DJ30 – 12,068   up 40
US Treasury 10 Year Bond – 2.07%    up 0.07%
USDEUR  -  1.3841
Gold – $1786  down $5
Oil – $96.98   up  $1.46

News from Europe……..

Italy voted, but Berlusconi lost his majority in the Italian Parliament.  He has agreed to resign.  All that is interesting, but not really important.   What is important is the 10 Year Italian Bond interest rate – which hit 6.71%.  This is very, very high.  I am waiting for it to hit 7.0%, and then I will raise the FINCON again.  Italy cannot survive economically with the 10 year bond rate at that rate.  It doesn’t matter who rules Italy, only its interest rate is important as of now.

We’re another day closer to a new Greek Prime Minister – and he should come soon.  The EU and ECB are insisting that the parties in power in Greece sign a document promising to follow the Greek austerity plan. Otherwise, they won’t give Greece the new money.

What’s really the problem in Europe?  Is it too much debt as I have stated?  Well, the debt certainly brings the problems to the fore.  The poor economic conditions in Europe also forces the issues.  But, it is truly the construct of Europe – the idea of eliminating nationalism by having a European Union – that is being tested and questioned.  The elite of Europe are committed to the EU and the Euro.  However, the population of Europe is questioning the premise.  The people of Germany don’t want to have to pay for the bailout of the Greeks.  The people of Greece don’t want to bear the pain of the austerity plan.  The people don’t like what’s going on – so their votes will ultimately decide the future of Europe.

FINCON = 2

DJ30 – 11,836   up 178
US Treasury 10 Year Bond – 2.01%    up 0.01%
USDEUR  -  1.3741
Gold – $1735  up $24
Oil – $92.51    up  $0.32

FED Meeting Results…….

The FED met and didn’t change anything for now.  It noted the 2.5% GDP growth in the 3rd quarter.  Here are the key statements:

1. Europe poses a threat to the US economy.  This is affecting confidence, and therefore growth in the US.
2. If Europe gets worse, the FED left open its ability to expand its holdings of mortgage securities (those toxic assets.)
3. Unemployment was predicted to be higher than they last predicted.  It will not drop to “normal” values by 2014.
4. 2012 GDP is predicted to grow at 2 to 2.5%, rather than the 3.3 to 3.5% previously predicted.
5. The FED hinted it may start raising interest rates as soon as mid-2012, and this had an effect on the Dollar and the Bond Market.
   

Lessons From Europe……..

Here are some lessons coming from the experiences of Europe – as they apply to the USA.  We can certainly learn from what is happening in Europe today.

Let’s start with the grand experiment in Europe.  Europe as everyone knows is much more of a socialist experiment than America.  They have national healthcare and national payments of all types to citizens.  America is heading in that direction through its passing of the healthcare legislation, Dodd-Frank regulations that constrain businesses (while not fixing the massive problems that contributed to the 2008 financial meltdown), new EPA regulations, political desire for higher taxes, etc.  But, Europe is a FAILURE – in the economic sense.  Ignore the differences – and concentrate on the common cause – DEBT.  Greece is a declared “bankrupt” state – that is financial FAILURE.  Why is America going in that direction?  But, you can say, Germany is a financial SUCCESS.  I agree, Germany is a SUCCESS.  But, if American is going toward the European model, and we don’t know if we are going toward the Greek model or the German model – why are we moving in that direction at all?  Why are we taking that risk?  It is so unnecessary.

Next, let’s move onto Greece specifically.  Greece teaches us that fiscal austerity is hated by the public.  Greeks are rioting in the streets of Athens and other Greek cities.  More importantly, those riots are far worse than things going on in America.  Greeks use Molotov Cocktails when they riot.  I don’t want to see that coming over here.  The lesson is simple.  Once the government gives something to its citizens, it becomes very difficult – or nearly impossible – to take it back.  However, America has too much debt, and our fiscal deficits are way too large. So, the Federal Government must reduce spending – and the citizens won’t like it.  In fact, the reduction in spending reduces GDP – another lesson from Greece as they see their annual GDP falling and pushing them into a deep recession.  So, the lesson to learn in America is that fiscal austerity must be done together with GDP growth measures (job creation, hopefully) – so that the net GDP of austerity and growth is neutral at the worst.

The last lesson that I would like to point out is the biggest problem facing Europe today.  Yes, their DEBT is the big problem, but their economy is slipping into recession – so GDP growth is their urgent problem.  A recession only makes things worse, and worse faster.  The EU is quietly looking at ways to fight the onslaught of a new recession.  They are specifically looking at reducing and eliminating REGULATIONS.  For example, they are considering dropping their CAP and TRADE regulations.  Their justification is that the rest of the world isn’t doing it, so why should they?  America is suing the EU so US airlines don’t have to pay for CO2 emissions.  Another example is in the UK – they are fighting EU regulations on their financial institutions in London.  The UK believes those regulations are stifling their ability to compete in that market.  America must wake up and learn that excessive REGULATIONS hurt the economy – so why are we doing it?

