S&P Rates Subprime Mortgages Higher Than U.S.

Indeed. Reality is beginning to set in. Bloomberg reports:

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.

S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties. New York-based S&P stripped the U.S. of its top rank on Aug. 5, saying Washington politics were making the country less creditworthy.

Merkel’s Cabinet Approves Larger Euro-Rescue Fund as Dissent Ebbs

We told you so. But notice the masthead above.

Some bits from the Bloomberg piece:

Ministers meeting in Berlin today backed a reworked European Financial Stability Facility including sovereign bond- buying powers, raising Germany’s share of EFSF loan guarantees to 211 billion euros ($305 billion) from 123 billion euros. The measures were agreed on by European leaders at a July 21 summit.

The way is being paved for Eurobonds, as we told you.

Peter Grottian, a politics professor at Berlin’s Free University, said by phone yesterday. “What’s more painful: risking the collapse of the government and a devastating economic backlash, or gritting your teeth and waving through a bill that may be effective even if you don’t understand it?”

We know how to deal with that! "Just pass it so you can read what's in it!"

Getting Germany to bring more of its taxpayer money to the Union's table will be read (and hailed) as great step in the solution to the sovereign debt meltdown, and panicked bondholders will breathe hurricane-strength sighs of relief. Markets worldwide will rally. And why not? They've acquired the souls of once great nations at fire-sale prices.

It remains to be seen whether the dream of surviving The Great European Sovereign Deleveraging has the mojo to stimulate enough "confidence" to resurrect something akin to a functioning economy. We suspect it will seem so. But the rule of three's suggests we're still in the second wave down of the punishment the world financial system has evaded for so long. There will probably be some buyable rallies. But watch your back.

We Submit for your Consideration

...that Muammar Gaddafi is complicit in the takeover of his own government and the handover of his WMD's to al Qaeda.

He is, after all, the deposed dictator who won't go away, and that seems a little strange.

Never Forget

Merkel Says Markets Won’t ‘Blackmail’ Euro Leaders Into Sovereign Rescues

...reports Bloomberg.

German Chancellor Angela Merkel said investors are trying to “blackmail” governments into helping debt-strapped European countries, underscoring the need for all euro-area governments to reduce debt.

Perhaps not, Angela, but you will bail out Europe all the same.

Stranger than Fiction

The "capture" of Osama bin Laden: who really believes the story as it was told? Besides the hopelessly credulous, that is.

Recently had a conversation with someone who speculated that the death was faked with the complicity of President Obama. The someone reports that one very credible source had a brother on the ship from which the body was allegedly "buried at sea," and reports that he neither saw nor heard anything of the sort while on the ship at that very time. A gag order was issued out of "reverence." But nobody saw anything.

The interesting feature of this thesis is that it's at least as plausible as the one that was served by the media.

Home.Prices.Drop.Again.

For the rest of us, that is. News flash:

Home prices in the U.S. fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009, as foreclosures added to the inventory of properties for sale.

However, there is a silver lining, literally:

Toll Brothers Inc. (TOL), the largest U.S. luxury-home builder, reported earnings that were better than analysts expected after a tax benefit and demand for its move-up houses remained stronger than other segments of the market.

It's 2008, only more so.

Bloomberg reports:

European Bank Job ‘Bloodbath’ Surpasses 40,000
By Gavin Finch and Liam Vaughan - Aug 24, 2011

UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue.

But it's not just "the sovereign debt crisis" that's "crimping trading revenue", it's regulators' response to it.

The Basel Committee on Banking Supervision will require lenders to more than triple the core reserves they must hold to protect themselves from insolvency by 2019. Under Basel III, banks will be obliged to hold core Tier 1 capital equivalent to 7 percent of their risk-weighted assets, compared with 2 percent under the previous international rules.

Some key words from the article: "bloodbath","31% decline in Financial Services Sector Index," "71% decline in revenues," "fundamental restructuring of banking."

Perhaps a little "fundamental restructuring" is useful in a sector that had grown fat and delusional on the easy money of a worldwide credit bubble. But now that credit is scarce, and entire nations are imploding for lack of it, the additional regulatory capital overhead required by Basel III at this very time might constitute cruel and usual punishment.

