317 Speculators attack Greece as weak flank of the Euro, disrupt Central Banks' confidence-building

Speculators attack Greece as weak flank of the Euro, disrupt Central Banks' confidence-building

(1) Chairman of BP is also chairman of Goldman Sachs International, and of European branch of Trilateral Commission
(2) Goldman Sachs 44% of its BP shares 2 days before oil rig explosion
(3) Six giant US Banks made $51 billion last year; the other 980 lost money - Forbes
(4) Hedge Funds speculative attack on Greece as weak flank of Euro
(5) Hedge funds are ganging up on weaker euro - WSJ
(6) Goldman can create Shorts faster than Europe can Print Money
(7) "Euro is dead", regardless of Angela Merkel's ban on short-selling
(8) Speculators' attack on Greece brings world to brink of another Lehman-style meltdown
(9) Speculators' 'Perfect storm' unsettles markets - Ambrose Evans-Pritchard

(1) Chairman of BP is also chairman of Goldman Sachs International, and of European branch of Trilateral Commission

http://www.trilateral.org/membship/bios/ps.htm

Peter Sutherland

Trilateral Commission, February 2009

Peter Sutherland is chairman of BP plc (1997 - current). He is also chairman of Goldman Sachs International (1995 - current). He was appointed chairman of the London School of Economics in 2008. He is currently UN special representative for migration and development. Before these appointments, he was the founding director-general of the World Trade Organisation. He had previously served as director general of GATT since July 1993 and was instrumental in concluding the Uruguay GATT Round Negotiations. Prior to this position, he was chairman of Allied Irish Banks from 1989-1993 and chairman of the Board of Governors of the European Institute of Public Administration (Maastricht) 1991-1996. ... ==

http://moneycentral.msn.com/ownership?Holding=Institutional+Ownership&Symbol=BP

http://www.trilateral.org/memb.htm

European Chairman: PETER SUTHERLAND
Chairman, BP p.l.c., London; Chairman, Goldman Sachs International; Chairman, London School of Economics; UN Special Representative for Migration and Development; former Director General, GATT/WTO; former Member of the European Commission; former Attorney General of Ireland

(2) Goldman Sachs 44% of its BP shares 2 days before oil rig explosion

From: Dick Eastman <oldickeastman@q.com> Date: 05.06.2010 08:35 AM

http://www.traders-talk.com/mb2/index.php?showtopic=120369

Posted by Rogerdodger

June 5, 2010

This oil spill working out too well.
List of BP stock ownership: LINK showing sale <http://moneycentral.msn.com/ownership?Holding=Institutional+Ownership&Symbol=BP>

Goldman Sachs Dumps 44% of it's BP Stock Weeks before Oil Rig

Golman Sachs sells largest ever chunk of BP stock 2 days before oil rig disaster <http://vodpod.com/watch/3763210-goldman-sachs-dumps-44-of-its-bp-stock-weeks-before-oil-rig-disaster>

Goldman Sachs sells largest ever chunk of BP stock 2 days before accident.

June 4, 2010

http://www.rollitup.org/politics/336874-golman-sachs-sells-largest-ever.html

The latest revelations in the British Petroleum gulf drilling disaster indicate that international banking firm Goldman Sachs sold over 4.68 million shares of British Petroleum stock just two days prior to the explosion of the British Petroleum drilling platform. This sell-off of petroleum stock is now recognized as the largest single liquidation of petroleum stocks in the history of modern markets. With this liquidation taking place just 48 hours prior to the gulf explosion which now looms as America's worst ever ecological disaster, any intelligent mind must ask these questions, "Was this sell-off an act of insider trading? Did someone at Goldman Sachs have foreknowledge of this disaster? Could the disaster have been man-made? If so, who would be the ultimate beneficiary of this event?"

Per Phil's Gang: GS shorts 5 million shares

(3) Six giant US Banks made $51 billion last year; the other 980 lost money - Forbes

From: Dick Eastman <oldickeastman@q.com> Date: 05.06.2010 08:35 AM

Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money - Forbes.com

http://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner-morgan-stanley.html

StreetTalk With Bob Lenzner

Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost MoneyRobert Lenzner, 06.03.10, 04:25 PM EDT

An oligopoly of Goldman, BofA, JPMorgan, Morgan Stanley, Citi and Wells Fargo is flourishing.

