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The Daily Reckoning | Tuesday, May 11, 2010 Markets soar as central planners pile more debt on the euro-inferno, Eric Fry weighs in on Europe's Big Fat Greek bailout, Plus, Bill Bonner with China's take on the US police state and plenty more... ------------------------------------------------------- When in Debt, Do as the Debtors Do More futile attempts to save a floundering currency Eric Fry Reporting from Laguna Beach, California... The euro-bailout stole the headlines yesterday, while cheering investors around the globe - especially those investors who own the stocks and bonds of bankrupt nations. Greek, Spanish, Portuguese and Italian stocks all soared more than 10% on the day, as yields on high- risk sovereign debt plummeted. Greek 10-year yields tumbled nearly 500 basis points - from 12.47% to 7.77% - as buyers rushed back into the market. But one has to wonder what sort of buyers these might have been. Were they: 1) The sort of buyers who sensed a bona fide buying opportunity; 2) The sort who sensed a bona fide short squeeze or; 3) Traders for the European Central Bank? Our guess would be #3, followed closely behind by #2. In other words, almost every aspect of yesterday's trading looked like a great big short squeeze. Since investors around the world have been establishing hefty short positions in all things euro-related, the threat of a $1 trillion buyer for said assets was more than enough to send the shorts rushing for cover...or rather, TO cover. "At the lightning speed that markets operate in today's world," says David Rosenberg, "this short squeeze could be over [already]...Recall the initial reaction to the TARP program [was]...a huge immediate relief rally of 11% that gave way to a 30% slide to the lows. The bottom was only turned more than four months later, once the kinks were worked out and the specifics of the stress tests were announced. Keep this in mind if anyone decides to extrapolate today's short-covering rally into the future. "In the final analysis," Rosenberg concludes, "if the EU lends money to Greece or to any other problem country in the zone, debt ratios...in the region will only rise further. It will be interesting to see how the rating agencies handle this. It cannot be lost on them, or the global investment community, that while loans, guarantees and central bank provisioning can deal effectively with liquidity issues, they are ineffective in addressing what's really at stake here, which are structural fiscal issues. So the deal over the weekend is only going to be successful and so far as it is backed up by meaningful reforms... "What is clear is that any rally in the euro should be shorted, because the line between fiscal and monetary policy has just become blurred. The cost of the ECB helping drive long-term yields in the periphery [countries] lower is jeopardizing the sanctity of the Central Bank balance sheet...Of all the knee-jerk bounces today, the euro is the one most vulnerable to a reversal." Our only surprise here at The Daily Reckoning was that the trillion- dollar bailout announcement failed to resuscitate the euro or to suppress gold...even for one day. The short-covering rally in the euro produced very meager results. After jumping nearly 3% in early New York trading, the euro ended the day with a miniscule gain. Gold, on the other hand, dipped only slightly from the near-record highs it hit last Friday. Apparently, investors deduce that the ECB's bailout scheme is inflationary, at a minimum. Somehow, some way, the ECB will conjure euros into existence that do not exist today. Thus, much like the Federal Reserve's activities during the last 18 months, the ECB will dramatically expand the supply of money and credit in an effort to "rescue" the euro. Ironic, isn't it? Trying to defend the value of a currency by producing more of it? In all of this, gold seems likely to benefit. Addison Wiggin, with a few observations from The 5-Minute Forecast... The Renaissance. The Age of Enlightenment. The Industrial Revolution. The Gilded Age. The Cold War. The Information Age... The Bailout Age? The European Union (EU) and International Monetary Fund (IMF) announced a plan that comes straight out of the United States' playbook: smother debt flare-ups with truckloads of "free money" while the central bank manipulates rates. European leaders unveiled a $957 billion plan to save themselves and their currency. Here's quick and dirty: The EU will pony up $560 billion in new loans and $76 billion in existing deals for the GIIPS nations (as we've taken to calling them... no reason to give pigs such a bad rap) The IMF says its ready with $321 billion The European Central Bank (ECB) has abandoned its old stance (and credibility) by launching a program to purchase government and corporate debt. "This is like pouring Chanel No. 5 on a French 'lady of the evening,'" Rob Parenteau wrote us early this morning, "after a night of wanton