European Democracy…….

When the Greek Prime Minister surprised the world by calling for a referendum on the Greek Bailout Plan, he was excoriated by EVERYONE outside of Greece, and by most of his fellow politicians.  The only people who supported him was a majority of Greek voters – they want to be able to express their opinion on the Greek Plan.

You can understand that everyone outside of Greece didn’t want their boat rocked – but it has been rocked.

The Greek Prime Minister has one thing on his side – Democracy – the ability of the Greek people to vote on their future, and not have some bureaucrat decide for him or her.

Europeans have forgotten, or maybe they never understood, the power of Democracy.  Politicians in Europe (outside of Greece) aren’t asking their citizens if they agree with the MAJOR decisions they are making today.  You see – Europe’s financial future is at risk – and bureaucrats and politicians are floundering, trying to work their way out this mess.

Even though a referendum is not a typical Greek consensus tool (as it is in Switzerland) – it feels right to the Greek people.  I completely support the right of the Greek people to decide if they want in or out of the Euro.  Moving back to the Drachma would be traumatic, in my opinion, but it would also provide the ability for Greece to emerge must faster from their recession than having an austerity program imposed upon them.  I don’t they the Greek people understand it, but they would be voting to use the Iceland model of recovery, rather than the Ireland model of recovery.  Iceland is now growing while Ireland remains in a recession.

DJ30 – 11,658   down 297
US Treasury 10 Year Bond – 2.00%    down 0.17%
USDEUR  -  1.3698
Gold – $1720  down $4
Oil – $91.58    down  $1.61

The Greek Tragedy caused another meltdown today in stocks and commodities.  Bonds soared as money came to America.  Gold held up remarkably well.

A Greek Tragedy…….

This is very serious. The Greek Prime MinisterPapandreou has said he wants to have a Greek Referendum on the European bailout of Greece.  Why did he do this?

The US-born Prime Minister has a very slim majority in the Greek Parliament – with defections leaving his voting majority all the time as they don’t agree with the austerity measure being agreed by his government.  Today he has 152 votes out of a total of 300 votes – a very slim majority that could be overturned very easily.  Being a true politician, he wants to strengthen his position.  Here are some recent poll numbers out of Greece bearing on his decision:

1. 59% of Greeks don’t like the austerity measures.
2. 54% of Greeks want to have a referendum – while 40% want to let the government make the decisions.
3. 72% of Greeks want to stay with the Euro – and not go back to the drachma.
   

You can see from these polls that the Prime Minister is thinking he can win the “vote of confidence” as the majority of Greeks want it held.  He also sees that by having a referendum that approves the austerity plan, he can dampen the anger in Athens against the austerity as the “people of Greece” have voted on it – and it’s not just another government edict.

So, he has declared a “vote of confidence” to be held this Friday.  The issue to debate is whether or not to hold a referendum.  There are two possible outcomes.

1. Outcome 1 – he wins the vote of confidence. In this case, the referendum will be held in January.
2. Outcome 2 – he loses the vote of confidence. In this case, a new election will be held to see if a different government coalition can be established.  A new government does not mean there will be, or there wil not be, a referendum vote on the European Greek Bailout Plan with agreed austerity.
   

The politics of this first vote will be made around whether of not Greece should stay with the Euro, or go back to the Drachma.  The emotional side of the vote will be whether or not those “Germans” can tell Greece how much austerity they must endure to be able to accept the Bailout Plan.  Naturally, if the Drachma is chosen, that means that Greece will default on its EUR 360B debt – and all the Greek banks will be closed – bankrupted by the bond default.  More likely, they will be nationalized by the Greek government and opened the next day.

When the referendum vote happens in January, there can be two outcomes

1. Outcome 1 – the Greeks approve the European Bailout Plan with agreed austerity.  This would be a vote to go along with last Wednesday’s European Summit approved Plan.
2. Outcome 2 – the Greeks disapprove the European Plan.  This would be a vote for “default” and moving to the Drachma.  A true default would trigger a payout of the Credit Default Swaps (CDS) written on Greek sovereign debt.  It would trigger a greater (than 50%) writedown of Greek debt – it’s been estimated it would be as much as 90%.  Italy (whose 10 year bonds hit 6.3% today) and Spain would be the next targets of the “bond vigilantes” and that could crash all of European banks if the Greek default didn’t do it by itself.  Alternatively, this path could also be calling the bluff of the European leaders – this could be a way to be asking for better terms from the other Europeans to keep the Euro intact.  This is playing with fire.  Some Germans are willing to call that bluff.
   

