Euro Spring for 2012?

Telling chart from ZeroHedge.

Picture this: hoards of idle youth roaming the streets of Europe as buds begin to bloom. And there may be more layoffs coming if overnight credit freezes even as the snow melts. Don't think it can happen?

Then read this. European banks will have to hunker down as their collateral loses value, thanks to the European Central Bank's determination to subordinate all distressed sovereign debt held by private-sector lenders. Rates will rise, countries will default, and credit-dependent employers will run out of cash. It will be oog-ly.

Quote for the Week, Jan. 29-Feb. 4, 2012

In economics, hope and faith coexist with great scientific pretension.
--John Kenneth Galbraith

Dr. Doom Looks Through the Gloom

Nouriel Roubini thinks he sees a way to avoid the coming collapse of the Eurozone...

...but we may be past the point where Keynesian intervention can work. Deficit spending by sovereign governments can sometimes create a hothouse environment for economic growth, but not after future growth has already been pulled forward through over-borrowing. Fiscal stimulus now would just add to the debt overhang, further damaging long-term prosperity. Doug Casey proposes instead that government spending be drastically curtailed and sovereign debts repudiated. "Those debts," says Casey [interview here], "constitute an unethical mortgage without consent on the next two or three generations of people as yet unborn as a result of the excess consumption of their parents and grandparents."

Meanwhile, the European Central Bank's attempt at monetary stimulus is coming up dry. As Bloomberg reports, cash that might otherwise go for private-sector investment is being used instead to refinance sovereign debt, effectively starving the economy. When companies run out of cash, companies default. Companies default, workers are laid off. Workers are laid off....

You get the picture.

The State of the Union--Unvarnished

Karl Denninger gives his.

[excerpts:]

"The simple fact of the matter is that we are borrowing more than one third of every dollar the federal government spends. This will double the national debt in less than a decade -- again. We have added more than 50% to our federal debt in three years, and we cannot continue on this path. Eventually, foreign and domestic creditors who have lent the government that money will go on strike, dramatically raising the cost of financing. When this occurs we will be forced to cut the size of government by more than 50% in an afternoon, instantly collapsing all of our federal social programs....

"The tax system at the corporate and personal level favors debt instead of equity, leverage over thrift and industry. This must end. The Fair Tax is one such way to do so; by zeroing the corporate tax and rendering all taxes on consumption it removes the preference for debt over equity, makes lobbying for special preferences impossible and makes the cost of government instantly visible and transparent to everyone in the nation. The Internal Revenue Code should be burned to ash and replaced with The Fair Tax tomorrow morning....

"...today America is not a bastion of capitalism. Many have claimed that we now have 'crony capitalism' but that too is a misnomer. Capitalism is the premise that one succeeds or fails through the wisdom of one's investment, predicated on capital formation (that is, the investment of economic surplus into various economic activities.) While the vestiges of this system remain in America, what has replaced it is a feudalistic system of scams, frauds, allegedly 'lent' funds that do not in fact exist and bribery of various forms, both legal and not."

Complete address here.

Quote for the Week, Jan. 22-28, 2012

My opinion is that there would never have been an infidel, if there had never been a priest.
Thomas Jefferson, U.S. President [1801-1809]

Be Like Mitt

"What did I do?"

Republican presidential candidate Mitt Romney came under fire this week for some of the things he had done in a previous life as a venture capitalist with Bain Capital. Let it be noted that his antagonists did not call him a venture capitalist. They said vulture capitalist. According to them, Romney and his fellow raptors made a habit of swooping down on struggling companies, gutting them, and leaving carcasses. It was creative destruction writ large, very large, with "destruction" italicized, capitalized, bolded, underlined, and color-fonted. Pretty coldhearted, but also very American.

