November 27, 2011

Disconcerting Economic Headlines To Keep On Your Radar

Something really bad will happen at Bank of America.
Organization and structural problems are threatening to upend Bank of America.  The state of Bank of America's governance and finances is so bad right now that regulators are threatening enforcement action if management doesn't get its act together.  I believe that there is something (BAD) going on at B of A – we just don’t know the extent of it yet.

Jefferies will fail.
Capital shortfalls at Jefferies have spooked investors recently, and now ratings agency Egan-Jones is threatening another downgrade unless the investment bank can raise $1 billion.  The failure of a mid-market investment firm like Jefferies would escalate panic about Europe, and would probably provoke a sharp tightening in bank liquidity. Traders might also begin to speculate against firms similar to Jefferies—too small to be bailed out by the FDIC under current rules but nonetheless important to the financial sector.

Investors in MF Global are never going to get their money back.
There has been criminal activity in this mess.  Because of the involvement of John Corzine, it has been delayed – for the time being.

The IMF will try to bail out Europe and U.S. taxpayers will take the fall.
The International Monetary Fund is making lots of moves— The IMF is preparing a 600 billion euro bailout for Italy in case the debt crisis worsens, Italian daily La Stampa reported citing IMF officials (via AFP).  The IMF would guarantee rates of 4 or 5 percent on the loan, far better than borrowing costs far better than the commercial debt market where yields have reached as high as 8 percent.  The loan is intended to give the new Mario Monti government 12 to 18 months to launch necessary reforms.
The size of the loan may require joint action with the ECB: "This scenario is because resistance from Berlin to a greater role for the ECB in helping states in difficulty -- starting with Italy -- could be overcome if the funds are given out under strict IMF surveillance," the report said.
This would be the second big move from the IMF this week after unveiling a huge liquidity program on Tuesday.  At the beginning of the month, Silvio Berlusconi announced that he had refused an offer of money from the IMF. Obviously this gambit did not assuage the market and Il Cavaliere was out within days.
An IMF bailout means money coming from the US taxpayer.  The U.S. will end up with the bill of any IMF expansion of IMF resources. The U.S. is the largest individual financier for the IMF, contributing 17.7% of its funds.

Germany is going to royally screw over Europe—and the rest of the world.
The Eurozone is quickly fissuring into two different camps—those who believe that stronger action (European Central Bank monetization of sovereign debt, Eurobonds, or some combination of the two) is necessary immediately, and those who want to wait for treaty change to fix the fiscal integration problems of the euro area.

France, the PIIGS, and many EU leaders are falling into the first camp, whereas Germany and the ECB are the staunch leaders of the second.  I think that Germany acquiesces on both Eurobonds and cranking up the money printing presses.  If they don’t, and relatively soon, I think that the world’s markets are going to get really volatile – and in a bad way.

U.S. banks will be hit hard by an imminent European crisis.
It is widely accepted that escalation of the Eurozone crisis will have an effect on the U.S. financial system. However, Fitch dramatically escalated those fears when it released a report last week saying that U.S. banks stand to take a big hit if the economic situation in Europe gets any worse.
Now the Federal Reserve is requiring 31 banks to stress test their portfolios.  Forget the worry on this – it’s a done deal.

Greece will not get its next tranche of aid in time.
Despite forming a new national unity government, Greek lawmakers are still posing problems complicating disbursement of the next round of aid from the first bailout.
EU leaders led by German Chancellor Angela Merkel are demanding that Greek lawmakers sign a commitment to passing austerity measures before the aid will be disbersed. Conservative leader Antonis Samaris, however, says his party doesn't want to.
Greece is really coming down to the wire here, and must receive aid within 20 days to avoid default.  Greece has NO bargaining chips, yet they are acting like they are in control of their own destiny.  I fully expect the atmosphere to get much worse.

The U.S. will slide back into recession.
Economic data has, on the whole, been beating expectations recently – if you want to believe the numbers (I don’t).
Recent consumer sentiment and initial jobless claims misses, an ominous economic surprise index, and a downward revision of Q3 GDP are just a few of the headlines indicating that the U.S. might actually be headed for a double-dip recession after all – if it’s to be believed that we ever left the first one.

China will experience a hard landing.
HSBC Flash PMI fell to 48.0 from 51.1 for November, a 32-month low for the indicator. This is stoking fears of a hard landing for the Chinese economy.  China’s economic numbers are more heavily manipulated than those of the U.S.  Whatever you read out of China, assume that the actual case is worse.
The headlines we've seen about China's underground banking system over the last few months aren't helping things either.  China’s regular banking system is in tatters, too. Be wary of investing in any company domiciled in China.

France might lose its AAA credit rating.
Fears about a downgrade of French sovereign debt have been moving markets all week.  Forget about this as a fear- it’s a done deal.
France has long been the subject of downgrade speculation, but now the credit agencies are adding fuel to that fire. Meanwhile, yields on French bonds are blowing out.  The Markets are tlling us all we need to know.  The downgrade is imminent.

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