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The global “shadow” banking system is unraveling, with dire consequences for  financial assets and failed policies.

We’re not used to things falling apart, and so our first reaction is disorientation.What we’ve been trained to expect by constant intervention in supposedly “open” markets is that Central States and central banks will “save the day” with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling  appeared in 2007.

So when official interventions are announced to great fanfare and then fail to goose the market, we’re disoriented.  John Hussman neatly summarized the insanity of a market propped up only by constant official manipulation:We represent the Lollipop Guild:

Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house.Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas  of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster.  This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and  expecting that the result will be fewer tantrums.What we have increasingly observed over the past decade is nothing but the gradual  destruction of the ability of the financial markets to allocate capital for the benefit of  future growth. By preventing the natural discipline of the markets to impose losses on  poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world’s policy makers are increasingly wrecking  the prospects for long-term economic growth.

The problem with depending on intervention “sugar” for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response.  We are very close to that point  now, as the expected “grand EU treaty agreement” is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge.

This is desperation.In market after market, participants don’t really have any faith in the future resilience of the fundamentals which supposedly underpin global markets; rather, they are desperately hoping the next intervention will work better than the last one. But  like insulin insensitivity, the market is on a one-way slide: every intervention works its magic for a shorter period of time, and markets respond with increasing torpor to the “fix.”

The next phase is chaos, as participants finally grasp that interventions will no longer save them.Then the mad rush to the exits (selling) will begin, and many will be trampled, as the bid will disappear across entire spectra of assets.

We should recall that nothing fundamental has changed since 2007.Here are two fundamentals of many which haven’t changed at all: wealth is still concentrated:

and the global financial system is still overleveraged and over-indebted, meaning that every decline in asset valuation triggers a “reverse wealth effect.”

As I type, the morning injection of hopium crack into the market’s veins is already wearing off. We are still in the desperation stage, as central bank manipulators and Central State apparatchiks are rushing around in a panicky search for some new supply of “sugar” intervention to prop up what has been unsustainable since 2007.

The manipulations have one ironic accomplishment: the resulting crash will be larger and more chaotic than the one in 2008 because the faith that State/central bank interventions are limitless magic will have been irrevocably lost.

Charles Hugh Smith – Of Two Minds

The EU summit “deal” is noise; we knew going in there would be no “grand bargain” and there isn’t.  Britain said “stuff it” (rightly so) along with a few others; those who went along did so pretty much at gunpoint.

The vassal state model may look attractive as an alternative to Mekosy, but they’re nuts.  What they’ll ultimately get out of this is a war.  Oh Archduke, is that you over there somewhere?

The internal issue for America is more-acute in the market sense.  Texas Instruments last night warned on weakening demand and got clocked in the aftermarket.  This morning Dupont issued a warning.  Either standing alone could be looked at as company-specific.  The two together cannot.

I said a bit over a year ago that PPI pressures would eventually filter through and hammer margins directly, and likely would result in cost-push pressures that ultimately would hurt the top line — although perhaps not at the firms that had the cost pressures.  In other words the deteriorating standard of living would eventually have to show up somewhere — “charge it” only works for a while.

It appears that it now is showing up.  This sucks, to be blunt, but it is very unlikely to be contained.

My macro-level view has not changed much; timing is everything in the markets and I still believe we’ll more-or-less hold together until late in December — another couple of weeks, and perhaps into early January, but in 2012 it’s going to come apart.

Those who think that we’ll get through the election will be wrong — I’ll go out on the limb and put that out there right now.  No chance folks — there’s not that much dry powder available to anyone.

As such consider your positions carefully if you’re long the market — the wild gyrations are a warning — overall “bullish” markets don’t behave this way, but ones that are about to fall apart sure as hell do.

I expect a very profitable 2012 — and not on the long side either.

Uh, that last story about Barnhardt exiting the business?

You better think again if you think you’re not at risk.  You are.

LONDON — The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market.

With cash increasingly hard to come by, Italy’s banks are turning to CC&G, the L.S.E’s Italian clearinghouse, for short-term lending. That includes some of the country’s largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation.

….

The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

One inconvenient question: What happens when the bank can’t pay it back?

“Financial entities are making money in new and different ways,” he said. “Just because times are bad doesn’t mean they’re not looking for profits.”

Right.  They’re lending your so-called “margin deposit” out to someone, making the entire premise of depositing margin against your position a bad joke and guess who the joke will be on if anything goes wrong?

Got a mirror handy?

The Market-Ticker

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An array of evidence suggests that a crash in equities might be just ahead.

I know, I know, retail sales are up so everything’s wunnerful, but the captain of Global Equities Flight 2011 just instructed the passengers to assume crash positions. It seems the captain has the distinct advantage of being able to see what’s just ahead, not to mention being able to monitor the engines and fuel levels. (Hmm, did the starboard engine just conk out? Not good….)

