Dave Gonigam – October 5, 2011
- No news from Europe, no movement in U.S. stocks…
- Euro leaders attempt to put a tourniquet on Dexia: How this one bank could set off dominoes that reach Wall Street and your hometown
- A raft of “meh” numbers on jobs and services
- Plopping a toilet seat atop a motorcycle: Strangest attempt ever to raise consciousness about “climate change”
- Readers sound off on the motives of Occupy Wall Street… while we dispatch a team to check out the local Baltimore version
Major stock indexes are drifting today, seemingly awaiting some sort of news from Europe.
It’s as if traders are now hanging on every word emanating from some commissioner, director, functionary or spokesmodel on the continent before they make their next move.
Up one day, down the next, the mood swings like a love-struck girl pulling petals off flowers…
In the final 45 minutes of trading yesterday, the S&P 500 transformed a 1.8% drop into a 2.3% gain — averting the formal onset of a bear market as measured from the April 29 high.
The catalyst? The Financial Times said European officials are figuring out how to pump new capital into the banks.
“Although the details of the plan are still under discussion,” the salmon-colored rag reported, “officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis.”
Love the choice of words here: It’s not about fixing the problem, but convincing traders the problem is fixed.
Where, you might ask, is this new capital for the European banks supposed to come from? Guess that’s one of those pesky details “still under discussion.”
But we’re getting a clue: The International Monetary Fund’s European chief proposes today to buy European government bonds, alongside the eurozone’s own bailout fund.
There were rumblings about this last week. There was even a number put out there by Dow Jones News Service, a doubling of the IMF’s bailout fund to $1.3 trillion.
Hmmm… Where would the IMF come up with $650 billion on short notice? Why, from its member nations, of course.
The United States ponies up 17% of IMF funding. Thus, the latest European rescue, should it come about, will cost U.S. taxpayers $110.5 billion. That’s $356 for every man, woman and child in the country.
Just as fuzzy as the plan to recapitalize the European banks is the plan to rescue one of the most sickly of those banks — Dexia.
Dexia, you’ll recall from yesterday’s issue, is the French-Belgian mongrel whose exposure to Greek government debt totals nearly twice its market cap. Should Dexia fall, the dominoes would extend to U.S. municipal bonds and U.S. money market funds.
Little wonder the details are yet to be worked out: Dexia has written down its Greek debt holdings by only 21%. This is at a time many banks have marked them down to market prices — as much as 51%.
Two French bank giants — Societe Generale and BNP Paribas — are in the same boat, by the way. U.S. money market funds hold roughly 20% of all their assets in the commercial paper of big French banks exposed to Greece.
Oy… The French finance minister is promising to reveal details of the Dexia rescue tomorrow.
If Dexia isn’t resolved, and quickly, the trouble “could spread to other banks,” says Andrea Enria, chairman of the European Banking Authority.
“Dexia is an extremely complicated file,” adds Benoit Petrarque, an analyst at Kepler Capital Markets. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”
We’ll come back to that 2008 thought shortly…
“We’re seeing a practical example of contagion playing out,” says Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods. “Investors aren’t quite sure what the sovereign debt losses will be, nor where the share price should be. They are concerned about the risks and reduce their funding.”
Whatever the outcome, “a Dexia rescue isn’t a solution,” reads a new piece from Forbes this morning, “but the beginning of a larger problem. For starters, a government bailout and restructuring could actually impair the bank.”
“The key problem for Dexia in this respect is the likely significant difference between book values of many of its assets compared to actual trading levels,” according to Otto Dichtl at Knight Capital. In other words, dumping assets would lock in the losses, rendering Dexia insolvent.
What’s more, says Forbes, “rescuing Dexia is the start of a larger, painful acknowledgment that governments may no longer be in control of Europe’s debt issues.”
Dexia’s liabilities total 1.5 times Belgium’s GDP. No better among the big French banks: BNP Paribas’ total liabilities equal 97% of French GDP.
“We face a bigger problem now and we will pay a higher price” than in 2008, says Nassim Nicholas Taleb, author of Fooled by Randomness.
“The structure of the problem has still not been understood,” Taleb said today at a press conference in Ukraine. “We haven’t done anything constructive in 3½ years. Nobody wants to do anything drastic now.”
And no wonder: The big U.S. banks’ eurozone exposure totals $2.7 trillion.
When Greece defaults — is it really a matter of “if” anymore? — investors will run for the exits from the rest of the PIIGS countries too. That’s big trouble for the big French banks. And the big German ones. And those banks alone account for nearly half of that $2.7 trillion total.
Imagine if one of those French or German banks collapses… and the knock-on effects on U.S. shores.
This is one key to the “mother of all financial bubbles” scenario Addison describes in his latest forecast.
“This new bubble started years ago,” he says, “with the government’s response to the Internet stock crash in the early 2000s. Then it morphed into the bigger housing bubble… And eventually into the even bigger credit crisis of 2008.”
“Now, due to the aggregate of those government actions, we’re in the middle of the largest financial bubble in history.”
When it pops, you need to be ready. Addison lays out a set of comprehensive solutions in this presentation.
Precious metals are perking up today in a way that stocks aren’t — up more than 1% as of this writing.
Gold has recovered to $1,644, while silver has firmed to $30.54.
