By Charles Hugh Smith, OFTWOMINDS

Medicare is an example of an unsustainable system that will go away in the decade ahead. 

Here are the sobering facts about the number of workers and those drawing Social Security, Medicare and Medicaid entitlements in the U.S. While the government claims to have a “trust fund” to pay for Social Security and Medicare, this is illusory propaganda. There are no funds set aside to pay these entitlements–they are “pay as you go” programs funded by current tax revenues. If the tax revenues don’t cover the programs’ expenses, the Treasury sells bonds, i.e. issues debt to pay the entitlements.

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

The Daily Reckoning

Sometime in the next few weeks we’re going to find out if Greece can afford to stay in the euro. We’re also going to find out if Spain and Italy can afford to leave the euro. Access to credit markets is the key issue. The stigma of default will lock a country out of capital markets. If you don’t have a plan to replace your currency and then devalue it, you’re doomed. We’ll return to this subject at the end of today’s Daily Reckoning.

But first, the crisis in Greece didn’t come to a head over night but it can’t be far away. Rival political parties have been unable to form a government. New elections are scheduled for the second week in June. The financial has definitely become political. The people have run out of patience with unsound money and the world built on it.

All that said, the Greeks managed to make a €430 million payment to hold-out creditors last night. Nearly 97% of Greek creditors agreed to the restructuring of the country’s debt in March. That wiped off over €100 billion in Greek debt and resulted in 70% losses for some of the bondholders who accepted the deal. Not all of them did.

Yesterday, the bondholders who didn’t accept the deal got paid in full. There is still about €6 billion worth of debt owed to creditors who refused to participate in the restructuring. You can imagine that the Greek decision to pay the holdouts would anger the creditors who agreed to the deal. They look like schmucks now. Schmucks.

But in the current scheme of things, €430 million is chump change. The real issue is whether the Greeks are going to default on €150 billion worth of government debt. If those bonds are owned by foreign creditors – let’s call them other European banks – then the Greek crisis becomes a European crisis. We’ll come back to this issue of ‘containment’ shortly.

For the Greek people, the most alarming aspect of what’s going on is that their life savings are at serious risk of a massive, overnight, non-voluntary devaluation. There are a lot of words for the magical process of turning one thing into something else: alchemy, transmutation, and transubstantiation come to mind. But to the Greeks it’s going to look a lot like highway robbery.

You’ll go to bed one night with your life savings denominated in euros. You’ll wake up the next day with them denominated in drachma. And your euro savings will be automatically converted to drachma at an exchange rate not of your choosing. For example, your 1,000 euros will become 100 drachma…or even 10,000 drachma. The nominal amount won’t matter. What matters is that the devaluation strips you of 70% or 80% of your purchasing power.

Most people would avoid that kind of value destruction if they could. Maybe that explains why €700 million was withdrawn from Greek banks on Monday, according to remarks made by Greek President Karolos Papoulias and reported in the Wall Street Journal. The Journal reports that between €2 and €3 billion in deposits have been withdrawn from the Greek banking system each month for the past two years. January was a high point, with €5 billion.

A bank run by any other name would look as desperate. And who wouldn’t be desperate now? Leaving the euro, devaluing the drachma, and defaulting on debt owed to foreign creditors are Greece’s best long-term economic survival strategy. But the unavoidable side-effect is to destroy the savings of the people, not to mention usher in a period of lower standards of living. That won’t win you many votes. It may start a revolution.

And how do you prevent the Greek precedent from being imitated by the Spanish and the Italians? To be candid, we don’t think it matters much now. Greece can’t afford to stay in the euro. The Spanish and the Italians can’t afford to leave it.

The economies and banking systems of Spain and Italy are indispensable to Europe. If they leave the euro, there is no euro. The Greeks can leave, devalue, default and use a weaker currency to claw their way back to economic competitiveness. If the Spanish and Italians leave, they lose access to private capital, they lose access to the ECB and they take down Europe’s banking system. They can’t leave. More importantly, they can’t be allowed to leave.

This makes the task of the European Central Bank (ECB) much easier. It simply has to guarantee Greek debt owed to all non-Greek creditors. Or, it could simply buy that debt. This would solve the problem of anyone outside Greece taking losses on Greek debt.

This is what corporatism looks like, when the Big State and Big Finance become the Big Power in the economy. Losses cannot be tolerated. Any loss results in lower equity capital at a financial firm would require selling assets. Since everyone owns a piece of everyone else, and owes to everyone else, any major loss in one place results in losses everywhere.

Of course it’s absurd that Europe is moving toward this kind of ‘extreme socialism’. The people most responsible for the crisis are not accountable and the people who have saved get punished. The elite are enriched and everyone else is enslaved.

This is why the financial crisis could so quickly become a political and social crisis. When people don’t think they can get justice from the courts or the cops, and when they think that cheating is the only way to get ahead in a system, the political and financial order is on borrowed time. The clock is ticking.

Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

Is the Australian Economy… Booming…or Busting?
2012-05-11 – Greg Canavan

The Art of Value Investing: How to Value a Business, Not a Stock
2012-05-10 – Greg Canavan

When Financial Markets Decouple From Reality
2012-05-09 – Dan Denning

Low Interest Rates Are A Dangerous Addiction!
2012-05-08 – Satyajit Das

The Bear Hunters and the Trigger Event for the Aussie Dollar
2012-05-07 – Dan Denning

Similar Posts:

• Don’t Invest in Europe’s Debt
• Debt Is a Bummer
• How Bailouts Encourage Bad Behavior
• The Euro is a Symptom of Centralisation
• Does Greece 2010 = Austria 1931?

More articles from The Daily Reckoning….

The Daily Reckoning

Former Treasury secretary Ken Henry reckons that what’s bad for Greece may turn out to be good for Australia. Why? It will make it easier for Australia to finance its current account deficit! Woo hoo!

Capital in flight – and that’s what a bank run is, whether it’s an individual depositor or a global hedge fund – has to find sanctuary. The easiest (most liquid) place is the US bond market. But Henry likes to think that Australia has developed the reputation as a ‘safe haven’ for global risk capital. ‘The good news side of it is that it is possible, maybe even likely, that any capital flight associated with the euro could make it easier for Australia to finance its current account deficit,’ Henry told the ABC last night.