That's because the excesses of credit bubbles are corrected by the mechanism of credit contractions. Credit contractions remove capital from the economy, as do regulatory requirements that banks set more of it aside. There is no need to impose additional capital requirements on banks, as long as they are subject to the discipline of the marketplace, which penalizes them for bad judgment and protects and rewards them for good judgment. The market is already imposing credit restrictions. Redundant capital restriction might be too much restriction. And the market will not cease to obey market laws; so the regulators ought to just let her do her thing.

If, instead of throwing countless billions of as yet non-existent dollars and euros at failing financial institutions to insulate them from the results of the credit contraction that they rightly have coming to them, regulators just let the market do its thing, there'd be no need to force banks to stash ever more amounts of precious capital in government bonds. The market would allocate the capital wisely away highly leveraged, high risk spots. That is, until the government can make money artificially "easy" again.

No, this is a clear example of two wrongs (1. "the Greenspan Put"; 2. Basel III) not making a right, but making an even greater wrong.

Unfortunately, it's not bureaucrats and bankers who suffer for this folly, it's the rest of us. The last time we saw investment banks "slashing" costs like this, it was in the summer of 2008, and we trust you recall what followed. If the investment banking industry is a leading indicator, as it has been for most of modern times, this is indeed a very ominous development for Europe.

For Europe, and for the United States, which invested billions of dollars of taxpayer money in bailing out European banks, this is an indicator of pending disaster of such a magnitude that the preceding 3 years could be considered only a warmup.

Who's going to bail Europe out of this next round? China? Nobody's buying their trinkets. The Arab nations? Demand for oil is tied straight to economic activity. Russia? Well, perhaps, as a pawnshop can be said to be "bailing out" a hapless pensioner, using her wedding ring as collateral.

Only the US can do it, and the US can only do it if our economy is unshackled from the ruinous policies of the Marxist Obama regime. We don't think the world can wait until 2012, though. It needs to begin now. And if it doesn't? All bets are off. Who knows how low we (the world) go, how much excruciating privation and social unrest everyman will suffer, or what sorts of tectonic shifts in geopolitical power result, if things simply continue as they are today.

Martha's Vineyard

...seems like it would be a lot better a hangout than, say, Camp David, if terrorists were to start suitcase-nuking the eastern seaboard.

"Foreign Direct Investment in China Jumps 20%"

...so reports Bloomberg. From the story:

“The weakening global recovery and turbulent financial market will make China an even more attractive place for investors to park their money,” Fang Sihai, a Beijing-based chief economist at Hongyuan Securities Co., said before today’s announcement. “The China story will remain appealing for many years to come.”

I suppose they can be forgiven be being a little full of themselves.

However, when "the world’s second-biggest economy" which "may expand more than 9 percent this year" has its bubble burst (as all bubbles must), it's going to be heard popping all around the world that poured so much of its wealth into it.

"Bachmann asked whether wives should be submissive..."

...so reports AP:

The Bible tells wives to be submissive to their husbands. If she were president, would that apply to Michele Bachmann?

Readers of this blog are plenty capable of dismissing such rubbish on sight.

But we wonder, why didn't anyone ask if "wives should be made to wear burkhas?" After all, when you mention the word "submission," you're really calling Islam by its true name.

-3.53%

Sorry, children, but things are just getting started.

Fed: More Of Same; Much More!

Bloomberg on today's Federal Reserve meeting:

The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated.

Naturally the stock market bounced substantially -- so would you if you had been falling for over a week straight -- but if one is tempted to think that today's bounce is due to relief of fears that the Federal Reserve was going to raise interest rates, we politely submit that one would be misled.

The Federal Reserve has done nothing for the past 3 years except subsidize a risk free bond trade for banks -- a transfer, if you will, of presumed future tax revenues from Treasury, Federal to treasuries, bank. Said treasuries are sitting on nearly 2 trillion dollars, some portion of which is attributable to the Fed's reaching into the pockets of children yet unborn. "A dollar today is worth more than a dollar a year from now" in an inflationary environment, and this apparently is part of the calculus that rationalizes this trade.

