Mario Cavolo

....Apocalyptic Bible thumping Armageddon lovers must be in a tizzy with the latest news as the financial meltdown is apparently rearing its ugly head as cities like Saint-Etienne, France and Jefferson County, Alabama are financially devastated by their own stupidity and greed using derivatives contracts to hedge and speculate with public money.

While in Northern Europe, 15,000 flights will be canceled today as the region is covered in volcanic ash, costing the airlines more than a handful of lost revenues. Can the stock markets be so callous and oblivious as to continue their rally?...anything's possible with all the old rules of economics apparently out the window.

April 15 (Bloomberg) -- The worst global financial crisis in 70 years arrived in Saint-Etienne this month, as embedded financial obligations began to blow up. A bill came due for 1.18 million euros ($1.61 million) owed to Deutsche Bank AG under a contract that initially saved the French city money. The 800-year-old town refused to pay, dodging for now one of 10 derivatives so speculative no bank will buy them back, said Cedric Grail, the municipal finance director. They would cost about 100 million euros to cancel today, he said.

“It’s a joke that we’re in markets like this,” said Grail, 38, from the 19th-century city hall fronted by an arched facade and the words Liberte, Egalite, Fraternite. “We’re playing the dollar against the Swiss franc until 2042.” Saint-Etienne is one of thousands of public authorities across Europe that tried to shave borrowing expenses by accepting derivatives deals whose risks they couldn’t measure. They may be liable for billions of euros, according to the Bank of Italy and consulting and law firms in France and Germany. As global economies climb out of recession, the crisis is hitting Saint-Etienne in central France, Pforzheim in western Germany and Apulia, an Italian regional government on the Adriatic. They may pay for their bets into the next generation.

Alabama’s Jefferson County

From the Mediterranean Sea to the Pacific coast of the U.S., governments, public agencies and nonprofit institutions have lost billions of dollars because of transactions officials didn’t grasp. Harvard University in Cambridge, Massachusetts, agreed last year to pay more than $900 million to terminate swaps that assumed interest rates would rise.

For Jefferson County, Alabama, the day of reckoning came earlier than in Saint-Etienne, but the common denominator was the use of complex, unregulated financial instruments known as derivatives that are typically linked to changes in market interest rates, currencies, stocks or bonds. Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc., in 2003 called derivatives “financial weapons of mass destruction.”

They pushed Jefferson County close to bankruptcy two years ago. It had refinanced $3 billion of debt with variable-rate bonds and purchased interest-rate swaps to guard against borrowing costs rising. Its interest rates soared when insurers guaranteeing the bonds lost their top credit grades, and the rate the county received under the swap deals fell.

Under the interest-rate swap deals popular with European municipalities, a bank would agree to cover a locality’s fixed debt payment and the government or agency would pay a variable rate gambling its costs would be lower -- and taking on the risk that they could be many times higher.

Full Must Read Story at Bloomberg

Let's start with a core economic premise and build a scenario of supporting premises as we ponder the new reality of the global economy without the rhetorical, crash and doomsday scenarios which almost never play out.

Here is the premise to explore:

Nothing will crash or collapse. Not the Euro, not the USD, not the stock market of this or that country; not anybody’s entire financial system. Assets will swing wildly up and down, systems will change, sometimes dramatically but doomsday collapse is off the table. People who constantly focus on threats of doomsday this and parabolic that are too addicted to the emotional thrills attached to such moves, or trying to sell you something; rather than applying a more genuine and balanced analysis of the global economic stage which is an increasingly complex, fluid, shifting entity.

Now let us build the supporting premises to see why, keeping in mind the intelligence of an elementary school sixth grader, to paint a picture of the new reality in the present and for the next 10 years.

The global new reality world is a world with unfathomable trillions of sovereign debt over everyone's heads. It is an ongoing reality, a big part of our new reality. This has been rightfully called a crisis of Biblical proportions. However, based on our premise for this essay, it is not. We just accept it as the new normal reality. We accept it and we adjust to it. Assets will adjust to it. The system will accept it and adjust to it. Individual assets in the system will respond to it by swinging up or down 30-50%, creating significant shifts in society and culture. We can't make it go away, anymore than we can change the color of the sky or the rising and setting of the sun.