Levity aside, there are unnerving similarities between the present and the pre-crash 2008 equities market. To make the case, let’s turn to some excellent charts from The Chart Storeand Ron Griess.

In the first chart, Ron has traced out the basic pattern and the percentage of stocks above their 200-day moving average (MA). Notice how weak that is compared to price.

Next, a chart which shows we’re right where the 2008 rally topped and tanked.

Last up, one of my favorites, an analog chart that overlays the present-day rally over the 1907 crash and rally. It is uncannily similar until QE2 saved the day for a few months. That pushed the present out beyond the 1907 line, but then current prices began falling until the most recent “6-week wonder” prop job once again saved equities from collapse.

Apparently we’re supposed to believe that channel-stuffing auto dealers and Americans-self-medicating-with-shopping-on-credit are really going to power the economy to ever greater heights of sales and profits. Anything’s possible, but despite the cheer and the constant calls for a year-end rally to end all rallies, the market is looking a little uncertain here.

Consider the broad-based Russell 2000, which seems to have traced out a beautiful head and shoulders pattern, as good a precursor to a crash as you can get.

The last time the RUT looked this ugly, the Powers That Be pulled one save after another out of their bag of tricks. Despite brave talk from Fed lackeys that “we have more amazing stimulus plans right here,” everyone knows they’ve shot their wad and have been reduced to playing around with Treasury yields that won’t do anything for the real economy. So all that brave talk about the next big Fed-rides-to-the-rescue is just that, hot air and paper-thin bravado.

For a very insightful chart of the RUT from a razor-sharp analyst, please see Technical Perspective: Repetition in the Russell 2000(Chris Kimble).

Zooming in a bit, let’s take a look at the S&P 500, where we see a classic wedge/pennant, the sort of thing that breaks big up or down. Given the abundant evidence of weakness, not to mention the potential for outright panic in global credit markets, does anyone not being paid to lie really think the probabilities favor a breakout here to the upside? Based on what? I know, I know, “seasonal patterns.” In other words, we’re depending on Santa to deliver the rally everyone needs to stay solvent.

It doesn’t take much imagination–none, really–to see the similarities between the July topping-out and the present. If volume is the weapon of the Bull, then everyone betting on the next big rally has to explain why volume has been declining.

Rather than get distracted with how much low-quality crap gets sold at loss-leader prices on November 25, we might be better served to focus on the U.S. dollar.As everyone knows, equities and the buck have been on a see-saw for a long time. If the dollar rises, equities drop. If the dollar rises a lot–for any reason, or no reason, it doesn’t matter– then equities crash.

If the euro weakens, the dollar rises. If the dollar rises, equities weaken. If there is anything else to know about the current equity market, how much can it possibly be worth?

He who sells first sells best. Something to ponder in the weeks ahead.

Charles Hugh Smith – Of Two Minds

I’m not surprised, of course.  After all, it was Paul Kanjorski’s effective extortion of FASB that literally marked the bottom in the market in 2009.  All you have to do is put a gun to someone’s head (and have the power to pull the trigger, as Congress does) and voila – it’s all ok, right?

Well, as we saw, no, it’s not ok.  But it is good for 100% rally in the stock market.

This morning we’re going to see big moves in US banks – BAC is up pre-market something like 8% and the others are also up big.  Europe is up huge across-the-board and our futures are up about 2% as well.

Why?  Because “Greece is Fixed!”

Wait: It’s not.

The “agreement” is that bondholders will take a 50% chainsaw, er, “haircut” on their Greek debt.  In yet another stunning “agreement”, this will somehow not trigger credit default swaps – in other words, they’re not really default swaps any more, now they’re “whatever we call thems when we want them to be whatevers.”

This is a huge problem up and down the line; if you bought this “protection” you now got nothing for it, which means this market’s functional purpose is now a zero.

Here’s the hint folks: Watch the spreads.

I don’t think this is going to work.  Drinking yourself sober never has, and this will be no different.  It obviously has and will, however, provide a short-term lift, exactly as we got one in the US after the first “go-around” with TARP and such.

If spreads do not come in and stay in, however, this will be short-lived.  I expect we’ll have some more ups and downs, but the the principle of gravity has not been repealed, and what goes up on the slow boat will come down on the express elevator.  It will not be long before the speculators attack Portugal or (more likely) Italy, and it will be quite interesting when they do, as there’s nowhere near enough firepower to repeat this game with them.

For today (and perhaps for a few more days) enjoy the rally.  Oh, and while you’re at it pay attention to oil and the bonds – there goes BenDover’s “Twist” effectiveness (incidentally that’s thrice now he’s said he’d “keep” bond yields low, and that’s thrice he’s been wrong.  Why do people put up with him again?)