debauchery." "Just like the Treasury and Federal Reserve's late 2008 bailouts and quantitative easing," Dan Amoss agrees, "this announcement will only serve to make Europe's economic adjustment even more painful for the private sector. The GIIPS debt balances need to fall one way or another, be it default or prepackaged haircuts and restructuring. "The Eurocrats are doing the bidding of European banks that are unwilling or unable to take necessary write-downs. It remains to be seen whether striking/rioting citizens will allow the planned austerity measures to work. I have my doubts. "This weekend's actions heavily reinforce the three-five year investing case for gold," concludes Dan Amoss, "because there's little reason for investors to view the euro as a relatively 'hard' currency. This weekend's actions also weakened the 'safe haven' status of German bunds; expect bund yields to keep rising if German politicians approve funding for the off-balance sheet strategic investment vehicle (SIV) contraption that was set up to evade the 'no bailout' clause of the euro treaty." The gold price reacted very little to the euro bailout. The spot price is right where we left it Friday, at just below $1,200 an ounce. Check this out: The US Mint sold over 41,500 ounces of gold coins in the first week of May - half the monthly average. Should this rate of coin consumption remain intact, May 2010 could end up being the biggest month in the history of the US Mint. December 2008, the previous high, clocked in at nearly 180,000 ounces. And now for today's column... The Daily Reckoning Presents Money for Nothing James H. Kunstler The European Union came up with a trillion-dollar bailout for itself at the dawn's early light yesterday. Initially, the bailout plan goosed the euro back above $1.30. But by day's end, the euro's value had gained almost no ground whatsoever. Hardly a resounding success on Day One of the campaign. I mention this event reluctantly, knowing how averse we Americans are to news out of Old Europe, that boring backwater of sclerotic cafe lay- abouts, socialistic train service, and less-than man-sized portions of things that real men don't eat anyway. The question begging itself here, of course, is how Europe intends to come up with roughly a trillion in bailout money. Sell Portugal to China? Cut Greece up into bait and catch whatever fish are left in the Mediterranean Sea? Frankly, I'm stumped. Talk about robbing Peter to pay Paul... All the European nations are already so hopelessly enmeshed in chains of unfulfillable counter-party obligations that the bailout might as well be a game of musical chairs played in the Large Hadron Particle Collider, set to the tunes of Karlheinz Stockhausen. The European bailout is, in fact, an absurdity. I predict that the effect of the announcement will last all of one trading day on the stock markets. The truth is that the imbalances of global finance are so grotesque now that the whole money system is hanging together with nothing but spit and prayer. I get rafts of e-letters every week warning of a supposedly-coming global currency - a companion idea to the notion of a one-world government. Both are fantasies. Events are taking the nations of the world in the other direction: towards break-up, downsizing, down-scaling. Likewise, if major currencies such as the euro and the dollar blow up, they're much more likely to be replaced by more local bank-notes backed by gold than by some hypothetical Amero or Globo- buck. Early yesterday morning, the European stock markets were zooming, and Bloomberg even carried a wonderfully mysterious headline saying Greek Bonds Rally. That was especially rich - like, who the hell is going to load up on Greek bonds now? Is there a pension fund somewhere run by such dimwits that they would sell their positions in the Goldman Sachs issued Wolverine CDO in order to get in on the new bargain in ten-year Greek sovereigns? I hope those pensioners are prepared to spend what remains of their lives selling chestnuts from pushcarts on the streets of Oslo. As if life in the USA wasn't surreal enough last week... Once upon a time, the stock market was a place where people with capital went to look for productive activity to invest in - say, a company devoted to making soap flakes, or an underpants factory. Now the market is a robot combat arena where algorithms battle for supremacy of the feedback loops. Thursday's still-baffling fifteen- minute "crash" was an excellent demonstration of the diminishing returns of technology. People too-clever-by-half, aided greatly by computers, have now gamed the investment indexes so successfully that these markets no longer have anything to do with investment - they're just about shaving micro-points of profit at high volumes by micro- milliseconds off mere differentials in... math! This is truly quant heaven, a place where only numbers matter and there is no correspondence to anything in the real world. In other