Here are my predictions:

1. If the poll numbers are right, and the Prime Minister is astute, then he (and his socialist PASOK party) will win the “vote of confidence” this Friday.
2. The referendum will take place in January – and the Greeks will vote for the austerity plan and to keep the Euro.
   

In the meantime, the financial markets of the world, and especially the European financial centers, are placed in a state of chaos.  That’s why this is very serious.  This chaotic state will last until the vote of January is counted.

This action by the Greek Prime Minister highlights the weakness of the European Union structure.  When a single European state can hold the entire European continent as a hostage, something is wrong.  The Greek Prime Minister is doing the politically astute thing right now, but he also rattling the entire world’s financial markets.  Here is what is being jeopardized:

1. European bank stocks are in a meltdown today.
2. As the stock price falls, eventually the solidarity of each bank comes into question.  This is natural, and it happens in the US too.
3. If a bank fails for whatever reason (think of the Dexia bankruptcy last month as an example), then the cascading of bank failures is risked in Europe.
4. If “big” European banks fail, then US banks come under stress and strain.  Liquidity dries up, and banking stops.
5. Another Lehman Bors moment could be just a little ways away.
6. The Greek action of a referendum jeopardizing a “default” opens the door for other European nations to do the same thing – something that Europe can’t stand.
   

We now sit at a very precarious point.  The Greek Prime Minister has set into motion, a series of events which now become unpredictable.  What reaction will the European leadership now take?  It is the “unknown” future actions that could create a banking panic at any time.  We can hope that our leaders  react with sanity – but the European leadership has shown that it is truly in “reaction mode”, rather than calmly plotting a course with inevitable outcomes.

Events are happening very quickly in Europe and in Greece.  It could turn out that there is a “snap election”, to put in a new government as Papandreou is losing support hourly from his party.  His opponents do not want a “referendum” as they fear that the populace will vote down the “deal” agreed with Europe – they want to preserve the deal, and not have a vote.  (Isn’t democracy messy?)

Another event is the decision by Merkel and Sarkozy that Greece should take the bailout plan agreed by the European Summit and implement it this week.  (I feel the European leadership is in sort of a panic right now.)

Breaking Rumor – it was rumored that the referendum was dead on arrival, but the markets continued to melt down in spite of this rumor.

During the Cold War (and today too) the military signaled how “hot” the Cold War was at any time by declaring a DEFCON state.

So, I believe I will create a FINCON state for the Financial Condition of the World, and I am raising that state one notch – from State 1 to State 2.  We are now at FINCON 2.

FINCON State Definition:
State 1 – no concerns
State 2 – single nation in financial chaos (bankruptcy imminent)
State 3 – regional financial chaos (such as Europe, USA, Japan, Far East, South/Central America) is imminent.
State 4 – world financial chaos imminent (falling currency values)

DJ30 – 10.940   up 141
US Treasury 10 Year Bond – 1.91%    up 0.12%
USDEUR  -  1.3347
Gold – $1640  up $25
Oil – $79.76    up  $4.09

Gold went down to $1600 twice yesterday, and has confirmed that price level as a true support for the gold price.  Gold continues to consolidate and to go up.

Update on Greece and Europe…….

The news from Europe continues to drive the stock markets around the world – including the US.  But, now it appears to be “good” news.  It’s good in the sense that it isn’t pointing to the European banks going bankrupt – but rather to them surviving for the time being.

Yesterday, there was news coming out of Europe that the Finance Ministers of the EU nations agreed that they would “backstop” the European banks.  This means that they will be propping up those banks to avoid them going bankrupt in the case of a sovereign debt default (think Greek debt).  This news caused the massive 400 point rise in the DOW yesterday – from negative to positive.

How much money was needed?  Well, the amount of 200B Euros ($260B) was mentioned by the IMF.  I personally don’t believe this amount as any numbers coming out of Europe are always on the “low side.”  However, given the idea of banks having 10 times the loans as they have capital reserves – the addition of $260B would mean they could take on loans of $2.6 TRILLION – and this seems reasonable to me.  The downside of this thinking is that if the loans lose more than 10%, the banks are bankrupt again.

And in fact, they are bankrupt today – and they don’t have this additional $260B today – so these are words (just jawboning) that mean nothing in fact.

The European troika (EU, IMF and ECB) have saying that Greece will “probably” get its 8B Euro tranche of money and the Greek Finance Minister said that Greece will not run out of money (= default) until mid November – giving Europe a little breathing room to work out the rescue.  This is all good news as far as markets are concerned – but it doesn’t change the fact that Greece will default sometime in the future.

In the meantime, the Greek civil servants all went out on strike on Tuesday – shutting down all the rail services and air travel services, and everything else as far as that is concerned.  It isn’t pretty in Greece right now.

