THE DIVINE COMEDY

Dante wrote the original version.  Italy and The Boys in Brussels and the ECB have been busy on the sexual.

For those who pay attention to such things Banco Populare did Vicenza and Venetia Banaca are well known; for those who do not they are a couple of busted Italian banks who have been in that shape for some time.  Kept on life support, last week the situation became impossible causing the ECB to declare the banks as having failed and requiring a dissolution under the Euro version of the "living will" as we call it  Over Here.

Simple, right?  Except that this is Italy and Italy is Over There.

Seems that there is a section in the ECB rules and refs that says if a national government determines that the survival of the bank in question is important to the region, rather than The provisions of the EU and the ECB, the government can apply its own bankruptcy laws to the resolution of the problem. OOOOOO-K.  Just what does that mean?   Well in the case of these two sterling institutions here's what happened.

Italy decided that the institutions were important to the neighborhood (Venetian and Tuscany...not exactly pockets of poverty) and as a result home rule applied.  At the end of the day, shareholders and   Sub-debt holder (more on that) got creamed, the government decided that after a "transparent decision process" (who knew?), Inter Sanpaolo would assume the assets, employees and businesses of the two institutions.  And oh, the senior debt holders would be protected.  It gets better

Taking a page from some previous operations, there would be a "good" bank and a "bad" bank.  In order to deal with the "good" bank, Inter would get about five billion bucks as a thank you for taking this on.  The "bad" bank?  Eh, we gonna guarantee you about thirteen billion so you no getta hurt.  One wonders why Italians tend not to pay taxes. Or, as one guy put it a while back, gains are privatized, losses are socialized.  Banking as it should be if you ask me, but nobody is.

Aside from the farce of it all there are a couple of serious questions that might be asked such as what the hell is the real policy Over There for dealing with failed banks?  Then there is the issue of the sub debt which is not your everyday piece of paper but a specially developed instrument which in many jurisdictions has been a prime source of newly issued bank capital.  This is there first instance where it has been REALLY treated as capital in every respect.  What is is future and how will it trade?  Finally, in a moment when Dodd/Frank is being reviewed and re-written, is it possible to square the circle with the two major regulatory systems and if not, what will be the outcome.  Got me on that one but we're going to visit a few more circles Down There before we get the answer to that.

WHAT TO SAY

I  donno.  Stocks are up, bonds are down, the dollar is up, and it looks as those things are going to stay that way.  The remarkable sector is of course financials which six months ago were cold as ice, and now?  The 10 year closed at 2.60% today which means at some point there has to be a rotation in to capture this yield but everything is so bullish that I wonder when.  That might come if the Democrats can convince enough electors to elect Hilliary but unless that happens, The Donald seems to be the dominating force in all phases of this market.  As far as the markets are concerned the guy hasn't put a foot wrong...of course he has yet to do anything of consequence but visions of sugar plums are dancing in people's heads all over the Street.

The foul winds are all international.  While economic sentiment has grown increasingly positive in regard to the EU, the political issue grow more negative by the day.  The Italian banking system will face a terminal point by the first week in January and the afor-mentioned political/financial crisis in Greece will begin to take center stage by mid-January.  All these have the potential to become flash points for market disruption.  And then there is China.

Trading in the Chinese sovereign debt market was suspended today in Shanghai in the face of plummeting prices no doubt reflecting the actions in the U.S. and the strength of the dollar.  The market is almost entirely internal but obvious has consequences for the Yuan as well as risk indicators throughout China and the region.  What is going on?  No idea, but aside from my ignorance the scarier thing is I don't think anyone has any real idea either.  Now I do know that the Chinese have been talking to anyone they think might have a handle on the near term consequences of a Trump administration or for that matter the actions of a Trump administration.  Nor do I think they have gotten an outline with which they are satisfied.  Things move quickly in China.  The herd instinct is alive and well.  It is to be watched closely.

That's it for this year except for a few interludes on issues that might arise.  Check in from time to time for insightful insights.  God!  That's too much even for me!

Later, gang.

JANET TIME .....YAWN

Fed moved 25 b.p. today as everyone knew they would.  Ms. Yellen's statement sounded like nothing had happened since the last meeting...nothing, zero, nada on the election or it's possible aftermath.  She was  a bit bullish in he predictions which called for a probable thrice-hike of 1/4% in 2017 and an eventual top rate of 3.00% by end-2018.  Down went the DOW 114 points; up went the dollar index; the 2, 5 and 10 year shot up with the latter easily passing 2.53% but the Long Bond sat still.  Damnedest thing...the curve actually flattened on the long end.  What does all this mean?  Beats me.  Markets are bullish; rates have been moving up; employment is at full capacity according to the manner by which it is counted which is of course rubbish and sentiment is sky high.  Janet, who loves data followed the data.  Can we all move on now?

Oh, if you are looking for truly nuts, the Greeks are back in the news.  Not to be content with BREXIT, the mess in Italy, the upcoming French and Dutch elections, the Euros have decided to grant the Greeks no further debt relief because it appears the Germans threw a hissy fit over PM Tsaspris' decision to grant Christmas bonuses which was verboten under the standing agreement.  OK, say the Greeks, we're going to call for snap elections early next year so you guys have THAT, too, to deal with and of course a conservative government will win on a campaign of dump the Euro and if it comes to it, the Union as well.  Guys, can't we all just get along?  The Greeks can NEVER pay what they owe so why care.