words, last Thursday's bizarre action was a warning that the American stock markets have become certifiable. These algo-robots may be elegantly complex, but they are really no more than triggering mechanisms, and Thursday's - whatever it was - glitch, let's say, ought to be regarded as a mere preview of the coming attraction: a spontaneous capital combustion in which the putative contents of these stock markets get sucked into a black hole so vast that the trading desks will have to find a way to arbitrage infinity to ever again catch a glimpse of America's receding wealth. And it could all happen in a finger-snap... But probably not tomorrow. Until then, rest assured that whatever else is going on out there, credit default swaps never sleep. James Howard Kunstler, for The Daily Reckoning Joel's Note: James Howard Kunstler is perhaps best known for his 2005 book The Long Emergency, which predicted the financial meltdown and the implications of the peak oil problem. Mr. Kunstler is also the author of 10 novels including his latest book, World Made By Hand, a story set in America's post-oil future. His articles have appeared in The New York Times, The Washington Post, Rolling Stone and The Atlantic Monthly. Bill Bonner The Not-So-Silent Economy Killer Bill Bonner Reckoning from Paris, France... Europe has lost its head! First, the weather is completely out-of-sync with the calendar. Perhaps it's because of the volcano in Iceland... The dust is blotting out the sun. There's no sun here today. Instead, the sky is pale grey. And it's raining. The calendar say's May 11th, but it could easily pass for February. The euro markets lost their heads too. Yesterday, Europe exploded to the upside. Stocks went up. Bonds went up even more. Especially Greek bonds. Why the good time? Because Europe decided to follow the US into full- scale combat with the future. Yes, the Europeans are as eager to prevent real change from happening as their American counterparts. The change they most don't want is what we're calling 'the Great Correction.' It's a combination of several corrections at once - including a correction of the welfare state. Europeans live well. And thanks to so many transfer payments and so many government-provided services, they live well without really having much money to spend. Their incomes go to pay taxes and social charges. Trouble is, they enjoy a standard of living that they can't really afford. This will sound familiar to Daily Reckoning readers. For many years, we pointed the finger at Americans, claiming that they spent too much money. Americans lived beyond their means. Individual households overspent and went into debt. That over-leveraging in the private sector in the US is now being corrected. At least, we think it is being corrected. (Recent figures are mixed...with some indications that private households are up to their old habits, trying to increase their standards of living by going into debt.) In Europe, the phenomenon is a little different. It's the public sector that is living beyond its means. Military budgets are small. Most government spending is focused on services and transfer payments. This social spending is responsible for a big part of the GDP and a big part of living standards. But as in the US, living standards are higher than people can afford. Governments provide more employment, more transfer payments and more 'services' than they have tax revenue to pay for. The result is public debt, which is getting worse every year. Europe, generally - excluding England - does not have high levels of private debt. The debt is in the public sector. That said, government debt in Europe, on average, is no worse than it is in the US. The Eurozone, altogether, has government debt to GDP of 88%. In terms of deficits, Europe is actually in better shape than the US. US deficits are running around 10% of GDP - or more. In Europe, the average deficit this year is expected to be 6.6%. In Europe, the center is solid. But like the edges of a carpet, the periphery states tend to get a little worn. Greek public debt is expected to reach 150% of GDP next year. Its budget deficit is as large as that of the US. You can't sustain a debt of 150% of GDP - not unless you are Japanese. So, a correction was inevitable. Greece had to change course. This is what caused a crisis last week, a 'rescue' over the weekend, and a sharp rally yesterday. America rescued its private sector. Europe is rescuing its public sector. Both are actually making the situation worse...but that subject is for a different day. Rather than permit problems to correct themselves, the euro feds stepped in to aggravate them. That is, the euro feds are following the same program as the Americans. If people get into trouble because they have too much debt, the feds come to their aid with more debt! In the event, EU financial officials worried that the Greek illness could be catchy. They were afraid that Portugal, Spain and maybe Italy would get whatever