By Charles Hugh Smith, OFTWOMINDS
Risk has returned to global markets as participants grasp that the central banks’ quantitative easing and massive stimulus have failed to reset the clock to 2006.

Right now there is a forecast for every possible market move. The dollar is about to turn down and gold is about to race higher; or, gold is about to fall to $700/ounce. The global markets are about to embark on a crushing Wave 3 decline to new lows, or the lows of 2009 will not be revisited in our lifetime.

And so on. Nobody knows what’s going to happen. If it were easy to predict the market’s gyrations, we’d all be millionaires.

But rather than rely on dart throws, we can construct a context based on “first principles,” which in the Survival+ analysis consist of an integrated understanding of context, causal connections and feedback loops.

Thus we can start by stating that the governments’ collective efforts to reset the global economy to bubbly 2006 with quantitative easing and massive stimulus have failed, and the global markets are pausing now in recognition of this forward uncertainty.

Yes, profits have skyrocketed from the depths of 2008 as corporations have slashed headcount and spending, but you can’t squeeze endlessly rising profits by harvesting the low-hanging fruit of cost-cutting; that’s essentially a one-off that’s already been done globally. To grow profits from here, corporations need sales growth. Any growth dependent on government stimulus is suspect because at some point that stimulus will decline or cease. Hence the uncertainty and sudden appreciation of forward risks to the “endlessly rising profits from endlessly rising sales” story.

In response to the visible failure of their QE/loose money/unprecedented stimulus giveaways, the central banks and their governments have announced more of the same. That is the primary feedback loop: lacking any political courage to tackle the endemic rot at the core of the global economy–excesive borrowing, leverage, bubble-blowing, etc.–then the governments keep pulling the one lever available to them which does not cause any immediate political or financial pain: more QE and more stimulus.

The pain from relying on QE and stimulus–in effect, extricating ourselves from overindebtedness by piling on more public debt–will come later, and hence is politically acceptable.

For context, let’s consider a few charts. As always, please refresh your awareness that there is investment advice on the freely offered site, only the meanderings of an amateur observer (me) by reading the HUGE GIANT BIG FAT DISCLAIMER below.

Any metric derived from price is called a derivative. Thus in calculating the rate of change (ROC) of price we have a first derivative, and if we further calculate the percentage of the ROC then we have a second derivative of price.

This is known as quantititive analysis, a little-understood arm of technical analysis.

Frequent contributor Harun I. submitted several long term charts, one of total NYSE volumes and another of the percentage rate of change (PROC) of the Dow Jones Industrial Average (DJIA). These metrics provide a “beneath the surface” view of the market on a long-term scale which in effect smoothes out not just daily gyrations but weekly and monthly movements as well.

The PROC is a second derivative of the price. By plotting two second derivatives in slightly different time settings, we get a chart similar to MACD or stochastics, in which the two plotted lines crossing provide a signal.

Here are Harun’s comments on the charts.

Below you will find a study of the historical PROC (percent) of the DJIA (yearly). The light blue line is a 4 period SMA of a 4 period ROC. The light green line is a 10 period SMA of a 10 period ROC. The big picture here is that, while the 4 period ROC bottoms first the next cycle will not begin until the 10 period ROC bottoms, which looks like at least another decade off.(emphasis added, CHS)

This assumes that the 100+ year bull market will continue. Note that both ROC’s have spent very little time in negative territory. However, this pattern will not continue indefinitely. At some point there will be a crossover and a sustained period below the zero line. It is likely that these times will be extremely difficult.

If history is any guide, I think this is a realistic view of what may lie ahead. Remember that it is a moving average of the ROC’s so there is a lag. But as you can see the the 10-year SMA of the the 10-year ROC has been fairly accurate.

The thing we should be concerned with most is an upswing at the end of this down-cycle that produces a new nominal high but a lower momentum peak creating a divergence. At this level of trend, such a divergence would be a very grave warning. If the game is not over yet, such an occurrence would probably mark a final blowoff and then things get really interesting for the next century or more.

Some might find this hyperbolic. The very fact that very few think it can happen creates the vulnerability. The millennial cycle is not going to abate just because we say it isn’t so.

Please excuse the low resolution of this chart. I reformatted it to fit the screen.