Another minor news article is that Moody’s downgraded Italian debt 3 steps yesterday – and the Italians shrugged it off, as they “expected” it.  There is nothing that the Italian government can do to avoid the downgrade (just like there was nothing the US government could do to avoid our downgrade).  Italians are spending more than they collect in taxes – so their debt and deficits are growing.  Ever with austerity (something the US government has not agreed to yet), the Italians are losing ground – and they are now the bogeyman in Europe (the one who will bring the house of cards down), rather than Spain (who could raise its ugly head soon.)

The IMF also said yesterday that it would buy sovereign debt alongside the EFSF (the European debt fund).  I consider this very dangerous – as the US is the major contributor to the IMF, and it is causing an obligation to US taxpayers without our approval or representation.  Think about that a minute.  What happens when those bonds to bad, and the IMF must write off the debt?  Where did the US money go that they lent out?  It went to “money heaven” of course.  I haven’t heard anyone in Congress talk about protecting Americans from the IMF actions.  Why is that?  I think it is that Congress is too focused on their own issues to look outside of itself – and maybe they trust little Timmy Geithner to protect Americans on this issue.

To give you an insight into European banks – consider the Dexia Bank.  It is now in deep trouble (again as it was bailed out in 2008 by Belgium and France).  Dexia currently holds a bunch of Greek and Italian sovereign debt, and can’t get day to day funding from other banks.  Dexia is very important in France as it is the main lender to French towns.  The solution this time around is to split the bank into a “good bank” and a “bad bank” and place the toxic assets in the bad bank.  How many toxic assets?  Well, they say (can I believe it?) 180B Euros (or $250B).  Now compare this number of $250B in toxic assets to the numbers the IMF was touting above.  Also remember that these toxic assets have some value (maybe 10%?), but even then the loss is enormous.  And Dexia is only ONE BANK.  What about all the other ones?  These numbers should scare you – it certainly has scared the banking markets (stock market and CDS market) – and you can actually learn from what the market is saying (risk, risk, risk.)  In the end, any loss to the owners of Dexia would fall on the Belgian and French taxpayers – as it is governmental agencies that own the bank in the first place.

My conclusion:  Europe is being forced to face its debt crisis – and to deal with it.  The US doesn’t appear to be aware that we are in worse shape than Europe – but we will be told about it sometime in the future.  Watch the bond market for that signal.  It was sovereign bond interest rates that caused Europe to act, and I believe that will happen in America too.

Ben Bernanke Speaks……

Ben was talking to Congress yesterday, and he said four thinks of note:

1. He said the US economy was “close to faltering” – I guess he is finally getting that we are going into a recession.  He is the last one to acknowledge this fact.
2. He said that “operation twist” would reduce the Fed Funds rate the equivalent of 20 basis points (0.20%) – and this is good for banks – so bank stocks went up on the news.
3. He said that “operation twist” was meaningful, but not enormous support for the US economy – this was a way of saying he didn’t expect “operation twist” to be the panacea many are looking for.  In other words, if the FED is to come to the rescue of the US economy when Big Ben says the economy is in the toilet, he will be doing something else (think QE3, or equivalent that means printing money).
4. He said that the Chinese currency is valued too low and it is causing our trade deficit to be impossible to balance.  I completely agree with Ben on this issue, and think that past and present President’s have been “weak knee’ed” when dealing with China on this issue.  I believe we should take a very tough stance and negotiate through a position of strength, rather than weakness.  They need us as much as we need them, and we could come to a more equitable arrangement if this was every addressed – and recognized by both sides.  Clearly the US doesn’t have experience or good negotiators working on this case – as China continues to gain from our relationship, and we continue to lose.

DJ30 – 11,154   up 143
US Treasury 10 Year Bond – 1.96%    down 0.05%
USDEUR  -  1.3583
Gold – $1616
Oil – $82.96    up  $0.82

Volatility in markets remains and has been with us for 2 months now.  This mean markets are in turmoil and it is very difficult to predict patterns and future behavior.  Investors beware.

German Parliamentary Vote…….

The Germans voted, and they voted overwhelmingly for Merkel and the expansion of the EFSF capability.  Most other European nations have also approved the EFSF procedure.  Slovokia is a holdout, but will vote next month.  Even the Finns approved the expanded capabilities.  There must have been a lot of arm twisting going on in Europe – you can almost hear it if you open your window.

The EFSF will now start to purchase national bonds.

All of this is aimed to calm the markets, and to prove that Europe is still cohesive and the Euro is intact.  So, what does this really mean?

