November, Wednesday 30, 2011

DOW + 490 = 12045
SPX +51 = 1246
NAS + 104 = 2620
10 YR YLD +.07 = 2.07%
OIL +.71 = 100.50
GOLD +34.00 = 1750.40
SILV + .91 = 32.93
PLAT + 21.00 = 1566.00
Who wants some free money? Anybody who wants some free money raise your hand and get in line.
The Federal Reserve has teamed up with the European Central bank, the Bank of Japan, the Bank of Canada, the Bank of England, and the Swiss National Bank and they are handing out cash. Unfortunately, you probably won’t be getting any of this free cash, but Wall Street loves the idea of free money.
Today’s announcement from the Central Banks actually involves lowering the cost of emergency U.S. dollar funding for banks and expanding currency swap lines between countries. So, the cash will go to the banks; the moves will reduce funding costs and improve liquidity. It’s not completely free money – it’s just a half off sale. The dollar market had been drying up; today’s move might help prevent a credit freeze. Maybe, maybe not.
There is still a big problem of solvency. Many European countries still have unsustainable levels of debt. Many European banks have government assets on their books. There used to be an assumption that those assets were “riskless”; the idea was that Greek bonds or Spanish or Portuguese or Italian bonds were safe – backed by the European Union. Well.., it turns out they weren’t safe. And so the cash needed for day to day operations started to dry up. American money market funds cut their investments in European banks by more than 40%. The retreat from France was particularly severe, with funds cutting their exposure by 69 percent. So now the banks have to build up their reserves, build up their capital ratios.
That means the banks need to raise some new money, and there are just a few ways to do that – they can issue new debt of equity, but that is really difficult right now – nobody wants to invest in the banks because they don’t know what they have on their books. The other option is a defensive move; the banks hold tight to their cash- they stop lending – credit freezes; governments can’t sell bonds; businesses and households can’t get credit; the economy slows even more.
So, what changed today? Not much really. The European governments still have unsustainable debt. The banks still have very risky government assets on their books. Nobody wants to invest in new bank debt or equities. The same problems we had yesterday, we still have today. Italy still has unsustainable debt. Portugal and Greece are still busted. There will be another general strike in Greece tomorrow and the country will shut down. More than 2 million people are on strike in the UK. France will likely be downgraded by the credit agencies. European countries, even Germany, can’t find investors to buy their bonds. Economists now understand that the PIIGS are well past the point of no return, with 130% or so of debt-to-GDP. The European Central Bank will be expanded, like other central banks, to print more euros, but still the system is going to face more debt problems. The ratio of debt-to-GDP in Europe, the US, and elsewhere (which is projected to only increase from here) will lead to the sort of problems historically associated banana republics. While this is not being adequately discussed in the mainstream, the debt of the supposedly advanced countries is projected to explode beyond the levels that are already tormenting the PIIGS. Put another way, in the decade just ahead, I expect the advanced countries to undergo the same pain we are already seeing in the weak countries.
What’s the difference as of today’s announcement? The central bankers now step up and give a signal that they will backstop the banks; they’re not actually backstopping anything at this moment, but they are signaling that they will – if they have to.
Woohoo! Free money for the bankers.
Does any of this sound familiar? It should. Three years ago, the Federal Reserve started handing out money to the banks; they bailed out banks that were too big to fail; they bailed out banks that were ready to collapse; they bailed out banks that claimed they didn’t need a bailout; they bailed out hedge funds; they bailed out wealthy individuals; they bailed out foreign banks; they bailed out banks run by terrorists; they bailed out everybody but Main Street. And today, they signaled that they are standing by to do it again.
As unsavory as bailouts are – they will happen. There are some very bright boys and girls who are working to avert a global financial meltdown. Their blueprint is the response to the collapse of Lehman brothers three years ago. Will the action plan work on Europe?
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis.  The Federal Reserve and their central bank buddies are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis created by excessive debt and gambling on excessive debt and creating money out of thin air. 
Well, the bright boys and girls didn’t solve the underlying problems 3 years ago, but they did avert a complete collapse. History doesn’t repeat but it does rhyme.
Woohoo! Free money. Just not for you and me.
What else is going on?
The Federal Reserve released it Beige Book today: Economic activity increased at a slow to moderate pace. Nothing new there.
ADP, the payroll processing firm, reported that private businesses added 206,000 jobs from October to November. The Bureau of Labor Stats will issue its monthly jobs report on Friday.
Now that AMR, the parent of American Airlines has filed for bankruptcy, don’t be surprised to see USAirways make a play for American.
Los Angeles has evicted occupy L.A. protesters. There are varying reports that the eviction was peaceful or possibly that police were beating a few protesters – probably a bit of both. 200 protesters were arrested. The Occupy movement is far from gone – it is now a global movement, stretching across 6 continents, more than 60 countries and more than 2,600 demonstrations.
A 490-point gain ain’t what it used to be. The S&P 500 has climbed 3 percent or more in a day 36 times in the three years since Lehman’s collapse, or about once a month. That compares with 27 times for the nine years before, or about once every 4 months. The Dow’s intraday move has exceeded 100 points every day in November except one, Nov. 18.
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