A train set beyond belief

It cost eight million euros and took 500,000 man-hours to build - so far.

The "perfect storm" of bullishness - or not

By now everyone knows that market indices took off like bottle rockets this morning. The Dow, for example:

The reason is that the most important central banks in the world, including the US Fed, agreed to charge each other less interest in dollar swap lines beginning this coming Monday.

The U.S. Federal Reserve, the European Central Bank as well as the central banks of Canada, Britain, Japan and Switzerland agreed to lower the cost of existing dollar swap lines -- or reducing the cost of temporary dollar loans -- to banks by a half percentage point, starting December 5.

The central banks' actions was intended to ensure that starved European banks facing a credit crunch have enough funding as the euro zone's sovereign debt crisis worsens.

Also, China unexpectedly cut bank reserve requirements in hopes of boosting an economy running at its weakest pace since 2009.

Further encouraging investors, the latest economic data suggested the U.S. economy was moving more solidly toward recovery. The U.S. private sector added the most jobs in nearly a year in November, while business activity in the U.S. Midwest grew faster than expected in November surged.

Other data showed pending sales of existing U.S. homes surged in October by the most in nearly a year.

"There's a perfect storm of bullishness. PMI came out better than expected, plus what happened overseas, and ADP was well above consensus," said Donald Selkin, chief market strategist at National Securities in New York, with about $3 billion in assets under management.

It's true that the lates jobs report looks good. Even so, I think the surge will retreat - the move announced today has already weakened the dollar, resulting in higher prices of futures for oil, gold and silver, which are always priced internationally in dollars.

Furthermore, the other side of investment makers don't see what the big deal is:

S&P Equity Futures are up another 3 Percent, Bond Market Yawns

Global equities are sharply higher with this global coordinated action. S&P 500 futures are up another 3 percent and will gap higher.

Meanwhile Spanish 10-year bonds rallied (yields fell) a mere 7 basis points to 6.32%, Spanish 2-year bonds rallied a mere 8 basis points to 5.51%, Italian 10-year bonds rallied 10 basis points to 7.13%, and Italian 10-year bonds rallied 9 basis points to 7.00%.

Whatever the equity markets see, the bond market doesn't. A flight to safety of German bonds is back on, that China needs to cut reserve requirements is a huge sign of weakness (and no it will not stop a hard Chinese landing).

Also bear in mind that on September 15, there was coordinated swap-line action that did nothing.

Here is what happened to the ESI index after the September swap-line action:

The fact is that none of the underlying, weak fundamentals about the Eurozone's or America's economy have changed. The euro is as weak as ever and the dollar is weakening even more. Nothing about the PIIGS' situation is improved. So essentially, today's central banks' action place yet another temporary bandage on a suppurating wound. The markets are reacting to the news that something has been done, but by the beginning of next week, I think that the sane heads on Wall Street will understand that this something isn't amounting to much because basically, nothing has changed.

That's also the assessment of PIMCO's CEO, Mohamed El-Erian, who says that the indices moved so dramatically today because, "Risk markets love liquidity injections, real and perceived." Also,

First, these monetary institutions feel that, again, they have to move because other entities have continued to be too slow and too ineffective; and second, they feel that they cannot, and should not ignore an actual or anticipated need to relieve acute pressures within the banking system.

These two reasons were made even more pressing by last week’s dislocations in the functioning of European financial markets – most notably, the inversion of the Italian yield curve, pressure on government bond markets in core Europe, the growing fragility of the banking system, a drop in market liquidity, and growing hesitation by market participants to warehouse any risk.

The immediate impact on markets unambiguously favors risk assets across the world. The longer-term effect depends on the scale and scope of the follow through from others. This is particularly important as we count down to yet another European Summit on December 9.

The hope is that central banks are acting because, looking forward, they feel confident that other policymakers will finally catch up with a big and spreading debt crisis that has serious implications for growth, jobs and inequality. The fear is that they are acting because they feel that they must again pre-empt yet another set of potential disappointments.

The AP reports that all that happened today is that Europe has delayed "major debt decisions for 10 days." Will policymakers finally catch up to the markets and bankers? To think that is the triumph of hope over experience.

