Tuesday, December 21, 2010

Predictions for 2011: Tap Dancing in The Minefields

1. There Will Be No Recovery in the US: As a nation, we will borrow about $1.8 trillion at all government levels (Federal, State and Local), of which roughly half will be by way of money printing. Simply put, the answer to a problem of debt is not more of it. One day soon enough we will have to live within our means.. and we will not do it voluntarily but at the point of a bond market's spear like Greece. The American people will begin to understand in 2011 that the only recovery thats happening is on Wall Street. Look for the U6 measurement of unemployment to stay above it's current 17%.

2. Muni Bond Implosions: With the end of the Build America Bonds program.. which was an important financial tool for local governments.. and the election of a Republican House, it seems that pretty much all Federal aid to state and local governments will end. With this, look for states to balance their budgets by cuts to local governments. I think dozens of cities and counties will bite the dust financially this year, either with a formal declaration of bankruptcy or by simply falling dramatically behind on their bills. California, Illinois, Michigan, Florida, Nevada and New Jersey cities and counties look particularly vulnerable. Look for Obama to try.. but fail.. to throw them a lifeline. Bernanke may also begin purchasing Muni's. Muni's will lay off at least 200,000 employees. These failures will shake ordinary Americans.

3. Euro Crisis v2.0.. the Spanish Flu: The EU/ECB/IMF plans to deal with the cascade of bad debts, overleveraged banks and overindebted governments is suspect. The EU's central bank, the European Central Bank, has essentially reached the limits of what it can do. Look for Spain, which needs to borrow $400 billion this year.. much of it in the first quarter.. to hit the wall and need to be bailed out. Belgium and Portugal are also in trouble. I forsee the EU/IMF fumbling the ball and asking Bernanke for a backstop, which I believe he will do.. and will catch holy hell back in Wash DC, but I do think the financial system will not crumble. If this one is mishandled, it could be exceedingly dangerous very quickly. In general, the economic conditions in Europe scare the bejesus out of me. The EuroBond is one possible and real answer, but I doubt Germany will agree to essentially co-sign all of Southern Europe's debts.

4. QE 3.0.. the MBS Edition: I look for Bernanke to begin purchases of MBS in fall; look for it to be in the neighborhood of $500 billion. The state of the US housing market will become dire by mid summer, threatening the health of many big banks.

5. Stock Markets: I don't see a lot changing.. the Dow will continue to be stuck in neutral, bouncing between 10,000 and 12,000. Many thanks will be sent to Ben Bernanke for keeping this casino open.. and sadly, that is what the NYSE has become.

6. US Gov't Bonds: I forsee the US Ten Year Bond, which today is at 3.35%, to touch 4.5% at some point in 2011. If the crisis in Europe plays out as I suspect (or some other crisis abroad) or there is a sharp stock market correction here, look for the yield to go below 2.75% again.

7. Commodities: I believe commodities will have an up year as the economic surge in Asia continues. If the Euro Crisis is serious enough, it could bring commodities downward as the US Dollar surges. Look for crude to hit $100, silver to hit $35 and wheat to hit $8.50 again. Americans will grumble loudly as gasoline approaches $3.50/gal and grocery bills are higher, due in large part to Mr.Bernanke's printing presses.

8. Beware of Black Swans: The world is a complex and dangerous place and has an exceedingly fragile economic system. One good shove will likely be enough to send the world's economy over the edge. A new Korean War, a war with Iran, a revolution in Greece or even an angry Mother Earth might be enough to send us all into an economic apocalypse thanks to the monstrous debt levels and credit default swaps. In 2002, the world's total debt was $60 trillion. This year, that amount reached $188 trillion, nevermind the hundreds of trillions more in credit default swaps. As I have always said, one day this will end very badly and very quickly.. but I doubt 2011 will be the year.

Saturday, December 18, 2010

Macroeconomics 101

I've always wanted to do an article explaining the basics of economics in terms my daughters could understand and why I'm so grim about our future. Being severely overcaffeinated this morning, I've decided to let my fingers fly..

