Wall Street Journal Editorial Page Dissects the European Bailout Plan

I would like to recommend the commentary from the editors at the Wall Street Journal dealing with the proposal that came out of Europe yesterday; a proposal which launched a massive short covering squeeze in both the Euro and in the equity markets.

Their editors are much more eloquent than I am but the crux of their analysis is in complete agreement with my own  - all these leaders have done is to temporarily paper over a problem that will not go away until the root of this weed is pulled up and disposed of. That however requires unpleasant business that will no doubt engender a loss in popularity to whatever leaders brash enough to actually roll up their sleeves and get down to the dirty business of fixing the cause of this morass.

Simply put - those governments in fiscal trouble have spent too much for too long and can no longer afford to do so.

If that sounds familiar, it should - it is exactly the path the current administration is leading the US down.

Forestalling the day of reckoning might make political sense in the short term but in the long term it is the stuff that composes the ruin of nations.

Everyone Bails Out Everyone

European deal has something for everyone, except the real problem.

http://online.wsj.com/article/SB10001424052970203687504577001671498250002.html?mod=WSJ_Opinion_AboveLEFTTop

Are Foreign Central Banks Slowing dumping Treasuries

Each week the Federal Reserve provides an updated number for its Custodial Accounts. A very crude way of understanding these is to consider them as a type of savings account for Foreign Central Banks that are held at the New York Branch of the Federal Reserve.

When the US buys goods from a foreign country and pays for those goods with US Dollars, oftentimes it ends up running a trade deficit with that particular nation. The result is that the foreign country ends up with a large amount of Dollars that it needs to "sterilize" in order to prevent an inflationary outbreak. What generally happens with a good portion of these surplus Dollars is that the country in question will purchase US Treasury obligations. That way it gains interest on its trade surplus of US Dollars which constitute part of its overall reserves.

For the sake of simplicity and convenience, the Treasuries are not actually shipped over to that country but are instead held "in custody" for that nation with the New York Branch of the Federal Reserve. Selling the Treasuries in question becomes very easy for the foreign Central Bank as it simply phones or wires  in its instructions and the deal is done.

Note the nearly exponential growth in the number of Treasuries held in these custodial accounts. As you can clearly see, beginning with the credit meltdown here in the US in the summer of 2008, the line has gone parabolic. This is a picture of the amount of indebtedness generated by the US as it took the path of enormous deficit spending to keep the liquidity flowing into the markets.

What strikes me about this chart is that for the last 3 years, the growth in the size of these custodial accounts has been steadily upward with only a few brief periods during which it was interrupted. Even at that, the line on the chart really never dipped all that much moving more or less sideways for a brief interval before resuming its upward path.

However something noteworthy now appears to have been underway since September of this year. The amount of Treasuries held in custody for these foreign Central Banks now appears to be slowly, but steadily declining. It reached a peak of $2.752 trillion the first week of September this year and has now declined to $2.67 trillion as of this week. That is a drop of $82.5 billion.

I do not know the exact composition of these custodial accounts in terms of the duration of the bulk of these Treasuries but I am fairly confident that there is a pretty good mix of both shorter dated and longer dated securities. The Federal Reserve's Operation Twist is designed to purchase $400 billion of longer dated Treasuries as it sells the same amount of shorter dated Treasuries.

I wonder if we are seeing foreign Central Banks using this Operation Twist to unload some of their longer dated Treasuries into the hands of the Fed. The Fed is basically buying, no questions asked. If you plan on getting rid of some of them, why not take advantage of the program?

It might be a bit too early to say with certainty, but if this is the beginning of a trend, it will signify that we are headed for a period of rising interest rates as it is doubtful that the Fed alone could soak up the Treasuries that foreign Central Banks might choose to unload if they begin getting nervous about the prospects of the US Dollar in the months and years ahead.

Stay tuned.

