Back From Italy

The good news is, contrary to the prediction of la mia ragazza, I didn't catch on fire and spontaneously combust walking into the Sistine Chapel.  The bad news is, my camera battery went dead before I could snap any ceiling photos, which you're not supposed to do but the Chinese were doing it, so I would have. 

Exhausted so this will be short.  I see Bernanke said yesterday to the House that he is prepared to unleash QE3 if it is needed, then back-tracked a bit today by saying the Fed was not prepared to print more money right now.  I looked back at my posts and see that I first suggested QE3 would be inevitable back on Feb 1st:  LINK

To be sure, the economy is tanking hard despite the b.s. coming from Obama/Geithner/Wall Street.  I'm sorry, but the employment situation is getting worse, auto inventories at the dealer level are piling up like dogs below a cat on a hot tin roof and housing continues to slide into oblivion.  Expecting much larger crowds in Italy than I encountered, I was quite shocked by the absence of Americans everywhere I went, especially in Rome. That's all about the rapid decline in disposable income resulting from high unemployment and the ravages of real - not the measured-by-the-Orwellian-Government - inflation.

But make no mistake about it, the Fed's money priniting is first and foremost all about keeping the big banks from collapsing.  The real story behind the sovereign debt problems accelerating in Europe is the degree to which U.S. TBTF banks are exposed to credit default swaps. We just don't know the answer to that question because GAAP reporting and accountability requirements are abysmal - and what regulations are in place are never enforced by the SEC, NASD, Geithner or the Fed.  I bet most big bank CEO's don't even know the truth about their own bank's derivatives liability exposure (recall Franklin Raines just scratched his head when queried about Fannie Mae's derivatives book just before FNM collapsed and Raines was canned).  I would opine and suggest that the big U.S. bank paper/cash exposure from derivatives to EU sovereign debt in danger of defaulting  (Greece, Italy, Spain, Portugal, Ireland, Iceland) is in the high multiples of $100 billion.  If Greece nominally is a $300-400 billion problem, Italy nominally is a $2 trillion problem.  Given what happened after Bear/Lehman/AIG, I think my estimate of the derivatives exposure is modest...

Secondarily, QE is about funding the U.S. Government.  Right now the Treasury (i.e. Geithner's handlers) are tapping into the Federal pension fund system for a few hundred billion in order to keep funding social security/medicare, the 9 million people getting unemployment, the 44 million getting food stamps, and our hedonist military aggression globally.  Without the Fed buying up most of every Treasury auction since last December, interest rates would be substantially higher OR these programs would have to be drastically cut.

If you want to know what the smart money thinks about the situation, take a look at the trading charts for gold and silver over the last two weeks.  A couple of really really intelligent market seers have have been forecasting price targets for gold and silver by the end of the summer that most people refuse to believe ($1600-1800 for gold and $50 for silver).  I actually think we could easily see much higher prices by the end of September, after the Indian buying season has kicked into full gear. 

And James Dines now forecasts $300-500 silver eventually.  For anyone doing the metals since 2001, you know that James Dines' predictions for this sector dating back to at least 2000 have been frighteningly accurate.  I see no reason to doubt his price forecast for silver, which means $6000-$10k for gold if the gold/silver ratio falls to 20 (I believe it will eventually go well below 20).

Vernazza, Cinque Terre:  The Italian Riviera