February 1, 2012
1) … Introduction
We are witnessing Neoliberalism’s death rattle rally. Capitalism is a dead thing brought back to life via the Eurozone leaders’ announcement of a debt brake, which in theory will enable Greece to sustain within the EU. Capitalism was also brought back to life via the ECB’s LTRO cheap credit funding facility. The ECB’s liquidity made a number of traders wealthier. Today’s rally is simply more hope, more speculation, more leverage, financed by ponzi Eurozone credit. A day of reckoning is coming soon.
2) … EU leaders announce pact for fiscal discipline
Carsten Volkery of Der Spiegel writes Angela Merkel Got The Green Light For Her Fiscal Pact at Monday’s EU summit but struggled to allay new fears of German domination. The planned message of the meeting, a commitment to jobs and growth, was drowned out by controversy following German calls to put Greece’s budget under EU control.
In the conference hall, leaders once again talked austerity, and 25 of the 27 heads of government signed up to the pact for stricter fiscal discipline that Chancellor Angela Merkel has been pushing for. Only Britain and the Czech Republic refused to join.
Merkel called it a “very successful result.” She imposed the fiscal pact, which includes binding limits on budget deficits and quasi-automatic sanctions on countries that breach deficit and debt limits, virtually on her own. And she did it in just two months. Progress has been much faster than most observers had expected when the pact was agreed to at the EU summit last December.
But Merkel can’t be wholly satisfied. She spent much of the day neutralizing a strategically misguided suggestion from the German Finance Ministry. On Friday, the Financial Times reported that Germany wanted to dispatch an EU budget commissioner to Athens to monitor Greece’s fiscal policy. The article referred to an internal ministry paper. While politicians from Merkel’s center-right coalition expressed delight at the idea over the weekend, the Greek government protested at what it called a “sick fantasy” and demanded respect for its national dignity.
Merkel had wanted the meeting to send out a different, more positive message about a commitment to create growth and jobs in the EU. But the notion of an austerity commissioner for Athens has renewed fears that Germany is trying to stamp its authority on the rest of Europe. Once again, old prejudices have been reawakened, and Germany’s international reputation is suffering.
Larouche Pac writes Merkel Earns “Frau Kommissar” Title At EU Summit
Aaron Wiener writes in American Prospect Austerity Über Alles. Austerity’s been the name of the game as Europe fights its sovereign debt crisis. At last night’s EU summit in Brussels, Angela Merkel scored one of her biggest wins yet, pushing through a “debt brake” that’ll force participating countries to keep their federal deficits under 0.5% of GDP. It’s about as anti-Keynesian as you can get. The fiscal pact is a major victory for German Chancellor Angela Merkel, who set it as a precondition for more decisive measures to stem the European sovereign debt crisis.
To many American economists, the plan looks, frankly, insane. That’s because it goes against one of the main foundations of American economic thinking: the teachings of John Maynard Keynes, who preached expansionary monetary and fiscal policy during times of recession. When the economy is contracting and deficits are increasing as tax revenue drops, Keynes argued, the last thing the government should do is pull money out of the system.
Sure, Milton Friedman’s “We are all Keynesians now” might no longer be strictly true in the United States, but Keynesianism still holds much sway over Democrats and Republicans alike. (When’s the last time you heard a politician of either party say in a recession, “I promise not to take action to create jobs; let’s just ride this one out”?) Not so in Europe, and very much not so in Germany, where Keynesianism is, for all intents and purposes, dead.
“German economics has been mostly purged of Keynesians,” says Sebastian Dullien, a Berlin-based economist and senior fellow at the European Council on Foreign Relations. “Among the top research universities, you might find one or two.”
Bill Wilson in NetRightDaily writes Default … It’s Better Than The Loss Of Democracy. Germany had demanded quite explicitly a “transfer of national budgetary sovereignty” to a “budget coordinator” appointed by European authorities to administer Greece’s budget that will “veto decisions not in line with the budgetary targets set by the Troika,” referring to the tripartite organizations administering the bailouts: the European Commission, the ECB, and the IMF.
Coupled with the €34 billion that remains of the original 110 billion bailout, that means governmental institutions have assumed €165 billion of Greece’s €340 billion debt — when they did not have to — rather than let losses be realized by European financial institutions, primarily in Germany and France. Now, they are poised to assume another €130 billion at any cost, even if it means the end of the liberty and sovereignty of the Greek people.
Bob Alderman in New American writes European Fiscal Pact Is International Financial Dictatorship.
