Saturday, May 22, 2010

Meat is meat

First time unemployment claims jumped up unexpectedly reversing a gradual decline over the past five weeks. Major corporations continue to replace middle class jobs with temps and lower wage replacements. Local governments and schools are continuing to layoff or cut hours with shrinking budgets as tax revenues decline from (you guessed it) so many people being unemployed and they are reinforcing the problem by cutting still more jobs. The good news is that all the states who had the backbone to put tax increases on the ballot saw them pass which will slow the hemorrhaging in those states.

The Euro has stabilized with pressure from Germany to end naked short selling which the German government characterized as a wolf pack threatening the world economy. Unfortunately there is nothing surviving in the financial reform bill to end naked shorts selling and you can expect the wolves to begin howling again when Congress ends the debate. The big Wall Street banks still have access to the Fed Window to borrow money at zero interest and use it to pump up the derivative market and drive down anybody’s economy they choose to prey upon. Germany’s protests will probably have little effect in the long term as the derivative trade is centered in New York and London and beyond their reach.

The US and the UK were on the verge of having their currencies become worthless until the wolves began tearing at the underbelly of Europe. Unfortunately for the Brits they are very close to the top of the list to come under attack from the same predatory trading against their debt and the Pound Sterling itself. It’s only a matter of time before the USD and US Treasuries come under attack as well. These predators may call Wall Street home but care not about the fate of the United States (to a wolf, all bloody carcases smell the same).

US equity markets were Friday after a steep decline but the rest of the world saw their markets continue down. Gold priced in USD is going up again after falling back earlier in the week. Oil continues to hover around $70 a barrel as concerns about the Euro collapse combine with an over supply of oil to depress prices. There is getting to be so much oil that you can go down to the beach anywhere and just help yourself.

Tuesday, May 18, 2010

Flash Deflation

The Euro plunged to new lows as Germany banned the naked short selling of bank stocks to avoid a Greek tragedy of its own. Wall Street huffed and puffed that Germany is desperate and has no business doing such a thing, read that, Wall Street missed making a killing. Naked short selling is a derivative exchange where nothing of any value is traded but since these instruments can in theory be traded for real stocks they do in fact set the market. This works in the same way Wall Street banks add another dollar onto the price of gas by running up the futures market.

The big Wall Street banks still have the trillions they were loaned interest free by the Federal Reserve after the crash and since the Fed has been "afraid" to tighten lending, the free money continues to flow. Nobody is safe from this sort of predation. The Republicans are filibustering a bill that would restrict the practice of naked short selling in the US. The SEC is rolling out new market rules that will severely restrict trading in large stocks with the intention of preventing another Flash Crash. They have yet to really explain the how this crash occurred but the fix indicates that they see a systemic risk from the massive trades the Wall Street banks are capable of making.

The thing to remember is that the Wall Street banks aren't gambling with their own money but with borrowed money. Their entire liquidity was wiped out during the last crash so it's only a matter of time before it all comes crashing down again. When a huge amount of debt is wiped out as happened in 1929 then runaway deflation sets in. Prices fall uncontrollably, businesses can't borrow and are afraid to buy anything because it won't we worth as much tomorrow if they can sell it at all. Massive layoffs begin to create a self reinforcing spiral of collapse. The government can step in with printed cash but they've already done that and it won't be as well received this time. There is also the problem of everything coming from China and that could stop which would create total chaos in short order.

This scenario is a real economy killer and sets the stage for fascism to take hold as it becomes tempting to take the assurance of stability (and something to eat) in place of that messy democracy. Anybody who thinks voting is a waste of time will miss it when it's gone.