The US Dollar gets Annihilated

"Whack a Mole" does not even come close to what the Forex crowd did to the US Dollar today. Earler in the week it fell below the 50 day moving average but seemed to be trying to regain its footing just above the 76 level.

Today it was blasted to kingdom come breaking through multiple support levels in the process and crashing through the critical 100 day moving average as if it did not even exist.

Based on the current chart picture, there seems to be little in the way of downside support until it reaches the former consolidation zone. Failure to stop there and it will make a new low.

Save the Stock markets - destroy the Consumer

While money managers, talking heads and other assorted various market pundits are wildly cheering the actions of the Europeans who have agreed to a plan for papering over the Greek bond, Italian bond, Spanish bond, Portugal bond, and heaven only knows what other country's bond problem, I cannot help but shake my head in wonder at such incredibly shortsighted "wisdom".

I think it safe to say that the level of the various equity markets have now become national security issues for most of the industrialized nations of the world; so much so that bear markets in stocks are no longer permitted by the monetary and/or governing authorities. The notion seems to be that an adjustment in prices by a free market cannot be permitted because of the fallout such an event would have on the overall financial system. Therefore, the end justifies the means - the end being preventing a credit lockup justifies governments using taxpayer money to bail out banks which made poor investment decisions and nations which apparently cannot balance their budgets.

While the Ra-Ra crowd cheers this sort of thing on extolling how wonderful it is for the economy, they are ignorant of the fact that the BEAST once let loose, cannot be controlled. Do these shortsighted fools not realize that the hedge fund community is not going to selectively bid up the prices of equities and completely ignore the basics of life such as food and energy? The same speculators that these governing authorities are attempting to placate are going to devour the hand that feeds them, or better yet, the food that our hands use to feed ourselves.

Just look at what is happening to the Continuous Commodity Index ( CCI ) as a result of this spiking of the punch bowl. The hedge funds are piling back into the commodity sector as they now have a green light for their risk trades and will begin leveraging up all over again. In the process they are pushing back up the grains and the energy sector. While recently both had come down in price, giving cash-strapped and hard-pressed citizens a bit of relief from the double whammy of stagnant wages and rising food and energy prices, that now appears to be going with the wind.

One can already see the impact at the grocery store of the rise in prices earlier this year as the cost increase finally worked its way through the distribution channel. Buy a box of cereal and spend more than $5.00. What in the hell is the average citizen supposed to do by the time these pestilential governing authorities finish with us? Spend $10.00 for a single box of cereal?

We have reached a point in Western society where this non-stop interference by the monetary and governing authorities is steadily destroying what is left of the middle class. Nice job you clowns. Keep the stock market elevated and the price of the huge bank share prices elevated but destroy the very foundations of the society itself.

I hope I live long enough to see the history books accurately portray where the ruin of the West originated - the Central Banks and the stupidly clueless political leaders who led us down this rabbit hole.

Silver has reached a key technical level

"Let the good times roll" is once again the motto of the stock market perma bulls as the Europeans graced the world financial markets with a gigantic sized punch bowl to help slake the thirst of the liquidity junkies. Mix in a dose of a better than expected US GDP number and it was "RISK ON" in a big way.

Silver, as expected when the risk trades are in full force, outperformed gold to the upside putting on nearly 6% against gold's 1.5% gain.

Note the chart and you can see that it has climbed exactly to the key Fibonacci 50% retracement level of its recent decline off the August high. It has also punched slightly above the 40 day moving average (dotted line) which a large number of fund traders monitor and is not far from the 50 day moving average.

If you recall the recent Commitment of Traders data, it showed a very low level of hedge funds on the net long side of this market, most of them having washed out over the past few months. If that crowd becomes convinced that the Europeans have effectively dealt with the sovereign debt crisis ( papering over the losses of the banks), they will pour money back into silver with a vengeance. Just take one look at what they have done to the copper and crude oil markets.

A push through today's session high puts silver on a path to make a run at $37.30 - $37.50.

Downside support is back near $33 followed by $32.50