Interestingly, the notion that the market is a full decade away from a true bottom aligns with two other contexts: the Bear market of the 1970s lasted from 1966 to 1982, approximately 16 years in which “buy and hold” investors lost 2/3 of the value of their stock holdings even as nominal prices hovered around DJIA 1,000. (Inflation destroyed 2/3 of the purchasing power of their investments.)

This projection to a market bottom in 2020-2022 also align with the generational forecast made by the authors of The Fourth Turning, which posits a 4-generation (80-year) cycle of major crises (and resolutions) in U.S. history: 1781 (birth of the nation), 1861 (Civil War), 1941 (Depression and world war) and hence 2021 (collapse of the Savior State and Plutocracy status quo, Peak Oil, etc.)

The Wall Street Truism has it that “volume is the weapon of the Bull.” If so, this chart reveals that the Bull has been in retreat since 2006, and that the recent global rally is entirely lacking in volume and thus conviction.

Since many observers are obsessing over the direction of gold and its see-saw playmate, the U.S. dollar, I include two shorter-term charts. The UUP is a proxy for the USD and GLD is a proxy for gold. I have constructed the most basic technical system: price and the 50-day moving average.

When price moves above the 50-day MA, that is a bullish trend; when it moves below, that is a bearish trend.

The chart of UUP certainly suggests the downtrend in the dollar has reversed. The chart of GLD is more ambiguous–it could be “resting”/basing for its next leg up, or it could be topping out and about to roll over into a downtrend. Regardless, it is unambiguously bearish to be below the 50-day MA. What is also noteworthy is the extreme volatility in the price of gold. Guessing its next move is not for the faint of heart.

No one knows what the market’s next move will be–there are guesses for up, down and sideways. But a glance at these charts should make us skeptical of forecasts of a new long-term Bull market in equities.

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More articles from Charles Hugh Smith….

The Daily Reckoning

Last August, it was reported that deflation in Japan had reached a new record. Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press’s attention. Prices had been going down for 10 months in a row. Then, last week an update:

“Japan Deflation Hits a Record Pace,” reported the BBC. Prices in Japan were falling faster than they ever had since they began keeping track in 1970. The tide has gone out so far; beachcombers can’t remember when there was so much beach to comb. But what follows is not offered as a prediction, but only out of curiosity. We don’t know how this will turn out. Could it end in hyperinflation? Maybe.

Prices fall in Japan. The yen rises. And the government uses every trick in the book – and some as yet unpublished – to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighborhood wants a bridge or a community center, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from its taxpayers, it returns more than 2 yen in public spending.

Investors must think the trend is eternal. Or perhaps they don’t think at all. They lend money to the world’s most spendthrift major government for 10 years in exchange for a yield of only 1.310%.

The drama of this story is an old and familiar one. Deeply flawed heroes at the world’s central banks and treasury departments think they can do a better job of guiding the economy than the markets themselves. It is they who set the price for short-term money, for example, not willing borrowers and lenders. They are the ones who fight the correction every inch of the way. They are also the ones you don’t want to stand behind; every shot they take backfires.

In France, the savings rate, as percentage of revenue, has gone up for the last 16 months, to 17% – the highest rate in 27 years. This comes as the Sarkozy government follows the lead of the US and Japan, with a deficit of about 8%…compared to 10% in the US and even higher in Japan. This is not the first time this has happened in France. The previous savings rate peak came when the Mitterrand government was trying to stimulate the economy out of the slump of the early ’80s. The more the government tries to stimulate spending by running deficits, the more people try to protect themselves by saving.

While the drama continues throughout the world, the story is most advanced in Japan. Which is to say, the central bankers have gotten themselves into deeper trouble. Martin Wolf of The Financial Times and Richard Koo of Nomura Securities applaud their performance. But by trying to suppress a correction in the private sector, Japan’s central bankers have stretched out a slump over two decades and set up the nation for a bigger crisis in the public sector. And there is nothing they can do about it. Their fiscal stimulus no longer stimulates. Their monetary inflation no longer inflates. And every quack cure they offer brings the patient closer to the grave. You might think they’d give up. Instead, they increase the dosage. Fiscal stimulus hits a new record, right along with deflation.

But it’s the final act that interests us. With public debt at nearly 200% of GDP and 700% of tax revenues, we shouldn’t have to wait much longer. Given the track record, we have to assume that it will be the exact opposite of what central bankers expect. They are aiming for the whimper of newborn growth. More likely, they will get the bang of hyperinflation.