You can’t attribute the metals’ strength to dollar weakness. The dollar index is unchanged right now at 79.1.
Keeping a finger on the weak pulse of the U.S. economy, we have the following numbers to chew on…
- Private payrolls: Up 91,000 in September, according to the payroll firm ADP. Unfortunately, all those new jobs were in the service sector — presumably low-paying
- Mass layoffs: Up 126% in September, to a total of 115,730, according to Challenger, Gray & Christmas. The bulk of that can be chalked up to planned troop reductions and job cuts at Bank of America
- Service sector: Still expanding, according to ISM. This is one of those numbers where 50 is the dividing line between expansion and contraction. The September number came in at 53. For once the “expert consensus” guessed right.
Tomorrow comes the weekly report on first-time unemployment claims, and Friday brings the September nonfarm payrolls from the statistical wizards at the Labor Department.
The White House has finally sent three trade agreements to Congress for approval. The deals cover South Korea, Panama and Colombia — the last of the three of intense interest to our contacts in Colombia during our visit there last spring.
All three were negotiated by President Bush and have been stymied by the usual partisan infighting. President Obama is asking they be passed “without delay” and Republican House leaders are promising to do just that. We’ll see…
From Japan comes an, er, innovation that truly would have never occurred to us. Near as we can tell, this is not a joke…
Toto, the nation’s biggest toilet maker, is launching the Toilet Bike Neo — a three-wheel motorcycle powered by human waste. “The bike runs on biogas,” reports the TreeHugger website, “converted from feces that is harvested directly from the driver — who sits on the bike’s toilet-styled seat.”
Toto is taking the bike on a 600-mile tour of the country, starting tomorrow. One of the stops will be in Nakatsu, home to a boulder that’s well known around the country, and uniquely appropriate for the occasion…
Here’s what tipped us off that this is for real: It’s a production model only, not destined for the showroom. It’s part of Toto’s campaign to reduce bathroom CO2 emissions 50% by 2017, in line with the Kyoto climate treaty.
Best of luck with that…
“In the mailbag,” a reader writes, “one subscriber opined that the protesters should march on Washington because ‘the parties on Wall Street…would not be there today if the people in Congress, the White House and the Federal Reserve had not rescued them.’ The real problem is that politicians are under the influence of monied interests.”
“The politicians need average Janes and Joes to elect them, but they end up serving the interests of the rich and powerful. A good symbol of that power is Wall Street. Despite the fraud that led up to the 2008 meltdown, the financial industry has managed to escape prosecution, take trillions of dollars in support and put the brakes on reform, all while continuing to draw unbelievable amounts of compensation.”
“The inordinate influence of the wealthy few over our government is what needs to be addressed. That concern is at the heart of the Wall Street protests.”
“For the reader who thinks that the Wall Street demonstrators have chosen the wrong location — well, they have also chosen the wrong ‘demonstratees.’”
“The ‘government,’ from the Offal Office to the slime oozing under the Capitol dome (Congress it’s called), allows the oligarchy. But they are not to blame either. Try the booboisie that elected them… Triumph to the sheeple won’t change.”
“Invade the trading floor(s)? Yeah the computers keep on byting. Where the hell is Stuxnet when you need it?”
“Love the protests, finally,” adds another. “In your record of what happened in London in 2005, how about making it 3,500 to storm the NYSE trading floor with bats?”
“And have those Greenpeacers do it again, of course in greater numbers — that is, I mean, get good ole revenge.”
“And last but not least, is it possible for Anonymous to virus those high-frequency computers, make them speed up or shut down or speed up and shut down?”
“Speak of the devil,” writes another, as if in reply. “Fox published an article today saying that the hacker group Anonymous threatens to hack into the stock exchange. The article quotes some as yes and some as no, but the FBI is taking it seriously.
“Is there a difference between the Wall Street protesters and the group Anonymous?”
“This highlights another safety feature of owning gold in storage in this computer-run world: Hackers can’t break into your gold and turn it into copper!”
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Baltimore’s version of Occupy Wall Street set up yesterday at the city’s Inner Harbor. Naturally we dispatched a couple of folks to venture out of the office to check it out. Right away, they ran into someone who said she’d read Empire of Debt…
“Even though it started at noon,” writes our correspondent Greg Grillot, “the vast majority of folks didn’t show up until 5 or later. Which made me assume they had jobs or class during the day.”
“At about 6 p.m., a few vans showed up, which we promptly unloaded in the bustling traffic. Some organization brought free food for everyone. At this point, about 200 folks were there. Mainly young, but a good amount of people in their 60s.”
“My general impression is that these are the disenfranchised and disempowered. And they’re (we’re?) coming together to formulate an action plan. This idea is at the atomic, grassroots stage, and that’s why the movement seems so amorphous right now.”
“I can say that a good deal of them agreed that 1) we need to stop fighting elective war — not necessarily due to innate pacifism, but since they feel a lack of opportunity and it seems suicidal to spend so much for these wars, and 2) they want to take big money and lobbyists out of politics.”
“There was an ocean of other demands, of course. But they had a messily orderly consensus vote process that they use to cover the minutiae of the protest (who’s on the sanitation committee?), and I assume they’ll get to the concrete demands with this process.”
“In short, this nascent movement is amorphous now, but when it coalesces, it will hum like a swarm of bees.”