As this site correctly predicted just recently, the European Central Bank’s hook-slide around German orthodoxy by flooding the European banking system with enough cheap Euros (QE on the QT) has had the desired effect not only of reducing the serious risk of a bank funding crisis but also of underwriting the ability of those banks to support their countries’ sovereign debt refundings – and at a profit, no less!

As a result, the alarming rise in Italian and Spanish and French sovereign debt interest rates has been arrested. Therefore, the threatening risk to the future stability of those countries’ budgets is now in remission.

US Economy Moves from ICU to Outpatient Care

Likewise, the US Federal Reserve has, again as we predicted, underwritten another two years of reliably low interest rates for US investors and business executives.

Chairman Bernanke, the Republican’s favorite punching bag next to President Obama, seems to recognize that the US economy’s problem has now shifted from the Intensive Care Unit to Outpatient care, while not yet being “out of the woods”. The Republican’s seem to think (wrongly) that they need to keep up the sense of an apocalyptic economic collapse to make their case. (Could it be that Central Bankers really do know what they are doing, despite what virtually all the Tea Party talking heads on CNBC say day-in day-out?).

Friday’s weaker than expected 4^th quarter 2011 GDP estimate on the surface seems to buttress the Fed’s case, and surely 2.8% growth is a weak turn of recovery by most historical standards.

As this blog has observed in the past, most initial estimates of GDP are wrong, by large percentage factors, because the early report includes actual data (as opposed to financial model projections) only for the first half of the quarter. In particular, 4^th quarter GDP tends to understate the trend, in either direction, i.e., if the initial data shows the quarter up, then more reliable data later will show it up even more, and the same for down trends.

While this is a small comfort to those who lost money on the stock market last week, perhaps they can bide their time and recoup their losses by buying back their shares before the corrected report comes out in late February!

One things for sure – the Fed will still be underwriting the economy this February…and next February…  and next February …

2. Did the stock market get traded down by the big funds on this friday get traded down despite the good employment numbers because those numbers tend to help Obama, whom the  hedgies hate? (yes again.)

3. Are the Euro currency and bond vigilantes driving down sovereign  bond prices this week to force “Markozy”to give in to market pressures at their meeting next week and turn loose the ECB to directly support bond prices? (Not a chance.)

4. Will the ECB lower interest rates next week? (My guess yes, but the market thinks no because of the falling Euro. But  note that Germany must really, secretly like the falling Euro, at least for a while — helps their exports outside Europe.)

5. Is Standard and Poor’s holding off downgrading France because it has become afraid they will be blamed for killing Sarkozy’s re-election and ushering in a Socialist government in France in this April’s election?

6. Will the US Fed announce QE III in the mortgage bond markets sometime shortly after its January meeting? (Y

7. How many governors (and current opponents) has Romney promised  to be on “really  short list” he VP nomination to? (at least six.)

Europe, on the other hand, remains tangled in its own underwear: in particular, the German strict construction of the European Union treaties to the effect that the European Central Bank can never act as a “lender of last resort” to its sovereign states, even to prevent a financial panic and  the collapse of the Euro currency. (German authorities seem to be most fond of enforcing the rules they themselves are the first to break: originally, by violating the Euro limits on national debt; and now, by their own political interference in ECB decisions, which they separately argue should be “independent” from such influence  –at least from other governments.) In effect, if the German position is not merely a negotiating posture to force recalcitrant Mediterraneans to get their budget acts in good German order — as many market participants seem to hope — the Euro currency is essentially a suicide pact!

All this could come to a head as soon as the first quarter of 2012 when Italy and Spain are forced to refund billions of maturing debt. At prevailing pricing trends, they cannot afford to do so without bankrupting their budgets. They need a financial  backstop to effectively put a lid on their sovereign debts’ interest rates by massive and timely market intervention — exactly what the Germans say the ECB cannot do.

Among Europe’s financial eminences, only the semi-disgraced Dominique Strauss-Kahn  seems to understand just how serious the situation is, but he is effectively without political force.

As we approach year-end, however, the ECB has attempted an elegant  hook-slide around  Germanic obstinacy by extending to three years its virtually unlimited lending facility to EU banking institutions at a rock-bottom short term rate that normally applies only to very short term borrowings. This yield curve tinkering –let’s call it QE on the QT  by the ECB — enables these banks to hold on to their existing holdings of Eurozone sovereign debt purportedly to maturity, thus deferring further write-downs impairing their capital or  the dumping of such bonds on a highly nervous market. It also invites the banks to buy into the refunding rollovers due. $500 billion of this offer was taken up by Europe’s banks, and another opportunity will be in place by February to continue  shoring-up the banking sector, which in turn helps the sovereign sector (which would have to bail out failing  banks to prevent Lehman-lke economic collapses int their economies).