We suspect Henry would like that capital to flow into a new infrastructure bond market. Those bonds would be floated by State governments and finance the infrastructure required for Australia’s growing population. We wrote about this new bond market in the most recent issue of Australian Wealth Gameplan. With new exchange traded funds (ETFs) in the fixed income market, it’s now possible to fill the ‘bond’ portion of the Permanent Portfolio with fixed income ETFs.

But back to Henry’s point, is Australia a safe haven for capital? Well, we’ll see. Obviously we like the place well enough or we wouldn’t have been here for seven years. But enjoying the climate and the footy is not the same as deciding to plough your life savings into the share market or the property market.

For a country that managed to run a persistent current account deficit during the greatest ever commodity boom AND managed to stack on about $220 billion in government debt at the same time, the ‘safe haven’ tag seems misplaced. As we wrote a few weeks ago, the last crisis shows that foreign money flows out of Australia in a crisis, not into it. But maybe this time it will be different.

Maybe what Australia needs is Don Corleone. We bet you didn’t know that Australia needs a ‘godfather’. As if the disintegration of the euro wasn’t enough to wrap your head around, the Chinese have seized on this moment of anxiety to put pressure on Australia geopolitically. A former officer in the People’s Liberation Army (PLA) has told Australia that it needs to choose who is going to be its Big Daddy in the Asia-Pacific for the next 100 years.

Song Xiaojun told the Age, ‘Australia has to find a godfather sooner or later…Australia always has to depend on somebody else, whether it is to be the ‘son’ of the US or ‘son’ of China [It] depends on who is more powerful, and based on the strategic environment.’ He inferred that, while Australia has been basking in the glow of record mineral exports to China, it’s been lazy about looking after its strategic interests. ‘Frankly, it has not done well politically.’

This must be the ‘bad cop’ part of the interview. It’s hard to imagine these kinds of remarks winning you influence and friends in Australia. It’s quite possible that Song means ‘godfather’ in the paternal way, as an older, wiser hand that looks after the interest of a ‘son’ the way a father might. But he could also mean Don Corleone. Is he making Australia an offer it can’t refuse? Hmm.

Assuming this is a two-man job, that means the ‘good cop’ must be Li Keqiang, the man slated to be China’s next Premier. He’s meeting in Beijing with new foreign minister Bob Carr. The men are celebrating the 40th anniversary of Australia establishing diplomatic relations with China.

Why would China try to get Australia in line, strategically speaking, right now? Is it because America is weak? Because Australia is vulnerable? Because China is strong? Or because China is weak?

Surprisingly, the last part may be more likely than you think. We don’t mean weak in economic terms, although you could make the argument China IS getting weaker. In fact, Li Keqiang made the argument himself to the Financial Times when he cited electricity consumption, rail cargo volumes, and the disbursement of bank loans in the Chinese economy.

Li said these three factors paint a truer picture of China’s growth model than do ‘man made’ GDP figures which are ‘for reference only’. Electricity output grew just 0.7% in April, year-over-year. In March, it increased by 7.2%. Rail cargo volumes are growing at half the pace they were this time last year, according to the FT. Banks are extending fewer loans as well.

Let’s see…less power used in making goods means fewer rail cars used in transporting them and fewer bank loans taken out purchasing or making them. That all adds up to slower growth. But is it a lot slower? Or is it just a little slower? That’s the big question.

And that brings us back to the issue of political strength, not economic strength. The 18th National People’s Congress of the Communist Party of China (CPC) will meet later this year. Among other things, the Congress will elect nine new members of the Standing Committee of the Politburo (SCP). This is the most powerful group in China. It’s the group that controls Chinese economic and political policy.

In case you’ve missed it, there’s been a power struggle going in the CPC. To make a long story short, we’d suggest it has to do exactly with what kind of ‘growth model’ keeps the party in power. The ‘Chongqing Model’ adopted by the ousted Bo Xilai relied heavily on selling land for development and then building massive state-funded housing and infrastructure projects. This investment-led growth has been great for Aussie resources.

But outgoing Premier Wen Jiabao – a CPC rival of Bo’s – has called this model ‘unbalanced, uncoordinated, and unsustainable.’ This is a point Dr Paul Monk elaborated on his presentation at our After America conference in Sydney. There’s disagreement within the Party over which growth model delivers sustainable benefits to the people, and thus keeps the Party in power.

What’s more, China has a lot less ‘policy flexibility’ to deliver growth on demand than some analysts imagine. Dr Savvas Savouri, the bloke we quoted yesterday, says, ‘On practically every measure, such as bank reserve requirements or interest rates, monetary policy is much tighter in China than in the West.’ He reckons all the Chinese have to do is lower interest rates here, adjust reserve requirements there, and voila…growth is back at 8.5% a year.

But that entire model of management is under review in China because it’s failing globally. It’s also under review because it’s fake growth…or growth for the sake of politics. All the signs point to the end of this global growth model. And if Li knows this better than anyone, he may be maximising China’s political leverage over Australia while it still lasts. Stay tuned for more on this geopolitical game.

Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

Is the Australian Economy… Booming…or Busting?
2012-05-11 – Greg Canavan

The Art of Value Investing: How to Value a Business, Not a Stock
2012-05-10 – Greg Canavan

When Financial Markets Decouple From Reality
2012-05-09 – Dan Denning

Low Interest Rates Are A Dangerous Addiction!
2012-05-08 – Satyajit Das

The Bear Hunters and the Trigger Event for the Aussie Dollar
2012-05-07 – Dan Denning

Similar Posts:

• The “China Story” is Not Dead Yet
• China – The BRIC About to Smash Through Australia’s Windscreen
• How China Will Defeat the US
• The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand
• Is Australia’s Economy Decoupled From the Rest of the World?

More articles from The Daily Reckoning….

The Daily Reckoning

The Dow sinking.

Gold sinking.

Oil sinking.

Copper sinking.

Yields sinking.