1. Greece will still default on its debt sometime (unknown date) in the future.
2. The Greek bondholders will take a haircut greater in the future than if they took it now.
3. The European banks – ones who own Greek debt – are saved from a meltdown as the EFSF funds will save them as needed in the future.
4. The Europeans are heading off a Lehman Bros meltdown of liquidity in European banks through this action.
5. Financial markets should settle down now as “everything (?)” is under control now.
6. The German Parliament has spoken for the German people – but the German people can speak at their next election (should be fun to watch as Merkel gets kicked out of office.)
   

My interpretation is that the European have overwhelmingly voted to maintain the EU structure with the Euro.  They do not want to go backwards.  Also, they have not faced the truth of the excess debt accumulated in Europe.  They have effectively kicked the can down the road.  Hurrah for them!!!!!!  Should make their demise that much more painful.

And, the troika (EU, IMF and ECB) debt inspectors are back in Greece checking up on the Greeks to see if they are going to live up to their promises of deep cuts in the fiscal deficit.  More riots are predicted for Athens.  There are tax collection mass rejections going on with people who are supposed to collect the updated VAT rate in Greece.  Interesting – the people of Greece don’t like to live in an austerity budget.  (Neither will any nation.)

Some US financial observations…….

Unemployment Claims fell below 400,000 last week.  BUT – the government has introduced some “seasonal adjustments” which might explain the drop.  Only time will tell.

One third of US CEOs will be hiring or making capital expenditures in the next six months – as compared to one half of them 3 months ago.  Very negative.  I would think that CEOs are in the best position to see the US economy through their own glasses – and their company’s ability to sell their goods.

2nd Q GDP was raised from 1.0% to 1.3% – but this doesn’t mean much regarding our sluggish economy.

30 year mortgage rate is now 4.01% – great if you can qualify to get one.

DJ30 – 11,191   up 147
US Treasury 10 Year Bond – 2.02%    up 0.11%
USDEUR  -  1.3601
Gold – $1655  up $52
Oil – $83.53    up  $3.29

Positive day in stocks with big jumps of up to 6% in Europe.  Interest rates are rising, and have been up 1/4% in 3 days.  Gold turned around has gained today.

How to Multiply Money…….

Here is a great example on how to “print money” the easy way.  This is being planned right now in Europe and is a perfect example of how inflation really works.

The Europeans a little while ago in May, 2011 created the EFSF or European Financial Security Facility to provide 440B Euros, or about $600B, for use to lend out to EU/Euro members in financial trouble – think Greece, etc.  The EFSF is a credit facility which has a AAA rating – and this is an important point.  It is provided by all the EU nations and therefore by European taxpayers.  Consider this facility a very special bank with a singular purpose – because that is what the EU leaders are thinking right now.

Well, here is the scheme being devised right now.  The idea is to “lever up” the fund 8 fold.  How you say?  Well, this is just like any bank in the world that uses its deposits to lend out much more than it takes in.  This is called the fractional banking system.  The proportion classically used for levering up is 10 to 1.  So, 8 to 1 is a little more conservative?

So, levering up at 8 to 1, the $600B fund can lend out 8 x $600 = $4.8 TRILLION.  Now we are starting to talk about some real money here.

What are they going to do with that money?  They will purchase those bum bonds from Italy, Spain, maybe other nations like Greece.  Then the EFSF will hold those lousy bonds which in the case of Greece are worth about 50% (or less?) than their face value.  The lending nations (Greece, etc) are off the hook until it is time to pay interest on those bonds, or to pay back the principle.

The EFSF using those bonds are collateral will then issue new bonds for sale under its own banner of EFSF bonds – and these new bonds will be AAA bonds.  So, the EFSF will be paying the lowest interest rate while holding bonds from nations who have much less than AAA rating, and using those bonds as collateral.

Do you think this is a trick?  Well, it is, and if the population of Europe falls for it, they will be paying the price tag sometime in the future.  Or, following the US example, maybe their kids and grandkids will be paying the price tag.

Will this actually happen?  It all depends on the German Parliament.  They will be voting on this proposal tomorrow.

Where does this EFSF action go……..

It is pretty obvious that this money printing exercise will create inflation in Europe.  You can personally gain on this by “shorting” the Euro.  But, a warning, I don’t recommend doing this unless you are an expert in the futures market.  The Euro, technically speaking, will be going down to 1.29, and then on to 1.16 Euros/Dollar.

Then, a little further into the future, European inflation will pick up as goods from outside of Europe have higher Euro prices – like things from China or the USA.

A higher inflation rate in Europe will lead to a further slowdown in the European economy – and could lead from a recession into a depression.

There aren’t many actions being proposed or taken by governments today that don’t feed further into a very negative economy.  Our government and the world’s governments are all in collaboration in this – as the only way out of the debt situation they created in the first place.  From an economics point of view, any solutions must go to recession as the problem is excess debt, and the solution is always getting rid of the debt – either by default or by inflation.  Naturally, we are not used to this as a population because we personally ALWAYS pay off our debt by using earned or saved money.  The governments are much more devious, and are working against your best interest – so sorry to report this.  Remember to vote the pin-heads out of office – - – vote soon and vote often.