The main fly in the ointment as we end 2011 remains the rating agencies’ posture toward Euro sovereign credits. These agencies collectively failed to downgrade the  US mortgage debt instruments that brought on our own financial meltdown in 2007 and the Great Recession that followed. They now seek to display their new-found backbone by following up Standard and Poor’s questionable downgrade of  US  credit on political grounds with threats of downgrading Europe’s safest credits, including France and Germany.

Ironically, a quick-trigger downgrade in Europe in early 2012 could have the same effect as the slow trigger in the US of 20005-07 — a massive collapse of global confidence this time in Europe’s financial structure, and a potential global depression along with it. If we are lucky, the agencies will notice the subtlety of “Super Mario” Draghi at the ECB — he may be the first Italian politician to outwit the Germans. As the US begins to sense its own economic recovery (look for a great jobs number on at the end of January’s first week), we can only hope this is the case.

Doc = Paul

Dopey = Perry

Grumpy = Gingrich

Happy = Romney

Sleepy = Santorum

Sneezy = Cain

Snow White = Bachman

Bankrupt countries can’t pay off –

Snow came  soon this Fall.

Berlusconi’s gone

Just after Pappandreou –

Snow obscures the dawn.

France is on the ropes

Triple A in jeopardy –

Snow will dash their hopes.

Germans fear their past

They hold the cards too tightly –

Snow will come too fast.

Sarkozy laments

Merkel plays “Mother May I?” –

Snow will drive events.

No plans make real sense

ECB, ESFS

Snow won’t pay the rents.

Super-Congress fails

Gang of 12 could not agree –

Snow will sting like nails.

Taxpayers complain

Republicans redebate –

Snow is worse than rain.

GOP stands firm

No  benefits or taxes –

Snow could  make them squirm.

No one left to trust

Obama’s lost his mojo –

Snow does  leave a rust.

Jamie Dimon squawks

But the Street is Occupied –

Snow won’t stop the Walks.

Markets trade on fear

Pessimism reigns supreme –

Snow will melt next year!

Let’s just look at the first few days. Overnight the Greek government says it will put the recent bailout deal with the rest of Europe to a vote of its people. The EU has a long history of failed referendums on deals sprouted in Brussels, but this one could be the mother of all cliffhangers to start 2012 off with a bang. It could be a clever move by the government to wring an endorsement from a populace that hates the bailout terms of austerity, but badly wants to stay in Club Euro, which it cannot to with a “no” bvote. But it could also be too clever by half and doom Greece — and the rest of us — to the effects of a Lehmanesque disorderly default.  There will a vote of confidence in the greek Parliament on this plan this week before the US market close on Friday (the same day as out monthly unemployment report).

But wait: there’s more. Just tonight, China reported weaker than expected export on purchasing managers reports, along with a bit of tepid growth in a manufacturing survery. Will this send a shudder of “hard-landing” fear into the global markets — or will traders sense that now the Chinese leadership will finally turn course and start stimulus again in some form — and even perhaps send signals to the G-20 meeting this thursday that they may well find it in their hearts to help out the European Financial Stability Fund  if only to protect their endangered export market.

But there’s more. Ill all this global sturm and drang bring the Fed a step closer to QE 3 in its post-meeting statement and Chair’s press conference on wednesday. (Australia cut its interest rates tonight as well: but they’ve got room to cut — the US Fed can only play bond-market games at this point. Best guess; a double nod to a slightly improving domestic business sector but an enhanced statement of willingness to do the necessary should the European situation continue (despite the agreements of the European governments of last week)  to pose a threat to global financial stability.

But wait, there’s still more. The European Central Bank holds it first meeting under its new italian Chair this Thursday — right after the US Fed and right before the Greek Parliament confidence vote. Will They give a hint of interest rates cuts in the near future to stave off Euro-recession in the wake of austerity; will they continue to buy Italian bonds in the secondary markets to facilitate effective “transmission” of their monetary policy (but really to stave off a run on the whole Italian sovereign debt by the Euro-bond vigilantes)?

What a week we have in store, and this just gets us to November 4: and we haven’t even mentioned the SuperCommittee and the risk of s second downgrade of US debt if it can’t come up with something by November 23, just  three weeks away. We have scary “headline risk” up to our eyeballs  –  or maybe it’s just Halloween!

