European Debt Worries Resurface

The Fed must be all smiles today as the dollar stabilized thanks to today's news out of Europe:

"The cost to insure Ireland’s debt climbed to a record, leading a surge in European sovereign credit-default swaps, on concern Anglo Irish Bank Corp. won’t pay back bondholders in full.

Contracts on Ireland jumped 23 basis points to 487 basis points at 12:50 p.m. in London, according to data provider CMA. Swaps on subordinated debt of Anglo Irish, which was nationalized last year, now cost 5 million euros ($6.7 million) in advance and 500,000 euros annually to insure 10 million euros of debt for five years.

 Investors are fleeing Irish bonds on concern bank bailout costs and a shrinking economy will hurt efforts to tame the European Union’s biggest budget deficit. Government guarantees covering some of the subordinated debt sold by the nation’s banks come to an end next week, while Irish Central Bank Governor Patrick Honohan said in June he didn’t know if junior bondholders in Anglo Irish will be “made whole.”

My Take:

Where's Baghdad Bob when you need him:

"There is no need to worry.  Ireland and Greece are fine.  They have plenty of money.  There is no debt crisis!"

 
I am joking of course but when you really look at the numbers it's hard not to think of this guy anytime you hear any central banker ftrom the west speak about their countries economy.
 
I had promised on an earlier post that I planned on heading oversees to see if I can find some analysts in finance that are not bought and paid for by Wall St who could give us a more realistic view on what's going on in the world.
 
I found a couple today:


 
 
Both of them nailed it.  What we are witnessing in Europe is unsustainable.  The rise in debt spreads are telling you the real story.  These countries are looking straight down the barrell of a debt restructuring.
 
Stocks in the US didn't like the Ireland news at all.  This is what sunk the markets in the afternoon.
 
This all got started when Ireland's GDP for the quarter came in at -1.2% versus the consensus estimate of +.3.  That's a huge miss and the credit traders proceeded to punch Ireland right in the face shortly after these numbers were released.
 
The global financial boat continues to take on water as leaks continue to spring up everywhere.
 
I expect to see a debt restructuring in Europe sooner rather then later.  It's becoming obvious that even with severe austerity(which Ireland has), countries cannot dig out from their deficits when they are paying 10% interest rates on their debts.
 
Paycheck to Paycheck
 
Let me switch gears quickly here.
 
I thought this article was particularly disturbing:
 
"CHICAGO, September 1, 2010 - As the effects of the recession linger on, one place it continues to have a tight grip is on workers’ wallets. Nearly eight-in-ten (77 percent) workers report that they live paycheck to paycheck to make ends meet. Sixty-one percent of workers said that they felt they lived paycheck to paycheck to make ends meet in 2009. Workers went on to say that sometimes they are unable to make ends meet at all, with one-in-five (22 percent) saying they have missed payments on bills in the last year. This is according to a new nationwide survey of more than 4,400 workers by CareerBuilder that was conducted from May 18 to June 3, 2010.

Workers report they have made a variety of changes to their living and spending habits to help get by. When asked what tactics they have used since the start of the recession to make ends meet, workers said the following:

• Cut back on leisure activities - 54 percent
• Used coupons or shopped at discount stores - 48 percent
• Drove less to save on gas - 37 percent
• Cancelled cable and other subscriptions - 12 percent
• Used public transportation - 5 percent"

Quick Take:

Recovery summer baby!  You gotta love it!

God help us if we have an inflation crisis. 

Americans could find themselves penniless in a hurry as unemployment continues to rise.  What in the hell are all of these people going to do once their unemployment benefits run out?  They obviously have no savings.

You can be sure of one thing:

Be prepared to hear a lot more about this type of news very soon because the peak unemployment levels were seen about two years ago.  This means the government checks are coming to an end for a hell of a lot of people.

I expect this to be the big news come this fall heading into the elections.  I think we are going to see some election shockers as the masses become desperate as they struggle to survive our depression.

In a strange way the European Debt Crisis actually helps the US in the shorter term.

I say this because the one thing that is holding the dollar together right now is the fact that many other countries are in far worse shape.