DJ30 – 11,401   down 108
US Treasury 10 Year Bond – 1.94%    down 0.14%
USDEUR  -  1.3675
Gold – $1788  down $30
Oil – $85.87    down  $3.07

Hope you are taking advantage of gold being below $1800 to make your purchases now.

The FED and Europe…….

The FED together with the European banks (Bank of England, European Central Bank and the Swiss National Bank) and the Bank of Japan have agreed to flood US Dollars into the European banking system.  Since the loans will be in US Dollars, and the FED is doing this at the request of the ECB, you can bet that the US taxpayer is on the hook if anything goes wrong.

Why is this happening?

As I’ve stated previously, the European banks were having great difficulty getting US Dollars as loans from the US Money Market – so a liquidity crisis was happening with European banks.  This is exactly what happened in the US in 2008 when Lehman Bros went bankrupt.  The solution is the same this time around – flood the banks with so much money that they are swimming in it.

How much money?

No one really knows as this is a “FED secret” – but in 2008, the amount was about $800B.  This time around you can bet that it is at least that amount.

Why now?

Well, it looks like the FED learned something during the Lehman crisis.  They learned that they were “late” in getting the money to the party.  So, they are trying to head off the crisis early this time and sending the money over before the European banks start collapsing.  Would they really collapse?  No, not really.  They would be bailed out by their national governments first – but that would look bad.  And the amount of money for some countries would be multiples of that countries’ GDP – so the bailout would look a little phony – just printing money.

Printing money?

Yes, you got it.  Where are all these billions coming from?  From the FED printing press.  If the money gets spent, it will cause inflation.  Naturally, that is not the FED’s plan.  They plan that these loans will be repaid, and the money will go to “money heaven” so basically, nothing happened.  Get it?  But, the world is a financially dangerous place, and anything could happen.  So, stay tuned to the news.

What’s coming up this week at the FOMC (FED Open Monetary Committee) meeting?

You can bet that this topic of loans to all the European banks is the number one agenda item.  We all thought that they would be talking about QE3, or something like a “bond twist” – but that will now take second agenda item.  This FOMC meeting will be the big news for this week.

What about Europe and Greece?

Well, it continues to plug on.  The key questions are “Will the Greeks get their next loan installment payment?” and “What are the Germans going to do?”

I think the Greeks will get their money as something will get worked out.  The threat of a Greek default is what’s causing the European banks to have this liquidity crisis.

The German question is the big question.  Merkel wants to support the EU and the Euro, but the German population doesn’t want to be the taxpayer for the rest of Europe.  Merkel, being a politician first, knows this, and is putting her in a pickle.  This will be the “wild card” that might set the world afire in a financial crisis.  You can see that the FED is doing everything within its power to avoid a meltdown of European banks.  More on this coming….

DJ30 – 11,539   up 255
US Treasury 10 Year Bond – 2.27%    up 0.08%
USDEUR  -  1.4509
Gold – $1815     down $5
Oil – $87.41    up  $2.05

In my opinion, stocks are still in a bear market, and anyone who hopes to sell some stocks before a further fall in prices should take advantage of this bear market rally.

More on Europe……

Here is the big picture on Europe, and what is going to happen in the future:

1. They hang together, or
2. They hang apart.
   

In other words, they (meaning Germany and a few others like Finland) agree that Eurobonds are a great thing, and Germany will pay the bill for the rest of Europe being bailed out, or

They split apart somehow and the EU and Euro as we know them will be destroyed.

Here is the latest…..

Germany is having a very difficult time deciding on whether or not to bail out the rest of Europe.  Here is how it breaks down.

1. The Chancellor, Angela Merkel, wants to do it.
2. Her party is rebelling, the people are against it, and she is losing elections.
   

The people of Germany are 75% against bailing out Europe and 15% for bailing out Europe.  That is pretty definitive, and it is very easy to predict what will happen.  That popular opinion will swing politicians against Eurobonds within Germany.  Merkel and her supporters will try everything, including guilt – after all they are all Nazi’s, or decended from Nazi’s, or something bad like that – so they should do the right thing and help their poor neighbors.

Naturally, the German people are hard working, and the ones alive today didn’t have anything to do with WWII history, and don’t feel obliged to bail out their neighbors.  Their thinking goes like this.  It is great to lend money to a close relative – maybe.  But, you wouldn’t lend money to a distant cousin.

