Tuesday, May 25, 2010

Another Global Meltdown Right Around the Corner?

Interesting day today. The markets started off the day looking like they were heading off a cliff as the market tumbled over 250 points which took the DOW under 10,000.

Later in the day the banks rallied which then lifted the markets after Barney Frank's comments around derivatives:

"But Mr. Frank's opposition to the derivatives spin-off proposal, which has been championed by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.), raises the chances that this provision will likely be altered or stripped out completely because Mr. Frank's comments on it were pointed.

Banks ought to be able to hedge their own risks," Mr. Frank said. He said banks would be prohibited from overly risky derivatives activities by the Volcker Rule and that the separate provision wouldn't be necessary.

"I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else," Mr. Frank said."

My Take:

It looks like the bankers are going to win again when it comes to financial reform.

It appears that this legislation appears will lack the teeth that it needs to really clamp down on derivatives trancactions. I will hold my judgement until I see the bill, but I am guessing that the bankers got their way based on how the market turned around this afternoon.

In fact, I am sure Wall St is already working on ways in which they can work around this financial reform. They are historically famous for finding ways to work around rules.

I still hold out hope that some of this legislation will at least reign them in a bit. Time will tell!

A weak financial reform bill is not good for the taxpayers or the stock market. Confidence will not return to the markets as long as the banksters are allowed to run wild on Wall St. The SEC is still nowhere to be found and it looks like they will continue to be.

Where in the heck are the regulators? They still have been able to figure out the cause for the flash crash. Is Wall St so out of control to the point where our government doesn't even understand how the market works anymore?

The fact that this 1000 point selloff and the ensuing rally a few minutes later remains a mystery scares the you know what out of me. Why would anyone want anything to do with stocks when no one can understand them?

The fact that Wall St tried to intitially blame it on a fat finger trade is embarrasing! Do they think we are that stupid? Apparently so.

Another Global Meltdown?

The market in my opinion is beginning to look a lot like 2008. We saw huge swings in both directions back then like we are now.

The market also ramped and sold off depending on various rumors and news just like it is today.

The questions that we are asking about today's Greek debt crisis are remarkably similiar to the ones seen in 2008 that were asked by the subprime crisis. The only difference is the trigger:

- Instead of asking is subprime contained we now ask is Greece contained?

- Instead of asking will subprime's issues spread into other forms of mortgage debt we now ask will Greece's debt issues spread into other PIIGS debt?

- Instead of aking which American bank will go under we now ask which European bank will go under?

- Instead of asking how much "AAA" MBS do the banks own we now ask how much PIIGS debt do the banks own?

Eventually confidence was lost in 2008 when realized that subprime was not "contained" and had been spread into almost all "AAA" debt. This then triggered a meltdown of our banking system ,and it almost brought down the whole financial system by the time we recognized the magnitude of the problem.

The Fed was able to stem the panic by passing the losses onto the taxpayers balance sheet from the banking system's balance sheet. The problem isn't solved and the losses are still there. However, they don't have to be recognized. Eventually they will be forced to but that's another story for another day.

Can today's debt panic be stick saved like the last one?

This is the key question that needs to be asked and the problem is I don't think that it can.

The 2008 crisis was was triggered and then cleaned up by one country and one currency which of course was the USA.

The problem with today's Greek crisis is there are 16 different countries involved and one currency(Euro) that cannot be manipulated. They cannot "print" out of their problems like we can.

This is why you continue to hear the word austerity over and over again in Europe. The only way out of this mess is by forcing the countries involved to slash spending and pay off the debt.

The problem is this isn't going to work because it's going it's going to be extremely hard on the people that live in the PIIGS. The nations taxpayers are the ones who are going to have to payoff the losses, and I don't think the political will is there to enforce the austerity.

We already know what the Greeks can do when it comes to riots and the austerity measures haven't even started yet!

There will be a lot of pressure on the PIIGS governments to leave the Euro and "print" their way out of this versus living under extreme austerity measures for generations.

This puts the Euro at risk and the reprocussions of such actions would be felt economically worldwide.

I expect to see a lot of violence once we realize how bad this European debt crisis actually is. Could this ultimately lead to wars? Absolutely but that remains to be seen.

Just like subprime this crisis isn't "contained", and it will likely trigger another another global financial meltdown.

Disclosure: No new positions taken at the time of publication.


CT-Hilltopper said...

Welocme to "The Great Depression II"

Coming Soon to a Theater near you.

jeff said...



I am starting to see the smartest guys on the street think the same way now too.

Jeremy Grantham, Barton Biggs, Shilling are all calling for it.

Check this out


Herb said...

At least there won't be any riots here like in Greece. Unless Oprah goes off the air.

flipdippy said...

I'm going to disagree with you on this Jeff. I think the timing is not right. To use an awful movie analogy, this is like 2012 (if you've seen it). If not, basically the rich know the end of the world is coming and keep their mouths shut in exchange for their safety as TPTB make preparations to survive.

I fully agree TPTB have given up on any sort of salvage operation, but they are punting and kicking and doing all they can to buy time to ensure they themselves can survive this depression.

It may be worse for us peons given the longer you delay the inevitable the worse it inevitably becomes, but it seems the price they're willing to pay to ensure survival into the next economic expansion.

So, for that reason, and perhaps foolishly so, I bought in long heavily yesterday on equities I feel should run in this blinding bull facade into 2011.

We'll see. I've never felt this anxious (generally speaking, not about trading) in my life.

Jeff said...


I can't disagree man.

The timing is the hard part. There are rumors of another $5 trillion QE by the Fed.

The Fed is going to go down swinging. I could see 2011 or even possibly 2012 but it will be too late by then.

What was interesting the morning was the German bond auction went horribly with a BTC under 2. Portugals debt auction actually had a higher BTC ratio than the German auction.

I would assume the bond boys are concerned over about Germany being forced to clean up the PIIGS mess.

We have a $40 billion 5 year auction this afternoon. Keep a close eye on that one.

I think the happens sooner rather than later but the timing is very difficult to predict.

getyourselfconnected said...

Another great post. Plenty to think about. I am going to cover a program that was snuck into the finance reform bill that will make up to a $50k loan to those unemplyned to remain in their homes until they can find a job and then pay back the loan. This chit is getting Onion like silly fast.

Anonymous said...

"They are historically famous for finding ways to work around rules"

Correction: The "Rules" are made to portray regulatory restrictions, and the essence of the rules is designed to be worked around.

CT-Hilltopper said...

Honey, they're preaching to the choir.

I've said this is where we were headed all along. My blog was my way of psyching myself up to do what I knew had to be done to protect my family.

My parents survived the first depression, and they told me enough about it for me to know that we were rushing into another one. Then I started researching, and I was sure of it. I'm not an economist, but I do know and respect money.

I've been called more names than you can shake a stick at...depressing, crazy. At one point I started refusing to discuss money matters with my significant other because he told me that I was ...misinformed.

I wish I were. Oh, to be one of the sheeple and not see this one coming.

Now I just shut up and prepare. I've learned.

Here's my newest prediction, Get. The "Gotcha" moment won't come from Greece. The bank failure that started the first Great Depression came from Austria. The one that starts this one will come from either Germany or Spain.

See, I told you that this prediction would make you feel better about yours.