Ger,any won’t put up any more moneythan already committed to the Stability Fund.

But the Fund is insufficient to save the day.

France wanted to make the Fund a bank so it could borrow unlimited amounts from the European central bank t extend its clout.

but Germany (and the ECB leadership) vetoes that.

The European banks will have to take bigger haricuts on their greek debt holdings to bring those debts down to an at least arguably manageable level for Greece going forward the next decade or more (new papaer to be issued to replace the old, post-haricuts).

But taking steep haircuts (50% + instead of the previously negotiated 21% (which was being arbitraged by hedge funds with trading actually at the 50% haircut level) means that banks must be recapitalized.

Germany says that the banks themselves must first raise capital, and then their own countries should pony up to help them re-cap.

But if France does that, it could lose its triple A credit rating, which in turn would jeopardize the integrity of the Stabilization Fund itself.

Soto bring more money to the table to fix both sovereign debt problems and the bank re-cap needs, Europe will need to do two things — (1) set up a “special purpose vehicle” ) shades of Enron?) to ttreact Brazilian and Chinese investments that could be used to prop up the Stabilization Fund indirectly (a sort of synthetic Euro-zone bond issuance) and (2) swallow its pride and bring in the IMF’s deep pockets (which of course are funded in no small measure by the US taxpayer).

Do you think this might be an issue in the next Republican debate?

Of course, China and the US are big exporters to Europe, and their stacok markets have suffered because of europe’suncertainties lately, so they have a strong interest in seeing things right . And in the US at least, we learned from Lehman that “real” hazard trumps “moral” hazard.

Germany has vetos sing the

In attempting to intimidate Charirman Bernanke and his colleagues in the same vein as Governor Perry of Texas, the risisng Presidential candidate, did a couple weeks ago with his “treason” charge against the Fed Chairman, the Republican Congressional leadership has laid bare for all to see that indeed their driving and sole purpose is to keep the economy in the tank and assure President Obama’s defeat. In attempting to put a straight jacket on the indepedent Fed in the form of a “quiet period”‘ of Fed inaction in terms of the  economy in the year leading up to a Presidential election undermines the integrity of the national bank and the standing of the US in the financial world.

One can obviously hold differing economic theories than the Fed or its Chair and freely criticise the decisions of the Open Market Committee as a routine part of the US political  process. But to posit that the Fed owes a “duty of impotence” because its actions might influence the economy in a way that could turn to the President’s benefit (as Perry argued) takes the political process into a room where it does not belong.

Hopefully the living former Fed Chair, Mr. Greenspan, and other former Fed Board members, who are free to speak out in response, will condemn this act of political subterfuge and sabotage immediately and with vigor. And assuredly, Chariman Bernanke and his colleagues should go ahead and do whatever they are going to do on September 21 and thereafter without fear or favor in terms of  either political side.

Imagine what the Republican reactions would have been if President Obama had sent a letter to Chairman Bernanke tonight asking the Committee to take “extraordinary action” to revive economic growth: this move by the Republican leadership in Congress is clearly a low  point of both arrogance and hypocrisy.

With Obama’s Stimulus 2.0 speech and the Dirty Dozen debt cut deliberations due to take center stage next month in Washington, it is clear that the heaviest lobbying artillery is being positioned and rolled out on the political talk shows and cable TV money coverage.

Bored as the media folks  are now becoming the second coming of the recession-to-be   hyping the short-sellers gloom-and -doom propaganda with their coverage of every chicken little economist, they seem to be shifting attention to the coming fight over “repatriation” of the $1-2 trillion dollars in offshore profits of US multinationals “trapped” overseas by the very tax loophole the same corporations lobbied for themselves — the one that lets them escape US corporate tax (at the relatively high rate of 35% compared with other capitalist nations, few of whom tax offshore earnings at all, but reduced by overseas taxes paid).

US multinations with substantial offshore profits are pushing hard for a tax holiday to bring those funds back to the US at little or no tax liability in order to put them to work in the US economy — allegedly to promote domestic job growth, although the last time this happened the proceeds were used largely to fund dividends, executive salaries, stock buybacks and M&A (which is usually a job killer. Despite that fact, there are good arguments, particularly in terms of the international competitiveness of US exporters, in favor of a repatriation tax holiday, and some even hope the President  will include a nod to such proposals in his coming speech as an olive branch , if not to the tea Party, at least to his natural constituency among liberal Silicon Valley CEO”s, even if it offends the Huffington Post crowd and certain liberal New York Times columnists, who will accuse him of (again) giving in to extortion by the moneyed interests.