Banking System 101: We now have what's known as a "fractional reserve system". What this means is this: lets take "JeffBank", which has $10mm in the vault. Most people in America believe that this means JeffBank can loan out $10mm. Not true. In 1913, they insitituted the fractional reserve lending and the 10-1 leverage ratio rule, which means that banks can lend out ten dollars for every dollar in the bank. Therefore JeffBank can loan out $100mm.. but if 1/10th of these loans go bad, JeffBank is toast because he only has that $10mm in the bank. Beginning in the early 1980's, regulators threw out the 10-1 rule (especially for bigger banking institutions) and essentially let them loan out whatever they wanted. Big US banks wound up with 30-1 leverage, and so if only 1/30th of their loans went bad, these big banks were either forced into finding cash to cover their losses or go under. In Europe, the banking system is even worse; most bigger banks in Europe are leveraged at like 60-1 these days.

Credit Default Swaps (CDS): Credit Default Swaps are a form on insurance written on many things such as Certificate of Deposits (CD), simple savings accounts, bonds, etc. Here's an example: Lets say that you have $1 million ($1mm) in JeffBank and lets say that its in the form of a 5 year CD, therefore you cannot simply walk into the bank and cash out any day you wish.. you have to wait the 5 years to get your million out. Lets say that JeffBank had loaned a huge amount of money to Lindsay Lohan, and as Lindsay gets dragged by the cops to yet another rehab clinic, you begin to worry about the whether JeffBank is going to survive Lindsay's antics.. and specifically worry about the fate of your $1mm CD. Therefore you turn to "JennyBank" (which is the exact same size of JeffBank and therefore has $10mm in the vault) and ask them if they will write an insurance policy on your $1mm CD in JeffBank.. so if JeffBank goes under and your $1mm CD is gone, JennyBank will pay you the $1mm as long as you pay JennyBank a monthly premium for this insurance. This insurance policy is known as a Credit Default Swap.

There is also something called a "naked" Credit Default Swap, and here is what this is: lets say that a month after you get the CDS from JennyBank on your million CD you get a call from a loan officer at JennyBank who says: "Ya know, if you really think JeffBank is going under, we can write you another Credit Default Swap for $12mm if you want to make the monthly premiums".  This new "naked" CDS isn't really protecting an asset like the first one is.. it is, as it's heart, essentially a bet. Most big US banks write these naked CDS for anything under the sun.. the biggest ones are for interest rates. For example, "LisaBank" is worried that if interest rates go up, their costs also go up and they might become insolvent, so LisaBank contacts JeffBank, who agrees to underwrite a big "naked" CDS for LisaBank just in case interest rates go to 9%. The big US banks have written naked CDS's for the City of Detroit, the Greek Government, GM, and most commonly on each other. When Lehman Brothers went under on September 15th 2008, it triggered an avalanche of CDS's. The very next morning, AIG.. who had underwritten hundreds of billions of CDS on Lehman, was toast. The rumor was that if AIG had not been saved, their collapse would've taken down Citibank, RBS (England's biggest bank) and UBS (Switzerland's biggest bank). They were essentially dominos thanks in large part to these CDS's. There are still hundreds of trillions of them laced in the system, thus making the failure of any bank, big company or government four or five times as bad as it need be.

So now lets go back to JeffBank, who now has a 25-1 leverage ratio (ie he's loaned out $250mm and only has $10mm in the vault). JeffBank has also underwritten a slew of naked CDS's worth another $250mm to LisaBank in regards to interest rates. Overall, JeffBank has a 25-1 leverage ratio.. and possibly 50-1 thanks to the CDS's. Because LisaBank and others pay JeffBank monthly premiums, bank profits are skyrocketing !! Hurray Happy Day !! But if interest rates go up to 9%, JeffBank will be forced to pay LisaBank the $250mm.. and JeffBank only has $10mm in the vault. Whoops. If JeffBank bites the dust, JennyBank is now on the hook for the $12mm CDS you got from them. The problem is, JennyBank only has $10mm. Therefore JennyBank also bites the dust. JennyBanks's failure then triggers other CDS's, destroying other banks. The Domino Effect. This is what was happening in September of 2008 and why it's so dangerous. If you are p!ssed that such an inherently dangerous system was allowed to become reality, you should be.

