Friday, June 15, 2012 – Greeks Look for a Bargain – by Sinclair Noe

DOW  +115 = 12,767
SPX + 13 = 1342
NAS + 36 = 2872
10 YR YLD -.02 = 1.59%
OIL – 1.11 = 82.80
GOLD + 3.40 = 1627.70
SILV + .10 = 28.84
PLAT – 8.00 = 1490.00

Sunday there will be an election in Greece. I don’t know how the election will turn out. I can’t find any consensus opinion. There may not be a consensus, even if there is a definitive winner. It appears the extremes are gaining in Europe because centrist parties are offering voters no meaningful choices. Pasok and ND (New Democracy) and Syriza. New Democracy is the old-guard conservative party; Pasok is the old-guard socialist party; Syriza is the new-upstart far left party. Golden Dawn is the new-upstart far right/neo-nazi party but they went to far during a televised debate last week when a spokesman started beating a woman on camera – that went too far and destroyed that fringe element. For Greeks that want to vote against the status quo they have no alternative but to vote for extremists. Right now it looks like New Democracy and Syriza will get the most votes, but not a majority, so they will have to pull together a coalition government, which they failed to do one month ago. But again, the election could swing in any number of unusual ways. 

Some common themes from Greek voters is that they feel they are being blackmailed into voting for parties that drove the economy into a ditch and blindly imposed austerity measures. The Euro-zone support for the international institutions basically means support for the current policy, which is a failed policy. Surveys indicate most Greeks want to remain in the Euro-union; they just want to get out from under the austerity and they want a plan to pay back the debt. 

Alexis Tsipras is the young leader of the far-left Syriza party. He says: “A Europe without Greece is a disabled Europe, and a Europe without democratic principles has no future,” and he adds: “in the European Union, we are all equals. Greece should not be used as a guinea pig for a failed economic policy.” It sounds reasonable enough; even the New Democracy and Pasok parties are agreeing with the far left; they all agree they want to stay in the Euro-union but they want to renegotiate the bailout terms. Still, all this agreement doesn’t mean they will be able to forge a coalition to govern the country.

There is a good chance Syriza will do well in the election. The whole bailout process has been a bit one-sided; the Europeans, especially Germany, has placed its boot on the neck of Greece and that’s how they’ve been doing business for the past year or so. Syriza has promised to bargain and negotiate with the Euro-union for better terms and conditions. The old-guard New Democracy and Pasok are begging and pleading with the Euro-union for better terms and conditions. The difference is Syriza is threatening to draw a line in the sand and try to force a bargain. The voters face a dilemma because there are risks involved either way. 

And the question of whether Greece will remain in the Euro-union will likely not be decided by Greeks but by the technocrats; and you couldn’t find a more screwed up group than the wing nuts that are in charge right now. 

How screwed up is everything? Christine LaGarde is the head of the International Monetary Fund. She has been very critical of the Greeks. She says Greek parents have to take responsibility if their children are being affected by spending cuts. “Parent have to pay their tax.” It is a strange argument. If the parents really had money saved up from not paying taxes, then they should be able to take care of their children with the tax free money. But forget the glaring irrationality of the argument. Asked if she is essentially saying to the Greeks and others in Europe that they have had a nice time and it is now payback time, she responds: “That’s right.”

Christine LaGarde is not Greek. As the managing director of the IMF, Lagarde receives a salary of $467,940 plus additional allowances of $83,760, plus automatic annual pay raises. As an official of an international institution the compensation package is not subject to any taxes. 

Angela Merkel, the German chancellor, declared that Europe was “in a race with the markets” to turn its monetary union into a fully fledged political union. Spanish borrowing costs have jumped to unsustainable levels; Italy tried to assuage credit markets with promises of even more cuts in public spending. The UK introduced a series of measures to insulate the British financial system from the Euro-zone’s crisis; apparently the idea is to flood the British banks with about $200 billion in cheap credit to jump-start lending to British businesses. The only question is whether there is any demand. The euro-crisis has sent the cost of bank funding spiraling upwards again, and so despite record low bank rates mortgages and business credit have been hard to find and are likely to cost more when available and credit expansion has not been happening. 

More Americans applied for jobless benefits and consumer prices dropped by the most in three years. So we have a couple of economic reports today which might give the Federal Reserve room to juice the  economy. Right now the reports don’t show growth or inflation. Claims for unemployment insurance payments climbed by 6,000 to 386,000 in the week ended June 9. The cost of living fell 0.3 percent in May, led by the biggest decrease in gasoline prices in three years. Also, the University of Michigan Consumer sentiment index fell this month to the lowest level since December, with gloomier views on current and future conditions. The Federal Reserve FOMC meets next week to determine monetary policy. The FOMC meeting coincides with G-20 and G-7 summits. Basically, the central bankers of the world are standing by, ready to jump in helicopters and throw money at bankers if there is a glitch in, well almost anything; they’re just looking for a reason to get in the helicopters. 