So the lobbyists rounded up all the usual pro-business suspects and even had John McCain on TV pumping the repatriation case, which has a certain symmetry  given his previous liberal views on the matter of letting illegal immigrants remain “patriated” in the US after paying a small fine. None dare call a “Tax holiday” amnesty! But what took the cake was the pro golfer Phil Mickelson appearing on CNBC to report the latest buzz from the corporate sponsors in the locker room at his most recent tournament as being all about the crying need for the repatriation tax break, which of course he endorsed with all the fervor he brings to his patented chip shots.

But one thing about pro-golfers — they wear their corporate sponsorship on their sleeve, quite literally, and on their hats, shirts, clubhead covers,  golf balls, shoes, gloves and ball markers — this at least creates complete transparency of who is funding their presence on the course. What is we mandated a similar system for our politicians as they engage in the great autumn debate about how to get control of the deficit in the famous ‘long run” while they consider a Stimulus 2.0 for the “short run’ to prevent the Recession 2.0 that CNBC has told us is coming like Christmas.

So Senator Dick Shelby could wear the JP Morgan hat while he argues for repeal of Dodd/Frank as part of the bargain; Tom Coburn could were the Hospital Corporation of America polo shirt while he argues for more Medicaid cuts; Bob Corker would have  Toyota driving glove in full view while he argues to pull the plug on the GM bailout or the Chamber of Commerce pullover while he argues to cut the employment mandate from the Federal Reserve charter; McCain, of course, would have the Cisco shoes in full view while he pushes the offshore earning tax holiday. And it goes for the other side too, as Nancy Pelosi dons the AARP windbreaker for her fight to thwart any momentum for Social Security cost-of-living formula changes, and Harry Reid can wear a Nevada regional airlines logo on his sleeve as he battles to keep the rural airport ticket subsidy.

We would all be better off if we could see right on the TV screen, just like we see on the final eighteen hole showdowns on Sunday, just what corporate and other institutional  interests are keeping our Congressional representatives “in the game”. And then maybe when Howard Schultz of Starbucks suggests that they all get together and pull their sponsorships in an effort to force bi-partisan agreement for a change, we can really see it happen real-time. Sure made a difference when it happened to Tiger!

Ben Bernanke is at heart an academic; and like a good dean who knows he must lead a divided faculty, he did not get out front of his colleagues in his Jackson Hole speeach this morning. But while he did not announce any specifics as to any form of potential QE3 to help the sputtering economy, he did not take it off the table, either. Indeed, he even opened the door a bit by extending the time of the upcoming September Fed meeting to two days from one — this is a dean who knows his faculty needs a good debate as the data comes in during the next three weeks. So these are the salient points:

1) Bernanke was NOT intimidated by Rick Perry’s “treason” charge against QE3 into taking any forms of “money printing” off the table, although some like Paul Krugman in todays New York Times, have suggested that. They are mis-reading “dean” Bernake’s deferecne to his colleagues need to debate, but his is not foregoing his rrole to DECIDE.

2) Bernanke is not panicked into thinking we are headed into a recession “double-dip” — the fear in the market exceeds the reality of the data, and Bernanke knows this and is trying to calm the waters a bit away from the hysterical commentators on CNBC and Bloomberg: it seems that cable networks’ rush to cover “Armageddon: you heard it here first” creates an atmosphere where every Chicken Little suddenly turns pro.

3) The real problem of economic sustainability remains Europe, which in the end makes US stocks a good investment — yet we over-blow that too as we in America simply don’t appreciate how the European political system “works” — at times the unwieldy emergent structure of the European community makes the US look positively functional!

4) In this light, Trichet’s speech to the Jakcoson Hole conference this weekend will be the important speech: will he foretell a pause at least in the European Central Bank’s mindless headlong rush to raise interest rates — hopefully yes.

5) Bernanke didn’t kick the can but more accurately passed the ball to Congress to act on some forms of fiscal and jobs stimulus ASAP, while maintaining a long-term plan to seriously reduce the projected deficit. This is a benefit to Obama and a rejection of the Tea Party agenda. Tis makes extension of payroll tax holiday a little more probable.

5) The market reaction, especially in the face of the oncoming hurricane, suggests that some traders at least are beginning to consider the “unthinkable” –namely, that Bernanke may have it right.