Markets On Steroids.

Yesterday the Euro and the stock markets went up because?

Depending on what we are smoking, the answer could be:

·         ECB reduced rate, or

·         No referendum in Greece, or

·         Possible absence of Government in Greece, or

·         MOMO chasing lemmings forgot the MF Global fiasco and major Euro bank stress, or

·         HFTs forgot about the fact that Europe is in recession, USA is in stall speed and China is slowing, or

·         Uncle Ben promised more free money, or

·         G20 leaders may agree to run the printing press at high speed, non-stop and may even mandate IMF to do the printing, or

·         Nothing was solved in Euroland compared to day before, or

·         Bad news is good news, or most importantly,

·         The primary dealer banks need to do window dressing of their balance sheet and convince the sheeples that all is well.

Take your pick but it does not matter.  Santa clause rally is upon us. From now till the year end, we may see a multi-week rally in stock markets. I have written many months back that when the 1^st day of the year and the 1^st month of the year in the 3^rd year of Presidential cycle is positive, 90% chance that the year will end in positive territory. 

There is absolutely nothing in the market to be happy about. It is just a casino on steroid. Europe’s debt is spiraling out of control and bond yields in Italy are going up. The bad moon is rising and the oceans are swelling to dangerous levels. No levy or dike can stop the tsunami coming in. It is not a question of if; it is a question of when.

I do not think that it is the right time to be in equities. The similarities with 2008 are too much to ignore. The entire global banking system is carrying trillions of dollars of un-hedged sovereign debt and other assets which are severely impaired. Just like MF Global, these sovereign debts are sitting in the books of the banks as risk free assets, leveraged to the teeth. But the stock markets will rise from here because the central banks are injecting liquidity or changing the rules of game. So how do we take advantage of that? They want us to be in equities and other risk assets. Then one day the floor will be removed from under our feet and we would be left dangling, holding worthless papers. From here till year end, window dressing will be on full swing. All the talking heads in MSM will sing that everything has been fixed.

I want to join the party but on different terms.  When the SPX reaches 1350, I would rather take that opportunity to short the market. But for now, I am declining the invitation to go long equities. I would rather go long gold just to be on the safe side. Waiting for a good entry price next week.

Today is a NFP day. The last 5 NFP days have been red. Will it be different this time? The normal pattern is either open high end low or open low end high.

By the way, do you know that the food stamp usage is at record high! Per the latest available record 45.3 mil people used the program. 45,000,000 people are a hell lot of people. And they say we are out of recession?

Join us on Twitter and get the instant update of the global macro economic situation. Take control and turbo charge your portfolio.

Corzine Bets and Loses

John Corzine, former Senator and Governor of New Jersey and former Chairman of Goldman Sachs, stepped down today as Chairman of MFGlobal, as MFGlobal remained in the headlines for its bankruptcy filing two days ago. Corzine presided over the firm as it made huge bets on European sovereign debt, thinking that the worst of that crisis had passed. Unfortunately for Corzine and MFGlobal, the worst of the crisis is yet to come and MFGlobal and its leader are no more.

To Corzine's credit, he has always espoused the view that sovereign debt problems are imaginary and not real problems. He never had much interest in measures that might tame the growth in US national debt or the debt problems in New Jersey. So, at least, Corzine is consistent.

The blind spot that poisoned Corzine's reign at MFGlobal is the same blindspot that pervades current attitudes on the US's national debt (and the obligations of a number of state governments). These huge debt loads are not sustainable, blind spots notwithstanding.

One good thing worth noting is that there was no rescue for MFGlobal, which is good. Second, Corzine took no severance as he fell on his sword today. That is also good.

There is a whiff in the air that there might be a problem in customer accounts, but I suspect that that is probably not the case, but we shall see. Assuming no mingling of customer accounts, this seems to be a case where markets worked properly and the outcome is the proper one. The company made a big bad bet and it didn't work. The result -- bankruptcy. That is as it should be. Firms will learn if we let them.

The Unraveling of a Dumb Idea

The proposed "deal" that has been crafted by France and Germany for the EU to "save" the Euro is one of the most absurd plans that has ever been concocted. It should be obvious that neither the bailors nor the bailees are going to go along with this (even if their leaders continue to pursue such foolishness).

It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.

It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).

The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.

Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).

A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.

Time For Long Gold?

Sometimes it is so easy to predict what will happen to the stock markets! And to think that TBTF banks have battalions of analysts and complex computer models to predict the future. On my last post I wrote, “Green tomorrow, but selling may not be over”. Sure enough, we had a green day across board. And now futures are down and it looks like it will be red tomorrow.

I also wrote that I expect a multi-week rally from mid-Nov. Apart from various indicators and analysis; one simple reason for the coming rally is the need of TPTB (The Powers That Be) to fool the investors and do a massive window dressing for the year end. The Greek referendum has been pushed till December and nothing much is going to happen between now and December. Italy and others in club PIIGS continue to dance on the edge of volcano. And they are inching ever so close to the edge.

This news is from Zero Hedge; “While the focus continues to be on G-Pap for the second day in a row following his shocking referendum announcement, the real diversion remains Italy, where the government is in as much of a state of chaos as that in Athens, and whose bonds, while not yet trading at Greek levels  (remember when the Greek 1 year hit 100% two months ago? Today it is at 225%... and tomorrow the two year will be at 100%), are far, far greater in amount, and the only thing preventing their collapse so far has been the ECB, whose monetizing assistance has been contingent on Italy passing and enforcing austerity measures to deal with its runaway debt to GDP of over 120%. Unfortunately, when BTPs open for trading in 7 hours, the ECB bid may not be there, or any bid for that matter, because as the WSJ reports, "Italian Prime Minister Silvio Berlusconi on Wednesday failed to issue growth-boosting measures demanded by European Union authorities ahead of the Group of 20 summit, raising further doubts about the government's willingness to pass economic reforms aimed at restoring investor confidence in the country."

