COMMENTARY for all articles by Gordon T Long

READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

POSTS:  FRIDAY 08-13-10

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

IRAN

U.S. Saudi Sale, With Helicopters, Said to Approach $60 Billion  BL

ISRAEL

KOREA 

Chinese Admiral Says U.S., South Korea Drills `Fresh Provocation' to China  BL

Eurozone industrial output falls in June  FT

The Eurozone Crisis Returns  BI

Europe's PIIGS economies, the soft underbelly of the Eurozone, are back in the spotlight.  Fresh concerns have emerged in the news regarding Spain, Greece, and Ireland's finances. Yet if the wave of news stories isn't enough to convince you that something is up, then check out the latest move for credit default swaps.  As shown below, credit default swap spreads are rising again for all of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).  We're heading back towards past peaks, the Eurozone crisis is back:

GREECE

SPAIN / PORTUGAL

FRANCE

GERMANY

Germany's GDP surges 2.2% in quarter   FT

Buoyant exports power fastest growth in decades

German Economy Expands at Fastest Pace Since Reunification  BL

ThyssenKrupp raises forecasts after strong quarter  FT

ITALY

UK

Repossession threat as Government reduces home owner support Telegraph
Dealing with bad debts Telegraph

It isn't just the Duchess of York who is struggling with debt

IRELAND

Irish Banks Rattle Nerves Again  WSJ

JAPAN

When Japan's debt bubble bursts – watch out CSM

Japan Hints at Yen Intervention WSJ

CHINA

China Has Enough Empty Apartments To House 200 Million People  BI

USA

Are We Headed for a Lost Economic Decade? WSJ

Goldman Sachs Sees 25% to 30% Odds of U.S. Double-Dip With Growth Slowing  BL

Web of shadow banking must be unravelled  FT

Japanese style Deflation Spreads to Global Bond markets Dorsch
The Pause That Doesn't Refresh Comstock

STATE & LOCAL GOVERNMENT

Look How Much Federal Spending Is Funneled Through The States  BI

Bloomberg (via Barry Ritholtz) had an interesting chart of the day today detailing the amount of grants the U.S. government gives to states, compared the the amount of federal government spending overall.  We'd say the rise over the past 25 years was shocking, but what the state spending is made up of is Medicaid and education spending, both of which have seen dramatic inflation during that time period.  From Bloomberg (via Barry Ritholtz):

CENTRAL & EASTERN EUROPE

DODD FRANK ACT

The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 2)

Assumptions Guiding the Act The Act is guided by several broad concepts: Wall Street must be strictly regulated to prevent systemic risk and to promote financial stability. Large interconnected international financial companies are inherently risky. Excessive leverage leads to systemic risk. A lack of transactional transparency impeded necessary regulatory control. Investors lacked information to properly understand the nature of complex risky securities. Regulators are capable of carrying out the intent of the Act. Specific blame for the financial collapse is assigned as follows: Lenders, investment bankers, credit-rating firms, mortgage brokers and others had ample incentive to take risks, often with other people’s money. That led to a bubble in credit: too much borrowing. The explosion of trading in the shadowy worlds of derivatives and hedge funds hid risks, and perhaps even created new ones, without the transparency essential to well-functioning markets. Big financial firms lacked sufficient capital cushions to withstand a shock, and assets they could sell quickly to raise needed cash. … For the inevitable day when another big financial firm gets into trouble, the bill attempts to impose order and punishment—but gives authorities the power to use taxpayer money if they deem it necessary. … Description of the Act What is obvious from a review of the Act is that the powers granted are very broad, almost unlimited, ill-defined, and yet to be written. The following descriptions of the Act are intended to give you an idea as to the vast scope of the Act and the powers granted. I have picked out some of the more important powers, but the Act is much more invasive and controlling than what I am describing here. I have gone into some detail because I believe that most people don’t understand how pervasive the Act is. Please bear with me here; it will be eye-opening. Here is a major law firm’s (Gibson Dunn) overview of the Act: [The Act] … seeks to increase financial marketplace transparency and stability by establishing a Financial Stability Oversight Council (the “Council”) focused on identifying and monitoring systemic risks posed by financial firms and by financial activities and practices. It establishes a new regulatory and supervisory framework for “large, interconnected” banking organizations and certain nonbank financial companies. By a two-thirds vote, the Council can determine which U.S. and foreign nonbank financial companies that are predominantly engaged in financial activities (together “NBFCs”) are to be subject to enhanced supervision (“Supervised NBFCs”) by the [Fed], based on the perceived risk a company poses to financial stability in the United States. Empowering the Fed to implement this regime substantially enhances its powers and responsibilities. As you will see, the Act, while it comprises 2,300 pages, speaks mostly of legislative goals, with specific requirements that require fleshing out by rules and regulations that will follow. For the most part, the actual law will be developed by the mandarins. The Concept of Financial Risk The entire Act is built around the concept of protecting the “financial stability” of the economy. The term “financial stability” is mentioned about 80 times in the Act but there is no definition of what it is. The Act assumes that the Council will know it when it sees it. Instead of defining the term, the Act assigns the new Financial Stability Oversight Council the duty of regulating companies whose activities threaten “financial stability.” The Council is obligated to conduct studies and make findings on which to base new rules and regulations which establish “prudential standards” for regulated companies. It is assumed that out of that process “financial stability” will be defined, but it seems no one really knows what “financial stability” is or what consists of a threat to it. Which is a problem is when you give vast powers to a new agency: it makes their powers almost unlimited. The likelihood of finding this Act unconstitutional because of vagueness is low. Consider the fact that a Council takeover of a company because it is a “threat to financial stability” will probably only be challenged in the courts during a financial crisis. This puts pressure on judges who have little knowledge of economics. They would be afraid to assume responsibility for the economy. Since the experts testifying in court will most likely be mainstream economists and financiers who believe in current economic thinking that such powers are necessary to save the economy, it is unlikely that courts will believe the testimony of “outliers” such as Austrian theory economists. The Act thus creates a board of economics czars who will have almost unlimited powers to regulate the financial sector of the economy.

