DOJ & GS: WWJD? ~ The Risk Averse Alert

Friday, August 10, 2012


Ya wanna get real fired up? Hope you haven't been drinking, because you're gonna puke...

Bill Black's Rhetorical Ménage à trois

The U.S. Justice Department is a gutless, criminal operation. Gutless, because it waited until Congress was in recess to announce its decision not to prosecute Goldman Sachs based on a formal referral sent by the Senate's Permanent Subcommittee on Investigations requesting criminal investigation of the firm following its two year inquiry into the origins of the 2008 financial crisis. Criminal because there will be no justice served in this matter without prosecution.

Truth is the DOJ is a mirror image of our president, who in fact is an accessory to murder of an innocent, 16 year old American boy killed via drone strike in Yemen, this occurring days after the boy's father, likewise a U.S. citizen and a suspected terrorist, similarly was murdered. On this note maybe the Obama administration did Congress a favor with the Justice Department's pass on a Goldman Sachs prosecution announced yesterday. The jellyfish leading Congress wouldn't know what to do. Obama is spitting in your face, Boehner! So what are you gonna do? Cry? What a joke.

Really, though, the joke is on Goldman Sachs. The Justice Department's decision more or less confirms just how vulnerable is everyone sitting on Mount Insolvent (which, of course, includes the Fed, the ECB, the BoE, the BoJ and every weak-handed, white shoe firm on Wall Street — all are trapped). The U.S. Treasury on the other hand has but one minor solvency issue: it's Geithner. Like the President, like the Justice Department, the Treasury Secretary is just plain morally bankrupt.

Of course, you know what they say: birds of a feather flock together. These people make Nixon look like a cub scout.

I feel your rage, too. So, now the question is: WWJD? It's obvious: Matthew 21:12-13. Time will tell if the United States really is a "Christian nation," as the far right incessantly insists (these being folks who wouldn't know Thomas Jefferson from J.J. Jefferson). Let's just say we better understand the political climate in Washington when first-term Kentucky representative Henry Clay rapidly rose to Speaker of the House and soon afterward rallied Congress to initiate the War of 1812. There probably are a lot of character similarities, then and now, distinguishing the political climate in Washington. Congress desperately needs new leadership. Today, it has none, which is about the only thing bi-partisan worth noting.


Setting up the above, long-term chart of the Euro Index are the following excerpts from this week's Credit Bubble Bulletin titled, "The Dog That's Not Barking."
The Draghi Plan could very well support European debt markets. Yet I really struggle with the notion of the ECB as savior for the euro. Desperate central banks are easily more apt to hurt rather than help their currencies. In a crisis environment, a central bank often must choose between flooding a system with liquidity to bolster debt and asset markets - or instead restrain liquidity creation in hope of stemming capital flight and stabilizing the value of its currency. Mr. Draghi would like to tough talk both securities markets and the euro higher. But European policymaking credibility is badly depleted. So markets will force his hand into coming with a substantial bond-buying strategy. Such a plan risks liquidity abundance fanning problematic capital flight.

And this gets back to The Dog That’s Not Barking. The euro has thus far struggled to retreat from the precipice. I have speculated that there are likely huge derivative trades written to provide protection in the event of a major euro decline. It’s reasonable that significant “insurance” has been written at the 1.20, 1.15 and 1.10 (to the dollar) strikes. If correct, this analysis infers that potentially enormous selling pressure might be unleashed if the euro falls much below current levels.

European economies are spiraling downward, and I expect economic activity to remain largely impervious to monetary stimulus. I don’t believe the Draghi Plan will reverse the crisis of confidence in eurozone debt or the European banking system - or meaningfully loosen Credit conditions. And, as I mentioned above, I fear a desperate ECB may increasingly jeopardize the euro. Mr. Draghi invoked “convertibility risk” as justification for monetizing government borrowings. Such measures, however, will not allay market fears regarding the sustainability of the euro currency. Increasingly destabilizing capital flight remains a serious risk.

As I have been suggesting here for quite a while, central banks are trapped. A three-word summary of Noland's perspective is "rates must rise." This would be to stem capital flight. Not that this would be some new trend. We already have seen the phenomenon of rising rates occurring in the euro-zone periphery — a very necessity venturing to stem capital flight from periphery banking systems. This relentless financial effect of hyperinflationary breakdown, however, now is poised to move straight to the euro-zone's core. Once pressure on interest rates arrives there, the impact will be felt everywhere. An accelerated race to the bottom will usher in hyperinflationary chaos on both sides of the Atlantic. Unimaginable shutdown of the physical economy will loom, accompanied by rates to make the likes of Paul Volcker blush.

Of course, it doesn't have to be this way. The Bundesbank certainly understands this, too. Former bank member and euro architect, Otmar Issing, hit the nail on the head Friday, saying to CNBC, "The medicine still has to be solving problems where they were caused, in the banking industry, restructuring banks, and also cleaning the mess in banks."

There are two choices on the immediate horizon: Glass-Steagall or hyperinflationary chaos. Either way, the stock market is doomed. It does not matter how well-run any particular company appears to be. What matters is the financial position of shareholders. Yet not even this will matter one whit should hyperinflationary chaos ensue. In this environment it is a virtual certainty close to every shareholder will reach a point of desperation forcing his or her stake's sale. Of course, that option will be available only for companies not forced to go belly up first.

Per the Glass-Steagall option, there at least is hope some stocks will not be decimated. Have no doubt, though, it will be a mere handful. Apparently, in the 1929-1932 period 3M only fell some single digit percentage, or so I have been told (I believe it was 4%). Just what was the position of the company's shareholders during that period requires further investigation.

All ominous technical circumstance related to the stock market laid hold of here for what seems an eternity rather apparently has developed with foresight that, the moment where but two choices forward, both bad for equities, eventually would be met. Well, here we are. A most meager volume of shares exchanged on NYSE-listed issues of late likewise is indicative of this common sense, how ever diverse its viewpoint, that no good awaits equities. Generally speaking, it is safe to say strong hands have not been accumulating stocks. Ever-shrinking volume stands as testament to this, as strong hands do not hang on for dear life. Instead, they bank profits while riding the market's rising tide, and in so doing cause the volume of shares exchanged to increase. This is the "wall of worry" the market is said to climb. Contrarily, squealing Marias and every so called analyst appearing on CNBC who incessantly beg for central bank largesse represent the proverbial bell rung announcing approaching panic. We learned (yet again) late yesterday that, the bell ringer is the U.S. Department of "Justice."

Fast Money
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