And of course the Italians are forming a new interim government, the 1,236,202 in the last hundred years and people are actually bidding up the shares of Italian banks like this is a good thing.  UniBank is talking up their capital raising exercise and Monte di Paschi is as well.  Speaking of wells, there has to be something in the water in Italy...the old Roman viaducts broke down or something.  They gotta test that stuff.

And the other Wells...Fargo that is.  Their living will was rejected.  Poor Big Danny Tarullo:  the only saving and loan on his watch list (he likes that kind of business model) has let him down.  Talk about the Grinch who stole Christmas.  Danny is left pontificating while staring out into space wondering how did it all go so terribly wrong so fast.  Worst yet, in 45 days of so he's going to have to deal with that bunch of thugs from Goldman Sachs over at Treasury so here is my first prediction for the new year:  Mr. Tarullo will be the next governor to resign from the Federal Reserve...IT'S BEGINNING TO LOOK A LOT LIKE CHRISTMAS........!

                                                -----------------------------------------------------

Tomorrow will be the last regular entry for a while except for the occasional effort.  We head East to baby sit and then for Christmas and when we return we'll be all-consumed selling our house and moving to another smaller location in the neighborhood.  Very bittersweet.  This place has been great to us and in the almost 16 years we have owned it not very many bad things have happened.  But it's time.   I hope to be up and running by mid-January.  A most Merry and Blessed Christmas to all, you my readers and a Brilliant New Year.

                         

SUPER MARIO (AGAIN)

You have to admire the guy.  Sr. Draghi pulled another rabbit out of the hat today which in the long run will have no effect upon the overall situation at all but in the short term will keep a lid on things and provide time for the politicians to get it right or wrong depending on one's view.  Mario left the discount rate unchanged and continued his QE program through September of next year BUT he reduced it in size from 80 billion Euros a month to 60 billion.  "It's not a Taper" says Mario.  Well, of course it is but that statement allows anyone to call it what one wishes and solves--to an extent--a couple of gnarly issues for Sr. Draghi.  When everybody else in the world is tightening he can tell the rest of the world, "So am I," but at the same time he can indicate to the Euro Zone that he is fully behind them.  Clever, our ex-Goldman Sachs Man in Italy---oh, you didn't know he was a Goldie?  Yep.  Another one.

There were two other things that Mario did, far less politically motivated but perhaps more important.    Before today the ECB was limited in it's asset purchases by the interests rate on the assets purchased. They could no go below -0.4% which is what the ECB pays on deposits to European banks.  That standard effectively had wiped out any purchases of shorter-dated German paper and making it quite difficult to find enough paper to fulfill the monthly quota with obligations of lesser mortals.  It also created an "ECB Put" which in turn created artificial value in other instruments.  No longer is the thought.  In addition, the minimal maturity of such purchases was reduced from 2 to 1 year.  Clearly, this should afford a greater stock of debt BUT it is also designed to steepen the yield curve with emphasis on the short end which is thought to be a very good thing indeed for Mrs. Monte's little boy, di Paschi and all of his playmates.  Bank shares Over There shot up at the news.  Super Mario.

Of course it doesn't mean a damn thing.  Our German friends would call it a nebelwerfer or fog thrower designed to hind the fact that the banking sector still stinks and the Italian banking sector is like walking into a gas chamber.  But no harm done and whatever buys time for whatever might come can't be all bad.

Of course the real problem is that money is fungible and so are rates which will continue to rise as the euphoria surrounding the prospects of the United States remains in place.  The Euro got hammered again today and will probably approach par in a month.  Problem is I don't know if, in these crazy times, if anyone has a clue as to whether that is a good or a bad thing.  What I do suspect is that there are some bond portfolios that have really been hammered but so far no real signs have emerged.  That could be a major issue if my supposition is correct but for the time being everyone seems very content to simply buy the index.  And I Romani? I have a classmate who happens to be a priest who lives in Rome.  He claims it is his earthly reward although nothing works particularly well  and the garbage men are on strike.  "Must be tough," said I at lunch yesterday.  "Tough," said he.  "There is no such word in Italian.  In Italy one lives as well as one can and is happy to do so.  After all, it is Italy."  I should have gotten him in touch with Massimo a long time ago.  Massimo has lived well, and...then  again...Massimo and a priest.........Quite a thought.

NOW WHAT?

Over Here, the jobs number came in bang on at 178,000 and every one went back to bed.  The Donald is a Rock Star; it's great fun to watch the NY Times, MSNBC and CNN go slowly, collectively insane and everybody is buying equities and selling bonds and getting rich while doing it.  So far so good.  Even what was supposed to be the greatest foreign policy flap in history, the taking of a phone call from the President of Taiwan (OMG!!!!) fizzled.  The guy is either really lucky or a hell of a lot better than anyone expected.  Then again, he isn't in the job yet.  Then there's Over There...

