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Thursday, December 01, 2011

I Made a Lot Of Money Yesterday

On paper anyway:

See "Dow closes up 490 points on Fed action."

That "action"?  The U.S. Federal Reserve will print a mountain of dollars and hand them to the European Union in an effort to stave off Euro disaster.  The stock market here is not big on financial disasters, and it is big on fixes - no matter how short-term - to troubling problems, thus the explosive rise in the Dow.  I told Paula yesterday morning to expect a jump of 400 points on the day.  I underestimated.

But what about that "action?"  Is it really going to solve Europe's problem?  Or, like methadone to the drug addict, is it simply staving off for a time the inevitable crash?

The Wall Street Journal has the same concerns I do:
Betting on Central Banks

Investors threw a party yesterday, lifting U.S. stocks nearly 500 points on the Dow after the world's main central banks joined to provide dollar liquidity to struggling banks. This makes sense to prevent intrabank markets from seizing up, but no one should think it solves Europe's larger problems of fiscal solvency.

The consortium of central banks is filling this gap by providing funds to each other that they can then make available to banks in need. To the extent this reduces the risk of an immediate bank liquidity crisis, the central bank move is constructive, as markets seemed to agree.

Markets may ... be betting that yesterday's central-bank move anticipates even more drastic action in the days ahead, especially more sovereign-debt purchases by the European Central Bank.

That may be getting ahead of things, since the standoff between the Germans and the world bailout caucus isn't over. Chancellor Angela Merkel would really give markets reason to cheer if she manages to persuade the bailout boys in Southern Europe that the price of such ECB purchases is economic reform and fiscal discipline. Best to wait until you see the whites of those eyes. [link]
"Economic reform and fiscal discipline."  Southern Europe.  Right.

In truth, the infusion of cash being provided by the Fed and other central banks around the globe is a bucket of water on a raging inferno.  There'll be no economic reform or fiscal discipline because the governments of Italy, Greece, and Portugal have refused to make any substantive reforms to date. Nor do they need to as long as Big Daddy is there to hand them a fat check when they run short on cash.

I give it six weeks.

And we'll be back here again.

Upside?  I made a lot of money yesterday.