United States: In the 1970's and before, most Americans could'nt get loans for anything except a house.. and even then you needed at least 1/5th down and had to show you had savings just in case. The 10-1 leverage ratio on banks essentially meant that they did'nt have tons of money to loan out and therefore had to be careful about who they loaned to. Home ownership in the 1970's was about 33%.. the other 2/3rds of people rented. But with the arrival of Alan Greenspan in the early 1980's, the 10-1 rule was tossed aside. Soon enough, we as a nation began living a pretty nice lifestyle.. the Reagan years, the Clinton years, the Bush years.. this was a prosperous 30 years. The problem was, it was built on a mountain of debt. As a nation, we essentially spent six dollars for every five we produced for thirty years. By 2008, over 70% of adults owned houses. In 2005, a friend of mine got what was called a "no doc" mortgage.. she did'nt even have to prove she had income !! Are you serious ?? Banks were loaning anything to anyone with a pulse. The banks found themselves leveraged 25 and 30-1 in most cases. By 2007, the party was ending. Foreclosures and losses began skyrocketing. The banks, which had loaned out way too much, were beginning to totter. Americans began defaulting on credit card debts, car loans and mortgages because they had gotten themselves into too much debt. These losses began taking their toll on banks, and in 2008 we had a banking crisis caused by too much debt, and multiplied many times over due to the above mentioned CDS's.

And here we are.. we as a nation are still way over our heads in debt due to Greenspan's policies. What would you do if you had a $50,000/yr income and debts of $285,000 (your mortgage is $220,000 of this) ? This is the position we as a nation find ourselves in. Realistically, we can do two things.. tighten our belts and slowly pay down the debts or default (which would crash the entire economy in days). In 2009 and 2010, we as a nation chose a third path.. the US Government began borrowing trillions of dollars and the Federal Reserve began printing trillions more to try and ease the pain that needs to come and try to get people to borrow and spend like they did in the past to kickstart the consumer economy. The problem is.. thanks to high unemployment (and under employment) and people defaulting on their debts, there just are'nt that many credit worthy people out there to loan to anymore. We as a nation will one day feel the pain.. and the pain we are feeling today is only a small, bitter taste of what needs to come. We cannot forever kick the snowball down the hill by borrowing money and handing the bill to our own children. Here's my favorite video.. it's an interview with Kyle Bass a few months ago, who's pretty much the smartest economist on this continent, on the US economy: http://video.foxbusiness.com/v/4372206/hedge-fund-manager-debt-defaults-ahead/

Europe: The problems in Europe are very similar to the ones described above.. too much debt, overleveraged banks, credit default swaps. The difference is, their problems are much worse.. the European banking sector is on average twice as leveraged as the American banks are. Worse, in many cases, the size of these banks dwarfs the nations where they're located. The most dangerous example here is Ireland, a nation of only 4 million souls, who has titanic size banks that have loaned out way too much to way too many. These banks are in serious trouble, and the government of Ireland is trying to prop them up. Because of their size, however, Ireland's government has had to borrow vast sums of money.. for every dollar the Irish government took in tax revenue this year, they are spending four dollars.. most of this to prop up these rotten banks. It's rather like watching a dirt squirrel trying to catch a falling hippo. Switzerland, with only six million souls, is also in this boat. Now the Irish Government is having problems financing itself. The EU's answer ? Yes you guessed it.. more loans !! Greece is in a similar position. Spain is getting there. But when the IMF and the EU give Ireland and Greece loans, they demand that these governments cut spending somewhere.. usually this means slashing the jobs and wages of public employees. Ireland in particular has suffered from this. Worse yet, as time goes by, their economies continue to shrink {caused in part by these spending cuts), and so these nations' tax revenues shrink as well, forcing yet more cuts in government spending. It's called a deflationary death spiral. Ireland's unemployment rate is 14.1% and soaring. Spain's last summer went over 20%. Strikes and riots are occuring in Athens as I type this. This is Bernanke's worse nightmare, and its why he's printing money. My fear here is that one day, the people and/or government of one of these nations will simply say "Screw This" and will let their own banks fail.. and we have another Lehman style crisis thanks to the trillions in CDS's.. Spain is particularly worrysome because of the size of their banking sector's debt ($1.8 trillion), their already high unemployment, and the inability of the other EU nations to deal with a problem of this size. Spain will need to borrow $400 billion in 2011, and their rates have been rising. Left alone without help of some sort, I highly doubt Spain makes it this year. Portugal will not make it this year. If Spain begins to totter, be afraid.. very afraid. Oh yes.. and Europe's Central Bank, the ECB, has a leverage ratio of.. get this.. 331 to 1. Yesterday it was leaked out that the ECB needed a $10 billion credit line from the Bank of England. The answer is the EuroBond, which essentially means Germany will be helping their southern neighbors in perpetuity.. but will they agree ? 2011 could be very interesting.