We struggled with this, Dear Reader. We meditated. We prayed. We drank heavily.

And finally…we overcame the rank desire to say: “We told you so!”

As you know, Martin Wolf, of the Financial Times, is the voice of The Economics Establishment. All that is great and good in the field – which isn’t very much – is given voice by Wolf. Then, it is acceptable for policymakers, Treasury ministers, and central bankers, not to mention the people you talk to at cocktail parties.

And lo! Here cometh the neo-Keynesian economist. What saith he?

He says the world is drifting towards Japan.

Of course, that was the message 10 years ago from a certain feral economist who will not be mentioned. He maintained that Japan was a leader, not a follower…and that the US would follow in Japan’s footsteps…with about a 10-year lag.

He even wrote a book on the subject, with Addison Wiggin: Financial Reckoning Day.

Where he got these ideas, we don’t recall. What we do recall is that almost everyone laughed at him. “Japan?” they said. “The US is nothing like Japan. We have a dynamic, robust economy. We have Lehman Bros., Bear Stearns and Countrywide ‘low doc’ mortgages. We have Alan Greenspan. And George W. Bush. We have ‘mission accomplished’ in Iraq. We have Silicon Valley, Bernie Madoff and a housing boom. Japan has none of those things. Ha. Ha.”

But now, the last laugh is on the other foot!

Japan’s market topped out in 1990. The US market topped out – in real terms – in 2000. Thereafter, Japan saw on-again, off-again recession…sinking prices, generally…and slumpy conditions. The US economy staged a limp recovery in the ’02-’03 period…then gave investors a bubble head-fake. Now, it’s back to the slump…

…and now, both Europe and America are looking more Japan-like every day.

Martin Wolf explains:

On May 10, 2012, the yield on the German 10-year bund was 1.44 per cent, on the US 10-year Treasury was 1.85 per cent and on the UK 10-year gilt was 1.9 per cent.

These are extraordinary numbers. They are particularly striking in the cases of the US and UK, which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

This combination of falling government bond rates with very rapid rises in public sector indebtedness reminds us, of course, of the experience of Japan since 1990.

At the end of 1990, when its “bubble economy” went pop, the Japanese government’s 10-year bond was yielding 6.7 per cent. As the economy subsequently declined, deflation took hold and fiscal deficits and public debt exploded. But yields on 10-year Japanese government bonds (JGBs) fell to close to 2 per cent in 1997 and then, with sizeable fluctuations, to troughs of 0.8 per cent in 1998, 0.4 per cent in 2003 and, recently, to 0.9 per cent. In short, the worse the Japanese government’s present and prospective debt position has become, the lower the interest rates on JGBs has also become.

Similarly, in July 2007, just before the beginning of the crisis and consequent explosion in fiscal deficits and debt, the US 10-year Treasury yielded 5.1 per cent. Now, almost five years later, the bonds of this alleged fiscal basket case yield less than 2 per cent. Again, in the UK, another supposed basket case, with huge fiscal deficits and a slipping austerity programme, yields have fallen from 5.5 per cent in July 2007 to below 2 per cent.

What does it mean?

Well, if the US and Europe are following Japan…and Japan is going nowhere…then three of the world’s large major areas are dead in the water.

And if that is the case, you can expect the entire world economy to “go Japan.”

That will mean lower commodity prices. A lower price of oil. A lower price of gold. Lower interest rates – yes, look for the yield on US 10-year notes to drop below 1%. Bad unemployment figures. Low…or negative growth…falling real estate prices.

…and probably a stock market crash.

Hold onto your hats!

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

Is the Australian Economy… Booming…or Busting?
2012-05-11 – Greg Canavan

The Art of Value Investing: How to Value a Business, Not a Stock
2012-05-10 – Greg Canavan

When Financial Markets Decouple From Reality
2012-05-09 – Dan Denning

Low Interest Rates Are A Dangerous Addiction!
2012-05-08 – Satyajit Das

The Bear Hunters and the Trigger Event for the Aussie Dollar
2012-05-07 – Dan Denning

Similar Posts:

• Japan and its Economy Did Not Have Secret to Everlasting Success
• Japanese Government Displays Generosity as Prices Fall in Japan
• Investing in Japan…
• Not So Big in Japan
• Recession for the Japanese Economy Once Again

More articles from The Daily Reckoning….

Zero Hedge

Just as we predicted moments ago, and as Dutch Dagblad warned overnight:

• ECB STOPS MONETARY POLICY OPERATIONS TO SOME GREEK BANKS AS RECAPITALISATION NOT IN PLACE -CENBANK SOURCES

The beginning of the end? EUR Collapses.

More articles from Zero Hedge….

Zero Hedge

ECB President Draghi just admitted that while the ECB Governing Council would like Greece to stay, they will not take any further extraordinary measures to save it and will do everything they can to preserve their ‘pristine’ balance sheet – which sounds a lot to us like – ‘we are not lending/printing/supporting your financial system anymore as you are far too big a risk (and are asset-stripped) and to be honest, it might be better if you just left – since we have encumbered all your assets anyway’.

Bloomberg: Draghi Signals ECB Won’t Keep Greece in Euro Area at Any Cost

European Central Bank President Mario Draghi indicated that while his “strong preference” is that Greece stays in the euro area, the bank won’t compromise on its principles to prevent an exit.

 

“The ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet,” Draghi said in a speech in Frankfurt today. Since the euro’s founding treaty does not envisage a member state leaving the monetary union, “this is not a matter for the Governing Council to decide,” Draghi said.

 

The comments are the closest Draghi has come to conceding Greece could leave the euro region. Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts, raising the specter of its exit.

 

“The Governing Council’s strong preference is that Greece will continue to stay in the euro area,” Draghi said.