The Union dodged one bullet this weekend but took another one in about the eight-ring.  Austria rejected a far right challenge but Italy soundly rejected PM Renzi, who promptly resigned, and with him it is thought the continuing concept of Italy remaining in the Union under Brussels.  That remains to be seen but in the effort to form a new government things are going to get very messy indeed with predictions already emerging that Beppy Grillo and the Five Star movement just might pull it off and be in the driver's seat in the formation of a new coalition.  How long it will take is another issue, the time line not only affecting the much-needed resolution of the Italian banking situation (nothing can be done without a government on an EU level) and the soon-to-come election in France which could be affected by either a government in place or NO government depending upon the trending politics in the latter situation.  The Italians could very well drag this thing out through the French elections looking for emotional and political support--for either or any party!  If the more populist Monsieur Filon comes out a clear winner, that is one thing, but if Mdm. Le Pen attracts enough support to become a force with whom one must reckon...well, that's a very different situation indeed.  The certainty is that France will be governed far more to the right than under the past years with Frankie Holland in charge...as will Italy.  Just how far right is the question.  The survival of the Euro is no better than 50/50 at this point and of course we must keep in mind that in the Fall it's Angie's turn.  Would she sacrifice the Euro in order to salvage what would remain of the Union and herself?  There's too much space between now and then to answer that but we should keep in mind that the Union came before the Euro and that there is a growing body of opinion that holds the view that it  (the Euro) wasn't a very good idea in the first place.

With all this going on, the markets were surprisingly quiet with the Euro holding firm after an early trading dip and that is a good thing.  Of course the Italian result was widely expected but a positive none-the-less.  Another good thing is that all of Europe has about 10 days left in the working year so if the lid stays on for that period we are looking at mid-January as the start of the Great Political Dance.  I think the Italian banking system can stay above water for that long but what I'd like to talk about tomorrow is the problem all of this causes for the ECB and Sr. Draghi.  The Grinch showed up early for him this year.

OLD HOUSE, NEW HOUSE

Ours.  We've spent the past few days selling our present abode and buying a new one, so this is going to be short.  It has been an emotional experience which also makes it hard to write.


OK, we can probably say we are in the midst of a bond rout with the 10 year closing today yielding 2.44%That is one hell of a move since the election boys and girls indicating that suddenly the entire Street and a good part of the investing world are positive on The Donald or at least what he might mean for the economy.  Whilst I normally pay little attention to the consumer confidence number this week's move upward to over 100% was equally extraordinary.  Of course equities are like a rocket ship aided in no little degree by the announced deal to cut oil production ...more on that in a bit.

Tomorrow brings the jobs report which suddenly is more or less meaningless absent the political ramifications.  Estimates are up 180,000 but once again the quality of what is being reported is open to serious question.  In an age of big data one would think that there could be more of a delineation between bedpans/burgers and quantum physics hires but one has to really struggle to find it.  Memo to President Elect: better reporting is something we desperately need along with believable data which half the time we haven't received.  but right now there are a lot of people around the world staring with shock and awe at where the U.S. appears to be headed and whether Mr. Trump's promises in regard to role of government are about to be fulfilled.  If there is one consistency since his election it is that his Cabinet appointments are doers--you may not like what they do but there are damn few theorists named so far.  To think this is not being closely watched globally is to be sadly mistaken...especially Over There.  That election cycle is coming around at precisely the wrong time for Europe's entrenched interests even in Italy which of course votes this Sunday (Memo to Us: the whole world votes on Sunday, why can't we?).  And even there, the word is "change;" we just don't know what kind it will be.

Finally...oil.  The agreement will last in practice for about a month and then the leaking will start and become a flood.  My buds in the West Texas Town of El Paso tell me there's more damn oil and gas out around their place and in the Permian than anybody ever dreamed about and Good Ol' Donald gonna let us go git it.  And don't forget them Mexicans, they say.  They gotta get their production up and they need us and the money to do it which they only git if Good Ol' Donald gits himself a deal on NAFTA otherwise that boy just gits up and walks away from the table.  Now I don't know whether these guys are right or not but in this business it's a lot what people believe that counts.  They are believers.

Jobs number tomorrow.   Whoopy damn-do.

STELLA CINQUE

I asked Massimo to predict the results of the referendum.

"Stella Cinque."

"5 Star?  wha..."

"Si, 5 Star.  That's who win, ma I'm not sure."

"Massimo, you have never been unsure about Italian politics in your life and now all of a sudden you're unsure!"

"Look, Charlie all of your geniuses say Clinton gonna win.  She lose.  All of our geniuses say the referendum gonna fail.  Ma I tell you this is no good year for geniuses.  This is a crazy year."

"But if it fails then Beppe Grillio becomes the kingmaker, right?"  Will the Italian people allow a comedian to run Italy?"

"No, Charlie you no understand.  Beppo...he runs nothing, Beppo just talks.  But what he say alot of people like.  He like your Trump.  He knows what people want to hear but the problem is Trump has smart people around him who know your government.  Beppo...Beppo has nobody.  Beppo has..how you say...dillitante."

"Amatures."

"Si, amatures.  So if the referendum fail and if Rienzi resign, we get new elections next year and then 5 Star can become a big part of the new government." And that's why I no sure that the referendum fail because we Italiani are not all pazzo, eh.  I think just maybe enough people say we can no let this happen and while they no like Rienzi they are too scared if 5 Star...how you say...set the agenda."

"What would that look like?"