So: Near term: Party! Long term: Head for the hills!

Update, 1:45 p.m.: I predict that there will be a distinct pullback in the Dow by the time the NYSE closes at 4 p.m. today. At Close: Well, I called that the wrong way. The Dow actually closed at 12,029.56, up just under 474 points for the day. Things to look for: Yields on 10-year Italian bonds and the US Dollar Index. If the former drops about a point and the latter rises another three points or so, then the strong market indices will have a longer shelf life because together they will indicate that some sort of real response to the Eurozone's long-term issues has been adopted. But that is pretty problematical.

Brits: Prepare for riots in euro collapse

Prepare for riots in euro collapse, Foreign Office warns - Telegraph

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain. ...

If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse.

Some analysts say the shock waves of such an event would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit. ...

Some economists believe that at worst, the outright collapse of the euro could reduce GDP in its member-states by up to half and trigger mass unemployment.

Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder.

“When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said.

Markets move faster than politicians

Which is one big reason why the Euro crisis is not getting solved.

“Financial markets continue to move faster than politicians,” Mansoor Mohi-uddin, head of foreign exchange strategy for UBS, said. “Fixed income investors are betting that either Germany moves towards a fiscal union with its eurozone partners or that, without the ECB willing to buy unlimited amounts of sovereign bonds in the secondary markets, the eurozone will break apart.”

This gentleman also says that the end of the Euro as the single, unified European currency has already been priced into the markets. But I would add that the markets have not priced it in all the way.

However,

The EU process continues and the politicians clearly feel they have ample time on their hands.

EU monetary history is full of delays and Germany giving in to pressure. Merkel’s position is under pressure and the Bund Yield has become our barometer for pro-EU solutions – for now the trend is clear – we are on-route to Germany giving up and soon.

Europe: Apocalypse now?

Germany told to act to save Europe - FT.com:

Germany is the only country in Europe that can act to save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”, the Polish foreign minister warned on Monday in a passionate call for more drastic action to prevent the collapse of the European monetary union.

The extraordinary appeal by Radoslaw Sikorski, delivered in the shadow of the Brandenburg Gate in the German capital, came as the Organisation for Economic Co-operation and Development called on European leaders to provide “credible and large enough firepower” to halt the sell-off in the eurozone sovereign debt market, or risk a severe recession.

The OECD’s comments came as the organisation slashed its half-yearly forecasts for growth in the world’s richest countries, warning that economic activity in Europe would grind to a near-halt.

If Europe does reach a financial apocalypse and economic activity there grinds to a near halt, the US will topple right behind. A third of the United States' trade is with Europe. Think we can take that kind of hit without crashing ourselves?

More: OECD: euro collapse would have 'highly devastating outcomes' worldwide

The collapse of the euro could send the world's advanced economies into a severe recession, dragging emerging markets with them into the mire, the Organisation for Economic Co-operation and Development warned on Monday. ... Pier Carlo Padoan, OECD chief economist, made plain in the body's latest six-monthly economic outlook that the greatest threat to global economic health comes from the eurozone rather than from the tax-and-spend gridlock in the US Congress. ... His comments came amidst evidence that the 17 eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent a credit crunch on an even worse scale than in 2008-09.

This is Europe. The moment of verticality is only
days away. 

There simply is no good news from anyone writing about the Eurozone and its future. The SS Europe is sinking and everyone knows it. But the national governments cannot agree on how to stop it. There is some consensus that Germany has to "save Europe," but the fact is that Germany alone cannot do it.

They say that when a ship sinks and you find yourself in the water, you have to get away from the sinking vessel because the water rushing into the ship will drag you along with it. But there is no economy in the world that can "get away" from Europe's impending and by now almost certain collapse. The recession we entered in 2008 will be like a walk in the park to what is coming. It will be a true depression. Ironically, in the short term America's markets will benefit from an inflow of investors' cash as they run away from the collapsing Euro markets. But that won't last.

How long until the sinking European ship turns vertical? Perhaps less than two weeks.

It's going to get uglier

Quick embeds of three pieces at Business Insider that are more than merely disturbing. The trends are pretty ugly.







