SICK

I feel like crap.  It seems everyone in the fly-over zone has caught this thing.  Low grade fever, shortness of breath, strength of a 2-year old and a penchant for falling asleep if one stays in the same position for 30 seconds.  Fortunately, everyone recovers so we carry on regardless.

Well, stage 1 is over.  The Italian Senate voted Berlusconi out this morning.  Thus endeth a 20 year -long reign over Italian politics and begineth the soap opera as to whether the disgraced old man, now stripped of his immunity, heads off to jail.  My money is on the side that he doesn't for two reasons.  First, he's 77 years old.  What's the point?  To have him die in jail?  Second, and more importantly, to punish and humiliate the old man after the humiliation he has just suffered would undoubtedly cause a push-back from his party's members who, after they themselves administered this humiliation themselves reaction would probable be, "Basta, we did it to him, now no more." A functioning government cannot be achieved without this mob, and without one Italy faces collapse.

The restructuring of the state must also be achieved and there is ZERO chance of that occurring without the input from Berlusconi no matter whether it is from outside the nick or inside...it will just be a hell of a lot easier if he is out.  After all, he and his gang probably control half the things that need to be restructured and while there is going to be some serious horse trading, it can get done if there is a will to do so.  Italy is not like the U.S. in these matters.  They have been doing this sort of thing for 700 years and while outsiders may not understand a thing that is going on, most of the time it has worked with varying degrees of success...at least as far as the Italians are concerned.  It's going to be very interesting to watch.

And speaking of such things, Over Here the popular wisdom is that the Repubs are losing the battle of the shutdown.  At least that's what the markets seem to be saying according to the talking heads as bonds are stable and stocks are up.  The talking heads, being part of the mainstream media, have--shall we say--a certain bias about these matters but they may well be right or it may be that nobody gives a damn.  Now two weeks from now may be a different thing with The Leader and the lap dogs proclaiming more horrors than befell the Pharaoh when The Big Trader put in a bid on the side of Mo and the Hebrews unless he gets all the money he wants.  That's shaping up to be a pretty good game of chicken and right now it's a push.  Ideology against ego.  Zowie!  I hope I'm fully cured to witness that one closely.  Just remember Johnny Cash, boys, before you make total fools out of yourselves.

MASSIMO

"CHARLIE! Com'es stai?!"

"Massimo!  Where the hell have you been?  I've been trying to reach you."

"Geneva.  I go for the waters.  No, I go for the operation."

"What operation?  You sick?"

"Eh, I get the old man thing, but the Swiss doctors they tell me you no worry.  They put in a bunch of what they call "beads" and they say this kill everything but not my...how you say..."

"Yeah, yeah I understand.  Damn, I'm really sorry to hear that but I have a couple of friends that have had the procedure.  Worked fine.  They're fixed."

"So why all you smart guys no fix this stupido of a government you have?"

"You know, Massimo, you have a hell of a nerve.  You guys haven't had a government since the war that lasted more that 3 years and you lecture me!"

"Piano, piano, Charlie.  (laughing)  Itsa not many times Italians can laugh at America.  But you make it too easy these past two months.  We gotta the 'Red Line' then she's a gone.  We bomb then we no bomb.  We hate Iran and then we play 'bacca il culo.'   And now you get the "Shut Down."  This guy, he's a better than Beppo.  Not like Italia."

"Oh God, here it comes."

"Eh your friend Berlusconi.  You see what he do?"

"I did and frankly I was surprised.  How did that happen."

"We have a talk."

"Who?  You?'

"Not exactly, ma I know what they talk about."

"And?"

"Anda we say, 'Look you do this and maybe you win next time but maybe there is no next time.  You old, maybe too old to run...maybe you not run at all.'"

"You're joking."

"Not too much.  Look, Charlie, thisa bad.  I no care but either we stay in or we go out.  Ma, with no government, we can do nothing.  This guy it no about him anymore and we make him see that.  Better he go...maybe we no put him in prison.  I think thatsa better cause then he no talk...but if he talk...He understand.  Now at least we can try to get a government that works and first thing, we musta fix the banks."

