Money for Nothing

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The European Union came up with a trillion-dollar bailout for itself at the dawn’s early light yesterday. Initially, the bailout plan goosed the euro back above $1.30. But by day’s end, the euro’s value had gained almost no ground whatsoever. Hardly a resounding success on Day One of the campaign.

I mention this event reluctantly, knowing how averse we Americans are to news out of Old Europe, that boring backwater of sclerotic cafe lay-abouts, socialistic train service, and less-than man-sized portions of things that real men don’t eat anyway.

The question begging itself here, of course, is how Europe intends to come up with roughly a trillion in bailout money. Sell Portugal to China? Cut Greece up into bait and catch whatever fish are left in the Mediterranean Sea? Frankly, I’m stumped. Talk about robbing Peter to pay Paul… All the European nations are already so hopelessly enmeshed in chains of unfulfillable counter-party obligations that the bailout might as well be a game of musical chairs played in the Large Hadron Particle Collider, set to the tunes of Karlheinz Stockhausen. The European bailout is, in fact, an absurdity. I predict that the effect of the announcement will last all of one trading day on the stock markets.

The truth is that the imbalances of global finance are so grotesque now that the whole money system is hanging together with nothing but spit and prayer. I get rafts of e-letters every week warning of a supposedly-coming global currency – a companion idea to the notion of a one-world government. Both are fantasies. Events are taking the nations of the world in the other direction: towards break-up, downsizing, down-scaling. Likewise, if major currencies such as the euro and the dollar blow up, they’re much more likely to be replaced by more local bank-notes backed by gold than by some hypothetical Amero or Globo-buck.

Early yesterday morning, the European stock markets were zooming, and Bloomberg even carried a wonderfully mysterious headline saying Greek Bonds Rally. That was especially rich – like, who the hell is going to load up on Greek bonds now? Is there a pension fund somewhere run by such dimwits that they would sell their positions in the Goldman Sachs issued Wolverine CDO in order to get in on the new bargain in ten-year Greek sovereigns? I hope those pensioners are prepared to spend what remains of their lives selling chestnuts from pushcarts on the streets of Oslo.

As if life in the USA wasn’t surreal enough last week…

Once upon a time, the stock market was a place where people with capital went to look for productive activity to invest in – say, a company devoted to making soap flakes, or an underpants factory. Now the market is a robot combat arena where algorithms battle for supremacy of the feedback loops. Thursday’s still-baffling fifteen-minute “crash” was an excellent demonstration of the diminishing returns of technology. People too-clever-by-half, aided greatly by computers, have now gamed the investment indexes so successfully that these markets no longer have anything to do with investment – they’re just about shaving micro-points of profit at high volumes by micro-milliseconds off mere differentials in… math! This is truly quant heaven, a place where only numbers matter and there is no correspondence to anything in the real world. In other words, last Thursday’s bizarre action was a warning that the American stock markets have become certifiable.

These algo-robots may be elegantly complex, but they are really no more than triggering mechanisms, and Thursday’s – whatever it was – glitch, let’s say, ought to be regarded as a mere preview of the coming attraction: a spontaneous capital combustion in which the putative contents of these stock markets get sucked into a black hole so vast that the trading desks will have to find a way to arbitrage infinity to ever again catch a glimpse of America’s receding wealth. And it could all happen in a finger-snap… But probably not tomorrow.

Until then, rest assured that whatever else is going on out there, credit default swaps never sleep.

James Howard Kunstler
for The Daily Reckoning Australia

James Howard Kunstler
(born 1948) is an American author, social critic, and blogger who is perhaps best known for his book The Geography of Nowhere, a history of suburbia and urban development in the United States. He is prominently featured in the peak oil documentary, The End of Suburbia, widely circulated on the internet. In his most recent book, The Long Emergency (2005), he argues that declining oil production is likely to result in the end of industrialized society and force Americans to live in localized, agrarian communities.
James Howard Kunstler

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Comments

  1. “now the market is a robot combat arena”… sweet line!

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  2. Steve’s quote of the day

    “Australia might just be starting to run out of greater fools”

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  3. Running? I understood they were walking, Steve. Following Keen… . ;)

    Biker Pete
    May 12, 2010
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  4. We’ll see biker, he still might get the last laugh. Sly remarks can come back to bite………………..