As notable for its audacity as it is, this feat has done nothing to stabilize prices, support or strengthen the value of the dollar, reduce unemployment or cause GDP growth; nothing to restore confidence in our markets either at home or abroad; nothing to overcome the blatantly anti-business bias of the administration -- nor was it meant to, nor would anyone expect it to. It was designed to keep corporations -- especially a few key banks -- from failing, on the pretext that they are "too big to", because they are the world's financial system.

Returning, then, to today's bounce -- we suspect that the takeaway from today's market action amongst the world's financial administrati will be that the Fed "has done it again" -- with accompanying sentiments including admiration. But the alleged "trillions of euros" of bond buying done by the Eurocrats a few days ago did nothing to keep the FTSE (for example) from losing 5+% the very evening that market-saving buying was supposed to be taking place; why would a few words from the Fed amounting to "nothing's changed here" change the game?

It didn't. The promised continued devaluation of the dollar by the Fed simply drove it down in currency markets and exaggerated an overdue bounce in the value of dollar-denominated assets like the stock market. But there is no reason to believe this indicates "health" on the part of the market that casts a vote on the health of the economy. The US is still in a state of bureaucratic denial about its budget deficit, it still refuses to stop spending trillions of dollars it does not have; its largest trading partner is still an unrepentant violator of human rights in the midst of a bubble of unprecedented magnitude; asset values have shrunken substantially globally; a generation has lost faith in its purported leaders, and London has gone up in flames. We take this state of things to be symptomatic of problems that go to the soul of a people, if that analogy can be used -- something that a government bank is ill-equipped to repair.

Our world is indeed a different place than it was two weeks ago, but the results of the Fed meeting today are as "status quo" as can be and then some. In fact, they appear a desperate attempt to preserve the status quo. On the face of it, they look very much like the face of Fed Chairman Ben Bernanke: unflappable, unruffled and inanimate. Unconcerned. Disengaged. Preoccupied. Distant. Out-of-touch. Very much, in fact, like the face of the Administration of the President. Like zombies, really. The living dead.

More of the same means...more of the same: the emasculation of the great economic engine we once were. The law of entropy has its own leverage, and decline, if it isn't resisted, gains momentum.

Death of the Individual

As the markets are taking a brief respite from their descent, we turn our attention to another pressing matter: the cessation of your existence.

Oh, you didn't realize that you've ceased to exist? Please, pardon the shock, but it's true. You have been subsumed into a technologically enabled, socially enforced global being. You are merely one among billions of cells. A highly-programmable cell, to be sure, but as fungible and expendable as any other.

In times past, aspiring philosophers would bemoan "feeling like a number." The 20th century philosopher Bob Seger put it this way:

I take my card and I stand in line
To make a buck I work overtime
Dear Sir letters keep coming in the mail
I work my back till it's racked with pain
The boss can't even recall my name
I show up late and I'm docked
It never fails
I feel like just another
Spoke in a great big wheel
Like a tiny blade of grass
In a great big field
To workers I'm just another drone
To Ma Bell I'm just another phone
I'm just another statistic on a sheet
To teachers I'm just another child
To IRS I'm just another file
I'm just another consensus on the street
Gonna cruise out of this city
Head down to the sea
Gonna shout out at the ocean
Hey it's me
And I feel like a number
Feel like a number
Feel like a stranger
A stranger in this land
I feel like a number
I'm not a number
I'm not a number
Dammit I'm a man
I said I'm a man

Quaint sentiments, those, viewed from the Post-Christian, Post-Modern, Post-Western, Post-American New Millennium, Decade 2. Here and now it is rather abominable to dare to think of one's self as an "individual." A contented spoke is a good spoke; a tense spoke makes for a wobbly wheel. And that is inefficient and sub-optimal.

No, these days the unhappy tendency to assert individuality will be bludgeoned out of you by peer pressure, corporate behavior codes, statutes and the steady re-education by the information and entertainment media. Not to mention the education system.

