Thursday, October 27, 2011

Morning Update/ Market Thread 10/27 - I Love the Smell of Leverage in the Morning Edition…

Good Morning,

Equity futures are zooming this morning as the Euronuts finally agree on a “deal.” The dollar is therefore plummeting, bonds are falling, oil is zooming, silver is higher, gold is flat, and you also get to pay the price for their folly in the price of food commodities. Note that the Yen is rising to new all-time highs, something that they feel they must fight with more and more printing in defense – Gawd I love the smell of leverage in the morning!

On the deleveraging side, the deal in Europe gives the private Greek bondholders a 50% default which will take the advertised Greek debt down from 150% of GDP to “only” 120%! This aspect is a joke, of course, because 120% itself is completely unsustainable, but they will be back at 150%++ in no time considering how the central banks “rescue” (enslave) people.

On the leveraging side the two other aspects of the deal more than compensate for deleveraging associated with the haircut. Part one involves leveraging their “European Financial Stability Facility” (EFSF) by “four or five times!” Let me translate that for you – the EFSF has very little, if anything, real backing it. It is simply a made up devise of pretend money that they are now leveraging – leveraging the leverage if you will, which is a fancy way of saying that they are printing money from nothing.

Part two of their leverage game is that they conducted phony bank “stress tests,” which they all passed of course, even though they are all functionally insolvent. Still, they are raising the capital requirement to 9%. Now, most people would put the raising of the capital requirement into the deleveraging category, but I ask those people one question to point them in the right direction, “Where does that capital come from?” Uh huh, once again we’re talking about thin air here, and when we’re talking money from thin air we’re talking leverage even if said leverage is parked momentarily.

Here are the details of the plan, first from CNN:
Finally, Europe has a deal

NEW YORK (CNNMoney) -- European Union leaders announced an agreement early Thursday on debt crisis measures, including a hard-fought deal with private sector investors to take a 50% loss on Greek bonds.

The agreement came at the end of marathon talks to finalize the policy response to the government debt and banking problems threatening the stability of the euro currency and global economy.

The response aims to resolve three related problems: the debt crisis in Greece, instability in the banking sector and a sorely outgunned bailout fund.
Under the new plan, Greek bondholders voluntarily agreed to write down the value of Greek bonds by 50%, which translates into €100 billion and will reduce the nation's debt load to 120% of economic output from 150%.

Charles Dallara, director of the Institute of International Finance, which represented the private sector in the talks, welcomed the agreement. In a statement, he said private investors agreed to the 50% discount "with the support" of €30 billion of official private sector funding.

The agreement also calls for a new €100 billion financing program for Greece, which will be funded partly by the International Monetary Fund, according to an official EU statement.

Stronger bailout fund: The leaders agreed on two ways to increase the firepower of the EU bailout fund, known as the European Financial Stability Facility. The methods will each leverage the fund by four or five fold, the statement said, boosting its resources to about €1 trillion.

The fund will be used to partially insure new issues of government bonds. In addition, it will be supplemented by the creation of one or more special investment vehicles, which will be open to private sector players such as sovereign wealth funds.

China has already expressed interest in backing the special investment mechanism. The possibility that China could back the the rescue effort helped lift U.S. stock prices late Wednesday.

Bigger bank reserves: The EU government heads also agreed to raise capital requirements for banks vulnerable to losses on euro-area government bonds.

"The overarching goal of the exercise is to foster confidence in the European banking sector," said European Council president Herman Van Rompuy.

Banks would be required to sharply increase core capital levels to 9% to create a buffer against potential losses.

Based on market rates in September, banks will need to raise a total of €106 billion to meet the new targets, according to the European Banking Authority.

That compares with estimates from the International Monetary Fund and private sector economists that ranged between €100 and €300 billion.

The banks would have until the end of June 2012 to meet those new requirements, according to a statement.

José Barroso, president of the European Commission, said the technical work needed to complete the measures will be completed "in the coming weeks."

"The key is implementation," said Barroso. "It is not enough to make commitments."
Remember when our banks were required to “raise their capital requirements?” Immediately Hank Paulson pushed for, and got, the ability to pay the banks for “excess reserves.” Those “excess reserves” are now parked to the tune of $1.6 Trillion, all earning interest paid for by the people of the United States. The Europeans are simply taking from the playbook of the U.S.. All you need to do, then, is look at the result here – the stock market zoomed for a few months and then petered out, while simultaneously creating inflation for the things people need to live. There you go, expect more un/underreported inflation, and expect to revisit the Euro problem again and again until the people finally remove those who control the production of money.

It’s a dangerous game because inflation will eventually leave the majority of the population penniless.

More on the deal from Bloomberg:
EU Sets 50% Greek Writedown, $1.4T in Rescue Fund

European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.

The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.

“Overall the outcome is better than we anticipated one week ago,” Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, said in an interview. “There are several issues left open, but I do believe that getting a more necessary debt relief for Greece is a pretty important step.”

