Breaking the Grip of the Federal Reserve will be essential to a new beginning
I feel less and less inclined to write about the economy and just wait until the financial system has successfully collapsed. The reflections currently going back and forth between the US, Europe and China, with India and Japan in a first row hands off onlooker position is rapidly becoming stale and boring and the playing field for incompetent media followers of fashion.
Last Thursday a lot of traders’ and investors’ walked home with soiled pants when Wall Street took a massive one day nose dive and apocalyptic headliners dominated the news…for one evening!
There is a herd of blindfolded imbeciles following the media in their analysis that Europe is doomed and is going to take down the world, followed the next day by reports from expert forecasters that all will be good to great soon.
It’s Monday, the weekend is history and the headlines say: Stocks mostly fell Monday as another slump in the Euro prolonged concerns about Europe’s economy. A quick look after the market closed today tells me that Google, Apple and Gold were on the plus side, while the Dow lost almost 127 points and is closing in on breaking through 10,000 on her way down. Nasdaq and S&P lost a bit too. Today the culprit is the US Government and its plans to reign in the banks with new regulations.
The Euro is down because of these concerns following a bailout of a previously unknown regional bank in Southern Spain.
Come on people, let’s cut the crap. The Euro was $1.2367 this morning which is still ahead of $1.232 it showed more than a week ago and by 6pm the Euro had cracked past 124 again because it’s a geo political game out there that few understand and fewer really control.
The world currency play right now is politically motivated. Here is the peg scenario between the Dollar, the Euro and the Chinese yuan. If the dollar strengthens against the Euro, the Yuan strengthens and that puts a serious stick into the spokes of the Chinese economy as exports get more expensive. The Chinese growth momentum cannot afford having its currency gain strength against the currency of its number one trading partner -THE EUROZONE-because of a weakening Euro.
Traders and pundits are constantly talking about problems elsewhere that incapacitate American growth.
Last week it was Germany banning that devilish habit of “naked short selling” which is as we all agree a totally immoral rape of the economy. This week it is a little savings bank in Southern Spain no one has ever heard of. And the suggested reason for panic is that this is only the second time in history that the Spanish Central Bank has taken over a bank.
Learn your history people;
When markets are ready to roll over, they’ll roll over. Experts, Commentators, forecasters and analysts can look for the ’cause,’ but they are just making noise. Lots of it, unfortunately.
So may I suggest that we take our eyes off the naked Germans or the protesting Greeks and instead take a look at what is going on in the US of A…
The Great Credit Correction is a worldwide phenomenon, but it is for all intents and purposes, centered in America.
The US economy is changing.
As a result, all the world’s credits need to be re-priced. We spoke about this about 2 years ago when the process started and we implied a credit re-pricing of up to 60% for some many public and private players.
What does that mean? Just that much of the world economy was geared to a trend that has come to an end – the growth and leveraging of the US consumer economy.
In China, for example, much of the export apparatus is set up to service US households. And much of the rest of it faces the opposite direction – towards Europe. Actually Europe has surpassed the US as China’s largest trading partner.
But to China the old world and the new world are both beginning to look a little stale. Both have too much debt. Both have made too many promises to too many people. Both have been using China to fund their excesses.
And if we are looking at chapters of the Crisis, we are now, broadly speaking, in the process of debt de-leveraging.
The private sector in America is paying down and/or defaulting on their debts. In the housing market, for example, delinquencies and foreclosures are at near peak levels. And demand for new mortgage loans is at a 13-year low even though some may want you to read an upswing in sale of existing homes based on incentives alone, yet not elaborating that these numbers have no basis to compare with.
Since so much of the wealth of the country has rested on housing prices, it is not surprising that a write-down in house prices would be as unwelcome as Chinese wallboard and lead painted toddler toys. In fact, it’s hard to find a place that hasn’t been affected. Overall people have less money; they spend less. They are also relatively well situated in credit intensive purchases and will drive their cars one or two years longer than in previous years. THEY’RE RE-BALANCING THEIR NEEDS AND WANTS.