Japan: Japan's economy is the first modern economy to suffer a real estate/banking crash, which happened in the 1980s. The response of the Japanese Government was much the same as we are today doing.. have the government prop up these rotten banks at all cost. As a result, Japan's government is severely over it's head in debt. For example, Greece is Europe's most overindebted government.. it owes 120% of it's GDP in debt and spends about 1/4th of their government revenues just to pay the interest on this debt. The figure for Japan you ask ? 210% as of this year. There is, however, a major difference.. Greece relies on foreigners to supply the loans to it's government. Japan, however, is very lucky in that their own people supply their government with the needed loans. Because of the amount of debt the Japanese Govt does owe, any rise in interest rates will hit their government's finances very hard. For example, a rise in interest rates of 2% would force the Japanese Govt to halt all funding to their Defense Dept and Medicare. So far, the Japanese people have been willing and able to finance their government. My concern here is that Japan as a nation is getting very old very fast. Fewer and fewer younger people are expected to not only pay down this debt but provide for the huge and growing elderly population. Japan's government this year spent two dollars for every dollar they took in as tax revenue. One day, something's gotta give.

Wednesday, December 15, 2010

2010 Predictions Revisited

"Jobs" Bill: Not sure how big, but the politicians are a tad scared about the unemployment rate (and well they should be lest they themselves meet that same fate in the next election). Aid to local governments will also be a part of this to avoid a muni bond implosion. Look for new taxes (trader's tax, etc) to partially pay for this. The healthcare bill might also contain immediate taxes on the wealthy": On 12/6, Obama and the new Republican congress agreed on a megadeal: Allow all of the Bush tax cuts for another two years and also extend unemployment for another 13 months. They also reduced the payroll deduction. All of this amounted to a $900 billion stimulus. I'll give myself a "B" here because no new taxes were added and municipalities were not helped


"Another QE: Expect Bernanke to announce another round of MBS purchases in the $600bln range, and perhaps another round of Bond purchases depending on how the roll over rates on short term bonds look. Look for Japan to curtail their rollovers of US debt" I got the amount exactly correct.. but not the form it took (it was Bonds that were purchased, not MBS). Lets call this one a "B"


"The FDIC will get another injection of aid from somewhere, likely the Fed, to deal with the bank failures" The FDIC raised their rates and forced big banks to pay years in advance.. but to be precise the Fed did not bail out the FDIC. Lets give this one a "C".


"The Bank of Japan will announce QE in some form, perhaps bond purchases" Hit.. in April the BOJ announced a series of measures to increase liquidity, though so far bond purchases were not among the measures. Again, lets call this a "B".


"The US Gov't deficit will be north of $1.25 trillion" This one was easy.. an "A".


"Unemployment will hover around 11%" It's hovering around ten percent.. and if they would've stopped their endless extensions of unemployment, my 11% would be right on the money. Still.. lets call this one a "C".


"This printing will have an effect somewhere in the world; the "carry trade" will, somewhere, inflate someone's stock market and real estate prices to unrealistic levels. Look for a crash somewhere, likely in Asia. Many other nations have begun to restrict the inflow of money; Taiwan and Brazil to begin with, and the list will probably grow" China's stock market and real estate markets have come back to earth in part because of our own monetary policies; money printed here is finding its way there, resulting in inflation. Over the last two months, China's government has been trying to stop this inflation by hiking bank capital requirements and will likely now try interest rate hikes. Vietnam, Taiwan, Brazil and Peru have resorted to capital controls to stop the inflows. I'll give myself an "A" here. 


"Look for at least one sovereign default in 2010. Ukraine, Mexico and Greece head this list of shame. They'll get bailed out in one fashion or another, but there will be serious damage done to EU banks in the process. Also refer back to point #7 for other candidates in Asia. These panics will not crash the system, but will scare investors out of equities and back into bondsThis was a clear hit.. "A".


"There will be no recovery back to the good ole days. We are as a nation still WAAAYY too far indebted for this to happen anytime soon,and this will continue for the better part of a decade at the very least" So far go good.. but a decade still to go. "B".