"Oh, Madonna, who knows?  They hate the Union.  They hate the Euro.  They really hate the Tedeschi.  They say 'They killing us again' like the war wasn't enough.  And you know?  A lot of people agree.  So if it their agenda, CIAO!"  I think so; I don't know how you stop it.  And of course the first thing that goes is the banks.  Charlie, they need a hell of a lot of money.  You think we get it from the Union or even Mario if the referendum loses?  You think we do?"

"Massimo, ordinarily I would say no but I wonder if the other Euros will look at it as there not being a choice.  I mean, if the banks go, the Union goes because Italy will have to get out of the currency and that will be the end.  But, God, what a choice that is!"

"Like you Americani say, 'You tellin' me!'  Which is why Charlie, I'm not sure what happens.  Too many people undecided, too many worried.  Me?  I vote "Si" but I no know."

"So we wait."

"Si, Charlie, we wait.  Ciao, mi amico.  Mi amore ala bella donna."

"Certo, Massimo, et ciao a te."

RETURN

Sorry about last week.  I couldn't do it Monday and Tuesday and then it was off for Thanksgiving.  It has been a rough few weeks and seeing the grand kids certainly helped.  Anyway, let's try to catch up by highlighting a few events of what is a rather important week before us.

The transition of governance continues apace Over Here with some of our major institutions such as the New York Times and NBC still in a total state of denial and in some cases approaching madness in contemplating a Trump administration.  It's a bit fun to watch but at at time when a true healing is much needed the attempts of the political left to continue to de-legitimatize Trump himself are becoming overwhelming by the new attempt to de-legitimatize the election itself with ridiculous calls for a recount in three states that Hillary couldn't have possibly lost...I mean...like...could she?  I could care less but this stupidity demeans discussion on real issues and will no doubt provoke a backlash among Trump's more ardent supporters who not on;y have the wind at their backs but the votes as well.  At a time when solid  reasoning and debate are needed, we run a good chance of getting...another two years as we had under Obama?  For those who don't live within these borders and may have a hard time understanding what this is all about, allow me to make one of my rare forays into the political thicket.  It goes like this.

Hilliary won the popular vote by a plurality.  So what.  In our system, it is the electoral vote that counts and that may not bode well for the Democratic Party in the future.  The Dems are the party of the coasts; the Repubs have everything in the middle and the urbanization of America may not be the sure thing that has been spoken of almost as Gospel over the past few years.  Yet, with the majority of votes in just two states, California and New York, a Democratic candidate might just win the whole thing in the future if there was no electoral college.  This is the first battle in that fight.  A change would require an amendment to the Constitution and that is no easy thing.  It would also logically require a change in the nature of government to a parliamentary system.  So much for We the People of the United States...and--whether you like it or not--the greatest political document ever written.  Then again, perhaps it is time.  Keep this analysis in mind as we navigate through the next few years in out history.

Anyway, the week to come.  The ECB gets together on Wednesday and quite frankly I have no idea with what Sr. Draghi is up to although I suspect not much at the present time because in Europe as Over Here, political events are beginning to supplant monetary events as the driving force as, IMHO, they should.  And there is a very big political event this weekend in Italy where a referendum proposed by the prime minister, if supported, could change the political face of that country forever and almost assuredly, the political face of the European Union.  It is far too  close to call but I have booked a call to my friend Massimo for tomorrow and as a result I expect to have a better feel for the situation by deadline time tomorrow.

Oh yeah, we have a job number on Friday that supposedly will make the decision for the Fed in December.  Don't waste your time.  The Fed will raise a quarter point and try to get the hell out of the way, allowing markets to drive the monetary scene for a while and--hopefully in its mind--getting out of the bore-sight of the incoming administration where it has very few friends.  Survival, even at that high level is a very basic emotion.

More tomorrow.

AS EXPECTED

The stress test that it.  The Italians are weak, the Spanish aren't in great shape, Caxia...after a zillion Euros of support still look to the Belgian Burgers for support, the Germans are fine with the exception of a few little Landesbanken and the French are brilliant.  Do I believe it?  Not for a minute but there seems to be general agreement that this go-around was conducted with a more cogent view of reality than any of its predecessors.  Whilst all the Brits passed, the Old Lady will do her own thing next months which promises to be a bit more demanding than what came out of the ECB.  Nevertheless, the system should make it through that one as well.

So, what does all this mean?  Not much, really.  Those two nasty words--structural adjustment--keep popping up and reduced fears about the banking system, whilst no doubt a good thing--will not have any real effect on the European growth outlook.  Today, like yesterday, it is still stinko with nothing on the horizon to change it.  It would appear, therefore, we get through this year with a whimper and look to 2015 to change the course of events.  Of course, that change could be in either direction as there is a heck of a lot of political activity scheduled.  Remaining is the  Big Destabilizer...Russia...with a currency in free fall, an economy in tatters and a nut running the place.
A worse scenario one could not imagine but there's not really much anyone can do.