As a reminder, when thinking of Europe, the shorthand rule is: assets. And specifically, the lack thereof. Why is the ECB scrambling to collateralize every imaginable piece of trash that European banks can procure at only some valuation it knows about? Simple – quality, encumbrance and scarcity. When one understands that the heart of Europe’s problem is the rapid “vaporization” of all money good assets, everything falls into place: from the ECB’s response, to Europe’s propensity for infinite rehypothecation, to the rapidly deteriorating financial system. It also explains why America will be increasingly on the hook, either via the Fed indirectly (via FX swaps <http://www.zerohedge.com/news/european-fx-swap-line-usage-ny-fed-rises-f…), or indirectly via the IMF (such as two days ago when US taxpayers for the first time funded the first bailout check <http://www.zerohedge.com/news/us-taxpayers-commence-bailing-out-ecb-gree… the ECB using Greece as an intermediary).

More articles from Zero Hedge….

Zero Hedge

In one of the most fascinating psychological shifts, there has been a massive shift in the perspective of the Greek electorate since the election two weeks ago. Almost as if the size of the actual votes for Syriza, the far-left anti-bailout party, gave citizens ‘permission’ to be angry and vote angry. The latest opinion polls, as per Credit Suisse, show the center-right New Democracy party crashing from 108 seats to only 57 as Tsipras and his Syriza colleagues soar from 52 seats to a hugely dominant 128 seats. Is it any wonder the market is pricing GGBs at record lows and ‘expecting’ a Greek exit from the Euro as imminent given the rhetoric this party has vociferously discussed. On the bright side, the extreme right Golden Dawn party is seen losing some of its share.

Greece: Election results…

Greece After Elections – current opinion polls…

UBS: Europe: Time to choose

Recent election outcomes in Europe herald the next, increasingly perilous stage of the Eurozone crisis. Voters are angry and are venting their anger at the ballot box. Their sources of frustration are clear—recession, surging unemployment, and the erosion of the previously sacrosanct welfare state. Increasingly, too, those wrenching dislocations are associated with ‘sinister’ external forces: ‘Germany’, ‘Brussels’, ‘The IMF’, ‘globalisation’, ‘creditors’ or ‘capitalism’. Yet the implications for Europe of voter discontent are much less obvious. The desire for change has not found a coherent expression of what changes Europeans want. Incumbents are being shown the door, but the patchwork of protest parties that replace them does not offer a viable alternative, much less a blueprint for dealing with Europe’s economic and financial crises. And expressions of frustration in debtor countries have their analogue in creditor countries as well. No one is happy with the status quo.

 

Still, how Europe’s political leaders address voters’ grievances will go a long way to determining the fate of the Eurozone and, quite possibly, the course of European history in the 21st century.

 

Matters in Greece deserve most attention. The fragmentation of Greek politics suggests that Greece may be economically, politically and socially incapable of restoring fiscal sustainability and a competitive economy by pursuing the orthodoxy demanded of it by the troika (the EU, ECB and IMF). At the very least, a substantial fraction of Greece’s debt will have to be further written down. But even then it is improbable that the social fabric of Greece can withstand, unaided, the years of declining living standards required to restore its fiscal health and competitiveness within the Eurozone.

 

That narrative is not new. But until now it has been considered taboo by the troika, which has insisted that its plans, properly implemented, would work. The flaws in that thinking have been laid bare by the outcome of the Greek elections.

 

What are the alternatives? Greece could decide to leave the Eurozone. That once-unspoken possibility was broached this weekend by ECB Governing Council member Honohan. Yet it is by no means clear that the re-introduction of a national currency would be Greece’s best option. Exit would entail leaving the EU, large-scale default on foreign obligations, a collapsing financial sector, surging inflation, and most probably little improvement in national competitiveness. And, as we pointed out in earlier research, history suggests the calamitous financial and economic consequences of an exit could threaten the institution of democracy itself.

 

A Greek exit could also put the rest of the Eurozone at considerable risk. Residents of other countries, such as Portugal, Spain, Italy or Ireland, might well conclude that the probability of leaving the Eurozone had increased, prompting them to move deposits out of their banks. The resulting bank runs could prove impossible to manage, resulting in a rapid and significant deterioration of financial and economic conditions across the Eurozone.

 

The other option is for Greece’s official creditors to acknowledge the impossibility of their policies and grant Greece substantial debt relief as well as support via fiscal transfers. Those policies would not change the inevitable decline in Greek living standards from today’s unsustainable levels. But they would cushion the blow, making it politically possible for Greece to remain a member of the Eurozone (and the EU). In this second scenario, Greece would essentially become a ward of the Eurozone. The price would undoubtedly be some loss of sovereignty and an economy in long-term decline accompanied by a shrinking population as many of Greece’s more ambitious and talented residents leave to seek better futures elsewhere.

 

So the choice facing Europe is stark. One path leads to fragmentation, accompanied by considerable risk of Eurozone financial and economic disarray. It threatens to end more than a half century of political integration in Western Europe, effectively changing the post-war course of European history.

 

The other path requires a degree of political change that is next-to-impossible to imagine. It demands acceptance of economic and political integration beyond Europe’s current grasp. In particular, Europe’s richer countries would have to acknowledge that European unity requires burden-sharing on a scale which hitherto has been politically unimaginable.

 

Faced with those choices, Europe’s politicians will undoubtedly prevaricate and deny. The troika will, with minor modifications, probably insist on ‘staying the course’. Yet it seems to us that ignoring clear voter demands for change might well be Europe’s worst choice.

More articles from Zero Hedge….

Zero Hedge

Now that we have entered the summer phase of 2012 it is time to recall how the summer of 2011 ran: in a nutshell – unsubstantiated rumor emerges usually one involving central banks being “generous”, sending stocks higher, rumor is then denied a few hours later, but the ramp persists. Sure enough, it has begun anew (because 2012 is 2011). Minutes ago we got the first such instance, where a European “think tank” came up with the brilliant conclusion that any minute now the ECB will be dragged back into the fray, announcing either LTRO 3 (because it will be different this time), or after 9 weeks of inactivity, the ECB’s SMP program will resume buying plunging peripheral bonds. Any factual basis to this? Of course not. But once the algos pick up the headline and create buying momentum for the sake of buying momentum, it is all uphill from there. So just as the market was on the verge of turning red for the day, the “think tank” appeared. Prepare for many more such short covering instances, because there really is nothing else left in the status quo arsenal.