"US Bond rates: There is some $3 trillion in short term bonds that needs to be rolled over in 2010...nevermind the additional $1.25 trillion that Obama will need to borrow. Then we get to the borrowing needs of other nations, other states, other cities all over the world. In short, there is a chance that despite Bernanke's efforts, rates will rise.. unless.. the stock markets take a hit, in which case investors flee stocks and (voila !) begin buying bonds again. A minor panic or two in exotic locales will help encourage yet more investors to once again purchase US bonds" So far there seems to be absolutely no problems funding the deficit. But.. this was due not to a stock crash, but rather a major panic in a very large exotic locale (Europe) as well as the Fed purchasing vast quantities of Bonds. Rates this summer were at Lehman era lows when Europe was having it's crisis, but they've crept up very smartly after QE2 was announced. Lets call this one an "B+". 


"Stock market: Because of #10 (bond rates) I fully expect a dandy pullback beginning early in 2010; look for the DOW to sink to at least 9000ish at some point. Lets just hope that it does'nt turn into a stampede for the exits, and there exists that possibility, though I think it won't turn out that way"  A clear miss, especially given the time frame I mentioned. "F" 


"Commodities: Since I expect a stronger dollar and a sluggish economy (and thus demand for commodities) I see commodities having a down year. Gold will cool off, but I would'nt look for it to get much below $900/oz again" The CRB Index (a broad measure of commodities vs the USD) went from 290 at the beginning of the year to 258 in June, indicating that commods started the year as I expected. My call on gold was a clear miss. Since September, the CRB has rocketed upwards, hitting 319 today. Lets give this one a "C-".


"Currencies: When the stock market begins to tank, the USD will strengthen some versus both commodities and other currencies. Bernanke will not allow it to strengthen so much as to bring about deflation, but he will allow it to go up some" A clear hit. The USDX (which measures USD strength) started the year out at 78. By June, the dollar strengthened up to 88. In July it began a Bernanke engineered descent to the current level of 80. Lets give this one an "A".

Overall, I'm going to give myself a "B". 

Sunday, December 12, 2010

Iceland's Temptation


Starting in the 1990s, Iceland's three largest banks.. Landsbanki, Kaupthing and Glitnir.. began loaning out vast sums of money in relation to their size and became quite profitable. Foreign investors.. notably British and Dutch.. rushed in to invest and get their piece of the pie after Landsbanki set up a Continental wing named Icesave. After all, it was guaranteed by the Icelandic government if all else failed.

Sure enough, by 2008, these three entities had leverage ratio's exceeding 75-1 (thats 75 dollars loaned out for every dollar in the vault). Predictably, these held up about as well as the Metrodome's roof did last nite as the snow piled on.. it collapsed. In late September 2008, the Icelandic authorities took control of Glitnir and Kaupthing. Two weeks later, their partner in greed and stupidity Landsbanki also bit the dust. The Icelanic currency, the Kroner, fell dramatically as well.

The Icelandic government, essentially unable to borrow money and with collapsing tax revenues, decided on a two-fold strategy: let Glitnir, Kaupthing and Landsbanki completely collapse and begin printing money to fill the budget deficits. An IMF loan agreed upon a couple months later helped. But the effects were profound for Iceland.. as well as over 500,000 British, Swedish and Dutch depositors, who were unable to get their money out of Icesave (Landsbanki's operations on the Continent) and Kaupthing, which had operations in Sweden.

The British and Dutch governments were understandably upset and asked the Icelandic government to make good on the deposits of UK and Dutch depositors of Icesave. Indeed the UK's Chancellor of the Exchequer Alistair Darling issued an order freezing the assets of Landsbanki, the Icelandic Central Bank and Icelandic Government.. using a 2001 anti-terrorism law as the pretense. The UK and Netherlands also opposed IMF loans to Iceland until their government agreed to financially compensate Icesave depositors. Nine months later, an agreement was reached, promising to pay UK and Dutch depositors €3.8 billion was passed by the Icelandic legislature under intense EU pressure. The Icelandic Volcano Gods showed their displeasure with the eruption of the Eyjafjallajokull volcano in late 2009, spewing ice and ash over the Ccontinent, with Britain getting the lions share of it's anger. More was to come.