The Japanese were recently among the champion savers of the world. Directly or indirectly, these savings financed the government’s stimulus efforts. Banks, pension plans, insurance companies – all bought government bonds as a safe way to store wealth. The government then drew upon this stored up wealth to finance its bridges to nowhere and its other boondoggles. The result is a misunderstanding on its way to becoming a disaster. The typical Japanese person looks forward to his retirement with a mountain of savings in his backyard. He believes he still has his cake. The government, however, has eaten it.

Higher savings rates typically produce lower prices, for a while. Currencies rise. Even in Weimar Germany, there was a period in 1920 when the mark rose. Falling prices would seem to be proof that the money is still there. But the real money is gone. Then, suddenly, people notice that their savings are nothing but paper. The tide turns. Confidence disappears. The big wave of accumulated savings hits the marketplace like a tsunami. Desperate people try to get rid of paper. They want something solid to hold onto. Long-term bonds, the most vulnerable to inflation, are exchanged for cash. Cash and government securities flood the market. Prices soar. Middle-class savers drown. Meek debtors, relieved of their burdens in the flood, inherit the world. So do the arrogant debtors in the government. And the shrewd speculators. And then central bankers return to their desks and come up with a new plan.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Japan and its Economy Did Not Have Secret to Everlasting Success
• Zero Percent Interest Rate Didn’t Work for the Japanese
• Typical Japanese Investor Would End Up With Less Than What He Started With
• Japan “Wasted Trillions” on Stimulus Programs
• Japan: A Morality Tale of Banks and Government Refusing to Deal With Debt?

More articles from The Daily Reckoning….

The Daily Reckoning

The bust in the economy ain’t so bad either. Credit default swap spreads are widening. Bond yields are rising…especially in Europe.

The service sector in the US is performing below expectations.

Oh…and listen to this:

“More weigh walking away from mortgages,” says The New York Times. As anticipated, people are warming up to the idea of stiffing their mortgage lenders. Why not? Millions of houses are underwater; let the mortgage company deal with them.

Delinquent mortgage payments have risen to over 10%.

The Baltic Dry Index is dropping, too.

And Dr. Copper is ’set for catastrophe,’ says a copper expert.

Copper, you’ll recall, is the metal with a Ph.D. in economics. It’s the metal that you find in home wiring, refrigerators, offices, automobiles, cell phones – just about everything. So, when the price of copper goes down it means something. Usually, it means business is slowing down.

Copper has fallen more than 10% in 2010. It will probably go down a lot further. Chinese companies stockpiled the metal last year, causing its price to double. Now, they’ve got more than enough.

And if the world economy is still slowing down, which is what the Baltic Dry Index is probably telling us, you can expect the price of copper to collapse.

Stay tuned.

Washington is waiting for a big storm. They’ve been talking about it on the radio all week long. More than a foot of snow is expected.

School children look forward to a holiday…not to mention sledding and snowball battles. Adults are hoping for a little time off too…but dreading the drive home from work.

Here at The Daily Reckoning, we can’t help ourselves; we look at it like the onset of a bear market…or a depression. It’s going to be rough. They’ll be some wrecks along the highway. Some people will get stuck. Some will get hit by snowballs or slip on the sidewalk.

See, it’s going to be fun!

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Depending on the Landlord
• Profiting From the Copper Indecision
• Bailout Rejected by the House
• Global Warming Temperatures Falling for the Last 10 Years
• We Don’t Serve Hamburgers

More articles from The Daily Reckoning….

The Daily Reckoning

Here’s a cartoon sent by one of our dear readers. We have readers all over the world. But Pamela must be one of the most remote. She lives on a tiny island in the middle of the Pacific. We’ve seen the photos. It looks stunningly beautiful. A South Pacific paradise.

It’s a little surprising that someone who lives in such a paradise setting would trouble herself worrying reading The Daily Reckoning and worrying about macroeconomics. But the world of money is fascinating. And probably a lot more entertaining if you’re not in the middle of it.

Yesterday, investors must have felt like they’d rather be somewhere else. The Dow registered a loss of 268 points. Gold took a $49 beating.

We won’t know for sure until tomorrow. If tomorrow is another bad day – as it probably will be – then it will be clear that the last stage of the bear market has arrived. This should be the final drop…when stocks should go down to their ultimate bear market low.

