A Flash Crash hit all major US stock markets this afternoon when a hacked Associated Press alert appeared which stated that two major explosions occurred at the White House, injuring President Barack Obama. Within seconds all the major stock indexes - the Dow Jones Industrials, the S&P 500, and the NASDAQ, began plummeting.
Do you still want to hold your money in Italian banks? What about Spanish banks, or even in the United States? The Cyprus bail-out, or bail-in as the EU likes to call it, has not put those questions to rest. They’ve become even more urgent now that the Troika – the alliance of European Union, European Central Bank, and IMF bureaucrats who spend their time going from one country bailout to another – have decided that depositors will be on the hook the next time a bank goes under.
The United States has so many “wars” on its hands that no one can keep them all straight. The War on Terror, the War on Drugs, the War in Afghanistan, the Drone War, the War on Women, the War in Iraq. To this must be added a quiet war, begun in 2008 as a response to the financial crisis, and so low key that it doesn’t deserve capital letters – the war on savers.
The Fed is throwing every dollar it can at the economy, but instead of getting economic growth, it is creating asset bubbles. There is a mini-housing bubble, a student loan bubble, a government debt bubble, a sub-prime auto loan bubble, a farmland bubble, and a massive stock market bubble. What happens when the Fed takes its foot off the monetary pedal, as it must at some point?
The recent US presidential election found the Republican Party on the losing end of a political and economic argument. It was Mitt Romney’s contention, both privately and implicitly when he selected Ayn Rand enthusiast Paul Ryan as his running mate, that 47% of the electorate was dependent on government handouts and therefore had no intention of voting for any Republican who threatened to reduce government entitlement spending. Mitt Romney after the election “doubled down” on this statement, insisting that Obama voters were bought off by government largesse.
Romney was defeated handily in the public vote – he achieved, ironically, slightly less than 47.5% of the popular vote – and he was thrashed in the Electoral College vote, which is what really matters. These results are being interpreted by the press and the pundits as a repudiation of Republican policies, and a rebuke to Mitt Romney for his perceived insult to Obama voters that they are lazy and, like parasites, live off the hard work of others.
The problem with this view is that Romney was half-right: there is a dependency class in America, and they do tend to vote Democratic. He was wrong on his interpretation of the motives and work ethic of this dependency class. One man’s handout, after all, can be another man’s means of survival. He was also wrong on his campaign promise to fix this situation by creating millions of jobs so that the moochers and parasites will have no excuse but to find work when the entitlement payouts end. Obama was wrong on this as well; no politician can pretend that they have some magic tool to create millions of jobs and return entitlement payouts to more sustainable levels. Not only is this not possible, but as I will contend here, such thinking makes the problem worse. The dependency class in America is growing, and it is here to stay for many decades into the future. It is a consequence of decades of government and business policies that let such an infra-class arise, and it is a consequence of very long term economic and social forces that operate on a global basis and are beyond the control of any one country. The United States is turning into a third world country, complete with vast pockets of poverty and idleness, and a small elite that dominates wealth and income. A dependency class is a prime feature of third world countries, and the political party which most successfully caters to this dependency class is more than likely to enjoy decades of political power.
The QE3 has been officially launched today by the Federal Reserve, which has promised to buy $40 billion of asset-backed securities from the market each month, on top of $35 billion per month of Treasury securities it is already buying as part of its program to reinvest proceeds from securities which are maturing in its existing portfolio. If this isn’t enough to excite the animal spirits of the economy, the Fed has put no limit or end-date on QE3, and it has pushed out its promise to keep short term interest rates near zero for at least the next 2-1/2 years.
