Notes From Underground: Let’s Make A Deal … But Will It Be The Full Monty?


The markets have greeted Sunday’s purported U.S. budget deal with a great sigh of relief as the S&P futures have opened 1.5% higher. At this moment it is difficult to determine what exactly has been agreed. It seems that Boehner was able to placate the “TEA PARTY” caucus for the moment–enough to get some compromise.

This budget battle has been important for what it revealed, in that the November 2010 election brought to Washington a zealous group of budget-minded representatives who are actually doing what was promised in their campaigns. That is not a political statement but a reality. Zealousness for the sake of nihilistic destructiveness is never to be awarded but principled compromise is a rare commodity in present-day Washington. More importantly, it seems that Wall Street may be set back on its heels as the “TEA PARTY” was in no mood to cave in to the capriciousness of the market and was not going to be held hostage to the vagaries of stock traders.

As the budget debate dragged on and the Wall Street sycophants whined and groaned, the more intransigent the opposition became. Going into the 2012 elections Wall Street ought to be very fearful of Obama’s liberal wing and the newly elected conservatives finding common ground in their disdain for Wall Street. The Geithner/Summers/Paulson bailout has not played well West of the Hudson and the longer the economy fails to gain traction, the greater the noise in opposition to the financial crowd and its lobbying in Washington.

Friday’s GDP numbers were a disappointment and without job growth the populist movement will look to blame the TOO BIG TOO FAIL BANKS. It is definitely too early to sort out the winners and losers in the current environment, but if I were advising the titans of Wall Street I would say, shut up and remove yourselves from the radar screen.

Now it is time to look again at Europe. Friday the FT had an op-ed piece by the Finance Ministers of Germany and France, Francois Baroin and Wolfgang Schaeuble. The piece is praising the efforts by Brussels to secure the existence of the EURO and keep the PIIGS in the EURO currency and political system. The terms of the bailout are important as it sets forth the ability of the EFSF and in 2013 the ESM to “… act on secondary markets if necessary to counter contagion risks in a timely fashion.”

This is an interesting statement because it seems that the markets are soon going to test the resolve of the EFSF as rates in the Italian and Greek debt resumed heading higher after the previous weeks euphoria. One thing we can be sure of and that is that markets will always test the resolve of politicians to act in defense of their goals. In a grand statement of defiance they conclude, “WE WILL PERSEVERE AND OVERCOME ANY OBSTACLE THAT MAY APPEAR ALONGOUR CHOSEN PATH.”

Well, the grand test will be coming and the markets will find just how far the EUROCRATS will go to defend the European dream. In a rather interesting addition, these two financial geniuses opine that, “Greece can succeed in making its debt sustainable in the long term if it succeeds in both incresing growth and reducing its debt ratio.”

Baroin and Schauble must be hoping that the Greeks have discovered the philosopher’s stone and are turning lead into GOLD. If the EUROPEAN DEBT markets return to the forefront after the U.S. budget crisis, European vacations for August will be short lived. It seems we will always have Paris.

Lost in last weeks Washington centric news was another effort by the Brazilians to reduce the upward pressure on the REAL. The Brazilian financial authorities have moved to install a 1% transaction tax on currency derivatives, and OTC currency trades must be registered. The authorities have also stipulated that they may expeditiously increase margin requirements. As a result, the REAL softened but nothing very dramatic.

Several currencies made all time highs last week under the influence of the U.S. Budget Crisis–Aussie, Kiwi, Swissie, SINGAPORE DOLLAR. The fear of U.S. downgrades and default have driven some currencies to levels that can cause great harm to underlying economies.

The SWISS economy is beginning to slow and the SNB has been reticent to intervene to halt the rise of the SWISSIE against the DOLLAR, and, especially the EURO because of the huge losses incurred in its last efforts. It seems that Swiss industries, no not an oxy-moron, have been priced out of markets as German production in similar industries is much cheaper. The FRANC has been a haven currency along with GOLD but I would urge caution as the Swiss government may move to invoke some type of financial tax on foreign currency deposites as interest rates are already at zero.

Using any measure of PRICING PURCHASING PARITY, the FRANC is at a very non-competitive level. Yes, markets can remain irrational much longer teh you and I can remain solvent. Europe and the U.S. are providing great stress to the global financial system making the imposition of FOREIGN EXCHANGE CONTROLS a real possibility.

Also last week, the Brazilian and the Indian representatives to the IMF warned Chrisitne Lagarde about pouring more large sums into the Greek bailout. The emerging nations are concerned that too much of the IMF’s assets are being utilized to bailout the colnial masters when such funds would never have been provided to the emerging world. Arvind Armani, the Indian executive director said, “History suggests that if this were happening to a poor country or developing country, the rich countries would have voted against the loans.” Madame Lagarde, welcome to the BIG GAME.

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