Mish's Global Economic Trend Analysis

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Real Reasons for Last Week's Rally Emerge Posted: 08 Oct 2011 06:35 PM PDT I immediately dismissed stories running rampant about a Financial Times article starting last week's rally. In Viral Nonsense About What Caused Tuesday's Rally I stated No fewer than a half-a-dozen sites featured or repeated a silly story about Tuesday's late rally that propelled the S&P 500 up 45 points in an hour. I am commenting because of all the emails I received on the idea. This is a case of looking for a cause and finding one. The most likely explanation of this rally is purely technical. Support was breached, no more sellers stepped in and a short-covering rally from deeply-oversold commenced as bears covered. If you prefer, "short-term psychology changed for unattributable reasons" It is highly doubtful this all happened because of non-statements with no details from Olli Rehn. Rather, Rehn just happened to be spouting nonsense right as the market was ready to reverse on short-covering. It is a mistake to look for an immediate explanation for every market move. Sometimes the explanation will not come for days (then be attributed to something else), and sometimes there really is no explanation other than short-term psychology changed. When everyone starts fishing for answers, someone will find one, no matter how silly, and the story gets repeated everywhere. I now have strong evidence that view is correct. Please consider the following interview on Bloomberg with Tom DeMark URL if video does not play: Tom DeMark on U.S. Stocks, Gold and Oil. You may not be a follower of DeMark. Indeed most people probably have never heard of him. However, scores of hedge funds and institutions do follow him and do pay attention to technical levels. Dovish Actions by Trichet Those seeking a more fundamental reason can find it in the ECB's decision to extend more loans to banks on easy terms as noted by Bloomberg in European Central Bank Extends Loans, Bond Buys Trichet, announcing a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign-debt crisis threatens to freeze money markets. Trichet will step down at the end of the month and be succeeded by Italy's Mario Draghi. "The markets are a bit relieved that they're getting some support rather than no support from the ECB in the form of liquidity measures," said Kathy Lien, director of currency research at this online trading firm GFT Forex in New York. Expect Leaks Inquiring minds may be wondering how something announce later could have precipitated a rally sooner. The answer is leaks. Someone always knows in advance and that someone is never you or me but rather banks and hedge funds. Two Possible Reasons for Last Week's Rally Dovish Actions by Trichet telegraphed in advance DeMark Technical levels reached then reversed The widely circulated reason of a Financial Times rumor made little sense at the time, and now makes zero sense in retrospect. Most bloggers missed the mark by a mile and parroted silliness related to a Financial Times story that by accident came minutes before the rally started. My friend "Pater Tenebarum" also got this correct. Please see Post Mortem of 'Turnaround Tuesday' for his interpretation. It is a huge mistake to think reasons for something will be immediately available. Sometimes reasons only become apparent days later, sometimes not for months. By the way, don't expect the rally to last. Nothing has been solved. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Merkel, Sarkozy Feud Over How to Recapitalize Banks Posted: 08 Oct 2011 11:16 AM PDT German Chancellor Angela Merkel and French President Nicolas Sarkozy are in a public dispute as to how to recapitalize woefully undercapitalized European banks. Via Google translate, please consider Merkel and Sarkozy on Sunday concoct a new plan to recapitalize banks German Chancellor Angela Merkel and French President Nicolas Sarkozy, meet tomorrow in Berlin to lay the foundations for a new program to recapitalize European banks. The umpteenth emergency meeting of the two leaders since the crisis began will try to outline a mechanism agreed to provide public funds to private financial sector in Europe in the event that Athens was doomed to see a default, a hypothesis increasingly shuffled in Europe. The main pitfall of the meeting is that despite the good feeling that boasts the Franco-German axis, Berlin and Paris have called for different models of bank recapitalization, each with the interests of his country in mind. The Chancellor stressed that it would be best that the banks themselves were able to raise funds "for his own," ie in the market or, alternatively, that national governments take charge of their recapitalization needs, a position broadly shared by Brussels. Only if they fail the first two springs, and if it is a bank of "systemic", states could resort to EFSF to support the institutions in trouble, a measure that would require some "conditionality" reciprocal form of "structural reforms ". The French position, meanwhile, denies this response in three steps and openly advocates that is used in the first place EFSF capital. The French Finance Ministry itself said yesterday that there is "divergence" between Paris and Berlin and that both nations agree that the European banks need more money. According to the IMF, the need to recapitalize European banks is between 100,000 and 200,000 million euros, well above as outlined in the stress tests conducted in July by the European Banking Authority (EBA). The "stress test" made in July, in which cited eight banks, five of them Spanish, assumed sovereign bond holdings, including Greece, had zero risk. A similar report appears in Reuters: Germany, France split on bank aid before summit Under strong U.S. and market pressure Chancellor Angela Merkel and President Nicolas Sarkozy will try to bridge differences on how to use the euro zone's financial firepower to counter a sovereign debt crisis that threatens the global economic recovery. A ratings downgrade on both Italy and Spain by Fitch Ratings on Friday underscored the grim climate. A German source said Paris wanted to be able to tap the euro zone's 440 billion euro rescue fund to recapitalize its own banks, which have the largest exposure to peripheral euro zone debt, while Berlin insisted the fund should be used only as a last resort when no national funds are available. After meeting Dutch premier Mark Rutte, Merkel confirmed the German position was that the European Financial Stability Facility was a backstop to be used "only if that country is unable to cope on its own. "I hear that the French are scared that too much bank recapitalization could jeopardize the French AAA and that is why they push for the EFSF solution for French banks. I expect Merkel to stick to national funds for recapitalization," said economist Jacques Delpla, a member of the French government's advisory council of economic analysis. France has the highest debt-to-GDP ratio of any of the six triple-A countries in the euro zone at 86.2 percent. If France, the second largest guarantor of the rescue fund after Germany, were to lose its top-notch rating, the whole edifice of financial support for Greece, Portugal and Ireland would crumble. "The main issue is a crisis of confidence in the sovereign. ... What is important is to deal with the Greek issue as quickly as possible and then rebuild confidence in the capacity of each bank in Europe to reduce its debt," Oudea said at SocGen's Paris headquarters. France and Belgium are arguing over whose taxpayers should pay to salvage cross-border municipal lender Dexia, which came close to collapse this week and is to be broken up. Moody's Investor Service on Friday said it may cut Belgium's credit rating. Until last week, the position of France was that French banks have no toxic assets. This prompted me to write on September 25 Desperate Times Lead to Desperate Lies; Europe Weighs the Weightless; Even Citigroup Sees the Lies Are central bankers and politicians really as stupid as they sound or are they pathological liars who simply cannot help it? Check out these preposterous lies by Bank of France Governor Christian Noyer as quoted by Bloomberg in Noyer Sees 'Absolutely No Reason' to Use Bank Backstop Noyer Lies "I'm extremely confident" in French banks because "we know them very well. We know their balance sheets, their risk assessments. We know they have no toxic assets." There is "absolutely no reason" to activate a support system for the nation's banks that was set up during the financial crisis in 2008. Markets "are over-reacting," he said. "They need to come back to a sense of reality." All of those are blatantly preposterous. However, lie number 1 has to be one of the top lies of the year. "French banks have no toxic assets"?! For starters, what about Greek bonds about to take a 50% haircut or more in default? That lie is so ridiculous no one on the planet can possibly believe it. On October 3, Dexia bank became the First Casualty of Greek Default. Now Merkel and Sarkozy are in an open feud over what to do about it. Bear in mind this is not about Dexia, the entire banking system is insolvent. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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