Shortly after the vote, the people of Iceland began marches and strikes in protest, enough to force Iceland's President Olafur Grimmson to refuse to sign it until the matter came before a national referrendum. The Icesave Referrendum was held on March 6th, 2010 under the ash cloud of Eyjafjallajokull.. with 93% of the population opposed and only 2% in favor. In short, Iceland's people gave their foreign creditors the middle finger. The eruptions ceased shortly thereafter.

But how has tiny Iceland fared ? It's been a little over two years since the collapse of Landsbanki. In the beginning, it was indeed awful: the currency fell sharply in value, foreign currency exchanges were essentially halted, the stock market closed for roughly three weeks after dropping 90% in value. Unemployment skyrocketed, beginning with Landsbanki and Glitnir employees. Food prices soared. 2009 and 2010 were miserable.

But something has happened recently.. the Icelandic economy is showing some very real signs of life again. In the third quarter of 2010, their economy grew by 1.2%. Their budget deficit for 2010 was only 6.3% of GDP. For 2011, more robust growth will lead to.. get this.. a budget surplus. Their unemployment rate has fallen from a high of 9.7% to 7.3% this year. The stock market is on a modest upswing again. Now lets take a look at Ireland: their unemployment rate is 14.1% and rising. Their budget deficit, including the backstopping of bad banks, is 32% of GDP. Unlike Iceland, they are Euro members and cannot simply print money as did Iceland. Ireland will soon join Greece and Spain in the deflationary death spiral, though it must be said that although the Irish budget has been approved, the IMF rescue package has yet come up for a vote. Irish PM Brian Cowen's popularity is on par with the Potato Famine for agreeing to it.

Iceland's President Grimmson last week had this to say comparing Iceland to Ireland.. much to the displeasure of EU officials: "The difference in Iceland is that we allowed the banks to fail. These were private banks and we did'nt pump money into them in order to keep them going. The state should not shoulder the responsibility". A tempting course of action indeed.

Friday, December 3, 2010

The 99'ers


Earlier this year, the US Congress agreed to extend benefits for the millions of people on unemployment; the total term one could stay on unemployment was 99 weeks, hence the term "the 99'ers". There are a little more than two million of these people.. and their time on unemployment has ended, beginning yesterday. By Christmas, all two million will see an end to their benefits. As next year unfolds, yet more people will lose these benefits with each passing month as well, but not in a deluge like this month.

There is now a battle in Congress by Democrats to try and extend this; the Republicans are putting their foot down, siting the need to reduce spending. Some conservative Democrats, calling themselves the "Blue Dogs", have agreed to extend the benefits.. so long as there are corrosponding spending cuts elsewhere. The total cost of extending these benefits three months would come to $12.5 billion.. which in Washington really is a spit in the ocean. Many Republicans argue that it's time these folks get off their @sses and get a job, no matter how menial.

For years, I myself would've lean towards the Republican position.. I myself have never in my adult life been without a full time job and have never received a dime from welfare, unemployment or any other social aid agency. But this time I'm leaning towards something different, and it's because I believe that America's problems are more serious now than at anytime since the Depression. I simply refuse to believe that this is a cyclical recession; these job losses are a permanent facet of life.

Unemployment is one of the few ways the US Government can directly help us folks on Main Street that does not involve trickling down through Wall Street. It also helps those who through no fault of their own are without a way to earn a living. As well as these things, it does some dandy things in the macroeconomics arena as well.. it helps consumer spending. The cut in benefits will hurt consumer spending.. at Christmas time as well. Better yet, it enables millions of families to continue paying on their credit card, mortgage and other bills instead of defaulting on them. For politicians, the immediate rise in the unemployment rate from 9.6% to over 11% might not be attractive either. At some point, even us econo-nerds must also realize the pain this will inflict on millions of families.

Therefore, my solution is this: extend benefits for those who live in counties where the unemployment rate exceeds 9% for six months.. which is probably better than 2/3rds of the 99'ers. These people are simply unable to find work. For those who are in counties where it is not, it's time to find a job. Here in Minnesota, we have plenty of entry level jobs available.. many thousands of people here simply don't want to go out into the cold and work for a living. Unemployment is not for people like this. How do we pay for it ? Given that this would cost approximately $2 billion a month, I propose the following cuts:

* Department of Defense: $1 billion/mo
* Department of Education: $500 million/mo
(slice aid to non citizen students)
* Slice "Earmarks": $500 million/mo

America's unemployment problems are not cyclical; we will not grow our way out of this. It's high time we as a nation begin to think about the serfs instead of sending armies abroad to fight in places we can't even pronounce and the pet projects of corrupt politicians.

