Your Bazooka Bluff has Been Called

Another long week at work filled with some drama that I could have done without. Looking forward to Superbowl weekend! Go Saints!

Remember, tomorrow is Friday night so get your requests in.

Note of Thanks
Last night I asked for help regarding revenue number for Whirlpool (WHR) for the past 9 years so I could work on an idea I was rolling around. Stagflationary Mark pointed me towards a great source for collective information on the S&P and that would have worked. An Anon reader was so kind as to pull up the WHR revenue numbers on his handy Bloomberg Terminal for me and provide a great chart for the years 1992-2009 and with estimates for 2010 and 2011 to boot! Thanks Anon! I will be reviewing that this weekend. I wish Anon all the best, especially as it pertains to things of chance, like say, the lottery or scratch tickets! (inside joke).

Side Dishes
I will not pretend that the big story was not the market panic/puke today but there were some other morsels that may go unnoticed that I thought were worth a look:

-Market Ticker notices that Cisco Systems (CSCO) has gone the route of zero percent financing to boost sales. This smacks of desperation and it reminded me of the height of the tech bubble when CSCO would lend money to customers to buy their products! Not quite the same, but a trend worth watching.

-No longer a banking executive with national security protections, Ken Lewis is going to court. It will be interesting to see if old Kenny boy tries to take Bernanke and Paulson down with him, and he is sure to have an armada of attorneys focused on doing just that. One can dream.

-In the most overwhelming vote ever held at Economic Disconnect, 87% of respondents think the triad of trouble (Bernanke, Geithner, Paulson) are liars. My vote was for mogwai's that ate after midnight, but that was the only vote it got!

Your Bazooka Bluff has Been Called
"I'm Daring You Billy"
Dick Brewer to Billy the Kid in "Young Guns"

On Tuesday I noted that Philippines failed to sell all of their bonds for the second time this year. Sovereign debt issues are a focus of mine for many reasons and today it seemed it was a focus for just about everyone.

In my mind there were two possible things at work today, one was the same old trick we have seen and the other would be a new chapter in the debt crisis.

From the department of the "same old story" the sell off today could be the never fail trick played by the FED and their friends to dump the stock market right before a major bond sale. Keeping in mind that indirect bids for the 21-day auction this week registered at ZERO (that's 0.0) the bulky sale next week of debt (around $150 Billion total) may have been a bit nerve inducing. Nothing like a major market route to get yields down and participation up, especially when US debt is so much better than any other debt in the world. Safe haven status rules indeed. If this was the motive then I would expect a quick reversal later next week and the good times to roll again.

If however this was something else, then we have an important inflection point facing nations all over the world.

So let me back up a minute. Remember a little time ago when Dubai was facing a serious debt issue? Markets swooned a bit and the credit markets were nervous. They were of course rescued by Abu Dhabi (though it became somewhat muddled) and all was well once again. What is important is that an explicit guarantee was demanded by the market and one was provided.

If this sounds familiar, it should. Who could forget Hank Paulson's claim that all he needed was a "bazooka" in regards to Fannie Mae and Freddie Mac:
"If you have a bazooka in your pocket and people know it, you probably won't have to use it"
Of course in reality the market rolled up in a fully loaded APC with reactive armor and called the bluff. Paulson's bazooka was limp and a full and explicit backing of FNM/FRE debt soon followed. Now they even has unlimited backstops!

And thus the current situation should be easy to recognize.

CDS protection costs for Greece, Portugal, and Spain were blowing up today. For some time now the Euro leaders have tried to maintain a "no bailout policy" in regards to Greece specifically, in my mind to try and keep themselves out of having to do the same for Spain which is a much bigger problem than Greece.

Well that game is now up. The players behind the money want a plan for an explicit backstop for Greece and some plan for Spain as well. The CDS costs will force the hand of the Eurozone here. In this day and age of government intervention in everything and anything this was inevitable. Why risk money on a wink and a smile when you can get a government guarantee on the whole thing up front? Why indeed. Anyone remember all those fire side chats about moral hazard I tried to have all the time? Maybe now you can see why.

The Euro currency is not going to break up. You know it, I know it, everyone knows it. I expect some kind of announcement either tomorrow or over the weekend in regards to the Greece issue that will also lay out the path forward for the next in line countries. Printing press Euro style coming up! I can recall all those weekend announcements for the latest greatest US banking bailouts during the height of the crisis, this will be no different.

In response to a dialogue I was having with the EconomPic author in this thread I noted the following:

jake,
why unlikely?
Short version; bluff of Euro has been called. Explicit backing of problem debt (Greece, Spain, Portugal, etc) is now demanded by the markets. How can they not answer and what does that mean for the currency?

To which he responded (quickly too, which I do appreciate the time taken, I know how busy we all are):

not necessarily unlikely that we'll see a correction in markets and/or economic downturn, but i think unlikely of a crisis of the system (where counterparties don't trust one another, bank runs occur, and the global economy shuts down).

it will be interesting to see how this plays out. i can see two opposing stories play out if the spain, greece, portugal get bailed out.

1) the euro gets crushed
2) the euro rallies as the uncertainty is reduced

I always get a bit lost where a government guarantee is taken as gospel without regard to the method of making good. I guess in the end you can sell off parts of your country (to whom?) or take away from private citizens to make good, but that carries it's own risks and not in a financial sense!

Still I think Jake will be right on number 2; the Euro will rally (not much) on the perceived reduced risk.

Now I have been seeing many running a victory lap in regards to the US dollar after all this. Enjoy the jog gentlemen. We have our own eurozone here called bankrupt states and California makes Greece look like, well, Greece. There are many others. Mish has extensive coverage of state and city issues and I would refer you there. Indeed the US dollar may be "King Crap of Turd Mountain" but that is not something you want to brag about at parties.

What About Gold and Silver?
Gold and Silver were crushed today and we even had the obligatory Clusterstock "Gold Sucks" post to top it off!

Now one would think on a terrible day for the markets gold would be a big winner. Instead it outpaced the indices to the downside. Silver was especially blown away. Gold and silver are hedges against fear, confusion, printing presses, uncertainty, inflation, deflation, cancer, H1N1 are they not? Well the answer is sometimes yes and sometimes no.

The metals were destroyed last March just like the markets, but stopped falling before the markets did, recovered faster, then were overtaken to the upside. Gold has been directly correlated to the indices at times and other times it has been off on its own. Gold has been walking hand in hand with the dollar at times and other times they have run away from each other. What does it all mean?

I have no idea.

What I do know is that the US will be faced with a double dip in housing that will prompt Quantitative Easing 2.0 for the mortgage market. Bankrupt US states will require another round of cash buckets to be handed out. Unemployment will require extension (forever?) of extended benefits. The Eurozone will have to confront a mass of angry union workers hell bent on getting their promised payouts. And much more.

I have always desired a large scale discussion on just what money is. The events of today only fast forwarded that talk. Today gold and silver got dusted. Tomorrow maybe paper money will encounter a similar problem.

Have a good night.