Gyroscopic Investing

Apparently the SP500 has just had its biggest monthly rally since 1974. I never expected that to happen!

If we continue at this rate soon we are going to smash through the levels first seen in 1999.

It's probably more like the biggest suckers rally since 1974. The European crisis was only delayed with this latest agreement.

Soon the markets will begin to realize that the "bazooka" they are currently celebrating will do nothing to solve the European debt problem — it only buys politicians some more time to come up with another plan. So, stocks will tank again, rallying every time Merkel or Sarkozy announce a new agreement-to-plan-something-else that can't work. I think there will be lots of gut-wrenching volatility for stocks in 2012.

There's also the moral hazard of PIIGS nations now wanting haircuts for their debt problems — as they wonder why Greece is being let off the hook. That's not going to be pretty.

And if the US eventually slips into another recession, that won't help stocks much either.

Soon the world will realize that Europe cannot solve this problem on their own without huge sacrifices that nobody will agree to. Europe will probably end up needing a bailout because it's 'too humongous to fail.'  ...And that's when US tax payers are going to get really angry.

Hopefully, with a miracle, that won't come true. But each day it all seems a little bit more and more likely.

Gumby, I don't get it when it comes to asking for bailouts from outside the eurozone. They want to devalue right- so doing more of their own QE is what they want not going to China and asking for "funding" from China. If the eurozone QE the bail out fund out of their own thin air, then China will anyway have to buy up euros so as to keep the dual peg between the yuan and the euro and dollar (otherwise Chinese exporters will suffer).

They can always print more money.

Europe can certainly solve it's own problem if France, Germany and everyone else agrees on how to proceed. But, the problem is what happens if they can't agree on a solution. Then the IMF will likely be asked to rescue Europe — an idea that was floated the other day (again) when Europe appeared to be unable to agree on anything.

http://online.wsj.com/article/BT-CO-201 ... 17082.html

A large chunk of the money that funds the IMF comes from US taxpayers. So, unless Europe agrees to some very tough decisions, the IMF (i.e. largely US tax payers) will be asked to help solve the crisis.

Gumby "A large chunk of the money that funds the IMF comes from US taxpayers. So, unless Europe agrees to some very tough decisions, the IMF (i.e. largely US tax payers) will be asked to help solve the crisis."

As Reub also said, all the "solving the crisis" is being done by money printing. From what I can see, in our globalized economy, money printing to bail out global TBTF banks has global effects. So whether the money initially comes from the IMF, China, the USA or the European central bank makes little difference if you are say a "US taxpayer". I guess a realization is dawning with the institutional speculators that the combination of unfettered money printing elsewhere in the world and the constraints on the eurozone currencies, provides them with a limitless syphon to transfer wealth to themselves. Even if the initial money printing is done in Frankfurt, then the USA, China, Japan and UK will anyway do money printing themselves simply so as to keep the currencies fairly level. In the UK we are doing QE and using the printed GBP to buy USD that go to our foreign currency reserves. Any which way, people all around the world are going to have their pockets picked to further bloat the banks.

To me the global economy sometimes seems like a kind of beast with a mind of its own. My impression is that it is doing everything it can to slough off trillions of dollars of debt. Basically to cause defaults so that the global ratio of paper wealth to real productive capacity is in line. The bail outs are restraining that sloughing off process. The harder the powers that be try to keep the debt whole, the more the global economy writhes around trying to slough the debt off.

stone wrote:As Reub also said, all the "solving the crisis" is being done by money printing.

Really? I'm not sure where Reub is getting his info from. I have not seen any evidence of "printing" so far. Not even a hint of it. I see haircuts, leverage, imposed austerity and backstops funded by outside investors.

http://online.wsj.com/article/SB1000142 ... 56302.html

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The complex solutions used to create a mighty backstop fund highlight the limitations of the euro-area architecture, where member states cannot freely tap into the European Central Bank's deep pockets when they run into trouble. The ECB has been buying bonds from troubled euro-zone nations but has warned that the scope of such intervention would be limited in time and volume....

To further increase the EFSF's firepower, euro-zone governments have agreed to create one or several funds, possibly placed under IMF supervision. The funds would be seeded with EFSF money and contributions from outside investors. Whether investors will bite remains a big question.
Source: WSJ

It doesn't fix the underlying problem. It only delays a real solution. And to make matters worse, the EFSF would need to at least double the backstops and guarantees to over €2 trillion if/when France loses its AAA and other sovereign debt downgrades happen.

Thursday's intricate plan also underlines the weaknesses of one of the euro zone's main economies, France, which would have struggled to contribute more money to the EFSF without jeopardizing its prized triple-A credit rating. France's President Nicolas Sarkozy said Thursday that his government would unveiled austerity measures in the coming days, its second package in two months, to take into account a much weaker economic-growth outlook.

Germany might have had the capacity to plow more cash into the fund, but last month German lawmakers said they would veto any such move.
Source: WSJ

This can — and probably will — get very ugly...

http://www.zerohedge.com/news/why-doing ... ka-pea-sho

Remember, Europe doesn't have a central Treasury — it's not the 'United States of Europe.' Only Germany can decide if money printing is worth pursuing, and Germany will be the last country on the planet to engage in money printing, since Weimar hyperinflation is still fresh in their minds. Germany's powerful constitutional court is already trying to stop the new EFSF leverage/expansion plan.

The whole point of the Euro is so that Germany wouldn't have to risk high inflation again. They convinced everyone in the Eurozone to share the same common currency so that Germany wouldn't have to devalue to compete with other European nations.

...And here's a short cartoon that explains how Europe is "solving" its crisis.

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As I explained before, Germany will not allow printing to be an option. The politicians don't want to print, and the people don't want to print. They remember what happened the last time they tried printing (hyperinflation, Hitler, etc), and it paralyzes them. Instead, they are basically putting Europe of for sale and hoping investors will buy it to prevent mutual assured destruction. It's totally crazy.

When did Reub say all of these things?