There will be a time when the middle class gets hit by a 2x4 in the back of the head that they never saw coming - Dave in Denver, circa 2004...That 2x4 is in motion - Dave in Denver, todayMajor European bourses were down anywhere from 2% to 5% (Italy). Italian and Spanish 10yr sovereign bond yields are soaring again. Large fissures are forming again now that the ECB's latest version of money printing (LTRO/QE) has been applied and the dust has settled. The problem is that the financial equivalent of Mt. Vesuvius is starting to rumble again. I visited the ruins at Pompeii last summer. Until then, I had never really grasped the true devastation caused by the eruption of Mt. Vesuvius. It's truly horrifying.
The amazing thing to me is how few people understand that the European situation is nothing but one big deflection/cover-up for the catastrophic problems embedded in the U.S. financial and economic system. If the quantifiable problems in Europe are "x," the quantifiable problems in this country are at least "5x." Note: that is what's quantifiable. Note #2: Not "quantifiable" by what is being reported in the media but what is "quantifiable" by doing intelligent research, including knowing where to look for quantifiability (like applying what we know about true housing market values to the level 1, 2, and 3 assets listed in the footnotes of Bank of America's latest 10Q).
The black swan on the horizon in this country is that which is not readily quantifiable. An good example of that is the pension underfunding disclosure announced by the State of Illionois yesterday. The State of Illinois announced that the State pension fund is underfunded by $83 billion. Huh? Here's the LINK Now, there are two components of unquantifiabilty to this disclosure. First, I wouldn't trust that $83 billion number any more than I'd trust Rick Santorum with my little nephew. I would bet my entire net worth that the $83 billion number is not based on a true mark to market assessment of a decent amount of the pension fund's holdings, like real estate, real estate backed assets, derivatives and private equity investments. The real number is much larger than $83 billion. Second, as the article states, this number does not include "uncalculated billions in underfunded pension obligations for city, county and other local governments." Unquantifiable underfunding - just in the State of Illinois.
Now if that's Illinois, imagine how ugly the truth of this particular problem is for California. And New York, New Jersey, Ohio, Pennsylvania and Michigan are right behind Illinois. But it's the "unquantifiable" truths that should be scaring the shit out of everyone. Another example of the unquantifiable is an event like MF Global. If MF Global is illegally stealing customer funds to use as collateral, I can guarantee you that other bigger brokerages are doing the same. Jon Corzine is a thief, but he's not clever and he's not an original thinker.
It's this unquantifiable reality that is the 2x4 that is going to hit most of the people in this country in the back of the head. I would argue that the swinging of it has begun. I just don't know when impact will be. The market definitely senses the presence of this 2x4 that's been put in motion toward the collective heads of the middle class. When the S&P 500 started dropping like Wile E. Coyote off a cliff, initially the metals and miners started down with it. But then out of nowhere some "invisible hand" ignited a sharp reversal, first in gold and silver and then in the miners. Some of the smaller cap mining stocks went from being down 5% at one point to going green on the day. The S&P/Dow remained on their lows of the day, down about 1.5% each.
What caused this? Two hours after the reversal occurred I have yet to find any news item or rumor that would have triggered the reversal in the precious metals and miners. What I will say, though, is that gold (and silver) tend to sniff out big problems well ahead of those problems becoming obvious to all. It's almost as if gold and silver started sensing that 2x4 in motion...if that's the case, the market will soon truly understand the role gold and silver play as flight to safety vehicles.