"So it's come down to it eh?"

"Fa sure."

"And the finish?"

"I'ma no know.  Jesu Charlie, things got bad while I'm gone, but I fix me and may I can help fix Italia.  And then..."

"Here it comes..."

"Wha!  You think I say I come to your place and fix you?  No body that pazo Mio amico.  I live too good here.  You should come stay."

"Now I can."

"EH, Wadda you say?  How you do that?"

"Just found out my Grandfather didn't become a citizen until after my father was born.  That means he was an Italian and so am  I!"

"PELLA MADONNA!  Charlie, we have enough troubles without more Americani come here.  Stay the hell home, eh.  You come to visit, eh.  No stay.  We have hell of a time.  The you go back."

"I probably will, but if..."

"Charlie, ciao, eh.  I call you soon, ok?  Buona fortuna with that Cretino you have.  I go. Ciao!"

"Ciao, Massimo.  It's always a joy."

MOVING ON

Well, Monday came and went.  The Leak created not a ripple in the otherwise placid pond of Euroland.  The Italians formed a government which withstood its first no confidence test and promised that Italy would not die the slow death of austerity as the PM flew to Germany to express his desire to stick to the suggestions of Ms. Merkel and the requirements of the Troika.  Now how that circle is going to be squared is anybody's guess but there you have it and so far the Germans have not said anything...well...Germanic.

I must admit that I was a bit skeptical about Massimo's outline of the last week despite his past record but almost as though on cue, the deputy PM, who as a member of the governing coalition while at the same time the head of the party of Berlusconi, immediately took credit for the tough talk against austerity and proclaimed his party's victory and of course by extension, the victory of the old reprobate.  I was going to call Massimo today and congratulate him but then thought, hold on, let's see how this thing plays out...at least for a month.  In the mean time, the focus may well be off Italy for a bit as the news out of Spain continues to worsen and while somewhat overlooked Over Here, all the talk Over There is is the utter collapse of Franco/Germanic relations at this point, they degenerating into ad hominem attacks on Ms. Merkel.  The Hollande government's approval rating is somewhere in the middle 20 per cent and a bit of frustration and panic seems to be setting in.  Funny.  The French and the Germans used to have at it about every 40 years for God knows how long--I mean every generation in Alsace-Lorraine would have to learn a new language--and that was supposed to be ended by the EU.  Well, old habits die hard and while I'm absolutely sure there will be no shooting, not much good is going to happen in the mean time.

The near future conversations will be dominated by thoughts as to the action of the ECB on Thursday.  There is now an almost 100% agreement that Mr. Draghi will lower interest rates yet again from their massively high level of 0.75%.  If that doesn't happen it's really going to be fun to watch...almost as much fun as observing people in belief that this action is going to make a difference.

Finally, today in a truly funny moment, Harvard historian Nigel Ferguson--who is a seriously smart guy--was commenting on the dust-up between his two Harvard colleagues, Rogoff and Reinhart and Little Paulie of Princeton residence.  Deriding Krugman's assertion that he had won the argument, Ferguson proclaimed that he in fact was wrong and that was the kind of comments headline writers for a tabloid make up not someone who used to be an economist.   Whoa!  In academia that's akin to remarks about your mother.  Can't wait for the next chapter in this soap opera.

GENTLE BEN...AGAIN

Over Here, the stock market got great housing numbers, good confidence numbers and Ben Bernanke.  As a result it came roaring back, shrugging off yesterday's news, Asia's performance and a stinko day in Euroland.  But make no mistake, it was Bernanke who, in pledging that the cookie jar will remained stuffed, was the cause of it.  He remains firm in his resolve that his policies are the correct ones.  On the subject of the EU, whilst troubling, he made it quite apparent that he had little concern.