See also my earlier post, "The long decline is just beginning."

Europe's problems explained in four seconds

It's simple, really.

Europe’s free ride on the back of Nato is over - Telegraph

Europe’s free ride on the back of Nato is over - Telegraph

Time for NATO's countries to start to look inward and prepare for a post-American alliance.

... In 2000, America’s share of Nato defence spending was around 50 per cent. Today, it has risen to 75 per cent. With peace at home, many European nations have redirected spending towards other priorities, free-riding off the US when it comes to threats overseas. And this problem is set to get worse, since every European Nato member is set for severe defence cuts – including France, whose own equivalent of Britain’s defence review begins next year.

This decline in capability has come about not just because we are spending less, but because we continue to spend badly. Military funding is channelled through dozens of separate national programmes and structures, creating enormous duplication and failing to achieve economies of scale. While Europe has half a million more military personnel than America, it can deploy just a fraction of them overseas.

Nato is also being weakened by changes in US foreign policy: as the then defence secretary, Robert Gates, said earlier this year, his country is starting to look west as much as east. What America sees in Nato is yesterday’s vision of the future: allies with declining capabilities, reluctant to put troops in harm’s way, and an institution ill-suited to addressing US interests – especially with defence cuts looming in Washington as well.

NATO has become militarily worthless not only to the United States but to itself. And it is past time to ask ourselves, "What has NATO done for us?" Well, not much.

And this should make the Brits sleep well at night: The Royal Navy has not even one warship to spare for emergency response within Britain's territorial waters.

Another crash coming?

John Mauldin says yes, and this time it will be initiated by Europe and will drag the United States down with it:



Update: "Capital Flight Proves Confidence in European Interbank System has Collapsed"

Capital flight from European banks has now reached such a state that for one undisclosed bank needed emergency funding last week for a mere $5 million. Previously, the ECB stepped in to provide $500 million in emergency liquidity measures to non-disclosed banks.

As money flees Europe, it lands in US banks that do not know what to do with it. Capital flight has led to negative interest rates in the US.

Nietzsche was right about Europe

A long essay by Edward T. Oakes, "Atheism and Violence," discusses and refutes the recent books of Richard Dawkins, Chris Hitchen, et. al., that if all humanity would only renounce religious belief, then violence would cease and permanent peace would result. Curiously enough, the rant-filled Friedrich Nietzsche, who claimed that "God is dead" and originated the germanic idea of the Superman, offers the best argument against these arguments, claims Oakes.

The point, rather, is that Nietzsche saw. However much he (usually) advocated what ought to be most abhorred, he at least recognized that true morality and Christian belief are siblings. Moreover, in tones redolent of Jeremiah he saw the consequences to civilization as a whole when its citizens lose their faith in God. For what will take the place of God will be only a passionate—and largely empty—politics:

For when truth enters the lists against the lies of millennia, we shall have convulsions, a spasm of earthquakes . . . the likes of which have never been dreamed. Then the concept of politics will be completely dissolved in a war between spirits, all authority structures of the old order will be blown into the air—one and all, they rest upon a lie; there will be wars the likes of which have never existed on earth. From my time forward earth will see Great Politics.

Such are the contradictions of atheism. With hope in progress gone, with the lessons of the twentieth century still unlearned in the twenty-first, with technology progressing, in Adorno’s words, from the slingshot to the atom bomb (a remark cited in Spe Salvi), with a resurgence of religiously motivated violence filling the headlines, all that the new atheists can manage is to hearken back to an Enlightenment-based critique of religion. But they find their way blocked, not so much by Nietzsche (whom, as we saw, they largely ignore) but by the ineluctable realities he so ruthlessly exposed. Not Nietzsche, but the history of the twentieth century has shown that godless culture is incapable of making men happier. All Nietzsche did was to point out that no civilization, however “progressive,” can dispel the terrifying character of nature; and once progress is called into question, the human condition appears in all its forsaken nakedness.

Comes now Greg Sheridan, foreign-affairs editor of The Australian, in, "European model a wretched failure."