What is acceptable is to push the limits of weirdness as a substitute for individuality. Bizarre hobbies, expressions of fantasy life, superstitions, body piercings, tattoos and outright mutilations (yours and others'), bizarre eating rituals and such, these are socially acceptable expressions of "individuality." After all, what's more unique than a tattoo? Ahem.

But if you express an original idea; if you outwardly manifest a moderate, normal, healthy and productive lifestyle, you are suspect, and rightly so, because you are not manifesting the qualities of a good spoke in the post millennial wheel. You should watch it.

Later on, perhaps, we'll introduce you to the fact that you no longer live in a respresentative republic, but rather a tribe -- a global one -- governed by supersition and raw power.

The machinery you made love to, as McLuhan might have put it, has reduced you to subservience. Oh, yes it has.

Not Betting on Coincidence

We hadn't intended to go there, but we've just seen some live footage of the looting and burning in London.

Somewhere on this blog you'll find posts from the last "global financial meltdown" that muse on the very orderly demise of once great financial institutions Bear Stearns and Lehman Brothers, how they fell like sitting ducks, and how there was evidence of concerted naked shorting of their stocks -- something that is not only illegal but cannot be done on a such a large scale without substantial resources, cooperation, and rank fraud. Of course we explained how the falling equity value would necessarily force such firms to shutter. We introduced the concept of intention with the term "Financial Terrorism" and watched the financial media eventually pick up on it, ever so briefly.

Today we are witnessing an even more global meltdown, complete with the most "timely" occurrences of civil unrest -- Greece, London, Israel, and who knows where next.

We find coincidences to be extremely rare and, rarer still, successive. While have no reason to conclude so, we are fully open the possibility that we are witnessing organized, global anarchy and an attack upon organized social and financial institutions. There really isn't a good explanation yet just why the Dow Jones is down over 10% in the last week, or why the Tel Aviv TA-25 index is down 19% in a month; or why the "anarchy" in London (FTSE: -16% in a month) -- notably in the "absence of police presence" -- is being duplicated in city after city. This is the age of the "flash mob."

And we don't have reason to believe it's a succession of coincidences.

It could very well be the culmination of collective folly, corruption, arrogance and oppression being set ablaze by economic malaise and dog-days heat; all being exacerbated by the presence of anarchists, 30 years on, in the White House, which amounts to a permissive if not agitating vacuum of leadership. More likely it is all this being seized upon by the sorts of opportunistic, malevolent gangsters who flourish in times like these. But we'll see. In the meantime, pay attention to China.

Who 'made $10bn on 10/1 bet that U.S. credit rating would be downgraded'?

So asks the Daily Mail. Of course, we asked this (and a few other questions) first. No, we're not Soros conspiracy theorists...but maybe we should be. Seems the last time there was a presidential election looming, the world financial system had a meltdown.

Moody's Maintains Top Rating, Cites "real policies," "positive steps" in Budget and Deficit Reduction

According to Bloomberg, Moody's Investor Service has affirmed its Aaa rating of US sovereign debt and given the following explanation:

The U.S. today retained its Aaa ranking with a negative outlook because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries and lawmakers last week took a “positive step” toward addressing the nation’s record deficits, Steven Hess, the senior credit officer at Moody’s in New York, said in a telephone interview.

Moody's is satisfied that congress, despite its refusal to pass a bill containing real expense reductions, has its heart in the right place. We should all have creditors so congenial:

“What we’ve said over the last few months is that we now see at least both parties having the same goal of deficit and debt reduction over the long term, even though more needs to be done,” Hess said.

Despite one economic indicator after another signaling lower GDP growth, employment, and tax revenue; despite congress struggling to finally pass a bill that is remarkable for the complete absence of any real budget and deficit reduction, Moody's is satisfied that US creditworthiness deserves its penultimate score; as good as it has ever been, and as good as it will ever be. Hess continues:

“More important to us than how contentious the process is, does it produce results? What we’re looking at is actual policies as opposed to the political debate.”