Of more immediate interest and perhaps concern is that Dilma won...and Brazil lost.  Oh, make no bones about it, the lady is a communist, they don't change, and as a result her economic policies and dismal governing record will persist and doom her country to no better than the gloom that has accompanied the past four years as well as to the continued destruction of the jewel in the crown, Petrobras, as a result of corruption, mismanagement and unconscionable incompetence.  Remember the Masters of the Universe of a few years past?  The BRICS?  Brazil, Russia, India and China?  Gee what happened, what went wrong?  The rule of law gang.  If it isn't there, nothing else is.  Might be something to keep in mind as we approach our elections next week

GENIUSES AT WORK

But before that,I did get ahold of Massimo who describes his situation as "being away."  No details, but apparently should he be found in Italy there would be all sorts of awkward court proceeding involving his friendship with a lady whose husband has apparently decided to formally seek resolution of a--to understate the case--failed marriage.  These things are messy in Italy and whilst Massimo claims that his relationship with the lady in question was merely "paternal" as he puts it, he adds the qualifier, "lately," which for Massimo could mean 3 months or thirty years.  Then again, he's older than I am and the ravages of time…  Oddly--or perhaps not--there is another lady involved; a friend of the ravaged husband who was until some time ago was a friend of Massimo's as well which tends to make me agree that "being away" is an excellent strategy.  Massimo's wife is well by the way in case anyone is interested.

Massimo did say one interesting thing about Italy.

"Charlie," he said.  "Qu'est Dragi?"

"What?  He's the head of the ECB."

"No, primero est Italiano."

…and when you look at it that way….

Anyway, whilst Massimo was dealing with Italian affairs, The Leader was off in New York doing nothing more that creating the most God-awful traffic jams you have ever seen in midtown in addition to making two of the most ludicrous speeches of his career equating the slaughter in the Middle East to Ferguson, Mo. in one and calling Climate Change (whatever that means) as the greatest global risk of the century when everyone who was supposed to listen didn't bother to show up.  Meanwhile, his boys, Jacob/Jack and Billy the Dud were finding ways to make fools out of themselves without any help.

Jacob/Jack announced new Treasury rules against the scourge of inversions, which may or may not be enforceable much less constitutional, but are certainly meaningless by any objective standard.  While he was doing that, Billy the Dud was blabbering about how important it was to maintain zero interest rates lest the dollar rise and make the U.S. uncompetitive in world markets.

Now let's see if I can describe this: on the one hand we have a political tool who has no business or credentials to be the Secretary of the Treasury, dealing with the world's most uncompetitive tax code and attempting to make it even more uncompetitive in order to score political points and Billy doing what he rails against China and everybody else for doing, demanding that we manipulate the value of our currency in order to gain competitive advantage.  One has to ask, are these guys born dumb or do they somehow become that way?  And yet there is wonderment as to why business confidence is not higher.  These stalwart guardians of out economy can't figure out among themselves as to whether they are pro business or agin' it.  Inversion for tax reason?  Why not just the hell out period and try it again someother place?  Which, as I have said before, is exactly what you are going to see happen in the insurance business unless somebody shoots Dodd/Frank stone, cold dead.  Which makes it real personal:  number 2 son works for State Farm.  I'll take the grand kids but I don't want him back.  21 years was enough.

JUST THINKING

I was looking at some numbers the other day and discovered something I hadn't known.  Do you know who has the third largest level of sovereign debt outstanding?  Italy.  Yep, La Bella Italia.  They have a lot of debt outstanding.  A lot.  Now at these levels of interest it's almost free but what I can't get a handle on is whether the levels stem from EUB actions, a dead economy in Europe or both.  One piece of intelligence may come from the complete flop of Sr. Draghi's Quantitative Easing program which has produced absolutely nothing in the way of increased lending.  Indeed, European banks haven't even bothered to look at it seriously.  In Europe, there ain't nothin' goin' on.

Whatever the case, somebody is holding a hell of a lot of Italian debt and one has to wonder how long this can continue.  Debt today totals 130% of GDP; growth is negative and the borrowings today are simply to service debt and pay the current bills.  A classic debt trap.  Now I know Italians are great savers; forget about under the mattress, they have Euros stashed away in places about which one would hardly drea…in and out of the country.  But it seems to me that no population could hold that amount of Euros which means that there is another player here.  Think it could be the Italian banking system?

We have seen this movie before.  Unlike the U.S. and Japan, Italy does not have their own currency.    They (like Greece) use the Euro which means the time honored and tested methods for getting out of the debt trap…i.e. inflate the hell out of the economy or debase the currency are not available.  Unlike Greece, Italy is a real country and if we have a Greek event…basta.  Think about this.  I'm going to call Massimo tomorrow with whom I haven't spoken in a while.  Poor Massimo is involved in a rather messy divorce…not his…and has been out of action for a while.  Hiding, I am told.  Private mobile numbers are a wonderful thing.  Oh, I also got a first hand report of the goings on in Argentina.  If I didn't know the reporter I wouldn't believe it..

Later.

…AND HARDER

Look, I think we are in a holding pattern waiting for something…I didn't know what…to happen.   I asked My Really Smart Friend, Larry, if there was anything good going on anywhere.  He said, "No,"  I don't like that.  He gets around a lot more than  I do and is far more up to speed than I am.  As if to emphasize the point the GDP numbers from Italy today were awful leading to what was described as causing a shock to many economists which I would think would be shocking in itself as who the hell thought anything good was going to come out of Italy which of course proves once and for all that too many economists are shockingly stupid.  Not Larry.  He gets it, but he's a rare bird.  He also has about 5000 bottles of Italian reds that I suppose he keeps around for barter when ultimately currencies are worth nothing but into which some day plan to put a serious dent.  We will die happy.