Where will that be? We don’t know. Maybe Dow 5,000. Maybe lower. One way or another every major bull market needs a major bear market. The two go together like yin and yang, Abbott and Costello, or gin and tonic. Take one out of the picture and the other one no longer makes any sense.

We’ve had our bull market. It took the Dow from under 1,000 to over 14,000 in the space of 26 years. We’ve had a bubble too. The party was a lot of fun for everyone.

Now, it’s time to clean up. It’s time for the bust in the economy…and the bear market in stocks. That’s just the way it works. Sorry.

If this bear market is going to correct the entire bull market from 1982 onward, it has to take prices back to the levels they were when it began. Back then, you could buy the Dow (from memory) for about 5 times earnings. Now, (we’re not doing any research here…just broadly remembering the figures…) it’s at about 20 times earnings. If those numbers are correct, you’d expect the final low to come in about a quarter of where it is now…or about 2,500.

Another way to look at it is to ask ourselves what the Dow of ‘82 would be today, adjusted for consumer price inflation. We don’t know the answer to that either…but we’ll guess that it would be about 4 times what it was then – or about 4,000.

So, now we have a range… We know roughly where this market could be headed – if it is the yang we’re expecting. And if that’s where it is going, a South Pacific island paradise would be a good place from which to watch it get there.

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Your Second Chance to Escape the Bear Market
• Bear Market Bounce a Sure Thing
• Deception of the Bull and the Bear Markets
• All the World’s Stock Exchanges are Now Officially in Bear Markets
• It Wouldn’t be a Real Bear Market Rally if it Didn’t Test Your Confidence in Your Position

More articles from The Daily Reckoning….

Zero Hedge

With Greece getting all the imminent default attention, have we forgotten California? Jim Grant chimes in.

• Greece: 3% of Eurozone GDP
• California: 13% of USA GDP

Rate Curves:

Greece

• 3 year: 3.45%
• 30 year: 6.26%
• 5 Year CDS: 400+

California

• 3 year: 1.89%
• 30 year: 5.59%
• 5 Year CDS: 333

Grant points out Trichet’s Jan 14 commentary: “belonging to the euro area, you have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency.” Further: “this should be borne in mind, compared with the share of CALIFORNIA, FOR INSTANCE, in the overall GDP of the USA.”

Grants reviews CA’s Baa1/A- rating as the worst in the US, the S&P downgrade and the structural not cyclical problem of California.

• State Revenue up 22% in decade debt service cost +143%.
• Interest expense to consume 10% of revenues by 2013.

Howerver Grant’s notes that Californida’s debt / gdp ratio of “perhaps 25% is dwarfed by Greece 113%”

Yet as Zero Hedge has pointed out how much does a standalone credit metric such as a state’s GDP truly matter? We know CA’s trust fund when it comes to funding unemployment benefits is now empty and every month sees greater borrowings from the Treasury.

Case in point, we present State Unemployment Benefits as seen from the Treasury’s (outflow) perspective ($MM):

Jan-08    3966
Feb-08    3572
Mar-08    3673
Apr-08    3664
May-08    3123
Jun-08    3053
Jul-08    3885
Aug-08    4650
Sep-08    5146
Oct-08    4951
Nov-08    4341
Dec-08    7384
Jan-09    8513
Feb-09    8808
Mar-09    10607
Apr-09    10883
May-09    9998
Jun-09    11982
Jul-09    11979
Aug-09    11454
Sep-09    12102
Oct-09    10749
Nov-09    10869
Dec-09    14065

We expect once the rumored cabal of Goldman and Soros finish their toying with Greece, they will look into the US. Then again, for fears of retribution by the President once it becomes known that a “US bank” (or hedge fund) is actively pushing CA CDS wider, this may be one of the most mispriced securities currently available. To those not fearing the wreath of the UAW, it may be worth the gamble on the short risk side.

More articles from Zero Hedge….

Zero Hedge

The $24 Billion 3 Month Bill closed at 0.11% high rate (just 7.85% allotted at high). Bid To Cover was 4.46 versus last weeks 4.06, and 3.96 over the past year. The demand for Bills surges as does direct bidders take down which was a whopping 17.2% of the total $22.7 billion. Indirects came in surprisingly weak at 28.9%. The balance is Primary Dealers.