WSWS reports EU Summit Agrees To German Plan For Austerity Straitjacket. The European Union summit that ended in Brussels Monday evening agreed to a plan drawn up by the German government for a series of measures that will force governments across the continent to implement harsh austerity measures. German Chancellor Angela Merkel declared, “The debt brakes will be binding and valid forever. Never will you be able to change them through a parliamentary majority.” In addition to the debt brake, the EU summit agreed to a German proposal that countries failing to pay their debts on time be subject to punitive sanctions to be imposed by the European Court of Justice. Such a mechanism is prominent among the demands of the international banks and financial institutions. Two countries, the United Kingdom and the Czech Republic, declared they would not sign up to the agreement. At the same time, the leaders of the two countries made clear they had no disagreement with the principle of universal austerity.
Ambrose Evans Pritchard writes Bundesbank Sinks Deeper Into Debt Saving Europe. Germany’s Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system, testing the political limits of EMU solidarity in Germany
An inquiring mind asks, has the precedent been set for further German preeminence in Euroland? Is Angela Merkel not sovereign over the Euro zone. Is not, fate is passing the baton of sovereignty from nation states to sovereign leaders in Brussels and Berlin. Libertarian hopes for Freedom, Free Enterprise, and a Free Monetary System, are simply mirages on the Neoauthoritarian Desert of the Real. Austrian economic writers are wearing anarcho capitalist spectacle. I suggest that they consider the Morpheus Proposal and take the Red Pill, as in the movie The Matrix, where Morpheus relates “You take the blue pill. The story ends. You wake up in your bed and believe … whatever you want to believe. “You take the red pill. You stay in Wonderland and I show you how deep the rabbit hole goes. “Remember. All I’m offering is the truth. Nothing more.”
Red Pill people are aware that fate is replacing the Banker regime of Banker regime of Neoliberalism with the Beast Regime of Neoauthoritarianism and that capitalism is being replace by regional global governance.
3) … The Emerging Market Infrastructure Stocks, EMIF, led a global stock rally with funding provided by the ECB LTRO, on the announcement of an EU Debt Brake.
Following behind Emerging Market Infrastructure, EMIF, were Emerging Markets Small Caps, EWX, Latin America Small Caps, LATM, Emerging Markets, EEM, BRICS, EEB, Emerging Market Financials, EMFN, Emerging Market Mining, EMMT, Brazil Small Caps, BRF, India Small Caps, SCIF, South Korea Small Caps SKOR, Russia Small Caps, ERUS, World Small caps, VSS, Brazil, Russian, RSX, India, INP, all rising on higher Emerging Market Currencies, CEW.
Rising currencies produced today’s zombification rally Emerging Market Infrastructure, EMIF, INXX, CHXX, GRID, BRXX, as seen in this ongoing Yahoo Finance Chart EMIF, INXX, CHXX, GRID, BRXX.
In Brazil, EWZ, Steel Producer, SID, Chemical Manufacture, BAK, Oil Refinery, UGP, Water Utility, SBS, and Electric Utility, CPL, all rose strongly on a higher Brazilian Real, BZF.
In India, INP, Tata Motors, TTM, rose parabolically and Copper Miner, Sterlite, SLT, rose strongly on a higher rupe, INR.
In Sweden, EWD, Auto Company, ALV, rose on a higher Swedish Krona, FXS.
Rising world currencies, DBV, and emerging market currencies, CEW, gave strong carry trade seigniorage to these countries known as carry trade nations where hot money flows stimulated dramatic rises in value EWD, EWO, EZA, TUR, GMF, CEE, EPOL, EPHE.
The risk on trade gave seigniorage to Biotechnology, XBI, IBB.
The EU Debt Brake rally stimulated European Financials, EUFN, which led Europe, VGK, higher, and stimulated Greece, GREK, vertically higher.
Neo liberal finance gave moneyness to Global Financials, IXG, Global Materials, MXI, Solar, TAN, Small Cap Consumer Discretionary, PSCD, Copper, COPX, Coal, KOL, Shipping, SEA, Steel, SLX, Rare Earth, REMX, Semiconductors, XSD, and Housing ITB.
World banks, IXG, seen in this Finviz Screen rose strongly, led by banks IRE, DB, RBS, BCS, HBC, NBG, EPI, BRAF, and by carry trade lenders MTU, NMR, MFG.
The neo liberal finance rally gave strong moneyness to the most dead of stock investments, WHR, the most toxic of debt, PSP, MIW, steel, SLX, automobile stocks, VROM, CARZ, and to growth stocks such as JBL, and CVCO. Debt laden US Infrastructure shares, such as MTW, rose strongly.
US Health Care Providers, IHF, which had fallen of late, also rose strongly.
The debt trade resurrected today fueling a infrastructure stock rally, a growth stock rally, and a value stock rally.
