street's predatory and parasitic behavior. It does nothing to reduce bank concentration and does even less to contain the next crisis which is rapidly approaching. The worst part of the reform farce is that it will close the discussion of reform. The Obama Team will then move on to either SS, the Deficit, Climate Policy, or perhaps even war with IRAN? Simply the Obama Team doesn't have the stomach or the political will to take on Wall Street. Dollar Dollar Bill Yal! We are in the midst of a correction, how big is really the question.

2-Europe is bankrupt financially. The Euro form the onset was doomed to fail. Why would anybody want to be in a union where one or two parties are doing all of the work and the other just sits their and consumes? Other than one party getting laid many times over, I can't figure this out. Germany and France are the two biggest exporters in the EU, and much of the economic activity coming out of Europe goes through these two countries, its by design that these are the two biggest countries on the hook if the PIIGS go bust. Portugal, Italy, Ireland, Greece, and Spain have too much debt that they cant effectively ponzy over because of rising interest costs. Why Greece was ever allowed into the EU is mind boggling? Greece has never been able to run their finances through out history. Even when their borrowing costs were higher, and their debts lower they still managed to muck it up. So why in the world would the other European Nations allow the Greeks to effectively lower their borrowing costs? Its like handing over the chocolate factory to a 5 year old. What we have is Greece running up huge amounts of debt on the cheap. They used the Germans and French to issue cheap EU debt because by themselves they would have never done this. Who do you think is on the hook for this? Mostly German and French financial institutions. Angela Merkel is in a bind. The Germans are sick of bailouts and have known from the beginning that everyone else in the EU was using them to run up debt. When the truth becomes unpalatable, it fails to become the truth. Every one knows that the best Greece can do for the Greek people is to default. They need to exit the EURO and then devalue their own new currency. The Greeks can worry about the legalities later. Its the least of their worries. We are just talking about Greece at the moment. What about the other PIIGS? We are in the 3rd Inning of a Pan European Debt Crisis. The dirty little secret here was that banks and policy makers were telling us that Greece is only 3% of Euro GDP and that the damage is contained. We have heard that from the frauds that are our policy makers. Remember Bear Stearns?

I posted early on in this crisis that Greece was a big problem.
http://tradersutra.blogspot.com/2010/02/is-greece-really-bear-stearns-of-europe.html

Currency traders all around the world were all ready derisking away. Derisking always happens with the most liquid assets. It starts with currencies, then moves to bonds, and then equities. I would not be surprised to see commodities crude take it in the grill this week. The correlations of all risk assets was incredibly 1. This is just completely unbelievable. This is the failure of Keynesian economic policy. We can't print our way out of a debt problem. We can't leverage ourselves out of a leverage problem. We can't issue more debt to get out from underneath existing debt. What ever bailouts have been announced and what ever monetization of future debts can't get you away the inevitable. Extend and pretend and kick the can down the road only works if you can keep the house of cards erect while you sucker the citizens into believing that you are on the electorates side. EU and US policy officials have been trying to re inflate the rotten to the core financial system. The Obama Team was purposefully put together not for repair and reform, but to re inflate the old corrupt system. To this effect they were highly successful.

There is no way out for the Euro. Its dead! Long live Europe and multiple currencies. People in UK who want to travel to other EU nations can't do it because things have gotten very expensive. The only ones doing any shopping in London are Non Europeans. The PIIGS must be allowed either to default or massively restructure their debts. The European Union was 1000 years in the making, and the Euro has been a product of 60 years of hard work but its time to move on to another system that conveys accountability.

3-High Frequency Trading along with program trading will kill our markets. I have written on these subjects so much I won't comment. Just read:
http://tradersutra.blogspot.com/2010/05/air-pocket.html

4-Asia has all of the money. China which has been using currency manipulation tactics has trillions of USD in their system. One would be surprised to find out that there is a general shortage of USD and Yen and too much Euro's in the system, but that is exactly what is happening. The Yen which is the biggest carry trade currency started to surge vs other currencies, this is what started the 1000 point down draft. Investors had borrowed YEN and used the cheap currencies to run asset prices around the globe. When the Yen rose violently, this caused the derisking/deleveraging in global equities. Investors around the globe have started to hoard Yen and USD. This is extremely dangerous for asset markets that have risen some 80%.

In the final analysis after careful consideration, I can't blame China. Its the US Policy Makers that have enabled not only Wall Street but China to do what they have been doing.
 http://tradersutra.blogspot.com/2009/11/china-walking-around-like-elephant.html
http://tradersutra.blogspot.com/2009/08/more-on-china-bubble.html
http://tradersutra.blogspot.com/2009/08/more-on-usd-and-china-decoupling.html

What is going to happen to China and the rest of Asia when they suddenly find out that the European and US customers are bankrupt? Tapped out?

Asian demand brough the world out of a serious recession. Commodities surged on China demand. China has already started to cool their economy, but with US and EU also going into the tank and the carry trade unwinding, this could get really ugly really fast.

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