The $27 Billion 6 Month Bill closed at 0.17% high rate, with 43% allotted. Bid To Cover was 3.83 versus last week’s 3.88 and an average of 3.8 over the past year. And as in the 3 Month, the Direct take down was a whopping 18.2%, with Indirects at 39.2% and the balance for PDs.

Tomorrow we will see another 1 Month Bill auctioned off.

More articles from Zero Hedge….

Zero Hedge

While nothing new to constant Zero Hedge readers, Rosenberg’s recap in a few simple paragraphs of what is happening in the European periphery, the EMU, and with sovereign balance sheets is a must read for all recent entrants into fundamental sovereign default analysis.

First the governments bail out the banks who were (are) basically insolvent. Then these governments, especially in Europe, see their balance sheets explode and face escalating concerns over sovereign default. The IMF now predicts that the government debt-to-GDP ratio in the G20 nations will explode to 118% by 2014 from pre-crisis levels of around 80%.

Now, the ball is put back onto the banks because many have exposure to the areas of Europe that are facing substantial fiscal problems right now. According to the Wall Street Journal, U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. Contagion risks are back. Stay defensive and expect to see heightened volatility.

In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

Whatever bad assets have been resolved have almost entirely been placed on the books of governments and central banks, which now have their own particular set of risks, as we have witnessed very recently in places like Dubai, Mexico, and Greece, not to mention at the state and local government level in the United States. We simply have not seen a reduction in the percentage of properties with mortgages that are “under water”, hence the FDIC has identified 7% of banking sector assets ($850 billion) that are in “trouble”, so how can it possibly be that the financial system is anywhere close to some stable equilibrium?

When accurately measured, including the shadow inventory from bank foreclosures, there is still nearly two year’s worth of unsold housing inventory in the United States, and commercial vacancy rates are poised to reach unprecedented highs, and this excess supply is bound to unleash another round of price deflation and debt defaults this year. The balance sheets of governments are rapidly in decline across a broad continuum, and it is particularly questionable as to whether Europe is in sound enough financial shape to weather another banking-related storm.

The global economy is set to cool off. Not only is China and India warding off inflation with credit tightening measures but most of the fiscal and monetary stimulus thrust in the U.S.A. and Canada is behind us as well. And, the fiscal tourniquet is about to be applied in many parts of Europe, especially the PIIGS (referring to Portugal, Ireland, Italy, Greece and Spain — these countries account for a nontrivial 37% of Eurozone GDP). Greece’s GDP has already contracted by 3.0% YoY, as of Q4, and is expected to contract 1.1% in 2010 and 0.3% in 2011 as a 13% deficit-to-GDP ratio is sliced from 13% to 3% (assuming this fiscal goal can be achieved politically). Portugal has a 9.2% deficit-to-GDP ratio that is in need of repair and Spain has a deficit ratio that is even worse, at 11.4% of GDP.

The bottom line is that even if the fiscally-challenged countries of Europe do not end up defaulting, or leaving the Union, the reality is that they will have to take draconian measures to meet their financial obligations. Devaluation was the answer in the past in Greece but it cannot rely on that quick fix this time around without leaving EMU and if it did, then that could make it even harder to service its Euro-denominated debts — at least not without a restructuring. And, if Greece did attempt at a debt restructuring, rest assured that Italy, Spain, Portugal and Ireland would be next — we are talking about a combined $2 trillion of potential sovereign debt restructuring that would more than triple the $600 billion direct cost of the Lehman bankruptcy.

This poses a hurdle over global growth prospects at a time when Asia will feel the pinch from the credit-tightening moves in China and India. And heightened risk premia will also exert a dampening global dynamic of their own in terms of economic decision-making by businesses and households alike. The intense sovereign risk concerns are not limited to Europe either. In the U.S.A. we saw CDS spreads widen out to their highest levels since the equity markets were coming off their lows last April. According to the FT, the Markit iTrax SivX [sic] index of CDS on 15 western European sovereign credits rose above 100bps on Friday for the first time ever.

More articles from Zero Hedge….