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  5. Hardly ‘sly’, Realist. I’ve been very open in my comments since Keen first made his comments about the GPC (40%); unemployment (20%) and interest rates (0%).

    But ‘realistic’ally, even if property fell 40% now, it would _still_ be higher in desirable locations, than when Keen made public his silly predictions.

    As Watcher7 notes elsewhere, it would probably need to fall 60% to make a real difference. Yeah, yeah, I know… it’s gonna fall 60%, right?! ;)

    Biker Pete
    May 12, 2010
    Reply
  6. Wonderful article!

    Reply
  7. Sorry, didn´t put the right rating with my comment. Next time!

    Reply
  8. No wonder people are confused…

    Two article headers from the business section of todays age

    theage.com.au

    US stocks rally as eurozone fears wane

    Wall Street 6:35am | US stocks cap their best three-day run in 10 months

    Gold futures rose to a record for the second straight day as financial turmoil in Europe spurred demand for an alternative to currencies.

    Stillgotshoeson
    May 13, 2010
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  9. Narrative shoes. Leverage can now take prices any which way right up til the event day. Belief in the use of more leverage to service already unserviceable debt will fail after the cycle and tempo of crises become like a beating of drum sticks at a royal tattoo.

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  10. Comment by Ross on 13 May 2010:

    Narrative shoes. Leverage can now take prices any which way right up til the event day.

    Agreed… DOW could go to 15000 with all the cash thrown about.. I still think it is set to hit a new low though… Sub 5000

    Stillgotshoeson
    May 13, 2010
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  11. Shoes I tend to agree. Maybe watcher will be proved right but I will stick to my guns for now. I am decisively defensive backing my bearish position but will be ready to switch where I see signs that the market is still buying lunacy. The trouble is the ramping up of the scoreboard with low volumes and trade concentrated in just a few stocks. That isn’t “the market” talking but just them staying out and praying.

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  12. A High of 15000 then a fall is a possibility.. there is just so much printed money out there… it is an increase not based on fundamentals.. house of cards, I am only holding a couple of stocks now.
    I am staying off the roller coaster for now, until I see a more definitive sign one way or the other..
    Still holding CTO, NCM (increased holding), GDO, IMP (increased holding), AGO and cash..

    Liking TNG as a speculative.
    Tatts Group (TTS) as a staple.
    Boart Longyear BLY as a good medium term

    Stillgotshoeson
    May 13, 2010
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  13. The problem I see with stocks and maybe other markets too is the increase in volatility that may occur when unpredictable and desperate governments/CBs started throwing fresh fiat at the deflation problem and introducing radical taxes etc (like Rudds the resouce tax). It would be easy to buy, get shaken out and repeat over and over, losing money and tearing your hair out.
    Though I think gold will go up I expect some crazy swings and same for stocks. With stocks I fear individual companies could go broke in the mayhem at short notice. Buying indexes might buffer the volatility/going broke problem a little. Anyhow just guessing.
    In my opinion gold is going up $250-$400 higher from here after a pull back to test the breakout. Last chance to buy at these crazy prices ;)

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  14. Gold held $1200 through the announcement of the “Greece/Euro bailout” that may well be golds low position in the for near future.. I am calling $1500USD by years end.
    Expect strong resistance to break $1500 for no other reason than the physcological aspect of the round number of $1500… Any trigger to go past $1500 will be a big one and I doubt it will see resistance until after $2000 if that occurs.

    I sold off Goodman last week for 71.5 They may see a $1 before a correction, they also may plummet to 20 cents. Maybe I have done a Keen and sold a little too soon, however I made the decision that gold is going to outperform commercial real estate in the medium turn and bought 2000 NCM at $31.42

    Stillgotshoeson
    May 13, 2010
    Reply
  15. Shoes, I suppose BLY restructured to try to pull more USD investor money in with them not buying under $10. Last time I looked I saw a bounce in hire rates but they were still down deep with funding covenants the issue. They also talked about of Europe but I haven’t seen follow through. Cash is a little better in TNG than IMP

    I have been buying into VTA as it has dived. AUD-CAD is doing what I expected on risk event days and am looking for soft commodity equity and currency to pay a double bounce at some time medium term.

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  16. Just a note for silver bulls/prospective buyers that in Aussie dollars silver has gone up 16.16% on what I was paying a few months ago. I believe Dan Denning has a good story on silver. How about an article Dan?

    Reply

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