Hey, have you heard?  The stock market is absolutely soaring right now.  The Dow was up 330 points on Monday, and overall the Dow has risen by more than 10 percent since October 3rd.  So should we all be throwing our money into the stock market in order to take advantage of this tremendous rally?  Well, if you actually believe that the sovereign debt crisis has passed and that we are no longer on the verge of a massive worldwide financial crisis then I have a bridge that I would like to sell you.  The stock market may be soaring, but absolutely nothing has been solved.  The truth is that this stock market rally is for suckers.  The primary reason why stocks rose today was because German Chancellor Angela Merkel and French President Nicolas Sarkozy promised that they would reveal a “comprehensive response” to the European debt crisis by the end of this month.  When pressed for specifics, Sarkozy stated that “now is not the moment to go into the details.“  So do global financial markets really have a legitimate reason to be giddy about the super secret plan cooked up by Angela Merkel and Nicolas Sarkozy, or are Merkel and Sarkozy just blowing a bunch of smoke?

Merkel and Sarkozy have made bold promises in the past, but nothing ever got fixed.

So why should we believe them this time?

If they have real solutions, why don’t they just reveal them now?

Why keep us in suspense?

By making these vague promises, Merkel and Sarkozy certainly did give a boost to global financial markets, but they also seriously raised expectations.

Now many in the financial world are expecting something truly significant from Merkel and Sarkozy.  For example, CNN has quoted economist Scott Brown as saying the following about the announcement by Merkel and Sarkozy….

“The Europe debt crisis cloud has been hanging over the market for a year-and-a-half now,” said Scott Brown, chief economist at Raymond James. “The risks and worries have been intensifying over the last couple of weeks, but after this weekend, the market is expecting something big and concrete that will put the crisis behind us.”

So can Merkel and Sarkozy deliver something big?

Of course not.

Merkel has already gotten all of the bailout money that she is going to get out of the Germans.  The political will for more bailouts is totally gone in Germany, and many of Germany’s top leaders have expressed this in no uncertain terms.

For example, German Finance Minister Wolfgang Schaeuble is publicly admitting that Germany will not be able to contribute any more money to the European bailout fund.

Also, the leader of Bavaria’s Social Christians, Horst Seehofer, said after the recent vote on the Greek bailout package that his party would go “this far, and no further“.

Recent opinion polls in Germany make it abundantly clear that the German people are overwhelmingly opposed to more bailouts.  Squeezing more money out of Germany simply is not going to happen, and that means that squeezing more money out of the rest of Europe is simply not going to happen.

In a recent editorial, Ambrose Evans-Pritchard described the current political situation in Europe in this manner….

Repeat after me:

THERE WILL BE NO FISCAL UNION.

THERE WILL BE NO EUROBONDS.

THERE WILL BE NO DEBT POOL.

THERE WILL BE NO EU TREASURY.

THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.

THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.

Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.

So exactly what “big” solution do Merkel and Sarkozy have up their sleeves that does not involve more money?

Can they really produce the goods or are they just blowing smoke?

Perhaps global financial markets should be focusing on what we can see rather than on what we cannot see.

For example, the first major bank bailout in Europe has now happened.  Dexia is being bailed out, and it is going to cost more than 100 billion dollars.

The funny thing is that Dexia actually passed the banking stress test that was conducted a few months ago.

What does that say about all of the major European banks that did not pass the stress test?

Also, perhaps global financial markets should focus on all of the credit ratings that are being downgraded all over Europe.

Lately, we have seen a cascade of credit rating downgrades.

For example, Moody’s slashed Italy’s credit rating by three levels last Tuesday, and the other day S&P slashed the credit ratings of seven different major Italian banks.

The problems in Europe continue to grow worse, and yet the stock market is soaring.

It doesn’t make a lot of sense, does it?

If Greece defaults, it is going to be a major disaster.

If Italy or Spain defaults, it is going to be financial armageddon.

The world truly is on the verge of a massive financial crisis.  If you don’t want to believe me, perhaps you might believe some of the top financial officials in the world….

*Bank of England Governor Sir Mervyn King: “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever”

*U.S. Treasury Secretary Timothy F. Geithner recently stated that if something is not done quickly, Europe faces “cascading default, bank runs and catastrophic risk.”

*IMF advisor Robert Shapiro: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected.”

For many more shocking quotes about how bad things have gotten in Europe, just check out this article.

Merkel and Sarkozy are holding really weak cards but they have chosen to raise the stakes anyway.

Their bluff may calm financial markets for a month or two, but in the end they will not be able to stop what is coming.

A great financial collapse is coming to Europe.

Try to get out of the way of the coming avalanche while you still can.

The Economic Collapse