So the European Bailout Plan Caused The Market To Jump Yesterday.

[sledge]

This one has got me puzzled.  Timmy G. took a trip to Europe last month and told them that their 400 billion bailout plan wouldn't be enough.  They needed a 1.3 trillion plan.

So yesterday the Europeans came out with a 1.3 trillion bailout plan.  France is still contributing 200 billion.  Germany is still contributing 200 billion.  And the IMF is providing the additional 900 billion.

Two Questions:
Does anyone know what the U.S. share of funding the IMF is?  I think it's over 50%.  Probably closer to 70%.

Can anyone explain why the stock market would rise on that kind of news?  I'm confused.  Since no one would lend us that kind of money to give to the IMF I guess we are just going to print it?  I guess this is the reason I'm not a stock analyst or working in high finance.  'Cause this just isn't making any sense to me.

Edit:  Something else that doesn't make sense to me.  The Federal Government (the treasury) prints money which it gives to the private Federal Reserve Corporation.  The Federal Reserve in turn loans that same money back to the Federal Government at interest.  When I try to make sense of that my brain shorts out and I get a WTF message.  Can anyone explain how this is good for anyone except the private banks ( Many of which are foreign) that own stock in the Federal Reserve?   

[WhiskeyJack]

I dont have an answer either sledge. Perhaps the FED is trying to get the dollar to remain the world reserve currancy by making the EU dependant upon it. But i just dont know. The only thing i see is perhaps they bought preppers like us a few more months to prep before a toatal world wide colapse.

[NOLA556]

it doesn't make sense, but the reason why they do it is because the new money bails them out of their short term predicaments. it's no different from any other loan. basically a treasury bond is just a promisary note. the Fed issues the actual legal tender. I may be just talking bullshit but that's how I understand it. It makes about as much sense as those "payday loan" places that RAPE poor people with ridiculous interest rates.

[JohnyMac]

A fellow prepper who I correspond with via e-mail on a regular basis was over in Greece last month on a vacation.

I will by-pass the travel log he shared with me other then his economic observations.

He was shocked to see that every Greek he spoke to felt that the Greek Government owed them. OK I get that but he also heard from the Greek's is that they feel that the EU owes them too.

It should be interesting to see if Merkel looses the next election there as the people of Germany are not happy about the Greek bail out.

Not to hijack your post Sledge, however I think what is happening in the EU is a precursor to what will follow here.

I would love to read what Veritas or Ridgeline has to say.

[sledge]

The Greeks feel the Greek Government and the EU owe them?  Do they feel that the rest of the planet owes them as well?  If that's the sentiment they have there is no question that their economy is going to totally collapse.  Sometimes wake up calls come hard. 

[Veritas]

I'll throw my hat in the ring.....

Around 4AM EST on Thursday morning, the Euro-peons decided to announce their "plan".  Basically it entails that private holders of Greek bonds will take a 50% "haircut".  (that's financial speak for "you loose half of your money")

US stock market futures shot up like a heroin addict in Detroit.  The DOW opened @ 9:30 up about 250 points higher.  Shortly thereafter, the US announced that 3rd quarter GDP was slightly higher than the 2.3% estimate.  It came in at 2.5%.  All of the button pushers on the stock exchanges decided to hit BUY instead of SELL, even down to the old frumpy man sitting in a Merril Lynch office with the jelly doughnut stain on his tie.

The news media starts blabbing on about "EUROPE IS SAVED, OMG!!" and that leads to an impressive rally in almost all sectors of the markets.  The indexes held their gain throughout the day (over 400 on the DOW at one point), pushing October 2011 to the best October that the US markets have seen since 1974.


Here's why we're all fucked.....


This so-called debt deal is just a managed partial Greek default.  50% of private bondholders (not public bondholders i.e. other countries like France) lost half of their money.  The "financial reach-around" is that their CDS contracts (credit default swap, basically an insurance contract to protect your investment against such a situation) are NOT going to be paid out to the bondholders, because this was considered a "voluntary default".  All of this sounds nice for Greece, but this deal only lowered their overall debt by about 22-23%, and they still have over 120% debt to GDP ratio, which is well past the point of no return.

The message that the EU has sent to bondholders is that countries will be allowed to selectively default, and if you hold these bonds, you will take a loss.  Your CDS contracts will not save you.  (We wouldn't want to rattle the derivatives markets, now would we?)

On Friday, after the market reality euphoria wore off, bondholders realized that most euro-bonds are now risky investments.  Spanish 2 year bonds had a roughly 6% jump in yield, while Italy's 2YR yield jumped over 7%. (click on the links, scroll down to the chart, and click on 1D).

http://www.bloomberg.com/apps/quote?ticker=GSPG2YR:IND
http://www.bloomberg.com/apps/quote?ticker=GBTPGR2:IND

Remember that we're talking about bonds here.  When prices go down, yield goes up and vice versa.  When you see the yield spike up like that, it means that prices are dropping because everyone is getting the hell out.