Focus hard on this shocking Wall Street reality: The top six bank holding companies earned an aggregate of $51 billion in pretax income in 2009. We're talking about JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Citigroup and Wells Fargo.

All of this pretax income can be attributed to their trading revenues of $59.7 billion. The proprietary trading operations of an oligopoly of banks, saved from disaster by Uncle Sam's largesse and subsidized with cheap money from the central bank, was the single driving force behind the restoration of their fortunes and the renewed surge in their stock prices.

For those willing to go long when the outlook was the bleakest, they've banked a double in JPMorgan Chase ( JPM - news - people ), scored a quadruple in Citigroup ( C - news - people ) and nearly a quintuple in BofA.

Some of the other 980 bank holding companies--like Bank of New York Mellon ( BK - news - people ), PNC Financial Services, U.S. Bancorp ( USB - news - people ) and M&T Bank ( MTB - news - people )--lost an aggregate of $19 billion for the 2009 year. Bank of New York Mellon had the seventh-largest trading revenue--it was just 1.6% of the total. By comparison, Goldman Sachs ( GS - news - people ) had 36.2%, Bank of America ( BAC - news - people ) 18.8%, JPMorgan Chase 15.4%, Morgan Stanley ( MS - news - people ) 11.3%, Citigroup 6.9% and Wells Fargo ( WFC - news - people ) 4.2%.

Trading Revenue at U.S. Bank Holding Companies in 2009

All data from December 2009 FR Y-9C filings. Dollar amounts in millions.

Total Assets, Dec. 31, 2009 Trading Revenue As a Percentage of Industry Trading Revenue
1 Goldman Sachs Group $849,278 $23,234 36.2%
2 Bank of America 2,224,539 12,067 18.8%
3 JPMorgan Chase 2,031,989 9,870 15.4%%
4 Morgan Stanley 771,462 7,279 11.3%
5 Citigroup 1,856,646 4,448 6.9%
6 Wells Fargo 1,243,646 2,674 4.2%
7 Bank of New York Mellon 212,336 1,032 1.6%
8 State Street 156,756 598 0.9%
9 Northern Trust 82,142 508 0.8%
10 MetLife 539,314 361 0.6%
11 GMAC 172,313 173 0.3%
12 PNC Financial Services Group 269,922 170 0.3%
13 U.S. Bancorp 281,176 163 0.3%
14 Fifth Third Bancorp 113,380 125 0.2%
15 SunTrust Banks 174,166 100 0.2%
Sum: Top 15 Banks by Trading Revenue 62,803 97.8%
Remaining Bank Holding Companies 1,399 2.2%
Total: All Bank Holding Companies (986 banks) 64,202 100.0%

Even more fascinating for public policy reasons, Goldman Sachs' trading revenue was 119% of its own pretax income. Bank of America's trading was 262.8% of its pretax income and Morgan Stanley's trading was an incredible 849.4% of its pretax income.

(4) Hedge Funds speculative attack on Greece as weak flank of Euro

From: chris lenczner <chrispaul@netpci.com> Date: 05.06.2010 11:23 AM

Soros, Goldman Sachs, Hedge Funds Attack Greece to Smash Euro

Webster G. Tarpley

http://tarpley.net/2010/03/04/financial-warfare-exposed-soros-goldman-sachs-hedge-funds-attack-

It has been evident for some time that the ongoing speculative attack on Greece, along with such other countries as Spain, Ireland, Portugal, and Italy, was not primarily a reflection of their economic fundamentals, nor yet a spontaneous movement of "the market," but rather an orchestrated action of economic warfare. The dollar had been relentlessly falling through the late summer and autumn of 2009. It obviously occurred to various Anglo-American financiers that a diversionary attack on the euro, starting with some of the weaker Mediterranean or Southern European economies, would be an ideal means of relieving pressure on the battered US greenback. Since these degenerate elites are incapable of directly solving the problem of the dollar through increased production, full employment, and economic recovery, one of the few alternatives remaining to them is to create a situation in which the euro is collapsing faster, leaving the dollar as the beneficiary of some residual flight to quality or safe haven reflex.

This is what emerged during the first week of December with a speculative assault or bear raid against Greek and Spanish government bonds as well as the euro itself, accompanied by a scurrilous press campaign targeting the "PIIGS," an acronym for the countries just named, coming from inside the bowels of Goldman Sachs. I have discussed this phenomenon several times over the last two to three weeks on my radio program on GCN.