As my credit trader friend always tells me:  "Jeff, risk is relative"  meaning that we might be screwed but if someone else is screwed worse than there will be buyers for the place that's the least screwed.

This is a simple investing rule but it's an important one that I consistently have had to remind myself of.  

The Bottom Line

Keep your eyes on what's going on across the pond.  One explosion like an Ireland debt restructuring could trigger a domino effect that could be catastrophic.

A Wall Street friend told me about this today when we discussed Ireland:  He read that saving both of Ireland's two largest banks would cost Ireland about 60% of it's GDP.   They are toast if that's accurate.  It's just a matter of when not if.

Let me end with a quick thought on stocks.

I am not liking how the stock market has behaved the last few days.  Tech looks extremely overvalued.  Apple is closing in on $300.  I see lots of new 52 week highs in this space.

I won't short the Apple juggernaut but I am thinking about taking a short position on tech.  QID is a nice "short" tech  ETF for a short term trading position.

I'll let you know if I pick some up tomorrow.  Futes are looking pretty sluggish.

Inflation Risks Soar as Investors React to Yesterday's FOMC Meeting

Today was all about the US dollar.  Here is a chart of bucky over the last couple days:

Gold reacted accordingly as it soared almost $20.  Here is GLD today:

Gold wasn't alone.  Pretty much all commodities are up sharply as a result of our crumbling currency.  Hat tip to The Fly at Icoin for the commodity charts below:

Cotton

Milk

Sugar

There are other commodity charts over at Icoin but you catch my drift.

Folks, the Fed is essentially throwing every middle class American under the bus with their QE/bailout policies.  The Fed is easing in every way possible in order to help out the banking cartel.

As a result, our currency is starting to get it's teeth kicked in.  The rising costs as a result of the falling dollar won't hurt the banksters because they can afford some inflation.  The problem is that 90% of us cannot AFFORD it.  In fact, many of you who are just getting by could starve if the Fed's policies don't change.

Just think what the dollar will look like if we announce a QE2?  Imagine what it will do to the cost of living in this country.

We are already seeing signs that the middle class is unravelling.  This article from The New York Times is particularly disturbing:

"The country’s continued economic doldrums have stores scrambling for the once-ignored low-end customer, as people make fewer costly shopping trips to stock their pantries, and increasingly, can only afford inexpensive items in small quantities like those sold at dollar stores.


Dollar stores have shown the biggest gain in shopper visits over the last year out of all the retailers that sell basic consumer goods, according to market research data.

Wal-Mart, the world’s largest retailer, is adding thousands of items to its shelves, including inexpensive ones, and is asking dollar-store suppliers to create small, under-a-dollar packages for its stores, too. In areas with high unemployment, Wal-Mart is grouping together its less than $1 items in a clear challenge to the dollar stores.

Some customers at Wal-Mart and the major dollar chains — Dollar General, Family Dollar and Dollar Tree — have such modest budgets that the retailers report upticks in spending at the beginning of the month, when government benefit checks and many paychecks come through. Late in the month, sales drop as even multiroll packs of paper towels are ditched for a single roll.


“People are literally running out of cash on hand as the month goes on and they’re looking for smaller package sizes,” said Craig Johnson, president of the retail consulting and research firm Customer Growth Partners. “They may have $10, $20, $30 to spend getting toward the end of the month, and they have to be able to still feed the family and get diapers and so forth.”

Take Continued
What are these people going to do if the currency keeps dropping and they only have $20 to spend by the end of the month? 

Whats going to happen when that $20 can only buy them 1 of the 4 items that they need in order to get through the end of month as we see further depreciation?

I don't wanna scare anyone but this is how social chaos gets started.  Everything is fine in America as long as they can watch American Idol and find a way to eek out a living.

If they no longer have the ability to pay their cable bill and eat it turns into a whole different ballgame.  We are the most armed country in the world and if Joe6pack can't afford a meal he is going to find someone who does.  They will then proceed to take it by force.

This happened all the time in Argentina during their inflationary crisis. 

The Bottom Line

I am as serious as a heart attack today.  The Fed is destroying this country with their policies.  They are IGNORING the majority in an attempt to save the minority who are mainly the banking elites. 

This is the polar opposite of what they should be doing. 

