Friday, July 23, 2010

Euro Stress Tests a Joke and Wall St. Loves Them

Apparently, according to the central bankers of the world, and especially those in the US and Europe, banks are well enough capitalized to easily survive any kind of future monetary event.

That was the official word from Europe, where it was announced today that only seven of 91 banks in the region failed the European Union's stress tests. The other 84, for the most part, are not only well-capitalized, but strong, vibrant and growing.

After much hand-wringing and posturing over the past four months and with the goading and encouragement of not only Treasury Secretary Tim Geithner, but Fed Chairman Ben Bernanke (who, incidentally is currently on a visit to Europe), Europe followed the lead set down by its American counterparts in 2009 and conducted their own rather flimsy and opaque tests to determine how the largest banks in the region might fare under certain - supposedly bad - economic conditions.

The tests, as in America, revealed very little about banking in the Eurozone. Except for giving European leaders and banking executives a little more breathing room by taking media focus off of them, the stress tests were designed wholly to persuade the general population that all is well in the world of global finances, which begs the question, "why all the fuss in the first place?"

In the broadest, most general terms, what the conduct of the combined central banks of the nations of Europe and the US, plus the mega-banking operations scattered around those countries shows is that the entire financial calamities of the past two years were either made wholly of flimsy cloth or that the economies of many of these nations, and the USA, are in perilous conditions.

Choose whichever poison suits you best, but keeping the banking system and sovereign debt structures at status quo is probably grand for bankers - for now - and pretty much meaningless - for now - for the general populations. Later on, within months, most likely, the truth shall be exposed for all to see, that the nations and their central banks have been painted into a liquidity corner from which many cannot escape without severe austerity measures or default on scads and scads of debt.

With an entire global structure built upon fiat money with nothing to back it except a nation's good word, the eventuality of final collapse is assured, the only remaining question being a matter of timing. The politicians, bankers and associated ruling class participants will keep the charade going for as long as they can. In the meantime, in towns and cities and states across America and across Europe, the dismantling of the middle class will continue apace. Credit cannot and will not be extended to anyone with less-than perfect credit histories and sufficient collateral. Major corporations will continue to flourish at the expense of smaller rivals. Stocks will head up, and then down, and then repeat the pattern. Slowly, almost imperceptibly, the structure of governance and the prosperity of individuals will fall prey to the ravenous appetites of massive governments and business structures working hand-in-hand.

All that one can hope for under these conditions is for a continuance of the deflationary spiral which has been fought at every chance by the central bankers, though mostly in vain. Some of the largest economies in the world continue to limp along with interest rates at or near zero and credit choked off to the general public. Obfuscation and new regulations will only serve to exacerbate the situation until the populations finally give up or rise up.

In Europe, surrender is not so easily assumed. In the United States, it is almost certain, except for a very small percentage who will fly under the radar of the government, skirting the laws and rules, until they too are caught in the widening liquidity trap.

It's not a pretty picture going forward and it may take years to fully play out, but the absolute scurrilous nature of Europe's attempt to mollify the public is handwriting on the wall, writ small, but with larger implications.

As for Wall Street's role in the continuing dance of fools, stocks waited patiently on Friday, hugging the unchanged mark until after the stress test results were released. Once assured there would be no serious blow-back, the major indices took off on a tear toward and beyond their 200-day moving averages, as presaged right here on these pages in yesterday's post.

After the results were announced, traders took a few breaths, some supposedly went out onto their terraces for a smoke, and when they resumed trading, about 12:45, proceeded to take stocks higher in a hurry, pushing the Dow Jones Industrials up more than 100 points in the nest 45 minutes. The die already cast, the trades were executed.

All closed higher, and especially important, the S&P 500 finished the week above the 1100 mark, yet another sign that there's absolutely nothing to be concerned about. Your jobs are safe, your pensions in good hands, with the government and the Masters of the Universe on Wall Street continuing to monitor the health of your and your children's portfolios.

If it wasn't for all of this being so neatly wrapped up on a glorious summer Friday afternoon, one might presume that it was all preordained, completely organized right down to the final neat detail.

Dow 10,424.62, +102.32 (0.99%)
NASDAQ 2,269.47, +23.58 (1.05%)
S&P 500 1,102.66, +8.99 (0.82%)
NYSE Composite 6,965.11, +63.20 (0.92%)

Advancing issues led decliners, as expected, by a healthy margin, 4992-1425. New highs exceeded new lows, 298-80. Volume was at almost the exact same level as that of the previous two sessions; not surprising, since these days it's just the same people moving the same stocks back and forth, to and fro.

NASDAQ Volume 2,263,999,250
NYSE Volume 5,161,690,500

Commodities markets were a bit more rational, with oil closing down 22 cents, at $78.98; gold losing $7.80, to $1,187.70; and silver dipping two cents, to $18.10.

With the indices all closing above their 200-day MAs, one might assume that the bulls are off and running once again, but I purport that it is only a temporary condition, based entirely on strong earnings reports (notwithstanding everything else, a very positive sign, but wholly in contraction with economic reality) which will come to a sudden end next week. This looks every bit like a temporary summer rally, which end as quickly as they begin.

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