RATING AGENCIES

'Overpaid' Pensions Being Seized  WSJ

CHRONIC UNEMPLOYMENT

 

David Goldman, of Asia Times' Inner Workings, has a pretty good explanation of why this is about more than just cuts reaching their peak. The productivity number doesn’t mean much by itself, but it is consistent with the idea that the US corporate sector can’t get much more blood out of this stone. The fact that private equity predators are giving money back (for example, Carl Moelis’ return of $750 million last week) and real estate funds also are unable to use the money they have ought to tell us something. There simply aren’t enough good projects to absorb the capital that is chasing them. If that’s the case for private equity, it surely is the case for large corporations considering investment. Small business, meanwhile, remains dead in the water, sunk by higher healthcare costs, nickel-and-time tax demands, and the death-by-a-thousand-cuts of regulation. In short, the economy is going nowhere, and the stock market doesn’t have a second act after the heroic cost-cutting of last year. From the St. Louis Fed:

GOVERNMENT BACKSTOP INSURANCE

CORPORATE BANKRUPTCIES

OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

US probes corruption in big pharma  FT

FLASH CRASH - HFT - DARK POOLS

MARKET WARNINGS

DEFLATION'S COMING, Says Gary Shilling, And It's Going To Clobber The Stock Market  BI

Prepare for chronic deflation, buy bonds, and sell stocks. Why is Gary still expecting deflation? Because consumers still have way too much debt, and this debt will take decades to work off.  Also, consumers are saving money again, which means they aren't spending it.  Banks have plenty of cash and reserves, but the demand for money just isn't there. And when consumers are strapped and credit is contracting, prices tend to fall.

The Hindenburg Omen Has Arrived  ZH

Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: "The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration." Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming. As a reminder, the 5 criteria of the Omen are as follows: That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day. That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues. That the NYSE 10 Week moving average is rising. That the McClellan Oscillator is negative on that same day. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory. Today, all five conditions were satisfied. June 2008 was another such reconfirmed event, and as Barron's pointed out then, "there's a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor." Boy was the emptor caveating within 120 days (especially if said emptor was named Dick Fuld). Which brings us to the present: should the Omen be reconfirmed within 36 days, all bets are off.

GOLD MANIPULATION

VIDEO TO WATCH

QUOTE OF THE WEEK

“In reality, however, borrowers – not lenders, were the primary bottleneck in Japan’s Great Recession.  If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something.  But when there are no borrowers the bank is powerless.” Richard Koo -- The Holy Grail of Macro Economics

ZH - Zero Hedge - Business Insider, WSJ - Wall Street Journal, BL - Bloomberg, FT - Financial Times

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