Going forward, investors are going to want higher rates on their bond investments.  (risk vs. reward, remember?)  This will force the Euro governments to issue bonds with higher interest rates.  It will cost the governments more money in interest rate payments to issue their new debt,  which is going to compound their problems further.  (It's kind of like putting out a fire with gasoline).

Here's the cliff notes version:  Europe proved how inept they are by trying to put out a fire with gasoline.  US investors were dumb enough to believe all of this, and the REAL European Financial Crisis has now officially just begun.

[Veritas]

On another note, I'll explain why I use the term "WE" are all fucked instead of "THEY".

Most people don't understand how deeply invested our banks are in Europe. (as well as other countries)

First you have to understand the Glass-Steagall Act.  Here's a link that breaks it down into pretty simple terms....

(put your tin-foil hat away about Wikipedia for a minute.  This explains all that you need to know for now.)

http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act

So, as you just read, the Commercial banks and the Investment banks are now one and the same.  The Dodd-Frank Act did nothing to fix the problem, and in many cases just made it worse.  In other words, banks can now take grandma's life savings and gamble it away in the derivatives markets.  The vast majority of wealth in this country is in electronic form.  How many people do you know that actually keep all of their cash in their home?

It is estimated that the derivatives markets are about 10x the size of actual currency floating around in the world.  If and when that bubble bursts, it will be make the Great Depression look like a bump in the road.  These derivatives are so complex, and intertwined that it's impossible to calculate what would happen if/when they blow up.

Think of it all as a room full of mouse traps.....

Mouse Traps Prank

The mouse traps are the derivatives, the girlfriend is the large banks, and the poor dude with the bruises is the American people.  (this will be felt around the world, but America has the most exposure to derivatives)

Now Greece isn't the largest economy in the world.  (Hell we gave more money to bail out General Motors back in '08 than Greece's annual GDP)  The issue lies in all of the side bets that our banks have been placing on them for the past few years.  Our bank's exposure to their bonds is one thing, but we can't even calculate what the derivatives markets would do.

So you'll either see a bank run where people try to withdraw all of their money (which the bank doesn't have) or new bailouts for these "too big to fail" companies that will gut the American taxpayer for generations to come.  (or a combination of the two)


Like I said,  "We're fucked".

[WhiskeyJack]

TY veritas. I have to admit i have the most limited understanding of global finance. I appreciate it when you break shit down in simple terms for simple folk like myself.  [URL=http://www.smileyvault.co

[sledge]

Veritas you do this for a living right?  Nice to have you around to explain some of this stuff.  Some of the things the European and U.S. finance officials are doing drives me nuts because to a common everyday guy it seems they have lost all touch with reality.

Thanks for the input.  Now could you show us where what they are doing makes good sense to any of our economies?   Is it just buying time?  Or is it just making select individuals wealthier? 

[Veritas]

Veritas you do this for a living right?  Nice to have you around to explain some of this stuff.  Some of the things the European and U.S. finance officials are doing drives me nuts because to a common everyday guy it seems they have lost all touch with reality.

Thanks for the input.  Now could you show us where what they are doing makes good sense to any of our economies?   Is it just buying time?  Or is it just making select individuals wealthier?

You nailed it on the head, Sledge.  They have lost all touch with reality.  It's like a heroin addict trying to get their fix.  They don't care how they get it as long as they get it.

There is no grand conspiracy theory.  It's just human greed and ineptitude that is running the show.

You can apply that to both ends of the spectrum.  The people running the show want more power, don't care how they get it, and are completely out of touch with the real world.   The regular people out there just want a bigger house, new car, and whatever new electronic trinket comes out next month.  They are too wrapped up in american idol, happy hour, and trying to get their bills paid to understand what is truly going on in the real world.

[sledge]

So Veritas, how many preppers are there in the financial world?  Are many of your associates preppers.  I was just wondering, can any of them see what's coming?  I have read a lot of reports where financial advisers are saying buy gold.  Are those reports just marketing gimmicks or are most financial advisers you know back stocking supplies?   

[Veritas]

I went out on my own about 2 years ago, so I don't have any associates anymore.  The short answer to your first question would be no.  Most people I've met in the financial industry have too big of an ego to prepare for an uncertain future, or are just plain clueless.

To answer your question about gold, you have to ask yourself..."Are they saying buy gold, or buy gold from me?"

Gold has it's place in the world, but you can't eat it.

[JohnyMac]

Great breakdown Veritas. You have a knack of making the complicated less so.

Veritas is 100% correct, "Gold has it's place in the world, but you can't eat it." IMO and only my opinion, PM's have a place in post  apocalyptic world for starting up a new business. The business might be farming. The business might be an old style grocery store. The business might be an ammo reloading operation. I guess my business side won't go away. 

On another note: PM's should be last or farther down on the "to procure" list of preps. Water, shelter, food, ammo, miscellaneous supplies then PM's is the order that I worked on.