Zero Hedge

As always, a much more rational credit market is not following the sudden intraday exuberance of stocks, which are trading in lock step with the DXY and specifically the EUR-JPY pair: every correlation engine is primed to copy step for step how the Euro and Yen trade in the stock market. With all indices green for the day, the culprit is solely the DXY which has taken a downleg over the past 30 minutes for no particular reason. In the meantime IG, HY, SovX and, yes the STUPIDs, have all put their fireman’s hat on: IG is 2.5 wider, HY is 15 wider, SovX is 6 wider to 112, the UK passed a hundred and the prevalent STUPIDity is surging to 242 from 235, another recent record.

More articles from Zero Hedge….

Zero Hedge

In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we “wonder” just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS “attacks” on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds’ anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure.

We quote from the Quatremer blog, both in original and in a hastily Google translated version:

Selon des informations fiables que j’ai obtenu vendredi, émanant à la fois d’autorités de marché et de banques, une grande banque d’investissement américaine (qui a bénéficié du plan de sauvetage des banques US) et deux très importants hedge funds seraient derrière les attaques contre la Grèce, le Portugal et l’Espagne. Leur but ? Gagner un maximum d’argent en créant une panique qui leur permet d’exiger de la Grèce des taux d’intérêt de plus en plus élevés tout en spéculant sur le marché des CDS, un marché non régulé et totalement opaque, afin là aussi de les vendre plus cher qu’ils ne les ont achetés. Pourquoi ne pas citer les noms ? Tout simplement parce qu’il s’agit d’un faisceau de présomptions qu’un tribunal risque de juger insuffisant en cas de procès. Et comme le dit un opérateur de marché : « on ne joue pas avec ces gens là ».

Here is the English:

According
to reliable information that I received Friday from both authorities
and market banks, a large U.S. investment bank (which has benefited
from the bailout of U.S. banks) and two very large hedge funds would behind the attacks against Greece, Portugal and Spain. Their goal? Earn
much money by creating a panic that allows them to demand of Greece
interest rates ever higher while speculating on the CDS market, a
market completely unregulated and opaque, so there also sell more than they have purchased. Why not mention the names? Simply because he is a bundle of presumptions that a court may not be sufficient in a court case. And in the words of one market operator: “we do not play with these people.”

What is the basis for this “destructive” behavior? Simple- the inability to create a synthetic basis by being allocated far too little in the most recent bond issuance to hedge existing shorts. Think of it as a PIPE investor who shorts stock of a company he/she knows will give out stock at a discount to market, a practice since banned by the SEC but being done rampantly to this very day.

According
to my information, the two hedge funds that hold most of the Greek
market of CDS were furious at having received only 2% of the last Greek
loan (launched January 25, for a period of 5 years, it has collected 25 billion request for 8 billion last survey). As
they gained a lot of CDS, they needed to secure their gains (in cases
of falling rates of those CDS), put in front of the paper, that is to
say government bonds (so – loses a CDS, and we won on the loan and vice versa). Because they have a big problem for now, they can not sell the CDS if they would themselves fall classes. To
show their strike force, and further push up CDS, they attack on Greece
in creating panic, “the CDS, is a bottomless pit with 200 million
dollars, you play as if you had a billion dollars, “said one market analyst. Same
game for the U.S. investment bank, which hopes eventually to lend money
directly to Greece became unable to borrow on the markets. Once the country to its knees, it will see the government to offer him a loan at a rate obviously prohibitive …

And thanks to near-infinite leverage courtesy of nominal margin requirements on CDS holdings, the spillover has started to impact the FX market as well. Certiainly, if this is indeed a premediated attack, this could have been coupled with the “two funds” pushing for a lower euro, in an attempt to start the dollar carry unwind, further depressing euro levels, and creating further panic on Greek (and other PIIGS) CDS.

To
increase the panic, these hedge funds and U.S. investment bank began to
sell arms to turn the euro, followed by investors stunned. If the euro lower, does not mean that the eurozone will burst? What
justifies the required interest rates still highest in Greece, Portugal
and Spain … Yesterday, the euro has almost reached $ 1.36 in less
than two weeks, he lost dime, fifteen cents for two months. A
slide that corresponds to nothing, but that side effect, provides air
to the EU economy: over the euro lower, more products made in eurozone
become attractive. “A very good news in this mess,” quipped one analyst.

