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September, Friday 09, 2011

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Stocks decidedly lower today. The Dow Industrials with another triple digit move. We haven’t seen this kind of volatility since October 2008. And there are some other things going on here. Treasury debt prices rose and that pushed the yield on the 10-year note to the lowest levels in 60 years.

The dollar moved to a 6-month high against the Euro. This is not so much a move based on the strength of the dollar, but rather the weakness of the Euro.

President Obama took his $447 billion dollar jobs plan on the road. The package includes $245 billion in tax cuts, $140 billion in infrastructure improvements, and $62 billion in unemployment assistance. Specific items include cutting the payroll tax for employers and workers, as well as projects such as roads, bridges, and schools. It was a good speech, as speeches go. The next question is whether the other politicians can manage to get behind the President’s plans or any plans to deal with the unemployment problem. Still another question is whether any plans will be enough to make an appreciable difference in actually lowering the unemployment rate substantially. I don’t have great confidence in the Job Plan to actually create jobs. I don’t have great confidence in the plan’s ability to lift the economy out of the downturn. I do have great confidence in our politicians… to continue being completely dysfunctional.

Another question on investors’ minds this week was whether the Federal Reserve would weigh in with some type of stimulus that would shower money down on Wall Street. It looks like the Fed is waiting to see if something happens to force them to crank up the printing press.

We look to Europe, which seems to be crumbling. There’s a lot of nervousness that Greece could default this weekend, and Greek bonds yields keep rising. One week ago, the 2-year Greek note demanded a 50% yield. Today, the one-year note demanded 87-percent return. If Greece’s bonds become worthless, that can trigger capital-requirement problems, and a lot of major banks could go under. At that point we would be looking at a contagion problem – much like the Lehman Brothers meltdown from 3 years ago. Nobody knows what exposure a given bank has to the Greek problem or the Credit Default Swap problem that would arise from a Greek default, and then interbank lending freezes.

Right now, Greece is on the roof. Greece is tap dancing around the edge of the roof, and they are wobbly. Meanwhile, Portugal and Ireland and Italy and Spain are all up on the roof as well. Now, something to keep in mind – defaults happen. Predicting the exact timing of a default is tricky but defaults are fairly. There is no clear make or break date for Greece, still I’d be a little nervous about being long over the weekend. It might be the way to go, but I’d be a little nervous. Which means it is unlikely to happen this weekend.
Best guess is between now and October 17th.

The government is facing the possibility of not being able to pay wages and salaries in October if its international creditors do not approve the pending 8-billion-euro sixth installment immediately.

The country’s foreign lenders have made disbursement conditional on the government’s adoption of new measures that will target the collection of at least 1.7 billion euros. Without the sixth tranche, the public purse will be 1.5 billion euros short on October 17.

The prospect of a freeze in payments appeared even more serious after Greek commercial banks failed to cover the sum of 300 million euros of supplementary, noncompetitive bids for Tuesday’s auction of T-bills, providing only 155 million. The shortfall is interpreted as a clear message by banks to the government that they are unwilling to fund future issues of T-bills.

In July, European political leaders announced a set of proposals to address the crisis, including a second bailout for Greece, which was teetering on the verge of default.
The centerpiece of the July 21 agreement was the proposed expansion of the European Financial Stability Fund. The fund was set up last year to facilitate low-cost loans for struggling EU members including Portugal and Ireland.

Under the proposed changes, the fund would be able to buy government bonds directly from banks and investors. Importantly, it would be able to do this for nations that do not already have bailout loans, such as Spain and Italy.

The goal is to contain the crisis by limiting volatility in the sovereign debt markets, where nervous investors have driven borrowing costs for several struggling EU nations to record highs.

That would take some pressure off the European Central Bank, which has been buying government bonds as part of an emergency program. But many analysts say there is not enough money in the 440 billion euro stability fund to be effective if Italy and Spain need to be rescued.

In addition to expanding the stability fund, eurozone governments must unanimously approve Greece’s 109 billion euro package of low-cost loans.

The agreement has already shown signs of cracking.

Finland and Greece reached a controversial agreement in August for Athens to provide cash collateral against loans from Helsinki.
The move resonated with other eurozone nations that have relatively health economies, including Austria and Belgium, which also called for collateral. Eurozone officials have chafed at the bilateral agreements, since they mean Greece would have to put up cash in order to get cash.