Update 12/6pm: Obama has apparently reached an agreement with the Repubs: another 13 month extension of u/e benefits and all of the Bush tax cuts will remain in place for another two years. This is going to blow a gaping hole in the deficit. It's apparent that the path of least resistance in Wash DC is to just borrow and spend ad finitum. Tomorrow will be an interesting day in the Bond markets.

Monday, November 29, 2010

The Great Irish Robbery


Details are just out on the Irish "bailout", and they're pretty painful if you happen to work for a living in the Emerald Isle. From where I'm sitting, it looks like the "troika" (EU, ECB & IMF) have literally robbed the Irish National Pension Reserve Fund, which acts as a backstop to all Irish pension funds. It has a value of €24 billion. Of this, eight billion is already "invested" in Irish banks. Of the €16 billion left, the troika has determined that €12.5 billion is to go directly into Irish banks, with the troika providing another €22.5 billion for the banks. Another €50 billion will be lent to the Irish Gov't, which is to provide the banks with sufficient funds to avoid going belly up. All told, the troika has agreed to loan Ireland and her banks €67.5 billion (only after emptying the pension fund) at an interest rate of 5.8%, a rate that is higher than was given to the Greeks six months ago. Given that Ireland is about to enter into a Depression and that the Irish Gov't is being held responsible for the solvency of these banks, this actually isn't nearly enough, especially as Ireland's economy (and thus tax revenues) begin declining.

In the last year or so, the ECB has provided Irish banks €130 billion in loans to keep them afloat. The troika has informed Ireland that this support will be ending as well.

Oh yes.. and the troika demanded Ireland's government enact a new "austerity" budget. Amongst the things included in this budget were slashing the minimum wage, 24,000 job cuts, raises in taxes amongst all income groups and slashes in services provided to the poorest amongst the Irish.

What of the (mainly German and English) bondholders of these banks.. do they get to feel the pain ? Of course not.. 100% guarantees across the board. Restructuring is still not negotiable.

All of this.. why ? To support Irish banks which foolishly lent out waaayy too much to waaayy too many, especially in the area of real estate. But more accurately, it's to protect the German, English and other banks which are very heavily invested in Irish banks. Were the Irish government to simply walk away (ala Iceland) it might cause a catastrophe for some very large banks on the Olde Continent.

If I were in Dublin, I myself would down a few pints of stout and join the protesters. One day soon enough, the people of a nation will have enough of this robbery on behalf of the banksters and put an end to this. They in fact maybe already awakening. On last Thursday, there was an election in Donegal, an Irish county where the Fiana Fail Party of PM Cowen has always won. The result ? Fiana Fail was flailed by a two to one margin by the Sinn Fein Party.. yes the very same party that is arm in arm with the IRA. The day after the election a couple of Sinn Fein MP's met with the IMF delegation.. and told the delegation they were neither needed or wanted in Ireland. The AK47 round across the bow I dare say. Then on saturday, an estimated 75,000 Irish marched against the bailout.. whilst small for America, this in fact amounts to roughly 2% of the population. Here in the States, that would be the equivalent of having six million people march to the White House. Another Irish Rebellion at hand ? If so, it's d@mn sure for the right reasons. This article in the Irish Times says it all: http://www.irishtimes.com/newspaper/opinion/2010/1129/1224284370155.html?via=rel

Update: Having just read an article from Paul Krugman, who gets absolutely everything dead wrong, I find myself in agreement with his post re: Ireland. The End is Nigh !! http://www.nytimes.com/2010/11/26/opinion/26krugman.html?_r=2

Monday, November 22, 2010

Irish misery and viva Correa !


Well today the Irish situation was "resolved".. an IMF/EU bailout, with the UK and Sweden also kicking in some funds. Champagne bottles are popping with the good news. Equities and commodities are rising; Eurocrats everywhere are giving themselves high fives. Now was'nt that easy ?