Why is the Fed buying mortgage-backed securities and not Treasuries, which it bought under QE1 and QE2? In the past fiscal year for the US government, the Fed purchased 77% of all the new debt issued by the Treasury, and because the Fed focused its purchases in the 10 year and beyond maturities, the Fed is bumping up against its self-imposed limit of not owning more than 70% of the outstanding paper in any maturity. The Fed is already close to this limit for maturities clustered around the 10 year mark, and the Fed owns on average 50% of all the outstanding paper in the 10 year to 30 year maturities. As Republicans have made clear in this election year, every Treasury purchased by the Fed is viewed as an attempt to influence the election of Obama, so this is a potent political reason to stay out of this market for the time being.
The planets are aligning for another round of debt monetization in Europe, backed up by the United States. Mario Draghi, the president of the European Central Bank, is reportedly looking at expanding the amount of Spanish government debt he can buy. He is also said to be considering another LTRO – Long Term Refinancing Operation, which is the mechanism the central bank uses to buy debt from private sector banks.
That Spain needs help is beyond doubt. The global bond market has been fleeing Spanish government debt as rapidly as it can, forcing yields to the 7.3% area, which is beyond the point where the Spanish government can continue to pay interest from its own revenues without severely cutting back on domestic expenditures. The same situation is playing out at the local level in Spain: Andalusia and other provinces have been besieging Madrid for help in meeting the interest burden on their own debts. There is also talk that medium to small size Spanish commercial banks are out of liquid collateral, and are unable to meet further collateral calls on the global markets.
Your pedal extremities are colossal To me you look just like a fossil. – Fats Waller
Business executives like to talk about their “footprint”. When JP Morgan Chase and Bank of America were racing all around the United States to see which could be the first to have a full national presence in every important market, they would talk about how their footprint was expanding state by state. Then it was on to establish a full global footprint, including in all key emerging markets, which supposedly are going to provide double-digit earnings growth for these banks during the next twenty years.
If you are the CEO of a major global bank and you have to announce a $2.0 billion trading loss, you will no doubt feel that the shareholders, regulators, and reporters are all against you. But if you announce that the loss occurred in a portfolio that just six weeks earlier was the subject of criticism in the press, and which you described as nothing more than “a tempest in a teapot”, you are entitled to feel that the gods are against you.
The gods definitely have it in for Jaime Dimon, CEO of JP Morgan Chase, the legendary “fortress balance sheet” bank that prides itself on having avoided problems during the housing bust and credit crisis of 2007-2008. Someone inside the bank blew a large cannonball through the bank’s fortress walls, and it seems likely to have been “the Whale” of the credit derivatives market, JP Morgan’s Bruno Michel Iksil.
The headlines coming out of Europe all tell us the same thing: the voters are fed up with austerity; they want growth. Is that really what these elections were all about? Nicolas Sarkozy was defeated by Francois Hollande, a Socialist party candidate, in a near-rout. In Greece, the two centrist parties which form the current government polled less than half the votes they received in the last election. It is unclear if they can even form a coalition government. If so, they will have to draw on either the far left party or the neo-fascists on the right to get a majority vote in parliament.
These two elections were as much about Germany as they were about domestic issues, as serious as those were (unemployment in France is 10%, and 20% in Greece). Germany is the instigator for austerity imposed on the periphery countries, and now imposed as well on its core partners such as France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations, but only in places like Greece, Italy, Spain, and Portugal, which are considered chronic over-spenders. It also wants you to ignore the fact that Germany was one of the first countries to violate the 3% debt/GDP rule that it insisted upon when the euro was founded. Germany wants everyone to see the world the way Germans see the world: Germans are thrifty, efficient, makers of excellent export products, and prudent about the use of debt. Most everyone else, especially in southern Europe and on the periphery, are spendthrifts, indolent, unproductive, and living off government welfare.
The planets are aligning for another round of debt monetization in Europe, backed up by the United States. Mario Draghi, the president of the European Central Bank, is reportedly looking at expanding the amount of Spanish government debt he can buy. He is also said to be considering another LTRO – Long Term Refinancing Operation, which is the mechanism the central bank uses to buy debt from private sector banks.
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