They’ve tried austerity measures. The Greek people have been fighting austerity. Austerity will almost certainly not resolve the pressing problems. Meanwhile,, nearly the same situation is playing out in Italy – which is the third largest economy in Europe.

Meanwhile, the big European banks hold billions of euros in sovereign debt on their books, and may be forced to take writedowns if governments cannot repay their debts.

Société Générale (SCGLF), one of the oldest banks in France, has been at the forefront of investors’ worried minds. The company’s stock price has plunged to its lowest level since early 2009, when the financial crisis was in full swing.

Deutsche Bank (DB), would not be immune if the sovereign debt crisis spirals out of control.

EU officials conducted Stress Tests on European banks a couple of months ago – the conclusion was that the banks had sufficient capital. But the Bank Stress Tests in Europe are as bogus as the US Bank Stress Tests. The fear is that there could be good old fashioned runs on the banks. If that happens then the governments would step in and take over – but it isn’t clear if the political leaders have the guts and the cash to bail out a major bank – much less several major banks..

Meanwhile, if the European banks face a run or face a possible nationalization – that would trigger Credit Default Swaps – derivative bets that many US banks made against the possibility of the collapse of the European Banks.

You probably missed it but yesterday the Federal Reserve released its Consumer Credit Report. I ran across some analysis on counterpunch. Yes, it’s a real snoozer, but it does reveal the truth behind all the “recovery” hype. So, let’s cut to the chase: When unemployment is high and wages are stagnant, the only way the economy can grow is through credit expansion – that’s the theory. That’s why economists pay so much attention to the credit report, because it lets them see if we’re making progress or not. Right now, we’re not making any headway at all.
“Credit increased $12 billion after a revised $11.3 billion rise in June. Economists projected a $6 billion gain. The rise in non-revolving loans was the most since November 2001.”
Hooray! The US consumer is alive and borrowing again. Let the celebration begin!
Not so fast. The uptick in credit spending is entirely attributable to subprime auto loans and government-backed student loans. Every other area of credit expansion is on-the-ropes. Commercial banks, finance companies, credit unions, savings institutions, nonfinancial businesses, and pools of securitized assets are all flatlining. No progress at all. In other words, the only way to induce tightfisted consumers to spend money they don’t have is by either seducing them with “No-down, easy-pay, 60-month-no-interest” financing or they are struck by the reality that they don’t have the skill set to be employed and they are scrambling by going back to school. Case in point; check out this article on subprime auto loans in Reuters:
“Lenders are making more subprime auto loans again, reversing the cautious approach they adopted after the credit crisis, an industry research firm said on Tuesday. The portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter from 37.2 percent a year earlier.
The data shows how keen lenders are to boost their loan books amid a sluggish economy….
Average credit scores for borrowers declined and the average term for their loans extended by one month to 63 months on new cars and 59 months on used cars.
Executives at Ally Financial said in May that subprime car lending had become “very attractive” because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. Making the loans is part of Ally’s strategy to grow by lending on more used cars…. More than a little ironic that Ally is the old GMAC, which used to make car loans, then got into the subprime mortgage business, which imploded, and resulted in the collapse of GMAC, which was reinvented as Ally
Bigger profits off lower credit scores. Now where have we heard that load of malarkey before?
Can you believe it? I mean, we haven’t even paid for the last subprime meltdown, and we’re on to the next? Do you think a little regulation might be a good idea here, so the banksters running these loan-laundering operations don’t blow up the system again and come around begging for more bailouts?

And then there’s the student loan biz. As this semester begins, college loans are nearing the $1 trillion mark, more than what all households owe on their credit cards. Fully two-thirds of our undergraduates have gone into debt. The College Board likes to say that the average debt is “only” $27,650. Student loan debt has grown by more than 500% over the last 12 years. This economy has now built in debt. Once upon a time, you could get an education without having to go into debt. The idea of inexpensive public higher education is part of the state constitution of Arizona.

Oh well, once the students get a good education they can get a good job, maybe they can work for one of the big banks like BofA.

Bank of America (BAC) has already announced 30,000 job cuts. Today there were reports that number may increase to 40,000 jobs being cut.

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