And as they have too much debt and credit is tight, they borrow less. Sales go down. And the banks that hold much of this debt go bust. The FDIC says it has put 775 banks in the US on the endangered list recently and yet we talk about a little bank in Spain as another trigger for economic unrest??
When sales go down, so does employment. The latest figures show jobless claims rising again, don’t believe otherwise. Among the poor and uneducated, the unemployment rate is over 30%, yet prognosticators with borders are following blemished government statistics and predict drastic drops in unemployment, based on the artificial strength of the dollar.
Meanwhile, the de-leveraging process is clearly seen in falling consumer and wholesales prices. Demand goes down; so do prices. Both indexes are down, with less consumer inflation than at any time in more than 40 years.
In Europe, the process of de-leveraging focuses on governments. By and large, private households are much sounder, financially, in Europe than they are in America, as families traditionally take on less debt. But governments are just as shaky…and sometimes in worse shape than in the US, primarily because the Eurozone is still a pre-teen organization, with the Euro not yet even 10 years old. No excuse, just observation.
The credits of Greece, Spain, and Portugal have already been marked down considerably. All European countries are rapidly building drastic spending cuts. Most likely, the credits – bonds and currencies – of the others at stake will follow soon
as Governments are trying to appease the market gods by offering to sacrifice virgins, widows, orphans, the rich and other taxpayers.
Higher taxes and austerity measures are expected to give investors confidence.
Naturally, neither the virgins nor the taxpayers are willing to go down this road. Neither are government employees, whose salaries and pensions are supposed to be cut. The process of de-leveraging is going to be long and hard, in any case. Most likely, it will end in bankruptcy, default and write-downs of public debt. One way or the other the great credit adjustment will arrive.
But let’s not forget that Euroland at least is taking up the issue while on this side of the Atlantic, few politicians, taxpayers, or investors see a problem and the news media keep finding “believable” sources that swear that the good times are saddled up to come marching in again. They believe the credit of the US is not only elastic, but with unlimited stretch.
So let’s sit back and wait ’til it snaps, because honestly there is very little that can be done at this stage of the game!
And when it happens, we may want to remind ourselves that it’s not the end of the world and it will force us to focus on what is good with the American economy, rather than wasting time chasing a past and a system that has changed forever.
Argentina Collapsed Gracefully 9 Years Ago
It is like with today’s followers of the TV dramas “Lost” or “Law and Order”; when the curtain falls something else will replace it. Period. We’ll adjust.
I remember the collapse of Argentina less than 10 years ago, when the country defaulted on the largest debt in history of $100 billion. Collapse comes when the fixes are more costly than the problem. Something we started with bailouts and too big to fail hand outs, a system that is now adopted by our European counterparts.
W. C. Fields put the predicament as follows: ‘If at first you don’t succeed, try, again. Then give up. No sense in being a damned fool about it.’ Let that be a lesson.
Or like local attorney Robert Peters admitted in a conversation of realities: If you’re down 22 to zero in the bottom of the Seventh, you may want to throw in the towel, while you still have something to rebuild from.
That’s what Argentine did and now 9 years later they do quite well considering the world’s financial disorder. My plea is not to be irresponsible and just walk away, yet I think we need to prepare for a successful collapse and solid rebuild keeping what is good and discarding what should have never become part of our financial system. A Federal Reserve would be my first choice.
What are we looking at?
In closing I’d like to say for the record that in the current chapter of the crisis, the U.S. dollar is likely to regain its temporary aura of being the sweetheart of the global financial community, albeit deeply dysfunctional. The country’s indebtedness will not go away. What will also not go away is the tendency for people to spend more than they bring home. America’s spendthrift is monumental.
And even though I hate time predictions in a world that only needs one Black Swan to throw off any timing, I look at 5 to 8 months of propped up bliss for the US, before the Collapse is inevitable and commodity prices have come so far under pressure that gas and oil prices alone will torpedo any recovery.
My suggestion: stay liquid, use liquidity to buy good deals in real estate, gold and silver and stay alert. Stay out of the stockmarket.