Seriously, however, try as I might I can see few positive signs and negativity abounds except it appears for the equity guys and one can't help but wonder if they are simply whistling past the graveyard having run out of ideas as well.  The days seem to sort of slip-slide away and I know it's August and no one in Europe can be reached but this feeling of I guess what one would call emptiness is stronger that I can ever remember.  The again, nothing really bad has happened if one overlooks the Ukraine and Gaza and discounts the possibility of escalation so maybe that's the bright spot on which to focus.  Any way, this is hard duty.



Going to get back to bank regulation again tomorrow and the latest in the stupidity that is know as Dodd/Frank.   I'll try to be creative.

…AND IN THE SOUTH...

For those looking for some good news, all eyes turned to Italy which is sort of like a guy in front of a firing squad being told that maybe everybody will miss.  Then again, the drowning man…

Beppe lost; in fact he got hammered but Renzi, who garnered over 40% of the vote will no doubt reject the austerity policies which he believes have brought Europe to its knees and go all out for a growth package that damns the fiscal torpedoes and rings up "all ahead full" (or "ahead Bendix" for you old salts).  Problem is, just how is he going to get that done without completely abandoning every guideline of the Union which will raise a true crap storm in the Calvinistic Northern Tier.  But Renzi has proven to be a tougher nut than anyone imagined and there will be substantial backing of any play he may make which will no doubt include France as self-immolation in this partnership with Germany is becoming less and less attractive to Les Citizens.

Spain will be there as the two dominant parties took a drubbing as their combined vote fell under 50% with all shapes and sizes of the opposition gaining none more so than something called the Podemos Radicals who I have been told are bad news coming from no where to around 10%.  It's one thing to know who's firing the shots but in Spain, the firing is coming from all directions but with the target clearly being Germany for all and the International Organizations such as the IMF for some.

Not so with Greece.  The Left was the clear winner and the policy suggestions all that such a result entails, namely the rejection of most if not all debt obligations and the retreat from the Euro.  Once again, though small, Greece looms massive in the direction Europe is headed.

Nevertheless, even if all the disagreements among nations could be resolved, there are two massive obstacles facing the Union that may well prove to be insurmountable.  In any scenario on any level the Currency, so treasured by most parties and which first buggered the South with massive inflows will almost certainly prohibit reflation where needed.  The currency is a mill stone around the neck of recovery and if--and this is a big if--fiscal and industrial policies are not radically changed will remain as such.  Unfortunately, the second massive obstacle is working in concert with my view that governance will not change, and that leaves a a large uptick in the world economy as being absolutely essential to European recovery under the present climate.  That is not going to happen either, but hope remains eternal and will so remain right up to the final tolling of the bell.

Astride it all, Draghi speaks this week as to the policy of the ECB.  "Whatever it takes," worked last time but there is now…finally…an understanding that Draghi successfully --and brilliantly--talked his way out of a financial crisis because talk was the only thing he had.  He still has no more.  Reflation, using tools available to the Fed and the Bank of England cannot happen; Sr, Draghi does not have the tools.  Nor does anyone else on the continent and the absence of capital markets which give such flexibility to U.S. policy makers looms large. What comes out this week is any one's guess but I would be more than a bit cautious.

I've cried "wolf" before only to be proven wrong but this time I may be right.  A financial crisis is one thing; a political crises is another and whether is is a good thing or not about the only thing upon which all parties agree--some grudgingly--is that the Euro is a disaster at this time and for different selfish reasons may have to be abandoned. What that would leave us with is at best a trade union operating much in the same manner as trade has been conducted among sovereign states for 5000 years.  Maybe that's not such a bad idea if it is the one policy point on which all can agree rather than one of the members saying one day, "bugger it" and heading off on their own.  I don't think the decision point is too far away and as I said that may not be all that bad.  After all, such a system got us this far...

THE BIG MELTDOWN

No, not the markets.  It got to 43 F. today with sunny skies and you can't believe the amount of water that is sloshing around, so the next thing you will probably be hearing about is flooding in the fly-over zone.  I can deal with warm.

It being a swamp out there I sat in today and did a bit of reading and thinking.  I usually watch CNBC in the morning and one of the old timers that has been featured just about from the git-go is the floor manager for UBS, Art Cashin.  Art has been around the market since you-know-who was a corporal and has reached the status and age in life when he can say pretty much anything he wishes. This morning was kind of a fun discussion rambling about credit, stimulus spending and tapering.  One of the gorgeous young things which CNBC seems to attract in abundance had this exchange:

GYT: "Art, why do you thing the Fed is signaling that the taper is going to continue?"

ART:  "Because it (the bond buying) doesn't work."

Well, that caused me to spill my Corn Flakes.  Now I've been saying that for three years but I'm not Art Cashin.  The other difference is I believed that the taper wasn't a 2014 event.  I was pretty sure that in an election year, with all the intellectual investment that went into the bond buying program, it would be impossible for Yellen to essentially admit what Art figured out (and me) that it doesn't work.  I learned a lesson: when a fact is so clearly evident it will be recognized as being such despite all the emotion and reputation that may be involved it declaring it not to be the case.  If Cashin can say that out loud on CNBC, the taper is for real and why then certainly I was wrong.  I'll try to learn from this.  Oh, in case you missed it, a couple of days ago was the 5th anniversary of the Great Stimulus of 2009.  That didn't work either.

