The Economy Guy

Stocks were up most of the day, but fell dramatically at the end.  Stocks are still jittery (and highly volatile) with the European scene.
Bond interest rates remain low, and the Euro went sideways today.
Gold continued its upward trend, and oil/gasoline fell slightly.

In the news today…..

Canada raised interest rates – 0.25% to 0.50%.  This is the first G-7 nation to raise rates, and is significant for that reason.  The increase puts the Canadian key interest rate at 0.50% and this is still very stimulative to the Canadian economy.  I personally see this as significant to readers as the world’s idea of more reasonable interest rates are now turning to higher interest rates.  It is only a matter of time before the FED does the same time.

France fights credit rating downgrade – as it is afraid of losing its AAA rating.  France is cutting its budget in an effort to maintain its AAA rating, as they have been warned of the downgrade.  I don’t think the US government is listening to the same message.

Greek Government – advised by British economists to leave the Euro and go back to their own national currency.  This would allow Greece to default faster and get back into the Euro faster and as a more healthy nation.  The new Greek currency would be immediately devalued, and then decline over time for further devaluation until the trade balance of payments with Greece stabilizes, and Greece comes back into being a healthy, balanced economy.

Israel – is stationing a nuclear weapons carrying submarine off the coast of Iran.  This is another ratcheting up of the heat against Iran.  Also, with the weak response by the US  to Iran’s building of a nuclear bomb, and no trade sanctions in the foreseeable future, the Israelis must be very disappointed in the US, and is taking its own actions.

Tonight’s Dinner Conversation……

Wall St – Has anything changed? No is the fast and the slow answer to that question.

Wall St banks is providing the exact same behavior that they were doing prior to the 2008 economic meltdown, and they are doing it today.  Just to further hammer this point home, here are some examples of what is going on today:

1. Banks (think Citigroup, Deutchebank, and Bank of America) are using the “Repo 105” rule to adjust their quarterly balance sheets to appear conservative (like a lending ratio of 15 to 1) when in reality they are adjusting their lending position JUST BEFORE each quarter to look good on their public balance sheet.  Then they go out and borrow up the gills (like a lending ratio of 40 to 1) and start gambling again.  So, basically, while banks are not breaking the law; they are bending their moral compass off to NOT give a clear statement of their financial dealings quarterly – something that is the intend of good bookkeeping.
2. The stock market melted down a few weeks ago, and no one can explain how or why it happened.  The most plausible scenario I’ve heard is that automated (computer program driven) trading all kicked in at once and drove stocks down further and faster than they should go.  Some stocks went to ZERO value because there were no automated or manual buy orders left for that stock.   This should give you no confidence in how the stock market actually works.
3. Merchant Banks are still writing Credit Default Swaps in a totally “opaque” method.  In other words, no one really knows who is trading these, and how big the market really is.  As a comparative position, the New York Stock Exchange is totally “transparent” as anyone can see who is trading and how much is being traded.
4. Merchant Banks and Big Banks are gambling just as much as they did before.  That means if something went terribly wrong, the government would be faced with the “too big to fail” problem up close and personal AGAIN.  What would the government do the next time around – even though the political wind appears to be against bailing big banks out????
5. European banks are “opaque” in their ability to show what they own, and who has bought their debt.  What happens if a BIG European bank fails?  Well, I assume the European Central Bank will bail them out, but what about the US Banks who are holding the failed European bank’s debt?  Will they lose out?  And, will this cause weakness in the American banking system?
   

These few examples are meant to give you an uneasy feeling in the pit of your stomach.  Our financial system is unstable, even though the government and news and the banks all tell you that everything is okay.

My point is “Nothing has changed.”  Can you find anything that has changed from before the last meltdown and today?  So, if the US financial system is doing the same thing, won’t we get the same results???

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,024 (down 113)
10 Year Treasury Bond – 3.30% (down 0.01%)
Euro – $1.2237
Gold – $1225 (up $13)
Oil – $72.22 (down $1.25)
Gasoline – $1.98  (down $0.04)