We reported previously that one Finnish party is also against bailing out Greece.  Well, the Finns are smart folks, and they did a private deal with the Greek government.  In return for Finnish support of an EU bailout that Finland would support and contribute to, the Greeks would agree to give some of their bailout money directly to Finland as collateral.  Naturally, when this secret got out, a lot of other nations wanted on this band wagon – including some Germans.  If you think about  it a little while = if everyone gets paid off who contributes, the  bailout gets much bigger and out of control.  It just doesn’t make sense.

The thing I get out of the Finnish story is that nations are still nations.  They are out for their own good, and they come first before their EU neighbors.  Kind of harsh, but true.

The German Supreme Court is ruling very soon on whether or not the European Central Bank violated its own rules by taking on European sovereign debt as collateral onto its books.  Its rules are very clear – they can’t do that and remain independent as a bank.  So, the German highest court may cause a major uproar within Europe very soon.  Here is a side problem with the ECB.  What happens if the bonds on the ECB books goes bad?  Who pays?  Who gives the ECB the money needed to bail itself out?  The Germans naturally.  So, this will make the German population even more mad.

My conclusion……

Given the lack of support for Eurobonds within the German population, the Eurobond idea is dead.  The leaders of Germany just don’t understand that yet.

There are a bunch of smart people looking at the possibility of how Greece could be kicked out of the Euro with the least problems for everyone else.  As an alternative, the idea of Germany going back to the Deutschmark is also being studies, but this option appears to be fraught with too many problems.

I believe that Greece will ultimately get kicked out – as a decision which is the least bad option.  The losers in this case are the supporters of the “United States of Europe” as a stronger Europe just isn’t on the card, and not in the hearts of Europeans today.

This will take a long time to sort out, and in the mean time we will probably get another catastrophe out of Europe that will affect us directly.

European Banks……

European banks are having large liquidity problems.  We see it every day in the news, but it is hard to understand as it comes out in the statistics.  Within the next month, I would expect that European banks will just dry up and stop lending to one another.  This will look just like the US in 2008 (the Lehman crisis) – and a lender of last resort will have to come forward to provide liquidity to all the big European banks – and I do mean all of them including the UK banks.

One of those statistics is the interbank interest rate – which is rising among European banks as you read this.

The choice for that liquidity injection is the ECB – which is having its own trial by fire right now – the IMF – which doesn’t normally do that type of bailout – and the FED – which is my choice for printing money faster than a speeding bullet.

The FED announced in Jackson Hole that it was expanding its September FED meeting from one day to two days.  That has given rise to a lot of speculation.  I will add to that speculation, and say that the plight of European banks will be on the FED agenda.  Let’s wait and see.  Of course, the European banks could freeze up well before the FED meeting, and impolitely not wait for their machinations, but that’s life.

DJ30 – 10,855   up 37
US Treasury 10 Year Bond – 2.09%    up 0.02%
USDEUR  -  1.4357
Gold – $1895     up $48
Oil – $84.10    up $1.84

Stocks, bonds, Dollar, oil all sideways.  Gold, on the other hand, HIT AN ALL TIME HIGH again.

Understanding the Gold Market today……..

I have been trying to understand the dramatic, even parabolic, rise in the gold price recently.  And, I have come up with a hypothesis – yet to be proved – but a good one that explains an awful lot of the action.

I don’t know if you’ve seen that Chavez of Venezuela has nationalized his gold mining industry at home, and has asked for all the gold bullion being held outside of Venezuela to be shipped back to him.  This is one of those political actions that has repercussions (reactions).  I think he wants to get his hand on his country’s gold before his upcoming elections – just in case it gets ugly in Venezuela and other nations want to put sanctions on him – think about Syria right now as an example.

The Venezuelan gold is held in London in various banks.  For example, the Bank of England is holding 99 tons of gold, and it has said it would ship it back to Venezuela.  But, there is over another 100 tons of gold being held by various banks – like JP Morgan and others – and Chavez wants them to send him his gold too.

Here is where the intrigue lies.  If these other banks used the Venezuelan gold to back the writing of futures contracts or leased the gold out, then when those banks sent his gold home, they MUST replace the gold to continue backing those previous actions.  This means they would have to go on the open market and buy tons and tons of gold – over 100 tons.  Now, that’s a lot of gold.  Guess what would happen to the price of gold with that big a BUY order?  It would skyrocket, of course.

And, more interestingly, if those banks have any problems obtaining physical gold to replace what has been shipped, the NERVOUS central banks around the world might just get real nervous themselves and ask for their gold back too that has been stored for safekeeping.  That would be a “run” on the gold banks.  And, it would cause pandemonium – to the upside – in the gold market.  I think this is why JP Morgan has predicted that gold will hit $2500 this year.

M2 Money Supply…..

The US M2 money supply measure is going up.  The normal rate of increase has been $10B per week.  However, for the past 6 weeks, that rate of increase is $60B per week.  This has never happened before.