Of course, one questions one's self when  this occurs.  Right now I'm asking myself why is the Euro trading like all is well Over There, the Pound is going through the roof with seeming no effect from the Loony Tunes up in the land of THE PEOPLE who are determined to follow the specter of Robert the Bruce right over the cliff and the Japanese who having witnessed the waste of a stimulus and print money schemes, are prepared to double down on all the stuff they  have tried without success. My new found wisdom tells me that before I announce the answers to all these questions I damn well better have the answers myself.  Right now I don't.  It's also caused me to thing again about my comments about Chinese bubbles but I still think I have that one right.  In the mean time, there is Italian politics, a cause of constant amusement…and no little concern…with Massimo somewhere in the flesh pots of Europe with his skis (and who know what else) AWOL when needed the most.  We're working on that one.

One interesting little note was that the Troika is returning to Greece to discover what everyone knows, that the Greeks need a bundle to stay out of default and to figure out I suppose what new piece of legerdemain will be needed to get past this latest mess.  The Greeks of course are quite convinced the current account surplus they've recently rung up is proof positive of they're sound condition setting aside for the moment that the surplus is a couple of million Euros and that they owe about a gazillion.  It's going to be fun to watch but I've learned my lesson: I am not going to pre-judge it.  Yeah, right.

BACK TO THE FUTURE

Well, it is now official.  Italy will have a new government if Matteo Renzi can form one.  In a rather stunning political coup, the former mayor Florence forced the resignation of fellow party member Enrico Metta from the prime ministership and has been asked to form a new government.  And THAT, sportsfans, is the story that will grip Europe for the next few days unless Frankie returns from Meetings with Barry with a new trinket on his arm.  Give the boy credit he's winner with nothing immediately apparent that makes him such.

Trouble and Strife had cataract surgery today and I've been playing Nurse Charlie and inasmuch as it is Valentine's Day I'm about to start my Escoffier routine with a Carre d'Agneau for the little lady. Deep and dark insights into Italy are going to have to wait.  By the by, if anyone out there is contemplating that kind of surgery, don't delay.  It is, as it turns out, it's absurdly simple; it took from wheel-in to wheel-out of the op room, 22 minutes with 8 minutes for the actual event.  You literally cannot notice the difference.  Absolutely remarkable.

Back on Monday with all the dirt.  Oh, it's snowing again.

BACK TO WORK

OK.  We have a Fed Head that everyone loves and a wide open approval to spend money we don't have without any restrictions, lousy numbers on the economy to which no one seems to be paying any attention as the stock market roars ahead, the Spanish 10 year trading through the U.S. 10 year, The Leader joking with his new buddy, Frankie, that he likes the job because he can do anything he wants and Turkey covering a $1.5 billion 31 year issue in the mid-6% range about 3X.  I mean, like, what can go wrong?

I guess there is something to this "new reality" thing because we old guys who sit and watch this just don't have a clue.  True, we are looking at another governmental crisis in Italy, but it's Italy for Pete sakes; they have one of those every twenty minutes.  The extent to which Greece is broke is finally being recognized but it's Greece for Pete sakes; they're always broke and who cares anyway.  The Germans punted to the high court in Brussels who signaled for a fair catch and will promptly take a time out for at least a year allowing Sr. Draghi to say anything he wants and hopefully, not having to do anything to back it up.  The Brits are out-performing everybody with a new projected growth rate of 3.4% which comes as a shock to everyone (especially Little Paulie) and the Bank of England which now has its knickers in a twist with interest rates which every day appear in need of adjustment for which few are calling.  I'm probable misreading the entire situation but I don't think I've ever seen a time like this one where nobody wants to have bad thoughts and the firm belief is if you don't nothing bad will happen.

I really have to learn more about China because there seems to be some concern there and if I don't know why I'm out of business.    Obviously we're in fine shape everywhere else, except for a few spots in Latin America like the Argies and the Vennis but they are rapidly becoming an irrelevancy in their own way much to the shame of both I am afraid.  Imagine what it must be like for those mobs to be told that no one cares.  'Bout the worst thing in the world.  Uh?  I'm actually smiling!  On top of that, it didn't snow again today.

SNOWJOB

Yes, it's coming down again, but that's not what I'm talking about in the title to this piece.  The Euros fascinate me, they really do.  The ability to flit with life, touching reality only briefly is a masterful achievement.  It's not like the Leader will, as proven, will from time to time deliberately attempt to mislead (lying); these lads have managed to convince themselves of the truth of their utterances which is a remarkable feat.

The latest practitioner of this art is he head boy himself, Jose Manuel Barroso, head of the Commission who a day or so ago announced that the crisis in Euro was over and there was nothing but blue skies ahead.  Ireland, said he, was out of crisis and even back in the borrowing game.  Spain's numbers were far better than expected and Latvia, the newest member of the Clan would soon be the Rock Star of Europe.  There was of course a few trouble spots in between but surely they would be resolved by the end of the year.