I had written many months ago that there will be two Euro, one for the Northern Europe and one for the Southern Europe. It will be interesting to see where France fits in. But that is still some months away. In the meantime we still have to worry about things in North America. The USA is at stall speed and the FED is unable to help the Banks as much as it would like. Again, the only way the TBTF banks can make money today is through speculative profit and we will see the buy programs being set in motion soon. Other things being equal, I expect 2011 to be in positive territory. At the beginning of the year, SPX was at 1272, so even if SPX closed around 1300 by the year end, that you be sufficient to fulfill the requirement of a positive year.

I am debating whether to go long equities but the risks are high and the end game is near. It is very difficult to be precise in this volatile market environment. More likely, I would go long gold but not before I am sure that we have reached the tradable bottom. There are signs that the selling would continue this week and that would put pressure on gold price as well. But that would be a welcome development as it would give a better entry point.

Green Tomorrow But Selling May Not Be Over.

All the euphoria of last Friday vanished in thin air with the curveball thrown by G-Pap. For the last 30 years Greeks have held the EU hostage with their brinkmanship and guilt manipulation. After the voluntary ( ha ha ha) 50% haircut agreed by the European banks, EU should now set aside another Euro 200 billion for loss write off and show the door to Greece. If that requires change in the treaty, do it. That way others in the PIIGS club will not ask for any further concession or write off. But that requires nerves of steel and team Merkozy do not have that. They are just buying time for their banks. In the mean time, Greeks have got hold of Europe by their S&C and blackmailing them, milking them for whatever it is worth. Greece will collect another few hundreds of billions of Euros and then default.  It is their sense of entitlement that is driving the whole Euro mess. I do not see any solution for the debt problem of Europe and Italy will soon follow Greece to give the fingers to Germany and France. Already the Italian 10 year bond yields are well over 6% and rising. Frantic efforts are on to reduce the gap between German bunds yield and Italian yield and they are even changing the margin requirement rules. ECB has now stepped in to buy the Italian Bonds to control the situation.

On the other side of the pond, things are as messy as ever. Channel stuffing by GM continues. GM books its car sales as soon as the inventories are shipped to the dealers. And dealers’ inventory is up by 15%. How long it can continue? This is not well for jobs or GDP.

I think we shall see a green day in the stock markets after two successive distribution days.  NYMO is no longer at extreme high and now hear the 200 DMA. So we might see some buying tomorrow but I do not think the selling is over yet. We might see some more selling before we can have any tradable bottom.  I also think we are heading for a multi week rally and would like to take this opportunity to go long. But I am still waiting on the sideline and will take the call soon. For now, the best course of action is not to take any action.

Black markets: a global $10 trillion economy

Excellent article from Foreign Policy entitled, "The Shadow Superpower", which examines the world's $10 trillion underground economy.

"You probably have never heard of System D.

Neither had I until I started visiting street markets and unlicensed bazaars around the globe.System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards.

To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of "l'economie de la débrouillardise."

Or, sweetened for street use, "Systeme D." This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy..."

Why the attraction to this unlicensed, improvised economy? Because that's where the jobs are, and where flexibility exists for entrepreneurs and traders/merchants to come in and do their thing without burdensome costs of regulation, licensing, and taxation (i.e., red tape). 

"...It used to be that System D was small -- a handful of market women selling a handful of shriveled carrots to earn a handful of pennies. It was the economy of desperation. But as trade has expanded and globalized, System D has scaled up too.

Today, System D is the economy of aspiration. It is where the jobs are. In 2009, the Organisation for Economic Co-operation and Development (OECD), a think tank sponsored by the governments of 30 of the most powerful capitalist countries and dedicated to promoting free-market institutions, concluded that half the workers of the world -- close to 1.8 billion people -- were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes. "

This is a trend I've talked about a bit on Twitter, but haven't covered here on the blog. Be sure to check out the full piece. It's well worth your time, and these trends will likely take hold here in the USA for similar reasons.

Greeks Should Vote No

Why should the Greeks agree to the bailout terms of the EU? If I were a Greek citizen, I would vote no. There is simply no way that generations of Greeks should buy in to austerity to support bad decisions by Greek bondholders. Default is the right answer -- for everyone -- not just for Greece.

If Greece defaults, and that doesn't necessarily mean leaving the Euro (any more than when Illinois defaults, which it will, that it means Illinois will leave the US dollar zone), then and only then can Greece, on its own, begin to correct the absurd government policies that have wrecked their economy. They have to reach this realization on their own. It cannot be forced from outside.

Greece is just the first gong in a series of bells that will ring of default through the Western world. No one, no one, can afford the economic policies that Europe has adopted over the past half century. Why the present US administration wants to emulate this disastrous course is not clear.

The idea that health care, retirement, education, housing, minimum wages, right to sue for virtually any absurd reason that one can dream up are all rights that must be provided to every citizen free of charge is so absurd as to hardly call for discussion. But these are the very policies that the Western world has adopted. Now, Europe and the US will have to live with the consequences and they are not pretty.

Again, Asia (ex-Japan), has not adopted the foolish policies of the West. Asia will achieve economic supremacy and fairly quickly as the West descends into the economic chaos that it has brought upon itself by the foolish view that government can provide all things to all people free of charge.