Now comes concrete proof of this conspiracy in the form of a Feb. 8 "idea dinner," held at the Manhattan townhouse of Monness, Crespi, Hardt & Co, a boutique investment bank. Among those present were SAC Capital Advisors, David Einhorn of Greenlight Capital (a veteran of the fatal assault on Lehman Brothers in the late summer of 2008), Donald Morgan of Brigade Capital, and, most tellingly, Soros Fund Management. The consensus that emerged that night over the filet mignon was that Greek government bonds were the weak flank of the euro, and that once a Greek debt crisis had been detonated, all outcomes would be bad for the euro. The assembled predators agreed that Greece was the first domino in Europe. Donald Morgan was adamant that the Greek contagion could soon infect all sovereign debt in the world, including national, state, municipal and all other forms of government debt. This would mean California, the UK, and the US itself, among many others. The details of this at dinner were revealed in the headline story of the Wall Street Journal <http://online.wsj.com/article/SB40001424052748703795004575087741848074392.html> on Friday, February 26, 2010. (See article)

Nor was this the only cabal in town intent on attacking the euro through the week Greek flank. The article cited suggests that GlobeOp Financial Services and Paulson & Co. are also piling on. The zombie banks were also heavily engaged. The article reported that Goldman Sachs, Bank of America-Merrill Lynch, and Barclays Bank of London were also assisting speculators in placing highly leveraged bearish bets against the euro. Note that these zombie banks are alive today because of US taxpayer money, in Barclay's case through AIG.

It amounted to a deliberate attempt to create a large-scale world monetary crisis which would certainly bring with it the dreaded second wave of the current world economic depression. The creation of monetary chaos in Europe through the convulsive destruction of the euro under speculative attack would cripple commodity production in western Europe, severely undermining one of the dwindling areas of the world economy which are still functioning. The genocidal implications for humanity ought to be obvious, but the assembled hedge fund hyenas were not concerned with these consequences.

George Soros has been telling every media outlet that will listen that the euro is doomed to fall apart and break up over the short run. Soros even has a theory to deploy as part of his speculative attack. Soros argues that the fatal flaw or original Sin of the euro is that it was based on a common central bank among the participating countries, but lacked a common treasury and tax policy. This means that a country like Greece can no longer defend itself from a speculative attack on its bonds by the simple expedient of currency devaluation, since there is no more drachma, and the euro is controlled from Frankfurt, not Athens. British spokesmen are quick to point out that, even though the financial situation of London is far worse than that of Athens, the British government is already devaluing the pound through a downward dirty float.

Given Soros's infamous track record, he must be taken seriously. In 1992, Soros became world famous through his attack on the European Rate Mechanism, which he executed by a highly leveraged speculative assault on the British pound, at the time one of the weaker members of the ERM. Soros' speculative attack led to a pound devaluation and the ragged breakup of the ERM, and netted Soros £1 billion in profits. It was as if Soros had personally stolen a £20 note from every man, woman, and child in Britain. The speculative gains were no doubt gratifying, but the overriding political purpose of the assault was to sabotage that phase of European monetary policy.

The London Economist has gone out of its way to mock Spanish Prime Minister Zapatero's remark that Spain was under international speculative attack. Press organs of the city of London and Wall Street have ridiculed the Greeks as a nation of paranoid conspiracy theorists. And yet, the revelations made so far are strong circumstantial evidence of pre-concert, as Lincoln would say. Even the US Department of Justice has been forced to send letters to the participants in the infamous "idea dinner," warning them not to destroy any of their records and thus putting them on notice that they are under investigation. While we should not have any illusions about the prosecutorial zeal of Attorney General Eric Holder, who once represented the international financial bandit Marc Rich, this is at least a beginning. Spanish and Italian judges are noted for their independence, and one of or more them may wish to examine the activities of Soros, Goldman Sachs, and their hedge fund allies.

