European Contagion, Consumer Spending and the Stock Market Scam

What lies behind our columned monuments?

Look at The Parthenon in Athens, Greece.

Behind that ancient Greek building lies a bankrupt country.

The threat of European debt default is one major factor that will lead to a major stock market crash in the United States. Stocks started to plummet this summer around fears of European contagion from default of Greek debt.

When asked if Greece is insolvent, as Nouriel Roubini claims, Greek Prime Minister George Papandreou told Bloomberg News that Greece is not going to default.

“We know where we were, we know where we are, and we know what we are going to do—and we are doing it,” Papandreou said.

When pressed with the question of Greece being insolvent, he added, “We are not going to default, and we have done everything we have done—not only us, not only Greece, but the European Union itself and the IMF [International Monetary Fund], of course, have basically given us a vote of confidence and we, ourselves, are following the targets. We are doing it, in fact, not to default. If we were going to default it would have happened, we would have decided that many months ago. We decided not to do that for a number of reasons. We think it would be wrong for the Greek economy, it would be wrong for the European economy, it would make things worse in the end. That is why we are taking the pain to make these structural reforms and we are on target.”

So, that means Greece is insolvent since he never said it wasn't. Here's more from ZeroHedge.com on Papandreou's comments that Greece is undervalued and their bonds will not currently be coming to market.

But, the European situation further weakens as layoffs continue.

BBC reported that defense company BAE Systems revealed plans to cut nearly 1,000 jobs at sites across the United Kingdom. Also this month, the Wall Street Journal reported Royal Bank of Scotland Group PLC will cut 3,500 positions in its back-office operations across the U.K., as it continues to shrink its businesses.

CNBC reported today that the UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, and the government would “deduct what it deems as the appropriate tax and pay the employees by bank transfer.”

So, I guess for consumers in the U.K., they won't be spending much money either.

Just for an added dimension, in Amsterdam, Dutch express and postal company TNT NV said it expects up to 4,500 “forced redundancies” at its troubled mail unit, meaning 4,500 layoffs.

Look at monuments in the nation's capital that resemble Greek architecture. They hide another bankrupt country behind banks holding undervalued assets. The U.S. has more debt than Greece, but more stature as well.

With 125 bank failures this year, there are still nearly 770 problem banks on the FDIC watchlist—holding residential and commercial mortgages and construction and land loans that may never be paid. The FDIC is basically insolvent and/or bankrupt.

With billions to trillions in undervalued assets, not to mention unpaid derivatives, major U.S. banks hold capital reserves without the ability to lend—meaning no credit for businesses that need it.

The second phase of the stock market crash involves a paradigm shift in consumer spending.

Since consumer spending reflects 70 percent of gross domestic product, less consumer spending means lower levels in GDP and, likely, a double-dip recession. Roubini gives it a 40 percent chance. One economist in a high government position said it was a 25 percent chance. A double-dip recession, basically, goes down in history as Great Depression II.

Overleveraged consumers, people with too much debt, reflect one reason why consumers will not be spending money anytime soon. Unemployment, at U-3 9.6 percent/16.7 percent under U-6, is another reason.

A Wall Street Journal analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that “over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans. That means consumers managed to shave off only $22 billion in debt through...belt-tightening.”

Meanwhile, overleveraged states try to balance their budgets. As a result, more state and local government employees face potential layoffs. In Austin, Texas, for example, an American-Statesman analysis of agency budget requests showed $21 billion in red ink, and 9,800 jobs that state agencies offered up for elimination as legislators prepare to trim that money from the 2012-13 state budget.

Still, despite these facts, the stock market increases.

Looked at the columned buildings on Wall Street. The Dow Jones Industrial Average rose 145 points to 10,753 today while the 10-year bond yield declines and oil and gold increase. It looks like money is going everywhere—into equities and conservative investments—but trading remains “light.”

Perhaps the fact that the National Bureau of Economic Research reported today that the recession officially ended in June 2009 influenced investors. NBER also said economic conditions are not favorable. Some analysts believe we are not only in a depression but never left the recession.

As Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose your own.”

Still, the stock market keeps moving up.

There is a reason, albeit conspiratorial, as to why the stock market is able to show such productive gains among such moderate growth at best.

In an August 2009 article, the writer, Chris Martenson, presents an investigative report, The Fed Buys Last Week's Treasury Notes, as to why the market remains up.

“In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday. This is at the upper end of their recent range of already exceptional purchasing activity...If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

"This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs") we can consider these additions of money as good as permanent themselves.”

Martenson calls the following Permanent OMOs: “The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee.”

According to today's ZeroHedge.com, Fed Injects Record $5 Billion Into Stock Market With Today's POMO, Tyler Durden said “Today's POMO is over, and the result is a whopper: Brian Sack has just injected a record for QE Lite $5.2 billion in stock, in order to complete all the elements of today's orchestrated Obama Town Hall meeting [on CNBC], during which the president is now fully expected to announce that he not only managed to end the recession singlehandedly (what an opportune time for the NBER to announce its results), but that stocks are now ripping every single time he appears on TV (same goes for gold, oil, and pretty much everything else).”

Brian Sack, by the way, is executive vice president of the Markets Group at the Federal Reserve Bank of New York. He is also the Manager of the System Open Market Account for the Federal Open Market Committee. The Markets Group oversees domestic open market and foreign exchange trading operations and the provisions of account services to foreign central banks.

“$5 billion today, add another $6 billion on Wednesday and Friday, lever up 30 times and you have some $300 billion in free buying given to the Primary Dealers so they can ramp the S&P to 1,150 by the end of the month. Job well done Mr. President. Too bad nobody but Wall Street and a few HFT [high-frequency trader] prop desks care about the stock market any more,” Durden said.

Many optimistic analysts, such as Richard Berner, chief economist at JP Morgan, said a “big shock” would be a problem for an expected “moderate recovery.” However, he does not expect a double-dip recession because of lower rates and a strong refinance market combined with a strong global economy.

What exactly is this economist looking at?

I'm not sure people can save their homes through refinance if credit remains tight--lenders will not take a hit in the spread of a new mortgage; I'm sure those consumers who did refinance would not be able to spend much on anything but their mortgage; and, I don't see how other areas of the globe, like Europe, are coming back if U.S. consumers decide to stop spending--which they have.

But who cares...right? A stock market over 10,000 tranquilizes all of public opinion's anxieties.

Robert Michaels