Monday, October 31, 2011

Today Was Ugly

The S&P 500 index futures started selling off around midnight (Denver time) and steadily went lower from then until the 2 p.m (Denver) close of the NYSE.  Both the SPX and the Dow closed on their lows of the day and the selling in the final 5 minutes of trading accelerated. 

On the surface the analysts and media will blame the action on deteriorating situation with regard to the "bailout" agreement rolled out on Friday.  I lifted my leg all over it on Friday and several high profile analysts released similar analysis over the weekend and this morning.  While there is no doubt reality set in with regard to the latest kick the can down the road plan out of Europe and the market retraced some of the gains it had made in anticipation of some kind of holy grail deal, I believe that an even darker reality connected to the truth about the state of condition of the U.S. financial and economic system is starting to infect the markets.

To begin with, the GDP report on Friday looked great on a headline basis.  "However," if you dissect the components, it looks like a one-time shot.  To begin with, that highly manipulated and unbelievable "GDP deflator," which translates nominal economic growth into real growth was reported to be 2% vs. 3.3% in Q2.  This number is so manipulated it's not even worth debating other than to know that the true rate of inflation is probably running at more like 10%.  That is where the John Williams Shadow Statistics inflation number comes in using the methodology used by the Government in 1990 to calculate inflation.   The big contributors to Q3 GDP were personal consumption expenditures and federal government spending.  I'm sure the PCE reflected a much higher rate of inflation (i.e. higher amount of money spent on food and energy) than is accounted for by the GDP deflator.  We also know that domestic auto manufacturers pulled forward auto sales to those who can still afford a new car by taking advantage of federally subsidized financing deals and dealer inventory stuffing (both as explained in a prior blog post).  Both of those are unsustainable.

Here's some reasons why this "bump" in Q3 GDP is unsustainable and will likely be followed up in the next few quarters with a negative GDP print (also, don't forget that Friday's GDP report will followed up by several revisions and I would bet the revisions will be downward).  Earlier last week some big industrial manufacturers reported better than expected earnings BUT also issued a gloomy outlook:  LINK  The Conference Board's consumer confidence index was released and showed the lowest level of confidence since March 2009:  LINK  Also, although it received no attention from the mainstream media, a non-profit research group released a study that shows that the aggregate debt level of the States is over $4 trillion:  LINK  Well, in the context of that number, does Greece's $400 billion debt really seem like the source of global financial demise?

Finally, the Treasury announced today that it was going to have borrow $20 billion more this quarter - for a total of $305 billion - than was originally estimated and $541 billion next quarter.  Combined and annualized, that imply about a $1.8 trillion spending deficit for fiscal 2012 (which ends in September for the U.S. Govt).  The primary reason is that tax revenues are coming in lower than forecast:  LINK  Looks like the budget deficit will come in higher than expected and the economy will be generating less growth than is being reported.  Do you still trust the GDP number the way the Government calculates it?  The market began to sell off even harder today about the time the Treasury borrowing report was released.

The bottom line is that, for sure, the European situation affected the markets today.  But the fact remains that if the degree of problems in Europe are X, the degree of problems in this country are at least 3X, because the problems plaguing the European economy and political system are the same problems destroying ours, only those problems here in the U.S. are several multiples worse.


  1. George Papandreou has announced that there will be a Greek referendum to approve the EU bail-out deal which would impose a 50pc haircut on its creditors Photo: REUTERS/Francois Lenoir

    Greece will vote no and then we will need a real bailoput of the European banking system.

  2. Someone Is Going To Jail For This: MF Global Caught Stealing Hundreds Of Millions From Customers?

    that there is simply no way that you will be left without some miraculous rescue, if only you can last one more day, and as a result proceed to "commingle" some client funds with the firm's cash. It turns out that at MF Global you do the latter... over and over... until you have literally stolen hundreds of millions from the firm's client accounts in hopes that the miracle rescue will come on Friday... then over the weekend... and then you realize no miracle is coming, partly because your actions have been exposed, partly because miracles only exist in fairy tales. The next thing you know, your firm is bankrupt and hundreds of clients are about to learn that all their money is gone. Poof. This is not a fictional tale. This is precisely what very likely happened at MF Global in the past 72 hours. And someone has to go to jail. That someone, if indeed this criminal act is proven to have taken place, should be none other than Jon Corzine himself.

  3. A Simple Three-Item Agenda for "Occupy Wall Street/We Are 99%"

    October 31, 2011 (Mobile version)

    There are really only three ways to cripple Wall Street's democracy-killing concentration of wealth and power: take our money out of Wall Street and the TBTF banks, eliminate private money from elections and abolish Wall Street's dealer, the Federal Reserve.

    There are only three things--and only these three--that will cripple Wall Street's democracy-killing concentration of wealth and power:

    1. Transfer the 99%'s money out of Wall Street and the Too Big To Fail Banks

    2. Remove campaign contributions from our democracy in a way that the corporate legalist lackeys in the Supreme Court cannot overturn, i.e. entirely publicly financed elections

    3. Abolish Wall Street's dealer, pusher and protector, the Federal Reserve.

    As long as Wall Street and the other SDIs control much of the nation's financial markets, assets and debts, and the Federal Reserve exists to protect and enable their predation and parasitic skimming, they will have the means to reap billions in profits which can then be funneled into our cash-corrupted political system of for-sale toadies and apparatchiks.

  4. The Elite Plan for a New World Social Order
    this is a conpact version of why , why & when, its a very good read

  5. Synthetic ETF Backers Pull Most Money in Two Years in Move to Real Assets

    ETFs that use swaps to clone stock, bond or currency returns have been criticized by regulators and firms including Fidelity Investors, which say clients risk losing money should the banks writing the derivatives become insolvent. Outflows from Lyxor are another blow to Societe Generale, France’s second-largest bank, whose shares have tumbled this year as the escalating sovereign-debt crisis squeezes lenders’ funding.

    “It’s an issue of counterparty risk related to the financial health of the backing bank,” said Jose Garcia Zarate, an ETF analyst at Morningstar Inc. in London. “Fears over synthetic replication have been building up, and at the same time, fears of banks’ peripheral-debt exposure have grown. Put those two together: bingo!”

  6. And people wonder why there are protests?..this is one of the reasons...what fantasy do these guys live in?

    Corzine Crashes Like It’s 2008

    But I’m going to complain anyway. The idea that Corzine, who single-handedly destroyed MF Global Holdings, was in a position to command so much as a penny in severance is horrifying. It suggests two things. The first is the extent to which “heads-I-win-tails-you-lose” remains the operative concept for Wall Street compensation. The second is that one’s politics doesn’t much matter when it comes to lining one’s pockets. Corzine is an avowed liberal who has decried income inequality and Wall Street pay — but right up until the end, he had his hand out for millions he didn’t deserve.