Average rates on fixed mortgages rose this week, the first increase in seven weeks. But mortgage rates remain near historic lows, boosting prospects for home sales this year. Mortgage buyer Freddie Macsaid Thursday that the average rate on the 30-year loan increased to 3.71%. That’s up from 3.67% last week, the lowest since long-term mortgages began in the 1950s. The average rate on the 15-year mortgage, a popular refinancing option, rose to 2.98%. That’s up from 2.94% last week, also a record low.

On July 1st, Cyprus, the tiny island nation in the Mediterranean, will automatically rotate into the Presidency of the Council of the European Union for a six-month term. Cyrpus is broke. Its economy is shrinking, unemployment is at a record, and real estate is collapsing after a phenomenal bubble and  a massive nationwide title-deed scandal that involved widespread collusion among bankers, lawyers, and developers. Cyprus is broke and in desperate straits. What will the European-union do to the Cypriots? What back breaking austerity measures will be imposed?  When will the technocrats take over the government? Just what kind of lazy, shiftless, no-good, do-nothing, tax-dodging sinners are these Cypriots anyway?

Unlike Greece, Cyprus will get a bailout without hardly breaking a sweat. The reason? Last December they discovered vast deposits of natural gas off the southern coast, up to 8 trillion cubic feet of gas. 

OPEC oil ministers agreed to keep their production target steady. Oil prices have fallen more than 20 percent over the past two months, and a statement from the Organization of the Petroleum Exporting Countries cited “downside risks facing the global economy” and ample stocks of crude as being responsible for the trend. While agreeing to hold the output target steady, however, the statement suggested that OPEC ministers were ready to come together on short notice if prices fell to levels dictating a production cutback. So, they don’t seem to be in any rush to push prices higher because the global economy stinks, but they won’t let prices drop much from current levels. Look for sideways price action for the next few months. 

Opec oil producers are not worried about the shale revolution. They might need to re-run their numbers.  The United States imported 4.5 million barrels per day (bpd) of Opec crude last year, 20% of the cartel’s exports and about half the country’s import needs.  But thanks to new technologies like hydraulic fracturing now sucking away on North American soil, the continent is already self sufficient in natural gas, and is eyeing an even bigger landmark – Opec-free oil supplies.  The US was the fastest-growing non-Opec oil producer in 2011 for the third year in succession.  US oil production is up 1 million barrels per day since 2006 to 7.84 million bpd, consumption is down 1.85 million to 18.84 million. Well, maybe OPEC doesn’t need to be worried right now but we are heading for energy independence, someday, maybe. It could happen. 

Usually the price of oil moves in lockstep with the S&P 500 but there has been a bit of a divergence lately; oil prices have dropped while the S&P has shown some resilience after a decline through the month of May. The question is whether equities will catch oil of vice versa.

This week’s tour de force performance was Jamie Dimon before the Senate Banking Committee. Dimon lied about not knowing what risks the CIO was taking. He knew the risks for at least the past two years. He lied about the losses being a “tempest in a teapot”; the losses have been growing and might not be finished yet. He lied about not knowing about the Volker Rule. He lied when said the traders were hedging and not prop trading. As a too big to fail banker, Dimon is part of a club of liars. 

In the largest fine ever assessed against a financial institution for violating sanctions on Cuba and Iran, Netherlands-based ING Bank will pay $619 million to the US government. ING agreed to pay the fine for secretly moving more than $2 billion through U.S. financial institutions in 20,000 transactions from the early 1990s to 2007. Cuba, Iran, Syria and Sudan are on the list of countries under sanctions for supporting international terrorism. The half-century old US trade embargo against Cuba also bars Cuban entities from using dollars in their transactions. 

The Department of Justice said ING has accepted responsibility for its criminal conduct” and agreed to pay the $619 million as part of a deferred prosecution agreement. The United States has 5% of the world’s population; we have 25% of the worldwide world’s prison population. If ING is accepting responsibility for criminal conduct, the why isn’t somebody in jail? We sent Lindsey Lohan to jail for nearly 3 months because she drank too much. We sent Martha Stewart to jail for more than a year because she lied about selling a few thousand shares of stock. Can’t we throw some bankers in jail for a few weeks for blatantly violating US laws governing transactions involving Cuba and Iran, and then using shell companies and other deceptive measures to cover up its criminal conduct?

I don’t want it to sound like I’m singling out ING. Credit Suisse Bank paid a $536 million fine to the U.S. government in 2009 to settle allegations of illegal dealings with Cuba, Iran and other sanctioned countries, in 2010 Barclays PLC paid $298 million on account of the same lies, Lloyds Banking Group PLC paid $350 million, while Switzerland’s UBS paid another $100 million in 2004 for similar complaints.

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