Anarchy and chaos in Athens one week? Cars beyond number burned in Paris in another season? And now this terrible, senseless, causeless violence in London and many other British cities?

And everywhere across western Europe, governments bankrupt or nearly so, living beyond their means, unable or unwilling to tell their people the truth about their finances.

And beyond this the strange, undemocratic and illiberal mechanism, vast and inescapable, but also creaking and slipshod and unreliable, of the European super state, unable to help anything but always able to interfere, taking decisions without any irksome recourse to democracy or national sovereignty, adding a new layer of illegitimacy to societies robbed of trust. London burning like the Blitz, and all of it inflicted by the pride of British youth. ...

The European model right now is a wretched failure. ...

But the European model, and the British version of it, certainly include a lavish welfare state, multiculturalism, a high level of economic regulation, the eclipse of any special place for religion (especially Christianity), and political correctness.

The last is a shorthand term for a general sense of shame and guilt about the true inheritance of Western civilisation, of shame and guilt for British history, and of a postmodern desire to forever subvert the allegedly dominant narrative of the generation before the baby boomers. ...

Western Europe is also perhaps the least religious society on earth. Christianity, in Britain as in much of Europe, is forever "subverted", which in truth means it is defamed, reviled and mocked. ...

The secular mind may rejoice at the post-religious moment of Europe, and especially of Britain. But an unemployed youth, with no tradition and no real education, with enough money more or less but not many prospects, with no source of moral authority and no help in understanding any basis for right and wrong, nothing to control an impulse, and knowing nothing of British history except that it was shameful and sexist and racist -- how exactly does this youth become integrated and whole, and indeed happy?

Why exactly is it that he doesn't help himself to a night's entertainment attacking ambulance officers and stealing TVs?

The British malaise, the European sickness, have no single, simple cause and no obvious answer.

But whatever it is that the gnomes of Brussels have been selling these past few decades, it doesn't work and it has toxic side effects, as Europe shows.

Obama is neither Kenyan nor Hawaiian

In fact, writes Englander Daniel Hannan, he's European:

My guess is that if anything, Obama would verbalize his ideology using the same vocabulary that Eurocrats do. He would say he wants a fairer America, a more tolerant America, a less arrogant America, a more engaged America. When you prize away the cliché, what these phrases amount to are higher taxes, less patriotism, a bigger role for state bureaucracies, and a transfer of sovereignty to global institutions. In other words, President Obama wants to make the U.S. more like the EU.

He is not pursuing a set of random initiatives lashed arbitrarily together but a program of comprehensive Europeanization: European health care, European welfare, European carbon taxes, European day care, European college education, even a European foreign policy, based engagement with supranational technocracies, nuclear disarmament, and a reluctance to deploy forces overseas. ...

The U.S. Constitution, in particular the Bill of Rights, is mainly about the liberty of the individual.

The EU Constitution is mainly about the power of the state. Here is the categorical difference between the two unions, the elemental distinction of which all the other differences are aspects.

Because the U.S. was designed along what we might loosely term Jeffersonian lines, it has tended to have a small government, strong local authorities, a flourishing private sphere, a limited welfare system, relatively low taxes, and skepticism toward global technocracies. The EU, having been conceived around the concept of an ever-closer union, tends the opposite way.

Last month, I wrote,

Back in March 2009, Doug Ross wrote that Obama's destruction of the American economy is deliberate. My question for scoffers at that notion is simply this: If the Democrats' wrecking of the American economy was not deliberate, what would they have done differently if they had been deliberate?

Yet even from across the Atlantic they can see that it was deliberate - the purposeful Europeanizing of America.

Cameron: shut down Libya's air force

Where are the carriers? It doesn't matter.

British Prime Minister David Cameron: "I have asked the Ministry of Defence and the Chief of the Defence Staff to work with our allies on plans for a military no-fly zone."

The point of a no-fly zone would be to prevent by force the Libyan air force from continuing to attack civilians demonstrating against the country's dictator, Moammar Qaddafi (see, "Libyan jets armed to kill").

But where are the carriers?

US Navy: No carriers in the Mediterranean Sea.