Their policies are going to make it more and more difficult for you to put food on the table every night.  Our way of living is being destroyed right before our very eyes.

Larry Summers just resigned last night and announced that he is headed back to Harvard.  Geithner is now the only person left from Obama's original economic team 

This shouldn't be a surprise.

I mean heck: Why would Summers or anyone else want to take the fall for economic catastrophe that's about to take place.

The only hope I have left is that the currency and bond markets continue to throw a tantrum which eventually forces the Fed to reconsider another QE2.

The scary thing here is without the QE2 I don't think the Fed can hide this monstrosity much longer.  Without the ability of the Fed to buy our treasuries I think the bond market collapses.

This leaves us with a hell of a choice: 

Do we QE2 and trigger a massive inflationary/hyperinflationary event?

or

Do we not QE2 and allow the whole house of cards to come tumbling down via a deflationary collapse.

In a nutshell this is what the Fed faces when it's all said and done.

The sad thing here is it didn't have to be this way.  If the Fed had said no to the bankers from the start we would have had the ability to afford the losses in the banking system.  It would have been painful as many banks would have failed but we would have survived.

Instead, the Fed decided to load their balance sheet up with trillions of toxic assets as they attempted to play "hide the sausage".

The results of this decision are catastrophic.

Papering over the losses by giving bailout after bailout to the people(bankers) who created this whole nightmare in the first place is the most disgusting thing I have ever witnessed as a human being.

Their plan failed miserably and it has left us bankrupt.  If this insanity continues we will also all be starving if they continue to destroy the dollar.

I'll end with three conclusions:

We are now left driving on a road to nowhere that will end in a very dark place. 

The arrogance and greed that has been exhibited throughout this crisis by the Fed and the bankers will be talked about in the history books forever.

I'll say it again:  It didn't have to end this way.

The Fed Takes One Step Closer to the QE2 Cliff

I think this best describes the Fed's policy after today:



The Fed today came within and hair of announcing a QE2 as they predicted a serious drop off in economic activity.

Bonds soared on the news as the market prepares for another Treasuries spending binge by the Fed.  Take a look at the 10 year on the news:

Gold soared on the news as the dollar plunged following the Fed's statement.  Here is a chart of the gold ETF GLD:

Folks, these moves are VIOLENT.  Look at the volume on the GLD move.  Gold moved almost $20 in a matter of minutes as the market digested the news.

I wanted to put up the US dollar chart but I can't get TOS to download it.  Perhaps since it's so ugly they decided to take it down...Just joking BTW...No tin allowed in here!

Fed Statement

Here is the FOMC statement in case you missed it.

The Bottom Line

Unfortunately I don't have much time today so I need to keep it fairly short. 

Folks, the Fed basically all but said they plan on doing a QE2.  This is why you saw the dollar plunge to 80.45 at the moment.

The stock market is even for the day but who really cares what the market does at this point.  I am serious when I say that.  Right now stocks are the worst leading indicator out there.  It's been taken over by trading robots and their various algo's.

When you need to read how the economy is doing you MUST look at the credit markets now instead of stocks.  Look at the dollar.  Look at gold.  Look at bonds.  Stocks tell you absolutely nothing at this point.

When the Fed pulls the QE2 button be prepared folks.  The "unintended consequences" of such actions will be violent.  Just look at how the market reacted when they simply hinted towards heading down the QE2 route this afternoon.

The Fed is rapidly heading down the QE2 path and they appear to not have the discipline to stop themselves from destroying the dollar.

If you haven't yet diversified into hard assets I suggest that you do so because if the fed pulls the QE2 button you may wake up one morning and learn that your 30 years of savings that are priced in US dollars are worthless.

I am not suggesting you turn into a gold bug and go "all in" on the metals.   All I am saying is that you might want to put some of your portfolio into items diversifies you out of the dollar.  There are many options:  Gold, silver, commodities, and other world currencies(CHF or CAD work for me). 

Let me be clear:  This is not investment advice.  It's just something that you need to consider.

If the Fed decides to blow it's brains out via a QE2 then you must be prepared for the consequences.

Disclosure:  Now new positions taken at the time of publication.