He's a politician of course and what you rarely hear from a pol is the talk of trouble out down in the valley especially if the trouble is on his watch.  "It's Bush's fault" is easy (so easy the Euros were also using that line), but after five or six years of somewhat dismal economic and fiscal performance the response one tends to get when the "Bush Solution"--or the local equivalent--is trotted out is, "Who's Bush?"  It's on to Plan B in the USA but for Euroland it's simply declare victory and move on.  Makes life a lot easier.

The reality is of course somewhat different.  The decline in Spanish unemployment for example is more of a result of unemployed Spaniards being found in ever-increasing numbers in England and Germany, creating a phenomenon not unlike that in the United States, while the overall unemployment rate in the EU remains at an uncomfortable and unsustainable 12%+.  Italy is faring no better it would appear although it is far more difficult to determine, as the Italian employment rate has been unreliable since Julie was off in Gaul.  There is of course little argument that the Euro as viewed internally as the currency of trade is vastly over-valued in regard to both countries, not to mention anything else south of the Alps.

All that would enough of a concern if it were not for France which appears to be finding itself more comfortable in playing the role of the sick man of Europe, a condition which is more and more placed at the feet of Frankie and his economic and (especially) tax policies.  The man is facing an increasingly serious political problem.  And of course there is Germany which has yet to face the first truly tough issue with a coalition government deeply divided on political dogma.  It will come and the result is nowhere guaranteed as I do not believe that decades of disagreement are easily overcome.

Anyway, if I were Mr. Barroso I would certainly temper my enthusiasm with a cold, hard stare at the reality about him.  I suspect each one of these issues will arise in the first half of this year and fairly quickly.  As a result, issues which previously have been allowed to lay fallow, such as immigration, will find increasing importance in the discussion.  The Policies of the ECB, whilst central to the overall issue are yet a separate discussion entirely.  Mr. Draghi has, in one sense, played his cards quite close to his vest, not to mention the formulation of a United States of Europe in regard to the Banking Industry.  Angels fear to tread on that ground and I have never been accused of being seen with a Harp.  I'll wait a bit for even broad generalities on that one.

OVER THERE

A remarkable thing happened today.  Little Paulie Krugman actually wrote a piece in the Times that more or less made sense.  All about Germany's self centered interests, crushing demands upon the southern tier, mad fiscal policy, blah, blah.  He was actually pretty much right if you take the view that Germany owes Europe.

Well, I'm not sure the Germans feel the same way for after all, it has been the the good Burgers'
money that has kept the EU afloat for the past few years, but today, Signore Prodi of Italy, almost as though on cue, suggested that what need happen is the formation of a coalition of the southern states to combat Germany, warning that "Germany will never sell another car in Italy" unless things change.

Now Prodi is not to be taken lightly.  He was probably the strongest moving force behind the establishment of the Euro and ran the EU for a goodly number of years.  Without him, all that has come about probably would not have happened but at the same time we cannot forget that it was his manipulation of the value of the Lira that made Italy eligible for European (manipulation is probably the wrong word..flat out lying about the value of the currency is more accurate) as he firmly believed that there could be no EU without Italy (probably correct).  Of course that has come back to bite Italia nel'la culo but it seemed like a good idea at the time.  Anyway, I thought this would be the week to talk about Europe and that's what we will do beginning tomorrow.  Meanwhile, Over Here, the train wreck that is Obama Care dominates all the conversation in DC with nary a sound emerging as to the discussions over the budget which in case you haven't been paying attention has about a month and a half left to solve all of our fiscal problems, and various factions of government continue to bring legal actions against anything that looks like a financial organization or financier.
Big win today, The Justice department nailed Steve Cohen and his SAC corporation with a $1.8 billion dollar settlement.  Of course that is exactly what Cohen was supposed to make this year.  Oh yeah, it's tax deductible.  Everybody wins.

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."

THE WEEK THAT IS

And it should be a beaut.  Barring a last minute compromise, the U.S. government beings shutting down at midnight.  I wonder whether anyone will other than the 1,000,000 or so "folks" as The Leader likes to call them who will stop getting pay checks in order to maximize the negative aspects of this.  Ugly and kinda stupid for all concerned but this ain't nothin' to the goings-on in Italy where there will be a no confidence vote on Wednesday as a result of every body's favorite, Sr. Berlusconi ordering a couple of his hand-picked deputies to resign from the coalition government in an attempt to keep himself from being kicked out of the Senate.  Why you ask?  Well, the Italians have a quaint little law that says if you are a Senator you cannot be incarcerated.  Mr. B., having been convicted of a few, ah, missteps would in fact wind up right there.  I think it goes back to Roman times but then again, half the country is 2000 years old.  It was easier then...ruling the world and such.

And before that bunch came the Greeks.  Kinda looks like they turned out the same way.  The constabulary arrested a bunch of legislators for being and acting like Nazis...whatever that means these days...causing a considerable disruption in parliament and no good whatsoever for the financial outlook of the country.  So here we have Italy and Greece at the doorsteps of political crises, Spain struggling with continued double digit unemployment, France rethinking whether they can tax their way out of their mess as the Germans, astride the continent, try to figure out how to put this broken egg back together without causing consternation all around (hint:  I don't think they care).

Finally, Obama Care starts tomorrow.  The lies that will be told will be spectacular in scope on both sides.  Oh yeah, this is going to be some week.