Greece does not need an austerity program, as the Greek labor movement has eloquently argued in the course of their successful and admirable general strike last week. Greece does not need a bailout from Germany, the sinister International Monetary Fund, or from anyone else. Least of all does Greece need to accept the advice of Austrian school or Chicago schools charlatans who recommend the catharsis of a deflationary crash that would destroy an entire generation through unemployment, poverty, and despair. Greece needs to defend itself with a 1% Tobin tax on all derivatives and other financial transactions. Greece should take the lead in outlawing credit default swaps, which amount to issuing insurance without meeting the capital requirements of being an insurance company. Greece needs to enforce EU and national antitrust laws. If Soros and his gang succeed in breaking up the euro, Greece should make the best of it by immediately imposing heavy-duty exchange controls and capital controls to protect the new drachma, on the model of Malaysia a dozen years ago. Greece should shut down domestic zombie banks and seize its central bank and use it to issue 0% credit for industrial and agricultural hard commodity production. If the Greeks made plain what they intend to do if they are forced to fall back on the drachma, the financiers who fear such an example would have another reason to relent.

Another obvious expedient is that of a bear squeeze or short squeeze. Soros, Goldman Sachs, and their gang of hedge fund allies have now used derivatives to establish short positions against Greek bonds and the euro, betting that these latter will go down. Political pressure is now being brought to bear on the European Central Bank and the Greek central bank to undertake an unannounced large-scale purchase of Greek bonds and euros in the forward market, causing the Wall Street predators to lose their bets, thus punishing them severely with extravagant losses. This is normal central bank practice, and it will be astounding if the Greeks do not execute such a maneuver very soon.

The world now faces a stark choice between two alternatives, with Wall Street forcing the issue. The first is that the zombie banks and hedge funds, having been saved and bailed out by national states and their taxpayers, will repay the favor by driving the national states and all forms of state, provincial, and local government into bankruptcy. This will be synonymous with the destruction of modern civilization itself. The second and preferred alternative is that the national states summon the political will to use the inherent powers of government to place the zombie banks, hedge funds, and related purveyors of derivatives into bankruptcy receivership and shut them down once and for all, relying in the future on nationalized central banks for the provision of credit. The second alternative would allow the preservation of modern civilization as we have known it. But in the meantime, the derivatives-based speculative attack on the southern flank of the euro has accelerated the arrival of the second wave of depression, which now appears likely to strike the world before the end of 2010./

(5) Hedge funds are ganging up on weaker euro - WSJ

Hedge funds are ganging up on weaker euro

BY SUSAN PULLIAM, KATE KELLY AND CARRICK MOLLENKAMP

FEBRUARY 26, 2010

http://online.wsj.com/article/SB40001424052748703795004575087741848074392.html

Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of trades at the height of the U.S. financial crisis.

The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar.

The currency wagers signal that ...

(6) Goldman can create Shorts faster than Europe can Print Money

By Tyler Durden  Jim Rickards: "Goldman Can Create Shorts Faster Than Europe Can Print Money

http://www.zerohedge.com/article/jim-rickards-goldman-can-create-shorts-faster-europe-can-print-money

Created 05/10/2010 - 12:04

Jim Rickards, who recently has gotten massive media exposure on everything from the JPM Silver manipulation scandal, to the Greek default, was back on CNBC earlier with one of the most fascinating insights we have yet heard from anyone, which demonstrates beyond a doubt why any attempt by Europe to print its way out of its current default is doomed: "Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money." Just wait until Europe finally realizes that the CDS "speculators" had all the cards in the poker game all along. And we hope Europe listens to the man: being LTCM's GC he knows all about failed bail outs

(7) "Euro is dead", regardless of Angela Merkel's ban on short-selling

Whatever Germany does, the euro as we know it is dead .

Angela Merkel's ban on short-selling is just a distraction from the horror to come

By Jeff Randall

Published: 7:56PM BST 20 May 2010

http://www.telegraph.co.uk/finance/comment/jeffrandall/7746806/Whatever-Germany-does-the-euro-as-we-know-it-is-dead.html

For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.

In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.

The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.

By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.

This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.

What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.

When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.

Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.

"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."

Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.

Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.

By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.

Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.

In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.

Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.

As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.

Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.

(8) Speculators' attack on Greece brings world to brink of another Lehman-style meltdown

Phase #2 of the Euro-Zone Debt Crisis

by Gary Dorsch | may 26, 2010

http://www.financialsense.com/Market/dorsch/2010/0526.html

"A trend in motion, will stay in motion, until some major outside force, knocks it off its course." For almost fourteen uninterrupted months stock markets around the globe were climbing higher, recouping $21-trillion of wealth since hitting bottom in March 2009. The global economy was pulling out of its worst recession since the 1930's, led by locomotives in China, India, and Brazil. On May 4th a survey taken by JP Morgan showed that global manufacturing expanded at its fastest pace in six years in April as output and new orders surged to new multi-year highs.