What follows next? Why summits of course… And lots and lots of hope that the Eurocrats are in control of a sinking ship. As a reminder from David Einhorn:

More articles from Zero Hedge….

Zero Hedge

Thetrader.se

As frequent readers of The Trader know, we have been rather bearish on the markets over the past months. The formation we wrote about during the “topping” out phase, all broke down, and have now reached crucial support levels. We are not suggesting this is the all in bottom, but from a trading point of view, many European indices are reaching support levels and we are probably looking at an aggressive boune to the upside. Our long term view is still with a bearish bias, but in the short term time frame, we expect the support levels to hold. Full chartology here. 

Ft.com
Shareholders in Europe’s listed companies will be given a binding vote on pay while those who invest in banks will gain powers to set a cap on bonus levels, under plans being drawn up by senior EU officials. The initiative from Michel Barnier, the EU’s top financial services regulator, would hand bank investors the voting power to curb “morally indefensible” pay and limit the gap between the lowest and highest paid. Banks would also be forced to disclose their top 20-30 earners. http://www.ft.com/intl/cms/s/0/35bcd8f6-9ea8-11e1-9cc8-00144feabdc0.html#axzz1v0L4fkM1

Greece is heading for a fresh general election after its political parties failed to form a national unity government because of opposition from the anti-bailout Syriza coalition. President Karolos Papoulias, whochaired three failed meetings with political leaders in as many days, was unable to bridge differences between Syriza and the two pro-euro parties, the centre-right New Democracy and PanHellenic Socialist Movement (Pasok). A caretaker government will be chosen on Wednesday to oversee the election, expected on June 17. http://www.ft.com/intl/cms/s/0/5aa74018-9e88-11e1-a24e-00144feabdc0.html#axzz1v0L4fkM1

The leaders of France and Germany on Tuesday joined forces to urge Greece to reaffirm its commitment to membership of the eurozone, after François Hollande flew to Berlin for talks with Angela Merkel, German chancellor, within hours of being installed as French president. Both spelt out their concern that Greece should remain a full member of the common European currency, while promising to consider new measures to revive economic growth in the country. But they also agreed that Athens must carry out the austerity programme it has agreed with the European Union and the International Monetary Fund.http://www.ft.com/intl/cms/s/0/fa18437e-9ecc-11e1-9cc8-00144feabdc0.html#axzz1v0L4fkM1

Much more reading below.

The US Department of Justice has opened a preliminary investigation into the $2bn trading loss at JPMorgan Chase, adding to the pressure on Jamie Dimon, the bank’s chief executive, as he faced shareholders for the first time since the scandal broke. The DoJ review is preliminary, a person familiar with the matter said, and is being led by the Federal Bureau of Investigation’s New York field office. The Securities and Exchange Commission is already conducting a separate investigation into the bank’s losses. http://www.ft.com/intl/cms/s/0/39133792-9e9f-11e1-9cc8-00144feabdc0.html#axzz1v0L4fkM1

Up to 20 of Europe’s top banks will on Wednesday discuss a plan to foil the dominance of the much criticised big three credit agencies at a private meeting of finance directors in Frankfurt. Some of the banks want to change the culture of information disclosure to the likes of Standard & Poor’s, Moody’s and Fitch to level the playing field for potential new entrants. “They get privileged information,” said one person familiar with the plan. “In future, maybe they should only get a standard pack, putting everyone on an equal footing.” http://www.ft.com/intl/cms/s/0/fcb4e672-9eaf-11e1-9cc8-00144feabdc0.html?ftcamp=published_links%2Frss%2Fhome_uk%2Ffeed%2F%2Fproduct#axzz1v0L4fkM1

Washington and Moscow should agree to an 80 per cent cut in nuclear arsenals over the next decade to help encourage smaller atomic powers to engage in multilateral arms control negotiations, says a former senior US general. Amid signs that President Barack Obama wants to press ahead with a new round of arms talks with Russia, General James Cartwright, the now-retired former vice-chairman of the Joint Chiefs of Staff and former commander of Strategic Command, argues that the US should reduce its arsenal to 900 nuclear weapons by 2022. http://www.ft.com/intl/cms/s/0/2118a9f6-9e9a-11e1-a767-00144feabdc0.html#axzz1v0L4fkM1

Brazil’s cost of sugar production has risen to match that in parts of Europe, illustrating the declining competitiveness of Latin America’s largest economy even in one of its core agricultural industries, according to a key trader of the commodity. Once by far the lowest-cost producers, Brazilian sugar companies are suffering from a stronger currency, inefficient infrastructure and rising labour and overheads, leading traders to consider moving production to new markets, such as Africa, said Alberto Weisser, chief executive officer of Bunge, one of the world’s largest commodities traders.http://www.ft.com/intl/cms/s/0/7e4e89f4-9eab-11e1-a767-00144feabdc0.html#axzz1v0L4fkM1

Wsj.com
Asian markets fell Wednesday after Greece failed to form a coalition government and concerns grew over the health of its banks, while major Japanese lenders climbed on better-than-expected profit outlooks. Coalition talks in Greece were finally abandoned, ending more than a week of unsuccessful negotiations, with a new set of elections expected in June. The political gridlock is boosting anxiety, leading depositors to withdraw €700 million ($898 million) from local banks Monday. Wednesday, Australia’s S&P ASX 200 hit a two-month low in early trading, dropping 1.6% to 4193.0. Japan’s Nikkei was down 0.8% while South Korea’s Kospi fell 1%. In Hong Kong, the Hang Seng Index lost 1.6%, while the China Shanghai SE Composite slipped 0.3%.http://online.wsj.com/article/SB10001424052702304192704577406942602624210.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

