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Traveling Into Uncharted Waters Looking for Ben

Posted by Larry Doyle on November 29, 2011 6:51 PM |

What lies ahead on our global economic landscape?

While market analysts and economists are paid to provide opinions, you know what they say about opinions.

Our global economy and markets have been supported by such unprecedented levels of government intervention with accompanying massive unintended consequences that trying to navigate our economic landscape can only be equated to “traveling in uncharted waters.”

Certainly, assorted market mavens, economic soothsayers, and political pundits will offer their opinions — and that’s what they are paid to do — but let’s be real, we are so far over our heads in terms of ongoing embedded losses in our global banking system that we really cannot provide a longer term chart for what lies ahead.

I defy people to provide a well defined outlook for what will likely happen in Europe and to the euro. The stakes are so high and the pressures so great that any number of scenarios could play out. How the chips fall will have tremendous ripple effects across all market sectors and the economy at large.

I am not so sure the banks themselves know how to fully and properly prepare for what might lie ahead. My personal take is that the major banks on Wall Street and their counterparts in Europe assuredly have Ben Bernanke’s direct line on their speed dial.

The fact that Ben bailed out the global banking system back in 2008 has set a precedent for this next iteration of our global economic crisis.

Navigate accordingly…and bring your life preservers.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

 

 

  • LD

    Euro-Zone Falls Short on Fund

    The rising debt-financing costs of Italy, represented at the meeting by its new prime minister, Mario Monti, were a major concern of the meeting, officials said, adding there were worries about the country’s heavy borrowing need of about €400 billion next year.

    An IMF official said the Washington-based fund could at present provide €100 billion to help Italy, if it came to that. That means that to assemble a credible backstop, the Europeans would need to raise a substantial amount of money elsewhere.

    Jean-Claude Juncker, the Luxembourg prime minister who leads the finance ministers’ meetings, said they “would continue to explore further options to expand” the fund.

    Elsewhere?

    Explore further options??

    Hello, Ben??!!

  • Bill

    Larry, you’ve been a Wall St. player. What is your take on battening down financially for a storm? I’ve given it a lot of thought. There’s the raging inflation scenario, which to me indicates precious metals and maybe other commodities. But that would get killed in a crash type scenario probably; just look at gold and silver lately. Maybe short term treasuries until this thing shakes out, but every day one stays in that, he loses a little more to Ben’s inflation machine. I figure I’ve lost as much or more to inflation the last four years as the adverse markets.

    • LD

      Bill,

      I have intentionally not put forth a “model Portfolio” here at Sense on Cents for the simple reason that I do not want to promote myself or this site in that direction. That said, I will offer the following view as to how I look at the markets:

      1. generate income via selected municipal revenue bonds, selected high dividend stocks, and diversified real estate holdings which produce rental income

      2. underweight equity holdings in general

      3. overweight cash for the very simple reason that selected hard assets (real estate and other entities) are finding it increasingly more difficult to get financing…this fact is being borne out in the price of these assets…this is a VERY PATIENT process…as in years…

      4. selected commodities exposure…primarily gold but not huge percentage…

      Liquidity will be rewarded…continue to minimize debt…

      Just my two cents…

  • fred

    Timely and spot on commentary LD as per today’s developments.

    My interest is on the pre market Monday activity, as should be the SEC’s; there was a large gap open in U.S. markets based on a rumor later formally denied (but interestingly the gap stayed open).

    In hindsight, this gap activity was obviously related to today’s news and the parties involved pre-mkt Mon had early ‘insider knowledge’ of today’s news.

    Let’s analyze the tape and see who these ‘insider’ trading scoundrels are. Another example of Washington-Wall Street incestuous behavior perhaps?

    What is the SEC’s enforcement position reguarding overseas premarket trading that has such a profound impact on US markets?

  • fred

    Getting back to this ‘coordinated intervention’. The Fed says these $ swaps do not involve the U.S. assuming any collateral risk.

    The ‘cordinated intervention’ allows foreign banks to dump their sovereign junk on the IMF for $. Isn’t the IMF 35% U.S., therefore doesn’t the U.S. assume 35% of the collateral risk?

    From where I stand we are now hook line and sinker involved in the EU’s fate; don’t we have enough of our own unresolved problems? Thanks Ben.

    • LD

      Fred,

      On both your points, the fact is the rule of the law and the risks borne by the United States citizens were long ago relegated to a distant second place—if that—in an attempt to save the world’s financial system from going over the proverbial cliff.