Now you, too, can be a vulture capitalist. And you don't even need Mitt's millions. For the price of two cappuccinos, you can buy a share of Bank of America's common stock and rub wings with other shareholders of a similar feather. You see, there is a fire sale going on at BofA, where management is converting to cash anything not nailed down. During 2011's fourth quarter, the company (as we learned from this morning's earnings release) sold an equity stake in China Construction Bank for $2.9 billion and assorted securities for another $2.4 billion. After all that, pre-tax income came to $2.7 billion, which suggests to me that the rest of the business, the part that stays, was losing money.

As Mitt will tell you, timing is everything. If you do decide to fly in for some warm flesh, make sure you are not the last to leave. When they start selling the furniture, you want to be gone already. Just like Mitt.

[update, 01-23-12--]

Go here to see how Mitt and his minions benefit twice from preferential tax treatment.

Quote for the Week, Jan. 15-21, 2012

Human nature cannot bear prosperity. It invariably intoxicates individuals and nations. Adversity is the great reformer. Affliction is the purifying furnace.
--John Adams, U.S. President [1797-1801]

BAC From the Dead?

BAC, 6-month chart

You can see it, without squinting even. Bank of America's common stock (ticker symbol: BAC) has risen in price per share by nearly one-third since mid-December. Last Thursday's up-thrust on heavy volume (over a half-billion shares traded out of ten billion outstanding) was a technical signal to just go long, baby. Pension-fund managers and Congress critters everywhere are breathing sighs of relief. The bottom, they hope, is in.

If BofA actually had a viable business model, with neither legacy liabilities nor regulatory repression, I would be buying the shares with both hands myself. But it doesn't, and I won't. Let me suggest instead that this is a heaven-sent opportunity to divest. This is actually the fourth such opportunity in the past thirteen months, starting with the Santa Claus rally of 2010 and running through the Saint Warren rally, the Big Bazooka rally, and now the Dow Dog rally. That's right, traders are piling into the worst performer of the 30 Dow Jones Industrials in 2011 (when BAC was down 58%) according to the knee-jerk, brain-dead theory that such a dog deserves a dead-cat bounce. Although they won't call it a dead-cat bounce. They'll call it a reversion to the mean, as if there were some sort of mathematical inevitability to it.

When I do the math, I still see declining organic revenues, ballooning legal liabilities, and unquantifiable derivatives exposure. BofA may have a random profitable quarter in the near future, but only through divestitures, draconian cost-cutting, and courtroom dallying. One suspects from the power of the recent rally that short-sellers are covering. But the scalloped pattern in the chart above shows that the shorts do re-load, kicking off another scoop down in price. Each rally high is lower than the one prior.

JP Morgan Chase reports Q4 earnings on Friday, and the other banks will follow next week. Let us see if the news is sold. "Friday the 13th will live up to its name when it comes to bank earnings," bank analyst Mike Mayo tells Bloomberg. "You're going to see all sorts of revenue and margin pressure."

Picture of Fear

Cash in Europe has nowhere else to go.

[chart from ZeroHedge--click to enlarge]

When the economy is running smoothly, banks lend to each other readily and willingly. Conversely, a curtailment in inter-bank lending is a sign that the economy is stalling. Or, in the current instance, seizing. The chart above shows that European banks with money to spare are parking it with the European Central Bank, not lending it out. Deposits at the ECB have reached a record €464 billion, higher than the peaks seen following the Lehman failure of 2008 and the flash crash of 2010.

These deposits have soared by €200 billion since December 21, when the ECB released a flood of fresh three-year loans through its Long-Term Refinancing Operation (LTRO). The operation is a desperate attempt to sop up impaired collateral held by stressed Eurozone banks, such collateral consisting of either discounted sovereign bonds or their own junk-rated debt. Collateral is the grease that makes the whole Rube Goldberg machinery run. When it goes bad, the machinery grinds to a halt. As the Wall Street Journal explains, "banks favor using the ECB as a safe haven for excess cash rather than lend it out to other banks...due to concerns about their counterparties' exposure to risky euro-zone sovereign debt."