Over There, the mood was, if not quite somber, certainly muted.  There will probably be no government in Italy as Berlusconi and the comedian announced that they will not work with anyone and no one seems to want Monti any where near them as the feeling is that will be the kiss of death.  Now no government in Italy might be considered by some a good thing, but not the chance of contagion from the mood of the Italian populace concerning austerity.  If that spreads to the rest of Europe there may be trouble ahead.  Memo to Euroland:  it will.  Almost immediately, Germany began warning that the early steps taken by Monti to rationalize the Italian State should not be reversed and suggested to France that stronger measures should be taken to make more productive its industry while at the same time supporting the austerity program of the EU.  You can imagine how that was received.  Spain is clearly looking closely at the Italian results for with an unemployment rate of about 25% the rumblings the government already faces over its austerity program could be moved to a full throated roar in conjunction with the Italians.  I think there is genuine consensus among the leaders of Europe that austerity must be continued but the Italian "thing" (as it is being now-called) could make life very difficult and should Italy reverse the Monti approach, as moderate as it may have been, all of the threats to the Union seen last year will probably reemerge.  Angie, unfortunately, has very little wiggle room.  The Volk can read the tea leaves and they seem to be telling a story of a strong possibility of more bail outs and a push back by the Southerners against the good German traditions of frugality, hard work and savings...not to mention that if needed it will be the Volk's cash that gets used.  They don't like that.

Massimo pointed out this morning that Thank God we have the election of a new Pope coming right up as that will shut up everyone in Italy until that process is completed as the politics surrounding this are the dreams of Italian pundits and Italians.  He's probably right.  I must say I am surprised with the lack of real interest or concern--save for a few trading hours yesterday--that this country is showing over the events Over There.  Then again, we have always been a nation to whom the price of hamburger in Kankakee is more important the possible dissolution of a political union of 350 million people...should it come to that.  But as long as we have Ben, I guess things will be OK.  Or at least that's what the stock market thinks.  It gives me great comfort.

WHEN DOES ONE START TO WORRY?

The Fed released the minutes of its January meeting today which was not warmly received by the stock market boys.  If there has been a clearer indication that the remarkable performance of the indices up to this point has to a great extent been the result of easy money, what happened to today should prove that if there was one don't expect another.  Indications that the current round of pump-priming by the Fed may not end when unemployment falls below 5% but might well end much sooner, drove the DOW down by over a 100 points at the close, despite the fact that the hints in the minutes were relative mild.  Nevertheless, coming so soon after the definitive statement to the contrary made by Bernanke himself in just the last quarter it rattled investors nerves.

Despite what certain politicians and talking heads keep yelling us, the latest signs have not been good.  Unemployment is relatively unchanged.  Housing starts announced today were way down.  We are looking at the sequester which appears will occur and which has done far more to reduce confidence than the fact indicate and to which economists have applied ridiculous figures of economic harm.  Europe is not looking good at all including Germany which is the bell-weather and even Asia is showing severe signs of slowing.  All in all, not a good economic picture worldwide.

Unfortunately, The Leader  and his team are doing nothing to help things.  The sequester, of which we spoke yesterday, has been turned into a doomsday scenario from a major irritant by Obama's intentions.  [Correction:  the amount involved spoken of in yesterday's offering as being $60 billion should have actually been, "in excess of $ 80 billion".....I regret the mistake].  The Leader has made it clear that the cuts he will make are those that will have the greatest effect on public opinion and be the most visible.  In short, they will be politically motivated.  Unfortunately, that will impact consumer confidence the most which means his entire strategy must be to blame all of this on the opposing party.  This is not the way to run a railroad and even if successful could result in a true pull back in economic activity which could put the U.S. in recession as early as the second quarter.  If that occurs...well, there will be plenty to think about in regard to future actions.

Over There, Massimo called today just to confirm that he had been correct and the Berlusconi had picked up a good deal of support and it was not too soon to start think about what kind of coalition it would be that governs Italy for what he believes will be a "brief time."  That says he, will be the worst of all worlds as that will cause the rest of the Euros to believe that Italy is ungovernable.  I'm afraid he's correct which I'm afraid will cause a serious upheaval in the money markets causing a lot of the gains in bond yields and especially in confidence to be lost.  The Pope's last day is the 28th; Italian elections are the 28th; the last day without a sequester is the 28th.  What me worry?  Nah, not until the 27th. at least.

