Monday, September 5, 2011

Labour Day Blood Bath In World Stock Markets

Wish everyone a good labour day holiday.  While the North American markets are closed, the markets in Asia and Europe are open and having a bloodbath so to say.  At this point of writing, DAX and STOXX are down almost 5%.  It is the same story being repeated. The flare up is now coming from Italy and the political situation in Germany, where Madam Markel is losing her grip on the power.  I have been writing that European union will eventually break up and there will be a Northern Euro and a Southern Euro. It is not going to happen in September 2011 but the chances are higher in 2012. When that happens, the economic tsunami will be severe. It is now widely accepted that Greece will default and to a certain extent, the markets have priced that in.  But even then, some of the banks in Europe will definitely go bust and that coupled with sovereign default of Ireland, Portugal and Spain will unleash a fresh round of Global recession.

Unlike 2008, this time, the central bankers and governments are aware of this problem but their hands are tied to the massive debt and there is very little room for effective maneuver. Only thing they know and can do, is to print money like hell, but apart from skyrocketing commodity prices and hyperinflation, money printing will not solve this problem. Till the printing press starts to roll and it may be as soon as October, the real threat is stagflation or deflation.

Housing constitutes over 40% of the CPI in the USA. While the low and declining housing price is dragging down the CPI, it is masking or hiding the higher cost of food and other daily necessities for the poor and middle class. The uses of food stamps are rising to an unprecedented level and there is no real income growth or job growth in the US economy. Happy Labour day indeed.  At best the US economy will muddle through without external shock from Europe, but Europe will definitely collapse sooner rather than later and that will push the USA in deep recession as well.

According to the WSJ, the Federal Housing Finance Agency is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble. The suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

According to Phil Davis of Philstockworld: “Asian shares were already following US financials downhill on overblown fears of the FHFA lawsuit.(I say overblown because the first bank sued, ING, already settled for .20 on the Dollar so banks are reacting as if they already lost $30Bn when it’s much more likely this will all get washed away for $6Bn, or about 2 day’s worth of profits (4%).  We’ve already seen the banking community write down over $1Tn in losses and survive to screw us over another day – do we really think this little wrist-slap will end them or is this just another example of retail suckers being stampeded out of the sector that is likely to benefit most from QE3? 

I somewhat agree with Phil that US Banks will survive these lawsuits and they will use free money from government to pay the government. That way, the current administration can say that they have taken action against the banks, punished corrupts etc etc without actually doing anything and that will satisfy the sheeple on the main st. After that the government will socialize the underwater mortgages in the books of the banks and the oligarchy in the USA will live happily ever after with the political class. Talk of vote bank economics!

This much they can control and manipulate. But the events in Europe or a geo-political flare up in the form of Israel-Iran conflict is beyond the control of the market manipulators.  Tomorrow when the markets open in the North America, we will see them plunge. I expect that the lows of August will be revisited or broken. But the end of the world is not coming yet. This is just the scare tactics to force the retail investors to sell out before the QE3. The bottom will fall off in 2012, when the debt deleveraging process will start in earnest.
It is going to be an interesting time for sure. When the recession hits will full force, many businesses will close down but many will survive as well. The survival of a business in bad times is not just a matter of luck. It is also a matter of great planning and anticipation. It will also bring in new opportunities. Those who can see it coming will come out stronger than ever. 

 Charles Dickens wrote “A Tale of Two Cities” in 1859.  Even after 150 years later, his writings still holds true as if it is written for today ;” It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. 

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