In the United States factory activity was firing on all cylinders, lifting the Purchasing Manager's Index (PMI) to a six-year high at 60.4 in April, with employers becoming increasingly confident about hiring. Although manufacturing is not a huge component of the US-economy the factory industry is still where recessions tend to begin and end. For this reason the factory PMI is very closely watched, setting the tone for the upcoming month and other key economic indicators.

The US economy added 570,000 jobs during the first four months of 2010. In sharp contrast, just a year earlier, the US economy was losing more than 700,000 jobs during the worst months of the "Great Recession," which began in December 2007. Still there's been a worrisome undercurrent lurking beneath the surface – the U-6 jobless rate, including those who can only find part-time work or are too discouraged to look for a job, rose to depression levels of 17.1% in April highlighting the deepening impoverishment of the American middle class.

Still, traders on Wall Street saw the glass as more than half full rather than half-empty. The key numbers were still turning up spades. The combined net income for S&P-500 companies in the first quarter were 46% higher from a year earlier, helping to fuel the S&P-500 Index's 75% rebound from its recession low in March 2009. Analysts on Wall Street upped their forecasts for S&P 500 profits to grow 29% this year and 19% in 2011, the biggest two-year advance since 1998.

Bullish traders bought increasingly expensive stocks on all dips, comforted by a steady stream of remarks from Fed officials promising to keep the fed fund rates locked near zero percent for an "extended" period of time. So powerful was the hallucinogenic effect from $1.75 trillion of liquidity injected into the markets by the Fed that speculators bid up the Dow Industrials to the 11,200 level, just shy of the 11,450 level - where horror story of the Lehman bankruptcy began.

Yet according to a Bloomberg opinion poll dated March 19th-22nd, there was always a big "disconnect" between the bullish perceptions on Wall Street and the fear and trepidation felt by workers on Main Street. There was great disbelief in the theory that the Fed could simply inflate the US economy to prosperity. Barely one in three Americans thought the economy was on the right track, and less than 10% predicted the economy would be strong within a year. Most American investors plowed their remaining savings in bond funds and missed the "green shoots" rally.

Still, the strategy pursued by the Fed and US Treasury were rather simple - inflate the value of the stock market through any means possible, including massive money printing, pegging interest rates at ultra-low levels, clandestine intervention in the stock index future markets, and jigging the accounting rules for valuing toxic bank assets. Eventually, the "wealth effect" would kick in and consumers would increase their annual spending by 3.5 cents for every dollar of added wealth. The Fed's QE scheme opened the monetary floodgates driving high grade and junk bond yields sharply lower, and fueling a $5.5 trillion recovery of US-stock values.

But just as US consumer confidence was rebounding to a two-year high, buoyed by the Dow Industrials' rally above the 11,000-level and US-home prices showing a year-over-year gain of 2%, the first increase since 2005, "a major outside force, began to knock the stock markets off their upward course." Few traders would realize how the tiny nation of Greece with just 11-million citizens could bring the world economy to the brink of another Lehman-style meltdown.

Few traders on Wall Street took notice of the obscure and thinly traded Greek credit default swap (CDS) markets. There was a sense of complacency about talk of a Greek debt default, with traders reckoning that at the end of the day politicians in Germany and France would ultimately bankroll a massive bailout and prevent panic and fear from spreading to other highly-indebted Euro-zone countries, like Portugal or Spain, and plunging the Euro into a death spiral.

However, lying beneath the surface of the euphoria on Wall Street a ticking time bomb was winding up and getting ready to explode. The villain igniting the fuse was a most unlikely source - the S&P credit rating agency - which usually lingers far behind the credit default curve. Surprisingly, S&P roiled Euro-zone politicians and shocked the markets on April 26th by downgrading Greece's ?300 billion of debt three notches to junk status, at BB+, and thus, derailing the upward trajectories in industrial commodities and global equities.

In the eye of the storm Greek CDS rates soared towards 1,200 bps, and yields on Greece's two-year notes jumped to 25.8 percent. Suddenly stock markets in the fastest growing emerging markets in Brazil, China, and Russia were at the gates of bear market territory after suffering steep losses of 20% or more. Crude oil plunged $23 /barrel to as low as $64 /barrel, and there was a 20% shakeout in the copper market. The Australian and Canadian dollars tumbled 12% and 7% respectively amid a flight from natural resource shares and monetary tightening in China.