ODDS & SODS

Another day at the office.  On both sides of the pond the news that dominated was that of the "Fiscal Cliff" and whether the drag-racing Leader and Speaker would engage the brakes fast enough to prevent what the majority seems to believe is an impending disaster.  Frankly, it seems to me that The Leader would much rather a compromise not materialize (he's never been interested in draws)  and that the Speaker just wants to get it over with at this point.  Fun to watch the stock market, however, move in hundred-point intervals depending on the mood of the moment.  Clever these guys.

Over there, the Brits caught a lecture from The Leader's boys about how bad it would be if they left the EU.  You can imagine their reaction beginning with, "Sod off," and getting a bit more pithy from there.  It would appear that we can expect the same sort of relationship building in the second term as in the first.

Berlusconi, bless him, mused out loud that Italy might be better off outside the Euro Zone which of course did no one any good muting the call only in so much as it referred to what might happen if Germany did not give up it's objection to the ECB acting as a lender of last resort to everything that walks or crawls in the Eurozone.  You can imagine the reaction beginning with, "Sodden off," and getting more pithy from there.  But it plays in Perugia and that is all Silvio cares about.  Oh, he also announced he's marrying his 12 years old...sorry, she's 26...girl friend just as soon as he can finalize his divorce.  When asked was his health an issue in regard to the age difference, he replied, "If she dies, she dies."  It was very colloquial...I may not have translated his response correctly.

S & P UPGRADED Greece from simple (?) to B-, that's 6 grades sports fans.   Whoopy damn dooo.  Yields fell, prices rose and a couple of hedgies made fortunes on the debt they were still holding.   They also upgraded the outlook to stable in the midst of a 24 hour strike and rioting in the streets with a couple of people dead.  Good job S & P.  Got any newly minted AAA CMOs hangin' about?
Not to be left in the dust, the ECB announced that Greek debt was now available for collateral once again.  Why not, they own most of it anyway.

Finally, something not to be missed is the new P.M. of Japan announcing to the head of the central bank that he now works for him.  You can imagine the reaction being, "Honto Yo,"---which is not quite "Sod off" in Japanese but depending on the inflection could certainly mean, "Are you #%&((^*@ me?"  New Honcho wants more liquidity in system and inflation up around 3%.  Don't laugh, this is an important development that will certainly have global ramifications depending on who wins.  If there is a clear loser, say Sayanora to that guy.  All about face you understand.  I think I may spend more time watching that part of the world next year.  Later.

THE PEACE PRIZE

Awarded yesterday to the European Union for refusing over the past 60 years to do what came natural to them; killing each other of course which may resume shortly if things don't shape up.

Berlusconi confirmed today everything that Massimo had stated yesterday; he's in the race and the gloves are already off.  At the present time his approval rating is in the dumpster but this is a formidable guy with a ton of money and less political morality than a Chicago Alderman--not to mention his own TV and radio network--on which he today labeled Mario Monti, "too German for Italy."   That plays.

Quite contrary to the common view, Italy is an enormously rich county; some have actually suggested (with a substantial amount of evidence behind them) that in so far as personal wealth, Italy is the richest country in Euroland...including Germany.  It is also one of the most disorganized, dysfunctional, bureaucratic, corrupt and backward for which over the years many have made a study as to how to "game the system" and made fortunes so doing.  The distribution of wealth is also immensely uneven both among regions and individuals.  The north is rich, the south is not.  And yet, in regard to external finances the Italians are in fine shape.  Indeed, the nation is, in many ways, like Japan...a nation of savers.  As more than one commentator has suggested, most recently Ambrose Evans-Prichard, who is a very good commentator indeed, Italy is an excellent country trapped in the wrong currency who would be much better off without the mill stone of the Euro around it's neck.  Whether he would believe a political argument along those lines or not, do not think for a minute that Berlusconi would not use it and that it would not be effective with a goodly sized percentage of the voters.  This is going to be a long, hard race and one which has just begun.  As for Euroland, whilst all the focus has been on Greece from the standpoint of a possible dissolution, now comes Italy seemingly out of nowhere, and as we have said before, Italy is a real country.