The euro-zone economy narrowly escaped recession in the latest quarter thanks to a surprising rebound in Germany, which offset deepening downturns in Spain and Italy. Although the region avoided two straight quarterly drops in gross domestic product, the common benchmark for recession, the figures nonetheless reflect a deepening divide between Germany and the rest of the euro zone that complicates the bloc’s efforts to stem its debt crisis.  Without growing economies, Italy and Spain will be hard-pressed to significantly reduce their debt levels and regain the confidence of financial markets, analysts warn, while Germany and other stronger countries could still buckle if contagion from the Greek debt crisis engulfs http://online.wsj.com/article/SB10001424052702304192704577405371296091052.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Japanese core machinery orders fell for the first time in three months in March, declining 2.8% from February, but the leading indicator of capital investment is expected to resume its ascent in an overall sign of optimism for the economy.  The fall in orders reflected a deterioration from the previous month’s revised 2.8% gain and matched expectations by economists surveyed by Dow Jones Newswires. Helping to drag down the March figure was a sharp decline in orders from the chemical and chemical products sector after a big rise the month before, according to a government official briefing reporters.http://online.wsj.com/article/SB10001424052702304371504577407024190647512.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

The U.K. is being drained of crucial medicines by exporters who sell them elsewhere in Europe at higher prices, putting patients’ well-being at risk, lawmakers said Tuesday. The U.K. Parliament’s All-Party Pharmacy Group called on the coalition government to find effective ways to restrict this so-called parallel trade, which is legal under European Union law but has long been condemned by drug makers. In the past, drug makers have complained about cheap parallel imports flooding into the country. “The parallel export of medicines intended for the U.K. market is undermining the effective functioning of the U.K. medicines supply chain, and http://online.wsj.com/article/SB10001424052702304192704577405952201196534.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Italian bank earnings in the first quarter relied heavily on trading profits made possible by cheap European Central Bank loans, raising questions about how lenders in a recession-plagued economy can cope without reducing loans to Italian businesses and households. As Intesa Sanpaolo SpA, the country’s largest retail bank by branches, and two other banks reported their results, the country’s banking association lashed out at a decision by Moody’s Investors Service to downgrade the credit ratings of 26 banks, calling it irresponsible and unjustified as well as an “aggression” against Italian companies and families. Intesa reported net profit of €804 million http://online.wsj.com/article/SB10001424052702304371504577405914102094938.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Australia’s “Big Four” banks face increasing scrutiny from both the International Monetary Fund and ratings firms as Europe’s financial problems drive up offshore funding costs just as domestic growth stutters. IMF officials arrived in Sydney this week for meetings with the four—Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. The IMF is testing the strength of Australia’s banks as it makes similar assessments in Japan and Brazil.http://online.wsj.com/article/SB10001424052702304371504577406132720944606.html?mod=WSJASIA_hpp_LEFTTopWhatNews

China is considering setting up a new way for foreign pension funds to invest in its vast capital markets, according to people familiar with the matter, its latest effort to prop up the country’s listless stock market. Chinese authorities are mulling whether to create a new mechanism for foreign pension funds that would be outside the country’s main official investment program for international investors, according to people who have been briefed on the matter. Currently, foreign investors have limited access to Chinese markets except through programs such as the Qualified Foreign Institutional Investor, or QFII, program. http://online.wsj.com/article/SB10001424052702304192704577403830125687496.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Marketwatch.com
Six months ago, talk of Greece leaving the euro was seen as so unlikely nobody had to think seriously about. Now the ‘Grexit’ — as a Greek exit from the euro has been dubbed — is increasingly seen as a done deal. Citibank rates the chances as high as 75% that Greece will leave the single currency in the next 18 months. The British bookmaker William Hill regards it as such as done deal it is no longer taking bets. http://www.marketwatch.com/story/germany-will-blink-and-wont-let-greece-exit-euro-2012-05-16

Greece’s Ministry of Finance confirmed that it would repay approximately 435 million euros ($560 million)of bonds maturing Tuesday as part of debt owed to private creditors, including banks and a hedge fund, that opted not to participate in the European Union and International Monetary Fund-sponsored bailout of Greece’s debt. The Financial Times reported that Greece has sufficient funds to meet the payment following its receipt last week of €4.2 billion as part of its second bailout agreement. http://www.marketwatch.com/story/greece-confirms-repayment-of-435-million-of-bonds-2012-05-15

Facebook Inc. plans to increase the size of its initial public offering by 85 million shares to about 422 million, in a move that could raise the size of its upcoming offer to more than $15 billion, Reuters reported Tuesday, citing a source familiar with the matter. The social network website plans to sell the shares in an indicative range of $34 to $38 apiece, having increased it from an earlier range of $28 to $35 a share. At the mid-point of its current range, or $36, the company will raise $15.2 billion http://www.marketwatch.com/story/facebook-ups-ipo-size-by-85-million-shares-report-2012-05-15

Bloomberg.com
Australian consumer confidence hovered near the weakest level this year and wage growth slowed, underpinning bets the central bank will cut interest rates next month to the lowest level in more than two years. The sentiment index for May rose 0.8 percent to 95.3, a Westpac Banking Corp. (WBC) and Melbourne Institute survey taken May 7-11 of 1,200 consumers showed today in Sydney. The wage price index, which measures hourly pay rates excluding bonuses, advanced 0.9 percent last quarter from the previous three months, when it rose 1 percent, the statistics bureau said.http://www.bloomberg.com/news/2012-05-16/australia-s-weak-sentiment-wage-growth-spur-rate-bets-economy.html

Cnbc.com
The United States’ economy could shrink as much as 4 percentage points in the first half of 2013 if Congress fails to address the expiration of $600 billion worth of tax breaks and jobless benefits by the end of this year, according to Goldman Sachs. In a report issued on Tuesday, Goldman said in the worst-case scenario, the “fiscal cliff” facing the U.S. will shave almost 4 percentage points off gross domestic product (GDP) span#ExplainsLink a, in the first half of 2013. http://www.cnbc.com/id/47439851

Cnn.com
The White House released documents Tuesday that show President Barack Obama and the first family hold assets valued at between $2.6 million and $8.3 million. The disclosure forms, required by the Ethics in Government Act, show the president’s largest asset, by far, is U.S. debt in the form of Treasury notes and bills. In total, the president has between $1.6 million and $6.3 million invested in Treasury debt.http://money.cnn.com/2012/05/15/news/economy/obama-assets/index.htm?cnn=yes