So then, applying a little commonsense, how will the assets of the world economic system respond to the fact of massive sovereign debt hanging over everyone's heads in the coming years? Let's take a look.

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NKoreans burn bills in anger over currency reform
3 minutes ago

By KWANG-TAE KIM
Associated Press Writer
(AP:SEOUL, South Korea) North Koreans set piles of old bills alight in anger over their government's surprise move to redenominate the national currency, a report said, a sign of growing frustration among citizens left with hoards of worthless bills.

On Monday, the communist government informed citizens and foreign embassies that it would redenominate the national currency, the won. But it limited the maximum amount of old bills that could be converted into new ones, telling residents to deposit the rest in government-run banks, according to media reports and diplomats.

There are widespread doubts among North Koreans whether they would be able to get their money back, they said. Angry citizens burned piles of old bills at two separate locations in the eastern coastal city of Hamhung on Monday, the Daily NK, a Seoul-based online news outlet that focuses on North Korean affairs, reported late Thursday, citing an unidentified North Korean resident.

It quoted the resident as saying he saw graffiti and leaflets criticizing North Korean leader Kim Jong Il in and around a college in Hamhung _ a rare move in a country where the totalitarian government keeps tight control over its 24 million people.

However, a Tokyo-based newspaper considered a mouthpiece for the North's government claimed Friday that North Koreans were praising the currency reform. The Choson Sinbo cited the North's central bank as saying the reform was aimed at boosting the country as a "socialist economic power."

The new highest-denominated bill of 5,000 won features a portrait of North Korean founder Kim Il Sung, Kim Jong Il's late father, a photo published in the newspaper showed.

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Hot off the AP newswire here's a first report on retail shoppers for the famous and biggest shopping day of the year. The crowds are out spending their money, as well they would with retailers offering 50% to 75% discounts!!!! (Tommy Hilfiger $450 bomber jackets for only $99).

We can expect the economic and quality of life challenges for America's middle class to continue over the next few years with an ongoing atmosphere of government-supported recession and deflation. The nice side of the coin is that the world can easily notice that the US is becoming a bargain hunter's and holiday traveler's dream destination! IF you are financial secure or have a strong, stable career income, then America is one of the greatest places in the world to live, offering a diverse choice of lifestyles to suit almost anyone's interests. More so, we'll continue to see America's consumer retail/household world of products offered at 30% to 70% discounts as the new normal for at least the next couple of years. That's a good thing for now and the near future even though it is happening for bad reasons.

It is important to recognize the structure of middle-class society in America continuing its shift toward a more "feed and support the masses" type lifestyle supported by liberal democrat government policies which will create a daily life that is comfortable for the masses at best, but lacking the variety of "American Dream" opportunities available to them in the past. The gap between rich and middle-class has widened to new extremes while at the same time the barriers to entry to entrepreneurially cross the gap if you're not already on the rich side is a concrete wall getting thicker and thicker. Talk of the smell of socialism is not without merit. Meanwhile, go grab those bargains...Cheers, Mario

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There is a population of around 200,000,000 Chinese citizens (100 to 300 million depending on whom you ask), who are at the economic level of comfortable middle class or higher. As the case in most countries, 10% of them are quite rich while 1% are the super rich.

Perhaps 30% of this group (60,000,000) has at least $100,000 USD cash in the bank, zero, yes, zero credit card or mortgage debt, and typically own 1-4 apartments which have tripled in value during the past five years. Surprising to many of you...

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For those of you noticing gold's rise to new highs well over $1000/oz along with the US dollar's decline, this article by Bill Bonner over at the Daily Reckoning website is a very good read summing up the all the related circumstances and economics...Cheers, M

Gold Touches A New Record: Is It A Bargain Or A Trap?
By Bill Bonner, Daily Reckoning, October 9, 2009

“Gold continues to climb…stoked by inflation worries,” says a headline in the International Herald Tribune. Yesterday, it touched a new record - $1,050 - even as the dollar rose, oil slumped under $70 and stocks dipped very slightly.

Well, what do you expect? The United States added $1 trillion to its monetary base in the last year or so. The federal government is running a deficit of $1.7 trillion this year. And along comes Barack Obama with an idea to stimulate...

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