I consider this a very significant event in the US monetary system.  It helps explain why the big banks are now charging companies to deposit money in their savings accounts.

My belief is that the Europeans are panicking right now, and getting their money out of European banks.  Their safe destination?  US banks, of course.  It’s very interesting how the world is very strange right now, and that is a danger sign – all by itself.

DJ30 – 11,406   down 77
US Treasury 10 Year Bond – 2.21%    down 0.07%
USDEUR  -  1.4411
Gold – $1787     up $21
Oil – $87.00    down $0.68

World Stock Markets………

All of the world stock markets are signaling a bear market right now.  Most of the markets sit at their 2010 support levels, and any break below those levels will result in a test of the 2009 lows in stock values.  So says Louise Yamada – one of the best stock market analysts around today.

The Bluebird – S&P Downgrade…….

When the S&P downgrade first came out, I told you that nothing much would happen in the US economy from that downgrade.  And, other than a dramatic FED announcement of low interest rates for 2 years and the subsequent stock market collapse, nothing much has really happened.  Have you noticed your life impacted by that downgrade?  I haven’t.

However, I have had more time to think about this “bluebird” event – one that came out of the blue and strikes you hard – and here is what I think will unfold based on this downgrade.  It isn’t in the US, but in Europe where the ramification of the downgrade will hit.  Here is how:

1. The US bonds are pretty good – ones that will pay interest on time – in spite of the gridlock in Washington politics.
2. European nations are not and have never been as sound as the US.
3. S&P (and others?) will start to look at the AAA rated European nations and ask the question – “How can the US be AA+ and these nations be AAA.”
4. Downgrades will take place over the remainder of this year.
5. With those downgrades – the banks within those nations will be downgraded too – as they hold the debt of their nations.  If the debt is lower than AAA, the bank must be lower too as they hold that de-valued asset.
6. With the downgrade of a bank – the interest rate paid on those bank bonds will go UP.  We have seen this already in the bankrupt nations like Greece, Ireland, Portugal – and started to happen in Italy and Spain – and that was national debt, not the lower quality bank debt.
7. If fear sets in, there could easily be a run on hose banks.  We are already seeing a run on Greek banks.  A run on a bank is when the depositors withdraw their savings – due to fear of loss of that savings.
8. A run on a bank will cause the bank to go bankrupt – and default on their bonds.
9. US banks hold European bonds and have loaned money to European banks.
10. US banks start to weaken due to losses on European bonds and European loans to their bum banks.
    

I think you are getting the pattern above.  And, it is caused by the S&P downgrade of the US Federal Debt.

This negative outcome makes a lot more sense to me than other possibilities like increases of interest rates for US Treasury Bonds.

US Treasury Bonds will have higher interest rates in the future – but not before the 2 years of FED action – unless the FED changes its mind during those 2 years.  The bond market vigilantes will cause US Treasury interest rates to go up by not bidding during new Treasury auctions.

So, how does the system collapse under the above scenario?  Well, it does it like most scenarios – it becomes its own BLUEBIRD moment.  In other words, one day everything is fine, and the next day the world has stopped.  It’s just that simple.  That is exactly what happened on that fateful weekend the FED decided to let Lehman Bros go bankrupt – the banking system froze up, and stopped working – all in a single day.  It could happen again.

The rapidity of a collapse (of a national debt, a corporate debt, a bank’s debt – just about anything) happens so fast, and with such little advance notice, that it catches 99% of the world by surprise.  Please be one of the lucky 1% who can see it coming – and prepare yourself for it.

European GDP Growth…….

I told you last week that France 2Q GDP was ZERO percent.  While that is a disaster in itself, today the total European GDP growth rate came in at 0.2% – and this is very near zero.  Germany’s 2Q GDP growth was 0.1% – an extremely low number.  Why is this such a disaster?

Simple, really.  With lower GDP growth, the European nations will have lower tax revenues.  And, as European nations run deficit spending (like us), the lower tax revenues will mean higher deficits (unless there is massive austerity measures initiated – as being promised in Italy).  And, higher deficits will mean higher debt, lower confidence in that debt (lower debt ratings – see above), and higher interest rates on European national debt (and I mean France and Germany and the UK).

All this leads to the ultimate demise of European debt through either:

1. Default – non payment of the debt
2. Inflation – printing their way out of the mess by paying off debt with new money – and this is my likely scenario.
3. Growing their way out by increasing GDP – a very likely scenario in a world where slower growth is signaling RED right now.
   

Angela Merkel and Sarkozy met today in Paris and didn’t come out with any statement on a “eurobond” which investors think is the only solution to the long term bond problem sweeping across Europe.  They did say that closer cooperation of European nations was needed – and this was just a platitude to be ignored in my opinion as it doesn’t address the debt crisis the Europe is facing.