On May 7th, EU monetary affairs chief Olli Rehn spoke about the need to avoid a Greek default on its debts at all costs. "Little did authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to. The consequence was that the world's financial system was paralyzed in a way that led to the biggest global recession since the 1930's. Consequences from Greece's insolvency would be similar, if not worse," he warned.

Rhen's apocalyptic warnings were taken very seriously. Euro-zone finance ministers and central bankers huddled behind closed doors during the May 8-9th weekend working frantically to craft a bank bailout plan before the opening of the Asian stock and currency markets on May 10th. What emerged was "shock and awe" - a 750-billion euro ($1-trillion) bailout package, including standby loans and guarantees that could be tapped by Euro-zone governments that were shut out of the credit markets. Putting the squeeze on naked short sellers the Spanish IBEX Index jumped 15% in a single day and the Euro briefly jumped to a high of $1.3100.

Since May 10th however the "shock and awe" effect has worn-off. The Spanish stock market index has completely surrendered its one-day gain of 15%, and the Athens stock index has retreated to within 5% of its March 2009 lows. The Euro has failed to gain any traction and is still sliding lower along a slippery slope towards parity with the US dollar. While the $1 trillion bailout succeeded in preventing an immediate default on Greece's sovereign debt, the cost of borrowing for Greece's biggest banks remains prohibitively high, which could choke its economy to death.

Thus, the focus of the second phase of the European debt crisis has shifted from the specter of a sovereign bond default to a frightful situation where European banks may become unwilling to lend money to the private sector, or could demand higher interest rates or impose tougher collateral rules. In other words, the markets fear a "double-dip" liquidity crunch, which could deprive European companies with junk bond ratings of badly needed funds as banks become more risk averse.

Since May 10th credit default swaps for the Euro-zone's top 50 junk rated bonds has surged to as high as ?625,000 to insure ?10 million of debt. That's up sharply from ?460,000 since the $1 trillion bank rescue plan was announced. In fact, the European corporate bond market has been effectively shut down for banks with bond issuance slumping to $2.6 billion in May, down from $82 billion in January.

Amid fears of a liquidity crunch in Europe there are expectations in the gold market that the ECB would respond by ramping up its money printing operations to full throttle, and in the process exerting further downward pressure on the Euro. As of May 21st the ECB had already bought 26.5 billion Euros worth of sovereign bonds as part of its agreement to monetize the debts of the most fiscally irresponsible Euro zone governments. The ECB might end up monetizing as much as 750 billion Euros of sovereign debt, including riskier bank bonds, to avoid a full blown crunch.

After climbing to a record 1,000-euros /oz in mid-May, Gold endured a brief pullback tumbling in tandem with sharp slides in crude oil, copper, nickel, rubber, and other industrial commodities. But gold has proven itself a very resilient metal and highly sought after as the purest form of "hard" currency, shining brightly as a hedge against paper currency devaluations and the monetization of government debt.

The European Central Bank (ECB) has crossed the Rubicon agreeing to monetize hundreds of billions of Euros held in Greek, Portuguese, and Spanish bonds. In the process the supply of Euros in world money markets is likely to increase. The ECB's efforts at sterilizing the bond purchases are voluntary and have been feeble at best. Furthermore, at the end of the day, there is little chance that Greece's 2.5 million working citizens can repay 300 billion Euros of debt, while at the same time absorbing 25% wage cuts in the public sector and paying 23% VAT taxes.

At some point Greece's government would seek to untangle the noose strangling its economy and demand a restructuring the country's debts, and in a polite way tell its lenders to take a big haircut. Argentina is holding a $20 billion debt swap this month at 45 cents on the dollar, nine years after defaulting on $95 billion of loans. The Euro would remain a very unstable and weak currency. Reports that Beijing is becoming increasingly nervous about its Euro zone bond holdings drove the Euro to as low as $1.2180 and fueled a flight for safety into gold.

(9) Speculators' 'Perfect storm' unsettles markets - Ambrose Evans-Pritchard
'Perfect storm' as market tremors hit China, Europe and the US

Capitulation fever has swept global markets on triple fears of faltering recovery in the US, Chinese credit curbs and Europe's intractable escalating debt crisis.