And speaking of Greece, apologies for the misinformation regarding the extension period which was in fact noon today not midnight.  The Greeks did get over 30 Billion in bonds put back but the price was such that it caused the seemingly magic 124% of debt to GDP figure so important to the IMF to swell to 128%.  As I have said, that number is about as meaningful as a bucket of warm spit but Chrissie put herself in a bit of a box and now the deal is how does one avoid the supposed consequences.  The ministers are now in session.  I hope they come up with something real: like a new present value analysis based upon the certainty of lower average interest rates for the period in question based upon new, solid, and irrefutable economic analysis just made available by...oh hell, who cares by who as long as it works.

Above all this is the seemingly absolute cock-up by Deutschbank and Morgan Stanley in running this thing. I have spoken to no one who can figure it out.  For their sakes I hope there is a real good explanation because if there isn't it's stupid is as stupid does.  And at that we shall leave it.

QUITE A DAY

Stumbled out of bed to make sure I caught the jobs number and there it was--up over 100,000 with unemployment down to 9.1%  Joy all over thought I and sure enough the market uponed sharply higher with one fool of a talking head musing that the crisis was over and there should be clear sailing ahead. Wasn't much later that someone must have whispered "Euroland" and everything went to hell in a hand basket with Italy the disaster of the day, calls for Trichet to resign (Jim Kramer is too dumb to realize that he retires in a month) and then he did himself one better by proclaiming that what Europe needs is The Suit because "he forced the banks to raise capital."  Actually, it was Paulson but Kramer counts The Suit among his circle of friends so that's where that came from.  For astute, in-debth analysis of all things international I would turn to the neighbor's yellow Lab first.  Then Massimo called.

"Where the hell have you been!"

"Roma."

"I can see that from the city code." (I have a fancy phone).

"So then why you ask."

"Because I've been trying to ring you for a week to find out what's going on over there."

"Carlo, I told you not to worry.  We be fine.  We just have to get this asino Berlusconi to--how you say--focus on what to do AND what to say."

"Did you?"

'Sure."

"How?"

"Eh,  lika you say in that stupido movie, 'we maka him an offer he no can refuse.' Of course, your friend Trichet, he help a bit.  He tell him he no buy any Italian paper unless he do what he tell him to do.  And the Tedeschi...shesa no fun either.  You know, he realize he might needa some help with thisa legal thing, so..."

"Enough, Massimo.  I don't want to hear any more.  So what happens now?"

"He maka speech.  Listen Charlie, listen.  I go now to dinner but remember, when  Massimo tells you it'sa be ok, its'a ok.  Ma Monday... we see.  Ciao, Charlie."

And damn, if he didn't make a speech right out of the central bankers' and the IMF play book.  Massive government reforms, elimination of as many regulations as possible, implimentation of agreed-upon financial steps by end-2012 not 2013 and--ready for this--a balanced budget amendment to the Italian constitution!  IMF?  Hell, this could have been written in the Tea Party Caucus!  Our stock market turned around on a dime and eventually closed up 60 on the DOW.  Massimo got that part right.

But remember, what he also said.  Let's wait for Monday because after all it is Italy and things have a way of changing overnight much less over a weekend.  The lights will be burning brightly not only in Rome but in Frankfurt as well and we await market reaction as this thing gets fleshed out.  Most remarkable, the Prime Minister even called the parliment back from vacation to begin implementing his promises next week.  In August?  Unheard of.  They really did get to this guy.  As I said, a most remarkable day and to end it, we picked our first home-grown tomato of the season.  What kind?  Why, uno pomodoro della San Marzano.  You had to ask on this remarkable day?

See you next week