Royal Navy: Britain has only a single aircraft carrier left in service, HMS Illustrious. Well technically, HMS Ark Royal will be on the active roll until 11 March, but its decommissioning work is completed. However, Illustrious is of "ski-jump" design and has no aircraft assigned to it, nor are any even available anywhere in the UK's arsenal. Harrier jets, the only type Illustrious can handle, are no longer in service there.

HMS Illustrious with US Marine Harrier jets conducting interoperability training in an undated photo. Britain's armed forces no longer fly the Harrier, the only type jet that the carrier can launch or recover.

French Navy: France has one carrier, Charles de Gaulle. Larger than Illustrious, it is smaller than American carriers but of similar design. Hence it can launch and recover conventional fighters and attack aircraft.

USS John C. Stennis, top and USS John F. Kennedy, bottom, flank the French carrier Charles de Gaulle, which is leading Britain's assault ship, HMS Ocean (a helicopter platform), in this 2002 photo.  

However, Charles de Gaulle has had its operational-readiness problems.

As President Nicolas Sarkozy prepares to use a historic London summit to announce the use of RAF jets off the Charles de Gaulle, his naval chiefs have told him she is no longer seaworthy.

Presumably the problems with the carrier's propulsion systems have been fixed, as de Gaulle just completed combined exercises with USS Abraham Lincoln.

Nonetheless, absent American carriers, it will be difficult, if not impossible, to enforce a no-fly zone over the long term if the model is the no-fly zones the US and Britain enforced over most of Iraq after the Gulf War. Those years involved constant patrolling and substantial commitment of airframes and crews.

The reason for the difficulty is that the closest Allied air base to Tripoli is Sigonella Naval Air Station in Sicily, about 350 miles away. This is not next door for flying high tempos of air interdiction. The next closest is Aviano Air Base in northern Italy, more than 900 miles from Libya.

However, Britain and the US (and France and Italy?) need not institute constant patrolling to shut down Qaddafi's air force. A fair number of these BLU-107 Durandal cratering bombs will do nicely:



Developed by the French and type-adopted by the US Air Force in time for 1991's Gulf War, the BLU-107 creates enormous craters even in concrete runways. The Brits once used an even more diabolical cratering bomb, the JP233, that not only made a huge honking hole, it also scattered 215 anti-personnel mines around the crater as a disincentive to repair the runway. However, this bomb was withdrawn from service, mainly because the Gulf War proved it was dangerous to the bombing aircraft.

However, chasing down individual Libyan fighters, while technically quite possible, is pointless. Crater their runways from one end to the other and the problem is solved. Carriers, while desirable, useful and highly symbolic for long-term commitment, are not necessary to get this job done. Sky park a few Predator UAVs above the airfields so that if Libyan engineers try to repair the craters, we will know immediately - and the Predators can launch disincentives. For that matter, we can crater the runways again and maybe bomb a few pilots' barracks as encouragement.

Putting Libya's air force into no-fly status is not all that challenging and it does not require aircraft carriers to do.

Update, March 2: Libyan air defenses would have to be dealt with, of course:

Option 1: Turn the runway-neutralization mission over to the US Air Force's 509th Bomb Wing with its B2 Stealth bombers. I doubt Libya would be able to counter them.

Option 2: Notify Libyan AF's high command that we are going to crater their runways but will not attack personnel or other facilities. Make it clear, however, that if they resist in any way all our gloves come off and Libya will not have an air force left.

USS Kearsarge, now on station offshore, can mount combat search and rescue missions in support. An aircraft carrier would be nice but is not necessary for this mission.

This is not to say I support such an action; I have serious reservations. But simply as a military action, it would not be terribly difficult.

Endnote: The toothless Illustrious is due to leave service in 2016. It's replacement, Queen Elizabeth, will not enter service until 2020 at the earliest. QE and its later sister ship, Prince of Wales, however, will be super carriers rivaling the US Navy's and will be the largest warships ever for the Royal Navy. Curiously, both predecessor ships of the same names were battleships sunk in World War II.

Related: To be clear, I do not think that doing this would be a good idea.

What happened to "no blood for oil?"

Remember these days of yore?

Well that no longer computes when it comes to bloodied Libyan oil.