Who really wins from all this? Germany, who rumors have as saying that they are close to letting Greece go. As Zero Hedge has long speculated, a Greek failure, and a collapse in the EMU, while a significant near-term negative, will be, paradoxically, the event that saves Germany, France, Benelux, and the core of the soon to be former European Union. And yet, it is the alternative that seems to be on the frontburner for now:

It is also necessary that the Union expresses its total solidarity with the countries attacked. This is no time to recall the Maastricht Treaty, which prohibits it comes to the aid of a State member of the eurozone. If investors have the absolute guarantee that Greece will not sink, the dust settles. Germany,
until very reluctant to say that solidarity begins to understand that
the euro is now in danger: Thursday, Angela Merkel, German chancellor,
said in Paris that he had put up “a Government economic Twenty-seven. ” Berlin and Paris will therefore joint proposals at the summit on February 11. Finally,
we must go further in regulating Michel Barnier, the future European
Commissioner for Internal Market, confirmed to me yesterday that he
intended to propose a directive on the derivatives markets (including
CDS) which 80% is out of control while they represent more than 600 000 billion dollars worldwide. We must reverse this proportion.

When in doubt, blame the CDS traders.

h/t MG

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By Karl Denninger, The Market Ticker

That sounds dramatic – even drastic.

But is it?

There’s an argument raised over at “Washington’s Blog” that the real cause of all the financial problems -the global mess – is the WTO:

On March 1, 1999, countries accounting for more than 90 per cent of the global financial services market signed onto the World Trade Organization’s Financial Services Agreement (FSA). By signing the FSA, they committed to deregulate their financial markets.

But let’s be straight here.

“Deregulate” does not give license to fraud, even though there are some who would argue otherwise. 

The root issue with all of these “financial products” is that they are unmarketable unless someone lies.

You can’t sell a “structured product” comprised of liar loans if you’re honest about the “qualifications” (or rather, the lack thereof) of the borrowers at anything approaching a profitable rate of return.  Nobody will buy.

With honest ratings a CDS + Bond will always yield less than the risk-free rate of return.  This is because nobody works for free, and the more complex something is, the more it costs.

These are facts, not suppositions.

So WTO or no WTO, without willful blindness toward fraudulent practices the market will take care of the scoundrels.  Without the ability to lie – that is, if we simply lock up all those who misrepresent credit quality the liar loan + CDS will yield less than a Treasury of equivalent duration, and as a consequence the purveyor of those liar loans will have to price them at a rate that accurately reflects their risk of default (plus his profit.)

This instantly cuts the BS.

Yes, we could simply tell the WTO to get stuffed, and I can make a cogent argument that we should – for a number of reasons, not the least of which is that “free trade” doesn’t make allowance for those working under literal (or near-literal) slave conditions, such as Chinese and Vietnamese workers who are working under effective conditions of indentured servitude and lack the human and labor rights protections we enjoy in civilized nations.  “Competing” with a labor source that effectively has a gun in its mouth is not only impossible, the concept is idiotic on its face.

But that’s irrelevant to the argument that “we were forced by treaty to deregulate.” Among other things deregulation does not mean legalizing fraud and never has. 

Second, the WTO’s “FSA” appears to have never been sent to Congress and thus has no force of law as a treaty.  It is a mere “suggestion” – and one that Congress has every right to ignore, as do our regulators, as under The Constitution all Treaties must be ratified by The Senate – without that consent any purported “international agreement” is of no legal force whatsoever.  Treaties cannot be amended once voted upon without being subjected to a second vote (and possible refusal); the FSA was an amendment to an existing treaty, and thus without being considered by The Senate is a nullity in terms of actual United States obligations.

The “globalists” (and scaremongers who believe we have sold out to them) would have you believe that we have somehow obligated ourselves.  This is false.  We have done no such thing, and whether our government has complied with these wishes (some would say demands) out of a desire to appease those who have bribed legislators with million in campaign contributions the fact remains that when it comes to legal force of law in this regard there is none.

This, by the way, includes the WTO, which has a nice list including the US on the web page referenced above.  That too is, as far as I can determine, a lie as the FSA was never put to Senate Ratification, and without that having occurred it is legally void, whether the WTO likes it or not.

(PS: For those who wish to argue that the Republicans are to blame for all of the world’s ills, you should look into who was President when the negotiations took place on the predicate parts of the treaty that was ratified prior to the FSA “add-on” that has no force of law.  Hint: He tried to hide what he had spilled on a particular blue dress.)

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