So, despite the fact that congress failed to produce policy which would improve the US's ability to service its skyrocketing debt, Moody's, which "is looking at ... actual policies" when assigning its highest rating to the distressed credits of the US, has somehow seen one.

In Moody's world, Baseline Budgeting, in which a smaller than expected increase in projected expenses is considered an expense cut, qualifies as an "actual policy" for managing the US 's multi-trillion dollar budget deficits; growing the deficit at a slower rate than projected is a "positive step" deserving of the highest credit rating.

Moody's is apparently of a mind with former Fed Chairman Alan Greenspan, who remarked recently that a US default on its debt is impossible because "we can always print money." To paraphrase Howard Dean, "what are they smoking?"

Trichet's Got A Bazooka (?)

Bloomberg: "Trichet Draws ECB ‘Bazooka’ as Italy, Spain Debt Purchases Begin"

Well, now, can't you just see everyone paralyzed with fear that they might be in the line of fire? Neither can we. The theater is burning. Pardon the mixed metaphor, but urging people to stay in their seats while you put out the fire isn't likely to meet with compliance.

Nobody Trusts Them

"G-7 Seeks to Calm Investor Fear After World Stock Selloff," trumpets Bloomberg News.

Our gut is that the G-7, or any other G, has never been able to calm periodic bouts of (frequently justified) investor fears. (Besides, everybody is pretty sure that Eurocrats, no matter how tough they talk, are economically impotent).

What has calmed them in the past is a sure and reliable, free-market sustaining United States.

The problem now is that the United States, at least administratively, is none of those things anymore. The world has lost its big brother. And now it's casting about for someone to believe in. Ironically, even as they mocked "cowboys," they longed for handsome strangers on white horses.

Every new low chisels a new low in confidence that can take a generation to smooth over. Dangerous times, indeed.

Gross Praises S&P’s ‘Spine’ on U.S. Rating Cut

Told you he reads this blog.

Long Term Downgrade

It might behoove observers (and participants) to bear in mind that it was the long term US Treasury bond that was downgraded from AAA to AA+ by Standard and Poor's.

The two-year Treasury still retains its top rating.

Now then, what are the differences between short term and long term Treasuries? And what are the differences between long term US Treasuries now and, say, last year?

The one we'd like to point out is: the costs of Obamacare. Congress didn't even raise the issue of these costs as it crafted its budget compromise. The market waited for it do so, and it failed.

AAA no more.

The folks at S&P straightened their collective spine and downgraded US debt, something that is probably long overdue.

This was released after market hours on a Friday evening, so there's no reality check from the markets.

So the question is, who bought the protection, and what did they know? And, who sold the protection, and who's gonna bail them out?

Can you hear America's enemies cheering?

-7.07% as of today's close

Well, this is the day I thought last Friday would be (-4.31%). Anyway, it's here, as promised. VIX needs to be up around 60 or higher. It settled at 31.66 today.

Start buying in the 9000's, if it gets there. Sooner, if you have really deep pockets and can stand some abuse. You may have to ride it down into the 7,000's or so and you may have to own it for a long, long time.

-5.5% and counting.

So there. Took a little longer than expected, but it usually does.

"Stall" is the new buzzword for the economy. Pass the airsickness bags, please.

And your VIX has a long way to go before it signals a bottom. That said, a little short covering might be in order. But it ain't over, IMHO.

-4.5% so far.

Referring to this post.

And look, I'm no doomsayer -- just look over the archives (you might just search "VIX" on this blog)-- but if support cuts out, we're looking at a collapse, as in, oh, Dow 9,000's for starters, speaking roughly.

Only two things could stop it: one, easing. But where's the money gonna come from?; two, jobs creation, and that's not very likely in a global meltdown with (and arguably because of) a decidedly anti-American American president. This appears to be the worst case scenario that Bush & Co. prevented us from experiencing in Oct, 2008.

And speaking of the VIX, it's a long way from bottom territory:

"Gross Says Debt Deal Fails to Make Significant Dent in Deficit" (-3.13%)

Gross Says Debt Deal Fails to Make Significant Dent in Deficit.

Guess he reads this blog, too.

Down 3.13% since close Thursday. Over halfway there.