Bond expert Marc Chandler, at his niftily named blog (www. marctomarket.com), points out that Eurozone banks need to re-fund, or roll over, €230 billion of their own maturing debt and expects that "the bulk of the ECB's liquidity provision will not be used to buy sovereign bonds, but to address the banks' own needs." Charles Smith, Chief Investment Officer at Fort Pitt Capital Group, uses more colorful language to describe this shell game:

These “refinancings” are nothing more than the (panicked) banks dumping their very worst collateral on the ECB to cover immediate withdrawals/maturities. And these withdrawals/maturities will keep on coming! And if they run out of pledgeable collateral, no worries. They simply issue new bonds, get a government guarantee on those bonds, and then post them as collateral for cash at the ECB. Italian banks issued 40 billion euros worth of such bonds yesterday! There’s a very vulgar term for this sort of behavior…”circle jerk”.

ZeroHedge insists that much of the LTRO liquidity is coming right back to the ECB as overnight deposits. The depositing banks no longer have a sufficient collateral cushion to recycle the 1% LTRO debt into higher-interest loans (e.g. short-term sovereign notes), thereby earning a positive "carry." Instead, they park the cash for 0.25%, effectively earning a negative return. Such is the price of impaired collateral, which itself is the end-product of risky lending.

Negative interest rates are a harbinger of impending deflation. Bloomberg Businessweek reports that earlier today Germany sold a six-month bill yielding -0.01%, "the first time a national money market instrument offered a negative yield" at issuance. Secondary markets have been marking yields on Germany's one-year debt below zero since November 30 [FT]. Before this is all over, we shall hear of many more "first evers."

[update, 11:30 a.m.--]

Reuters has an article just posted on how private-sector non-banks, and not just the ECB, are becoming sources of cash for struggling banks. These non-banks are familiar names--Johnson & Johnson, Pfizer, Peugot, etc. They are cash-rich multinationals looking to put their money to work (but not, it should be pointed out, by investing in their own businesses). They are the "shadow" bankers. They lend to the banks through so-called "repo" transactions, in which they buy collateral from the banks, then sell it back later at a discount, pocketing the "haircut." Lehman Brothers, you'll recall, used repos to hide the firm's leverage from investors and regulators. Remember how that turned out?

Quote for the Week, Jan. 8-14, 2012

Beyond a critical point within a finite space, freedom diminishes as numbers increase.
Frank Herbert

David Collum's Year in Review

This chemist gives it to you straight.

David Collum, professor of chemistry and chemical biology at Cornell University, surveys the global economic landscape--and does not like what he sees. In his review of 2011, Collum describes both the trouble in which we find ourselves and the opportunity to set things straight. Included is a list of books and links that will get you up to speed. Here are two nuggets to whet your appetite, the first pertaining to the Federal Reserve, which, you may be surprised to learn, does not exist to serve ordinary taxpayers...

Here's my biggest gripe in a nutshell. The Fed, whether it's a wholly owned subsidiary of the banking cartel or not, is charged with protecting the banking system. Period/full stop. The banking system is global. Period/full stop. Ergo, one does not even know if the Fed's actions are in the best interest of the United States. Period/full stop. What is to prevent them from sending trillions to Europe, Asia, or any faraway place because bankers got themselves in trouble? Absolutely nothing; they do it relentlessly...We keep hearing that we made money on the bailouts, including from General Motors! That's an OMG/LOL/WTF all rolled into one. The $700 billion TARP was put on display for public consumption. It was designed to be paid back in the light of day. The rest of the money [at least ten times as much] entered the system covertly.

...and the federal government, which (now you've got it!) does not exist to serve ordinary taxpayers:

Government is a living, breathing organism that exists to perpetuate itself. There is nothing that says evolution must create a pleasing government better suited to individual liberties. History paints an altogether different picture. Possibly the single largest selection pressure is money. It has always bought political favor. When our government was a few percent of GDP and the industrialists were buying favors while building a nation, government had little power to wield. When money commandeers the machinery of a huge government, however, you have a monstrously expensive and intractable problem.

Quote for the Week, Jan. 1-7, 2012

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
--Charles Mackay