Washingtonpost.com
China Gas Holdings Ltd., the utility that began life as an online retailer, has become the industry’s hottest property as China plans to double use of natural gas and replace coal in the biggest-polluting nation. The company, a seller of subsidized gas in canisters and pipelines to 151 cities, gained 38 percent since receiving a hostile bid in December, valuing it at HK$15.3 billion ($2 billion). Some of its biggest Chinese and Korean stockholders increased their stakes after the offer, pushing its market value up to HK$17 billion and creating a contest for control of a utility that last year was mired in an embezzlement scandal and a decade ago sold clothing on the web. http://washpost.bloomberg.com/story?docId=1376-M425FJ1A74E901-45JAMI3EFT32KLD4UH9USUDH5Q

BBC.co.uk
The UK’s trade deficit narrowed in March, driven in particular by stronger exports to the US, China and Russia, official figures have shown. The seasonally adjusted trade deficit in goods and services was £2.7bn, against £2.9bn the month before, the Office for National Statistics said. Car exports in March were worth £200m more than the previous month. The deficit on seasonally adjusted trade in goods was £8.6bn in March, unchanged on February. http://www.bbc.co.uk/news/business-18069660

Telegraph.co.uk
Foreign holders of €422bn of Greek debt were warned to brace themselves for “killer losses” as coalition talks in Athens collapsed, threatening Greece’s future in the eurozone.  The euro tumbled to a four-month low and European stock markets dropped as political leaders and economists warned that the next round of elections called in Athens amounted to a vote on Greek membership of the euro. “What’s at stake isn’t just the next Greek government,” said Guido Westerwelle, Germany’s foreign minister. “What’s at stake is the Greek people’s commitment to Europe and the euro.”http://www.telegraph.co.uk/finance/financialcrisis/9268573/Global-lenders-face-killer-losses-on-Greek-debt.html

The number of Britons claiming jobless benefits is expected to climb to levels not seen since the end of 2009, as the UK’s recession-hit economy continues to struggle through the crisis. Official figures released on Wednesday are expected to show that the number of people claiming job seekers allowance (JSA) grew to a 30-month high of 1.618m in April. Economists polled in a Bloomberg survey also expect the UK unemployment rate to climb to 8.4pc in April, from 8.3pc in March, when the unemployment rate fell by 0.1 percentage points. http://www.telegraph.co.uk/finance/jobs/9268730/Jobless-claims-set-to-climb-to-30-month-high.html

Smh.com.au
Gold fell to a 19-week low as the US dollar rose after Greek Pasok party leader Evangelos Venizelos said new elections will be held after attempts to form a government failed, curbing demand for the precious metal. Gold futures for June delivery slipped 0.2 per cent to settle at $US1,557.10 an ounce at 1:42 p.m. on the Comex in New York. Prices earlier dropped to $US1,546.80, the lowest since Dec. 30. Silver futures for July delivery dropped 1 per cent to close at $US28.08 an ounce on the Comex. The metal fell as low as $US27.895, the lowest since Dec. 30. http://www.smh.com.au/business/markets/gold-eases-as-greenback-draws-demand-20120516-1ypo1.html#ixzz1v0Qk8Df9

Wages grew at a faster pace than economists estimated in the first quarter, led by paychecks for miners. The wage price index, which measures hourly pay rates excluding bonuses, advanced 0.9 per cent from the previous three months, when it rose 1 per cent, the statistics bureau said today. That compares with forecasts for a 0.8 per cent gain. CMC chief market strategist Michael McCarthy said the data showed stronger demand in the labour market compared with the Reserve Bank of Australia’s reading in recent months. http://www.smh.com.au/business/wages-rise-more-than-expected-20120516-1yq1q.html#ixzz1v0QqUcSk

THE real estate sector is in the grips of a ”white-collar” crisis, with more than 200 workers made redundant across the industry as deals collapse and development projects dwindle. Job losses are tipped to swell in the near future as companies look to cut costs to reach earnings forecasts. The losses are not only among back-office staff, but finance directors and senior management. Even chief executives are being forced to take pay cuts and work under tighter incentive pay regimes. http://www.smh.com.au/business/jobs-losses-hit-real-estate-as-market-deteriorates-20120515-1yoxw.html#ixzz1v0QvQZg2

Straitstimes.com
India said on Tuesday it would cut purchases of Iranian oil by 11 per cent following pressure from the United States (US) to join a drive to isolate the Islamic republic over its disputed nuclear programme. Indian refiners expect to import 15.5 million metric tons of crude from Iran in the fiscal year that began April 1, the country’s junior oil minister told parliament in a written reply, down from 17.44 million tons last year. http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_799163.html

Xinhuanet.com
Singapore’s Minister of State for Trade and Industry Teo Ser Luck will be in China to help pave the way for Singapore’s small and medium enterprises (SMEs) to establish a stronger economic presence in the Central China region. He will meet Chinese officials and key business leaders to gain a deeper understanding of the overall development of Central China, local TV Channel NewsAsia reported on Tuesday. http://news.xinhuanet.com/english/business/2012-05/15/c_131589913.htm

Australia’s building products maker CSR Limited said on Wednesday that construction market in Australia was likely to remain weak for the foreseeable future. The company estimates that total housing starts in Australia will be around 140,000 houses for the year ended March 31, 2013, down from 148,300 in the previous year. “Excluding the global financial crisis and the introduction of the GST (goods and services tax), this represents the lowest level of housing activity in the past 15 years,” CSR said in a statement on Wednesday. http://news.xinhuanet.com/english/business/2012-05/16/c_131591295.htm

South Korea’s jobless rate fell to 3. 5 percent last month from a year earlier as job creation kept its solid growth trend in the service industry, a government report showed Wednesday. The unemployment rate stood at 3.5 percent in April, down 0.2 percentage point from the same month of last year, according to Statistics Korea. From a month before, the rate was down 0.2 percentage point. The jobless rate fell last month due mainly to persistent growth of monthly job creation in the service sector, but the figure declined at a relatively slow pace as later-than-planned civil service exam increased the number of people who prepares for job-finding. http://news.xinhuanet.com/english/business/2012-05/16/c_131591092.htm

