Inflection Points And Ruined Vacations
With the exception of a couple of memorable days in 1987, July is generally not a cruel month. Just the opposite; it's when finance and government people take off, safe in the knowledge that nothing much will happen while they're away from their desks.
This July, though, has ruined a lot of vacations by hosting a series of big events, some of which look like inflection points in the developed world's descent into chaos.
In the the U.S, the Fed's (according to a just-completed audit) $16 trillion of secret loans to everyone from foreign money center banks to the wives of hedge fund managers seemed, for a while, to have ignited a self-perpetuating recovery. Asset prices and corporate profits were way up and consumer spending was almost healthy. But that's now looking like a mirage, as GDP growth slides back towards zero, home prices continue to fall and big-name companies announce stepped-up firings:
Layoffs Deepen Gloom
Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery.
Cisco Systems Inc., Lockheed Martin Corp. and troubled bookstore chain Borders Group Inc. are among those that have recently announced hefty cuts, while recent government numbers underscore how companies have shifted toward cutting jobs.
The increase in layoffs is a key reason why the U.S. recorded an average of only 21,500 new jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2%.
In response, Fed chairman Ben Bernanke promised that QE3 or something similar was primed and ready to go if needed. And since the unprecedentedly huge QE2 wasn't huge enough, the next stimulus plan will necessarily have to be off the charts.
Europe, meanwhile, in its usual convoluted way has basically given up trying to keep its insolvent peripheral countries in line, and from now on will simply bail out whoever needs it.
Eurozone leaders draw up radical plan to safeguard euro
European leaders are poised to take a quantum leap to safeguard the future of the euro and rescue Greece from insolvency by turning the eurozone's 15-month-old bailout fund into a much more ambitious instrument resembling an embryonic European monetary fund. The deal being hatched at an emergency summit of eurozone leaders also looked certain to entail haircuts - losses - for Athens' private investors, increasing the likelihood that Greece will become the first eurozone country deemed to be in some form of default on its sovereign debt.
A 15-point draft agreement being negotiated provided for a vast expansion in the role and powers of the €440bn bailout fund established in May last year. If finally agreed, the package would be the biggest eurozone move since it created the bailout fund, following months of acrimony and dithering that prompted bitter criticism of EU leaders, particularly Chancellor Angela Merkel of Germany.
Currently the fund can only be used as a last resort to rescue a eurozone country whose plight jeopardises the stability of the euro as a whole. Under the radical plan, the fund would be able to intervene on the secondary markets to buy up the bonds of struggling debtor countries, to take pre-emptive or "precautionary" action to nip a debt crisis in the bud by, for example, agreeing lines of credit, to supply loans to struggling eurozone countries which would then use the money to shore up and recapitalise their banks. Such aid would apply, unlike at present, to countries not already in bailout programmes.
The transformation of the bailout fund was directed not so much at Greece as at containing the threat of contagion to other vulnerable eurozone countries, an attempt to curb market uncertainty over the fate of the euro.
And the US this very weekend has passed the point where a serious deficit reduction plan is possible and will now just raise the debt ceiling without meaningfully cutting spending.
Republicans Back Short-Term Debt Limit
Republicans challenged a presidential veto threat by preparing for a short-term extension of the U.S. debt limit, hardening partisan differences in the face of warnings that a stalemate risks roiling financial markets as soon as tonight.
President Barack Obama would veto a deal to raise the debt ceiling if it doesn't extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC's "Meet the Press." Daley warned that "markets around the world" would react negatively to a short-term measure.
"We've got to get past this debt-ceiling vote," Daley said. "It's time to get some certainty."
House Speaker John Boehner, an Ohio Republican, said in a separate interview on the "Fox News Sunday" program that he'd prefer a bipartisan package but "if that's not possible," House Republicans are "prepared to move on our own."
"There is going to be a two-stage process," Boehner said. "This is about what's doable."
Boehner said he aims to announce a framework, bipartisan or not, later today to try to minimize uncertainty before Asian markets open. Senator Tom Coburn, an Oklahoma Republican, said on NBC that Obama's veto threat is "a ridiculous position because that's what he's going to get presented with, that's the compromise way through."
- Imagine trying to steer a long/short hedge fund portfolio through all this from a Caribbean beach with spotty broadband. One day the economy's falling back into recession and stocks tank, the next day QE3 is pre-announced and stocks pop. The U.S. and Greece are sure to default, and then they're saved by massive bailouts/debt limit deals. Gold is setting records, cotton is tanking, oil is testing $100 -- and you're supposed to relax and "get away from it all." Poetic justice for the leveraged speculating community.
- The US debt ceiling thing is just sad. Even the best-case-scenario $4 trillion deficit reduction is for ten years, while by an honest accounting Washington's liabilities rise by nearly that much annually. Raising the debt ceiling on those terms is in effect just a license for the government to let fly. Spending (on and off balance sheet) can soar, debt can keep piling up, and the guys responsible for the deal can retire with nice pensions while their successors take the blame for the crash.
- It's now apparent that all these bailouts have only slowed the destruction of credit throughout the developed world. The Long Waves have been thwarted by unlimited printing presses but are still there, waiting to get at all the crappy paper hidden on bank and pension fund balance sheets.
- "Sarkozy and other leaders also stressed that the Greek package won't be replicated for other countries". Of course it won't. We believe you!
- 2012 is shaping up as Round Three in the showdown between the Long Wave and the printing press, with a late 2011 credit contraction being met with history's biggest deluge of fiat currency and sovereign debt. Interesting times!