Wednesday, April 28, 2010

Just Fleeing

The Republicans in the Senate are backing down their just say “no” position on the Wall Street reforms after Harry Reid changed his vote to “no” on this morning’s vote to open debate. By doing this Reid is in a position to call for a vote at any moment and he announced that the Senate would remain open for business all night. Republicans would presumably be obliged to attend or read about the vote in the morning. Normally this sort of parliamentary maneuver is not seen in the Senate but since the Republicans have already gone past any imaginary line of decorum that had existed, Harry is taking off the gloves.

There is a growing sense of urgency to create a mechanism for dissolving the Wall Street banks as the world economy threatens to collapse. The Asian markets took another big dip yesterday as the Greek tragedy spread through Portugal and into Spain with S&P downgrading their debt a notch. Spain is in much better shape than Greece but is also much bigger. Portugal, Ireland, Greece and Spain (the PIGS countries) had all been drinking the Chicago School of Economics kool-aid to one degree or another. Nobody knows just how much peril they are really in since it’s unknown how much of their debt is hidden among complicated synthetic financial instruments created by you guessed it; the Wall Street banks.

The Asian markets will open again this evening our time and if they don’t accept the reassurances by the German government that everything will work out fine then things could get ugly. The Wall Street banks have been using the interest free money they have been getting from the Fed to pump up the markets by taking advantage of the carry trade. The carry trade is where you carry cheap money from one country into a country that offers a better return and enjoy profits with no real investment required. The risk to this is a sudden change in currency values which could make you over leveraged. (that’s Wall Street speak for broke) The sudden strengthening of the USD as many people flee the sagging Euro could be such a triggering event.

The only way for an investor to avoid the worst happening is to sell off holdings at any price. This is called a market panic because buyers become scarce no matter how low prices go. The Chicago School says these things don’t happen in a free market because there are no bubbles. They are still saying that and balk at any responsibility for the current depression and basically claim it’s all in our heads. US markets were up today anyway as the Fed confirmed that the free money will continue flow to the Wall Street banks for some time to come. Gold was up worldwide with brisk buying as not everyone is fleeing the Euro to the USD, some are just fleeing.