Are markets finally heading in the right direction?
Security was unusually heavy at the Eurostar terminal in Paris yesterday. Police roamed the halls and corridors. Long lines formed as baggage and passports were inspected. In the executive lounge, plain-clothed cops eyed packages鈥nd studied travelers.
Then, in London鈥n our way to the office we passed a melee of striking cab drivers and electricians. A scuffle had broken out. A man was on the ground, surrounded by Bobbies in phosphorescent green jackets.
Europe is on edge.
鈥淲hile Rome burns the eurozone fiddles鈥� says the headline in today鈥檚 Daily Telegraph.
At least, things are starting to go in the right direction; the Dow fell 389 points yesterday.
What鈥檚 that? The right direction is down. And apart. It鈥檚 the way to wash out years of built-up debt that can鈥檛 be repaid鈥nd cleanse the system of zombie loans, zombie businesses, and zombie spending.
The right direction is to let the accumulated wisdom of willing buyers and sellers figure out what things are worth鈥et them destroy those that are worthless鈥nd raise up those that have real value.
The right direction is to let Mr. Market do it. God knows he causes enough trouble. Let him sort out the mess he makes.
But the right way is not the only way. Obviously, it鈥檚 not the way the zombies want to do it. They want to fiddle鈥o meddle鈥o manipulate the system so that the rewards go to them and the costs are put on someone else. They want to sweep problems under the carpet鈥nd continue spending!
But yesterday, investors began to realize that there was no carpet in the world big enough to hide Europe鈥檚 government debt.
Not that the debts are particularly huge. Some are bigger than the US. Some are smaller. Generally, European governments tried to provide more and more services by going deeper and deeper into debt. Generally, the US government enticed its own households into debt 鈥� with EZ credit, low rates and government-subsided loans for students and housing. And they鈥檙e both still at it鈥ee below鈥�
In other words, in both Europe and America, government used centrally-planned, bureaucrat-direct zombie capital investment to make up for real growth. And you know how that goes, dear reader.
Today, again, the world鈥檚 attention is focused on Italy. 鈥淒oomed by corruption, bloated by bureaucracy and poor productivity,鈥� says the Telegraph. But hey鈥t could be describing any number of places.
The unemployment rate for people between 15 and 24 in Italy is 30%. Hospitals are overcrowded. Roads have potholes. And the 鈥渃ountry has been spending more than it earns for years鈥�.鈥� Italy鈥檚 national debt is 120% of GDP. US debt is 100%.
But at least the Italians are civilized. They have some of the highest tax rates in Europe. They just don鈥檛 pay them.
Poor Berlusconi. He鈥檚 being forced to resign. After so many years of public service. So many years of doing his level best on behalf of the Italian people鈥o create a better government鈥 better nation鈥nd a better world. And now they cast him out like an empty cereal box. And the popolo minuto look on鈥awk鈥nd gloat.
But at least he has a tender shoulder to cry on鈥nd a warm smile to greet him after a hard day鈥檚 work. The Telegraph reports that the aging politician spent the night with Francesca Pascale, 26. The woman is an angel, for sure鈥escending from the heavens to succor the embattled Italian prime minister in his hour of need.
But let鈥檚 not get distracted by Berlusconi鈥檚 trials and tribulations. We鈥檝e got a financial crisis on our hands. The Italian 10-year note yield jumped over 7% yesterday. It was at 7.25% when we looked this morning. At that rate, say the experts, it鈥檚 too expensive for the Italians to borrow. And if they can鈥檛 borrow, they can鈥檛 pay their bills 鈥� including about 300 billion euros-worth of debt that they鈥檙e supposed to roll over in the next 12 months.
Naturally, the holders of the debt are a bit nervous. And who holds it? Banks. That鈥檚 right. The same banks that bought housing derivatives and brought the whole world鈥檚 financial system to the brink of collapse. Now, they鈥檝e got government debt up the kazoo. And once again, the world鈥檚 financial system edges towards a fall.
The New York Times is on the story:
Europe鈥檚 efforts to stem financial contagion foundered on Wednesday as investors dumped their holdings of Italian government bonds, prompting a global stock market sell-off.
Investors drove up the cost of borrowing for Italy beyond 7 percent, a critical level that many economists see as unsustainable and that last year precipitated bailouts for the financially troubled nations of Greece, Ireland and Portugal.
鈥淲ednesday鈥檚 surge in Italian government bond yields has catapulted the euro zone crisis into a dangerous new phase,鈥� said John Higgins, a senior markets economist with Capital Economics, in a research note.
Italy faces important tests of investor confidence at an auction on Thursday of one-year bills to raise 5 billion euros, and an auction next week of five-year bonds when it hopes to raise up to 3 billion euros. About 48 percent of Italian debt is held by Italian investors; the rest, 52 percent, is held by investors outside Italy, mostly in Europe.
It is unclear who beyond the central bank will be providing demand for Italian debt in the coming weeks.
Who, beyond the central bank? Our guess is that, soon or late, they will not look much further. Hold onto your gold, dear reader. Sell stocks on rallies. Buy more gold on dips.
The feds continue to lure American households into debt with subsidized mortgage rates. Bloomberg reports:
What do you think, dear reader? Do you think Ginnie Mae 鈥� inventor of the mortgage-backed derivative 鈥� has also invented a model that allows the government to have its cake and eat it too? Can the feds sell debt to American consumers鈥ake a profit out of it鈥nd also render a good service to the public?
Or is this just another zombie racket, run by an overpaid hack, that shifts resources to favored industries and leaves American households even deeper in debt?
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