Economictimes.com
If inflation has broken the back of the aam aadmi, the biggest contributor to the pain in the UPA’s term is food prices. Government data on wholesale price index ( WPI) shows that there has been a 63% increase in the price of all commodities between April 2004, a month before UPA took charge, and April 2012, the latest period for which data is available. But when it comes to food products, the index has more than doubled from 98 to 206.4. So, you are now spending at least twice the amount you spent in April 2004 just to meet your basic consumption needs.http://economictimes.indiatimes.com/news/economy/indicators/food-prices-double-in-upas-term-as-demand-outstrips-supply/articleshow/13160793.cms

As it battles a choppy currency market, the Reserve Bank of India (RBI) is taking a close look at bets that punters, corporates and banks take on dollar-rupee futures that are traded on stock exchanges.
The regulator will meet select banks this week to sense the activity in the futures market and its possible influence on the spot rupee which breached 54 on Tuesday before closing at 53.79 against the dollar, following RBI’s veiled intervention. According to currency dealers’ estimate, the central bank sold as much as $200-300 million on Tuesday, with the rupee touching a low of 54.15. Unlike the over-the-counter (OTC) foreign exchange market, where a corporate needs an underlier like export, import or foreign currency loan, traders can take futures positions that are pure bets. But while the futures market allows higher speculation, it is closely monitored and perceived as more transparent. http://economictimes.indiatimes.com/news/economy/finance/rbi-keeps-an-eye-on-currency-bets-intervenes-to-lift-rupee/articleshow/13158659.cms

Foreign direct investment (FDI) by Indian companies rose by nine-fold to over USD 72.04 billion over five years till 2009-10 from 7.21 billion during 2000-01 to 2004-05. “The increased outward FDI by Indian parties has been primarily driven by resource seeking or market seeking or technology seeking motives,” Minister of State for Finance Namo Narain Meena said in a reply to Rajya Sabha today.
The minister added that the increase in outward investment is a corporate strategy to promote the brand image and utilisation of raw materials available in the host country.http://economictimes.indiatimes.com/news/economy/finance/fdi-by-indian-cos-rise-9-fold-to-72-bn-in-5-yrs-till-2009-10/articleshow/13155098.cms

The rising balance of payments risks and the relentless downside pressure on the rupee since the March Budget announcement have led to a slew of measures from the Reserve Bank of India in recent days, along with greater intervention efforts. While the measures announced so far have had limited FX impact, further steps – such as the introduction of a special scheme to attract NRI deposits, similar toResurgent India Bonds (1998) or India Millennium Deposits (2000), and re-introduction of a special dollar-buying window for public-sector oil companies ( special market operations) – are reportedly under discussion. The key question is whether these would be enough to stem the rupee’s slide. This is not the first time that the rupee has come under pressure since the onset of the financial and economic crisis in 2008. India’s dependence on capital inflows to fund the current account deficit makes the rupee a natural target of speculative selling during periods of heightened global risk aversion.http://economictimes.indiatimes.com/news/economy/finance/rbi-has-done-its-bit-now-the-government-needs-to-wake-up/articleshow/13157194.cms

Yonhapnews.co.kr
South Korea’s jobless rate decelerated in April thanks mainly to more positions created in the service sector, a government report showed Wednesday. The jobless rate stood at 3.5 percent last month, down from 3.7 percent a year earlier, according to the report by Statistics Korea. Last month’s tally also represents a drop from a jobless rate of 3.7 percent reached in March. A total of 455,000 jobs were added to payrolls in April with 24.75 million people employed in the country overall, the report showed. The employment rate edged up 0.4 percentage points to 59.7 percent.http://english.yonhapnews.co.kr/business/2012/05/16/8/0502000000AEN20120516001600320F.HTML

Fin24.com
South Africa launched a multi-billion rand incentive programme on Tuesday aimed at boosting the competitiveness of its manufacturing sector, where a global economic downturn and a volatile exchange rate have hurt exports. Manufacturing contributes about 15% to gross domestic product but contracted during a recession in 2008/09 that slashed one million jobs, a fifth of them in the sector. The three-year Manufacturing Competitiveness Enhancement Programme (MCEP) will offer grants worth R5.bn to companies that replace obsolete equipment, retain jobs and comply with a black economic empowerment drive among other criteria. http://www.fin24.com/Economy/SA-launches-drive-to-boost-manufacturing-20120515

Tehrantimes.com
Nine petrochemical projects will be implemented in the current Iranian calendar year (began on March 20), which will boost the country’s output by 8 million tons. The projects will create over 3600 jobs, the Shana news agency reported. Iran has implemented 38 plans to boost its petrochemical output. China and countries in Western Europe are the main recipients of Iran’s petrochemical exports, followed by countries in Southeast Asia, the Middle East, the Indian Subcontinent, Africa, and Latin America http://www.tehrantimes.com/economy-and-business/97920-irans-petrochemical-output-projected-to-increase-by-8-million-tons-by-march-2013

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Flash off the rumor mill, unconfirmed — it appears the Greek banks were just cut off by the ECB.

If this is true then this is the latest “Gun up the nose” game by the Germans and ECB, and is almost-certain, in this political climate, to blow up their face (and quite possibly with shooting involved on the part of the Greeks too.)

This instantly hit the Euro and US stock market, which had been having a reasonably decent day.

If true and confirmed then Greece has been effectively orphaned.  This appears to be a facial attempt to stick a tourniquet on Greece’s neck, as with elections due next month cutting off Greek banks now will basically guarantee they all detonate.

Expect the incipient bank runs to resume en-masse within hours if not minutes.

Time to critical mass is now measured in days if not hours, and if acceleration occurs the weekend is the perfect time for Greek authorities to drop the hammer in the form of a bank holiday and capital controls as they will have no choice irrespective of the critical damage that will result from them doing so.

More as I’m able to learn and/or confirm it.

Update: Just repeated on CNBC – ECB stopping monetary policy operations with “some” Greek banks.  Hmmm…. what’s “some” gents?

More articles from the Market Ticker….