the Greeks had. So, they decided to inoculate the whole Eurozone with a $1 trillion program. Where will the money come from? Just as in the US, it will come from people who don't have any. All the Euro states are borrowing money already. Now they will have to borrow more to pay for people who borrowed too much. The plan calls for loan guarantees and money from the IMF too. Plus, the European Central Bank will do its part. It will go into public and private debt markets to buy troubled debt, the equivalent of the Fed's 'quantitative easing' program. Yes, dear reader, the Europeans threw in everything they had. Under no circumstances did they want anyone to say it was 'too little, too late.' It was a "historic" occasion for the European Union, said French finance minister Christine Lagarde. On that point, she was surely right. Up until now, Europe had shown some dignity...some skepticism...and some good sense. It had intervened to protect speculators from their mistakes, but reluctantly. Now, it has thrown in the kitchen sink, the oven, the refrigerator...and everything else. But what's this? Asian markets seemed to slough off the Euro miracle this morning. And even the euro seems to be wondering if this rescue effort will be as smooth and effective as people thought. Markets are quite likely to continue second-guessing today...and then third-guessing tomorrow... The gains could prove very short-lived. Why? Is it too little, too late? No, it is not. It is too much...much too early. More thoughts on this, after we have time to think about it. In the meantime... And more thoughts... - "More bullets to dodge on the road from ruin," is a marvelous headline in The Financial Times. If they had just changed one word it would have been accurate too. Europe, like America, is still on the road TO ruin. "Everyone has had a wake up call about limitations [to state borrowing,]" the paper quotes an economist with HSBC. But when the wake-up call sounded, Europe - like the USA, hit the snooze button, rolled over, and went back to sleep. That is the real meaning and real effect of the bailout. Instead of being forced to balance their budgets right away, the wobbly countries, will get to wobble some more before falling down. What else could happen? If Europe's fringe states are to avoid falling down, they will actually have to reduce their spending - drastically. And, to judge from the riots in Greece, that would mean dodging real bullets. We don't think Europe has the stomach for it. Neither does the USA. - On the Police State we're in... Here's a twist for you: China criticizes US abuse of civil and political rights: "In the United States, civil and political rights of citizens are severely restricted and violated by the government. "The country's police frequently impose violence on the people. Chicago Defender reported on July 8, 2009 that a total of 315 police officers in New York were subject to internal supervision due to unrestrained use of violence during law enforcement. The figure was only 210 in 2007. Over the past two years, the number of New York police officers under review for garnering too many complaints was up 50 percent. According to a New York Police Department firearms discharge report released on Nov. 17, 2009, the city' s police fired 588 bullets in 2007, killing 10 people, and 354 bullets in 2008, killing 13 people. On September 3, 2009, a student of the San Jose State University was hit repeatedly by four San Jose police officers with batons and a Taser gun for more than ten times. On September 22, 2009, a Chinese student in Eugene, Oregon was beaten by a local police officer for no reason. According to the Amnesty International, in the first ten months of 2009, police officers in the US killed 45 people due to unrestrained use of Taser guns. The youngest of the victims was only 15. From 2001 to October, 2009, 389 people died of Taser guns used by police officers. "Abuse of power is common among US law enforcers. In July 2009, the Federal Bureau of Investigation put four police officers in the Washington area under investigation for taking money to protect a gambling ring frequented by some of the region's most powerful drug dealers over the past two years. In September 2009, an off-duty police officer in Chicago attacked a bus driver for 'cutting him off in traffic' as he rode a bicycle. In the same month, four former police officers in Chicago were charged with extorting close to 500,000 US dollars from a Hispanic driving an expensive car with out-of-state plates and suspected drug dealers in the name of law enforcement, and offering bribes to their superiors. In November 2009, a former police chief of the Prince George's County's town of Morningside was charged with selling a stolen gun to a civilian. In major US cities, police stop, question and frisk more than a million people each year - a sharply higher number than just a few years ago." Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com