But a debt bust, that is a credit bust and global collapse, known as financial armageddon has only been held in abeyance, it cannot be abated as the European Banks, EUFN, are insolvent banks, and European nations, particularly the PIIGS, Portugal, Italy, EWI, Greece, GREK, and Spain, EWP, are insolvent nations. All of these are zombified fiat assets, which are sustained by the European Central Bank’s LTRO Facility. Fears of sovereign insolvency and bank insolvency will return one day.
The chart of the US Dollar, $USD, UUP, shows a close lower at 78.92. The chart of the USD/JPY shows a trade lower to 76.20. The Debt Brake Rally is seen in the chart of USDJPY and EMIF, EMMT, and EMFN.
4) … Commodities, DBC, USCI, traded weakly
Commodities were not leveraged up; rather stocks were leveraged up. Natural Gas, UNG, fell strongly. The chart of commodities, DBC, shows weak.
5) … Total Bonds traded lower while hope of Greek debt sustainability rallied world government bonds.
Bonds, BND, traded lower, but hopes for securing Euro zone debt sovereignty, gave rally to International Corporate Bonds, PICB, and World Government Bonds, BWX, through rising world currencies, DBV, and Emerging Market Currencies, CEW. The charts of currencies looked topped out. I expect fears of EU debt contagion to arise, and that investors will recommence competitive currency deflation, with the result being a disinvestment out of stocks, EWX, EMFN, EMMT, EMIF, and deleveraging out of commodities, DBC.
The Interest Rate on the US 10 Year Note, ^TNX, closed at 1.84%. The flattner, ETF, FLAT, traded lower, evidencing a flattening 10 30 US Treasury debt yield curve which is seen in the chart of $TNX:$TYX, trading lower,yet the rally in US Treasuries, TLT, EDV and ZROZ is clearly over as their charts show a topping out pattern. Mario Draghi’s LTRO facility and the EU Leaders’ debt brake turned back the hand of the bond vigilantes today.
Furthermore Tyler Durden, writes Under Twist, The Fed Has Purchased 91% Of All Gross Issuance In Long-Dated US Treasurys. One of the salient questions asked of Bernanke by Congress relates to a Kevin Warsh oped in the WSJ, in which he said the following: “Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions, with huge implications for our standard of living—with heightened risks around future funding costs.” This is arguably the question that dominates Fed policy making under the Operation Twist doctrine, in which the Fed buys up long-dated paper and sells Short dated (under 3 years), the second leg of which however is completely irrelevant, as the Fed has already guaranteed ZIRP until 2014, in essence confirming that Twist was nothing but a stealth QE3 as we have claimed all along, as the Fed’s ZIRP4EVA policy effectively offsets any and all short-dated sales. Needless to say Bernanke’s response was irrelevant. However, here is the most jarring statistic.
As Barclays showed a few days back, under Twist, the Fed has monetized virtually all, and specifically 91% of all gross issuance in the 20-30 year maturity bucket. In other words, Warsh is absolutely spot on, and once again we are left with an artificial market in which it is only the Fed that defines the UST curve shape by molding the long end. What happens when Twist ends? Will the 30 Year collapse? What happens when there is no explicit back stop to the long end? Is this the reason why Bill Gross yesterday said that he fully expects much more check writing by the Fed for the next ’12, 24, 36 months.” And how can it not: we don’t have a market of rational players any more – the entire market is merely one irrational player, whose biggest counterparty incidentally, the ECB, is beyond broke. Finally, what happens to the Fed’s balance sheet when interest rates start rising? Holding a portfolio with a duration greater than it has ever been, the DV01 is currently well over $2 billion (i.e. a $2 billion loss on every basis point increase in rates). And rising.
6) … Obama proposes home debt owners heaven with new financing scheme; it’s just in time for this year’s election.
Mike Mish Shedlock writes The Presidents Plan For Home Loan Refinancing I comment that the US president is enlarging existing ponzi credit to stabilize banks, the GSEs, and anyone holding mortgage backed securities, MBB. It’s quite an incentive, as every refinanced home will have a MERS free, clear title loan.
7) … In today’s news of structural reforms
Naomi Spencer of WSWS reports Kentucky governor announces austerity budget. Kentucky’s Democratic Governor Steve Beshear proposed budget cuts of 8.4 percent for many state agencies and spending freezes for other critical areas.
Shannon Jones of WSWS reports Emergency manager announces school closure in Highland Park, Michigan Parents and staff at Barber Focus School learned Monday that it will be shut down within a week. The announcement followed within hours the appointment of an emergency financial manager to run the district.
8) … A global Eurasia war is coming; it will be centered in Syria and Iran
Tyler Durden writes Israel Accuses Russia Of Supporting Iran Terror Organizations, Says Iran Has Enough Material For 4 Nuclear Bombs.
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