      While the losses in our global banking system were once projected to be in the $4 trillion range, the greatest risk to the system now is the systemic risk centered on the failures of a wide array of counterparties, primarily European banks, which have started to see a run on liquidity via depositors. These swaps are a vehicle for the global banks to access $$$ which they need BADLY.

      While the fairness and integrity questions do mean a LOT to you, me, and a whole host of others who thought we were playing by the rules which define capitalism….well, we should all forget about those rules for now and the foreseeable future.

  • LD: MUST READ

    Noted economist Larry Kudlow wrote this afternoon,

    It’s often said that help comes to those who help themselves. But Europe can’t seem to help itself. So on Wednesday, the U.S. Fed came to the rescue. And that rescue triggered a global stock market rally, including a near 500-point gain in the United States.

    Basically, the Fed is making it cheaper for Europe to borrow dollars. And this dollar backstop symbolically shows that the Fed, the European Central Bank, and other big central banks are not going to permit a 2008-type credit freeze and financial meltdown.

    But in terms of Europe’s overall problems, with governments unable to live within their means, and with investors on strike against government bonds and a very shaky banking system, the Fed action is really like taking a Tylenol gel cap. Might help the headache in the short run. But the fundamental illness is unaffected.

    Basically, Bernanke & Co. cut the interest rate it charges for dollar swap lines to the ECB and four other major central banks (Canada, England, Japan, and Switzerland). With interbank funding pressures in Europe rising substantially of late, the Fed’s action was timely. It doesn’t really create new dollars, but it lowers the borrowing cost of dollars taken by the ECB and other central banks. Technically, the Fed has lowered the dollar swaps spread from 1 percent above the OIS — the overnight index swap, which is comparable to the fed funds rate — to only 50 basis points.

    So this is good. And stocks responded by rallying big time.

    (Oh, by the way, while the Fed was lowering its dollar-swap interest rate, China eased monetary policy for the first time in several years by reducing bank reserve requirements by 50 basis points. This may be the first of several Chinese easing moves, and it certainly added to the stock surge.)

    But a dollar shortage is not Europe’s problem. As of the weekend of November 23, foreign central banks had tapped the Fed for only $2.4 billion of dollar loans. This is very small. In December 2008, during the height of the financial crisis, foreign central banks borrowed $580 billion.

    The European problem is a ballooning welfare entitlement state that is bankrupting most of Europe’s governments. And high European tax rates are strangling economic growth. And the debt that private investors won’t buy is held by a banking system that is increasingly vulnerable. And Germany, the strongman of Europe, doesn’t want to pay to bail out the southern countries or anyone else — including, it would seem, France.

    In short, nothing has been solved in Europe. The Europeans are not yet helping themselves. Why should the ECB write a trillion-dollar check to near-bankrupt governments? And how can the IMF borrow $800 billion from the ECB to give the same troubled governments even more money? And remember, the U.S. owns nearly 20 percent of the IMF. Is Congress really going to sign off on this massive ballooning of its mission and balance sheet?

    Meanwhile, the role of the European Financial Stability Facility (EFSF) rescue fund has yet to be clarified. And individual countries have yet to guarantee the liabilities of their own commercial banks in order to fence them off from disaster. The bank recapitalization plan still hasn’t gotten off the ground. And then there’s the latest from Germany, where Chancellor Merkel wants a new fiscal union through bilateral treaties, where troubled countries would essentially report to the EU in Brussels (read Germany) and submit to sanctions and various enforcements so that they live within their means. This too seems fanciful right now.

    Think of it this way: Will Italy become Guam? Will Greece become a 19th century protectorate of Germany? Doubtful.

    The point is, none of this has gotten done.

    A final thought about the 500-point Dow Jones rally: The U.S. economy is both stronger than we think and highly profitable. Despite all the tax, regulatory, and spending threats coming out of Washington, the resilient American economy is at least growing by 2.5 or even 3 percent right now. New data show stronger consumer sentiment and somewhat better pending home sales. The Chicago manufacturing report is heftier. And the ADP jobs report came in over 200,000 — way above consensus — suggesting a better nonfarm payroll report this Friday.

    So, with the help of easier Fed dollar liquidity to avoid European Armageddon, a hint of easing in China, and a profitable U.S. economy, stocks are back in favor.

    At least today.






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