Last-ditch talks with bank representatives led to the debt- relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc. Greek Prime Minister George Papandreou will address the nation at 8 p.m. in Athens to outline the summit’s ramifications for the country at the eye of the two-year sovereign debt crisis.
“The world’s attention was on these talks,” German Chancellor Angela Merkel told reporters in Brussels at about 4:15 a.m. “We Europeans showed tonight that we reached the right conclusions.”

ECB Role
Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

The euro advanced to a seven-week high against the dollar, rising above $1.40 for the first time since September. It was at $1.4007 at 11:48 a.m. in Brussels. The Stoxx Europe 600 Index surged 2.6 percent.
“It’s long on words, short on detail,” said Peter Dixon, an economist at Commerzbank AG in London. “The solution that’s been put in place now gives us enough ammunition to stave off any immediate problems but we may well run into other problems down the track.”

The summit was the 14th in the 21 months since Europe pledged solidarity with Greece, and came amid mounting global pressure for the bloc to deliver a credible anti-crisis toolkit before a Group of 20 meeting Nov. 3-4 in Cannes, France.
“Long on words, short on details…” That’s because when you are making money from nothing, you don’t want to tell the world exactly how you’re going to do it, but it doesn’t matter because printing money from nothing is still printing money from nothing, all of which goes to benefit those who produce it – the further you are from that production, the more economically disenfranchised you will be.

Now turning back to the U.S. our trumped up Q3 GDP rose to perfectly meet the 2.5% “growth” expectations. Again, this is a completely bogus measurement with inflation way understated which overstates real growth. Also, they count the creation of debt, including our government’s deficit spending, as “productivity.” Oh yeah, we’re producing something alright, we’re producing money and leverage lots of it! Below is a chart showing the MZM money supply on the same graph as supposed GDP – note how they mirror one another, that’s because they have been made to be one in the same:

GDP is not a measurement of “production,” it is a measurement of money and moneyness. And the comparisons of debt to GDP are completely fallacious! What matters is not a nation’s debt to the nation’s trumped up “productivity,” what does matter is the nation’s debt compared to the nation’s income! Comparing the nation’s debt to GDP is like comparing your own debt to your neighborhood’s productivity – what do they have to do with anything? Nothing! It’s completely ridiculous! What matters in regards to YOUR debt is YOUR income – period.

Here’s Econospin cheering the trumped up figures, buying into all the false constructs, and then perpetuating the myths:
Economic growth finally strengthened in the third quarter-and the component mix is more favorable than expected. GDP growth improved to a 2.5 percent annualized increase in the third quarter, following an anemic 1.3 percent in the second quarter. The advance estimate matched market expectations for a 2.5 percent gain.

Demand numbers also improved as final sales of domestic product increased an annualized 3.6 percent in the third quarter after a 1.6 percent rise the prior quarter. Final sales to domestic purchasers (excludes net exports) gained 3.2 percent, following a 1.3 percent gain in the second quarter.

Strength was led by business fixed investment with personal consumption expenditures gaining momentum also. PCEs advanced 2.4 percent, following a 0.7 percent rise the prior quarter. Strength was led by durables with services also accelerating. Nondurables growth was soft. Net exports improved but at a slower rate. Inventory growth was positive but at a slower pace. Government purchases-on weakness in state & local spending-were flat but an improvement over a modest dip in the second quarter. Residential investment posted a modest gain but slowed from the prior quarter.

On a year-ago basis, GDP is up 1.6 percent, matching the pace in the second quarter.

Economy-wide inflation according to the GDP price index held steady at a 2.5 percent pace and equaled consensus forecasts for a 2.5 percent boost.

Today's report is good news, showing that economic momentum has picked up a bit. The component mix is particularly encouraging as final sales have picked up.
Woohoo, paartay!

Speaking of parties, Weekly Jobless Claims came in at 402,000, down 1,000 from the prior week, not the 6,000 as reported by the spinmasters following the +5,000 revision for the week prior data not reported by Econospin:
Initial jobless claims are holding steady in a narrow range just above 400,000. Claims came in at 402,000 in the October 22 week, a bit better than expectations. The four-week average of 405,500 is 10,000 below the month-ago period to hint at mild improvement for the October employment report.

Continuing claims in data for the October 15 fell 96,000 to 3.645 million with the four-week average of 3.701 million nearly 50,000 lower on the month-ago comparison. Improvement for continuing claims is an uncertain mix between hiring and benefit expiration. The unemployment rate for insured workers dipped one tenth to 2.9 percent.

There are no special factors in today's data, data continuing to suggest that employers, busy with production, are not scaling back their workforces.

This number needs to be below 350k to reflect real job growth, it’s been years of nothing but job shedding. Taking credit for “jobs saved,” is nothing but more fraud designed to cover-up Fraud.

Remember, once debt saturation is reached, adding more debt into the system only results in less real productivity and in higher unemployment. Not to worry, though, the Euroclowns have a deal.