Guest post by Peter Tchir.
How Dumb is Draghi?
The bear case continues to make a lot of sense. We have a global economy that is slowing. Profits are slowing. I see that and generally agree with it. I think housing may be stabilizing more than people give it credit as many of the problems slowly work themselves out, but in general I have no problem with the bear argument, especially for U.S. stocks which have priced in so little bad news relative to stocks in the rest of the world.
The problem I have with the bear scenario is that part of it hinges on Europe failing to respond to Spain. The argument is basically that the EU will fail to help Spain. Spain will continue its collapse and bondholders will lose money dragging down banks and insurance companies. The losses in Spain will scare investors out of Italy, causing the same wave of panic. I think I am more pessimistic than most on what happens if Spain reverts to the Peseta or the Greece exits in a fit of anger.
Representative Ron Paul talked about the current presidential campaign and the status of his own candidacy, and he responded to telephone calls and electronic communications. Topics included his goals for the upcoming Republican National Convention; and his bill to audit the Federal Reserve, which the House was expected to take up that week.
We are getting an ever increasing deja vú feeling yet again. In 2011 it was all Greece, now just change that to Spain. Same, same, but different, or? From Presseurop.
There are three conclusions to be drawn from these events. The first is that Spain is heading inexorably towards a bailout, probably quite soon. It was always a case of smoke and mirrors to imagine that the promised €100bn (£78bn) package of support for Spanish banks would be enough and so it has proved.
This is a country with a collapsing economy, an imploding property market, banks nursing colossal losses, and 10-year bond yields at 7.5%. The question is not whether there will be a bailout, but how big it will be. At least €300bn in all probability.
Janet Tavakoli on the ongoing bail out of Wall Street. From a Bloomberg interview in 2008.
Liu: So, so, so, are you, so are you concerned that…
Tavakoli: Let me get to the more important point, Betty. That the Secretary doesn’t really have any effective oversight built into this Bill. Basically, his word stands as the final authority on what’s going on with buying in these assets. Furthermore, it really doesn’t help in mitigating foreclosures in any specific way. Once you buy in the securitizations, finding the owner of the specific mortgage is extremely difficult to do. Furthermore, my grandparents came to this country to get away from people who would draft Bills like this. The American taxpayer and the American citizen should realize this is the most dangerous Bill to ever come before Congress in our lifetime. We are selling Democracy on the cheap. For what? For getting our money market funds guaranteed? My grandparents were happy to endure economic hardship so they would get away from governments that would do something like this. We are basically subverting Democracy. This is a terrible thing, and our Congress has not spoken out against it. My state senator, Senator Obama, has shown no courage at all in speaking out against this. McCain has said very little. (full article here).
Passage from Octopus, by Guy Lawson, via Matt Taibbi.
As a velocity trader, Graber constantly bought and sold the same stocks… He talked about the stock he traded with intense passion, passing around made-up gossip, false speculation, and occasionally real news – anything to stir up action. One of Graber’s abilities was to “paint the tape,” the illegal practice of trading with the sole purpose of moving the price of a stock. The agribusiness giant Archer Daniels Midland was one of the stocks Graber fooled with relentlessly. To paint the tape on ADM, Graber and Israel would call eight different brokers and put in buy orders simultaneously to run up the price – at a time when Graber was holding lots of the stock ready to sell into a rising market. It was a racket the Securities and Exchange Commission was hopelessly ill-equipped to stop.
“The SEC questioned Freddy all the time,” Phil Ratner recalled. “But they couldn’t catch him. He traded so much that it was impossible to say he’d traded on inside information.” (Full article here).
We are about to experience the Euro Exit Crisis.
The whole point of exiting the eurozone is because a country no longer has the money to finance its continuing operations. Insofar as Spain, Greece and possibly Italy, that moment will arrive shortly—possibly within days in the case of Spain. So if a sovereign government reaches this moment, it will have no choice but to exit the EMU and revert to a local currency which the government can then devalue.
By doing this, the government simultaneously has all the cash it needs to continue operations, and also inflates away its debts. The private sector gets a shot of adrenaline insofar as foreign trade is concerned, because its goods and services become that much cheaper on the foreign markets. And the employment situation gets a boost, as those producers selling their cheap goods and services overseas begin to hire more workers to fulfill demand.
The downside is that the government gets shut out of foreign bond markets, its financial sector takes a huge hit, and prices for essential goods and services rise dramatically, hurting the poor, the lower middle-class, the elderly, and the unprepared.