By Ambrose Evans-Pritchard, International Business Editor

Published: 2:51PM BST 21 May 2010

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7746915/Perfect-storm-as-market-tremors-hit-China-Europe-and-the-US.html

"It is the perfect storm," said Andrew Roberts, credit strategist at RBS. "People have been too complacent about risky assets. This is a global deflation scare and people need to get ready for falls in US and European bond yields to 2pc."

The global stock market sell-off continued for a third day on Friday. London's FTSE 100 dropped 2pc to trade below 5,000 for the first time since last October. Germany lost 2.4pc, France 2.2pc, Japan 2.5pc, while Wall Street opened lower.

Investors shrugged off German approval of a $1 trillion (£700m) eurozone rescue package, doubtful that it can resolve the debt crisis. World equities are now heading for the biggest monthly fall since October 2008.

Wall Street shares plunged 3pc on Thursday after new jobless claims in the US rose to 471,000 last week, the biggest jump in three months. The S&P 500 index of shares fell to 1080, triggering automatic stop-loss sales as it crashed through support on its 200-day moving average.

The US Conference Board leading indicator turned negative in April, the first drop since the depths of the Great Recession. This follows data showing an 11pc slide in building permits, pointing to a double-dip slump in the US housing market later this year. Lumber prices have fallen 26pc from their peak in April.

David Rosenberg from Gluskin Sheff said a fresh "train wreck" may be coming in the US mortgage market as rates on a wave of "option ARM" contracts reset upwards in September. This may compound a deflationary process already eating at the US economy as Washington's fiscal stimulus wears off and the effects of a stronger dollar feed through. Core inflation has dropped to the lowest since 1964.

Meanwhile, monetary tightening in China has begun to set off tremors. Shanghai's bourse has tumbled 20pc since mid-April (or 58pc from its 2007 peak), dragging down oil and base metals.

This may prove more than a refreshing pause. Ben Simpfendorfer, RBS's China economist, said credit tightening since April was needed to cool the property bubble, but "regulatory tightening is not a precise science and there is a risk the measures cause an abrupt correction in property prices and construction. It might be that China provides the next surprise."

Goldman Sachs said that there were signs "beneath the radar" that China may be slowing, citing reports that property sales had dropped 80pc in Beijing in the first half of May compared to a month earlier.

Above all, nothing has been resolved in Europe. The short-ban on bond trades this week by Germany's regulator BaFin comes as the Libor-OIS spread used to gauge strains in the interbank market flashes warning signs, rising to a nine-month high of 25 basis points. The iTraxx Crossover measuring corporate bond risk jumped 45 points to 620 yesterday. "The way the market is behaving right now suggests that investors are getting set for something nasty to happen," said Suki Mann from Societe Generale.

Regulatory clamp-downs are often symptomatic of stress. Wall Street crashed 28pc over eight days after the US Securities and Exchange Commission imposed a short ban in September 2008. While BaFin's move has been dismissed political posturing, the story may be more complicated.

An internal BaFin note in February said German banks held ?522bn of exposure to state bonds in Portugal, Italy, Ireland, Greece and Spain. It warned of "violent market disruptions" if contagion spread beyond Greece, triggering a "downward spiral in these countries, as in the case of Argentina".

Investors are baffled by the cacophony of voices in Europe. A day after German Chancellor Angela Merkel said the euro was in "existential danger", French finance minister Christine Lagarde replied that "the euro is absolutely not in danger".

Details of last week's EU summit confirm early reports that Ms Merkel was ambushed by a French-led bloc, agreeing to demands for a ?750bn rescue package for Club Med under duress.

Karl Otto Pöhl, ex-head of the Bundesbank, told Der Spiegel that the bail-out offers no help to Greece. The country can never repay its debts and needs "partial" forgiveness. "This was about was about protecting German banks, especially the French banks, from debt write-offs," he said.

While Ms Merkel is likely to win backing for the rescue in the Bundestag on Friday, this does not settle the deeper issue of whether Germany will accept an EU debt union. Articles in the German media have questioned whether the country should remain part of EMU. "Should we bring back the Deutschemark?" screamed a front-page story in Bild Zeitung. Fresh cases challenging Germany's EMU membership are certain.

France may have won a Pyhrric victory, securing a short-term triumph at the cost of alienating the German people and setting off a political process that may cause Germany to turn its back on EMU.