Indeed.. except for the people expected to pay for this. The government of Ireland, like Greece, Iceland, Ukraine & Latvia before it, has agreed to give an ever larger portion of their budget to prop up rotten banks.. at the expense of social services and government employee wage slashes. In Latvia & Iceland, this has led to a deflationary depression where their economies shrink by at least 25% and possibly more. Greece is heading in this same direction. Worse, when their economies shrink, these governments will be forced into yet more slashes of services and wages as their revenues don't keep up with projections. It's like taking more and more plasma from a man who's losing weight.

In one respect, Ireland did actually win.. the Eurocrats were hell bent to make Ireland raise it's corporate tax from it's (EU low) rate of 12.5%, thus keeping Ireland competetive and able to attract more businesses to it's shores. This remained intact. Indeed Ireland has a host of new pharmaceutical industries about to ramp up and looks to be a good candidate to keep it's boat afloat. But it was a small victory. In the end Ireland parted with part of their hard won sovereignty and condemned their people to a decade of indentured servitide in order to bail out banks.

At some point, the people of these nations will have enough of this and will either elect or install somebody who will essentially flip off the bankers. Has this ever happened recently ? Why yes it did. Tiny Ecuador elected a Belgian educated economist and leftist Rafael Correa, in late 2006. His announced priorities were to increase social spending at the cost of debt repayments. In 2007, Correa immediately began threatening to default on Ecuador's debt. He declared these debts illegitimate due to them being induced by corrupt regimes, threatened to sue them in international courts and other actions. His intent was to get them to accept restructuring, and it worked.. Ecuadoran debts were substancially reduced. I'm still looking for the exact figures, but my understanding was that debt was reduced to something like 1/10th of face value.This was an important point. In the 1980s, Alan Garcia of Peru simply stopped paying.. and for a while it worked. But after a couple of years, Peru had to come back to the markets hat in hand, long after Garcia was gone.. with those debts intact. Correa's successors will not have debt hanging over them irregardless of whatever else he accomplishes.

At the end of the day, what Correa did has to happen elsewhere, be it by forcing them as Correa did, or by simply halting payments as did Peru. I'm aghast at what I've just written.. I sound like a revolutionary.. and in America I would be considered a "righty". But sadly mathematics don't lie.. these nations are entirely unable to pay. It's only a matter of when and how for a long list of nations, mainly in Europe.

Sunday, November 21, 2010

If I were King...


C'mon everyone.. we've all thought about it.. just admit it. Tomorrow morning, at 8am sharp, Obama and the entire US Congress, along with Ben Bernanke, arrive at you royal chamber and upon bent knee acknowledge you as their sovereign, ready to serve. But.. what would you do ? Here's your chance to write three Amendments to the US Constitution. Here's mine:

Currency Amendment: The nation's currency shall henceforth be the responsibility of the Currency Board. Every four years each state shall elect one member of the board by an election of the people. The Currency Board shall determine the amount of growth in the nation's GDP each quarter from a variety of sources. They will then monetize 1/10 of this amount, to be divided equally among all adult citizens and sent in the form of a check to said citizens. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment.

Leveraged Transaction Ban: Henceforth, all transactions involving banks, stocks, bonds or any other financial instruments shall not use leverage. All financial transactions shall be fully funded. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment in every instance.

Government Debt Ban: Henceforth, all levels of government.. state, federal & local.. will be banned from incurring debt, be it actual or implied. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment in every instance.

C'mon folks.. give it a try.. I'm curious to see what others have in mind to do as King..

Tuesday, November 16, 2010

PIIGS Roast


Well the escalating crisis in Ireland has gone unsolved; fellow EU member states are pushing the Irish Gov't to accept a bailout. The Irish, who indeed have the cash to endure until next summer, are resisting becoming wards of the IMF and thus condemn it's citizenry to indentured servitude. But make no mistake.. the situation is unbelieveably bad. Irish banks are wildly overleveraged and hemorraging badly, with the Irish state guaranteeing the debts. To put this in perspective: Here in the US, our Gov't borrows one dollar for every three it spends. Ireland's Gov't has revenues of roughly €36 billion.. with projected expenditures of €87 billion, so in effect they have to borrow five out of every eight dollars they spend. Worse, the interest rate is hitting all time highs.. today {again} the Irish Ten Year Bond settled above 8%.. which essentially means Ireland is unable to borrow on the open bond markets. The reason the EU is putting pressure on the Irish to accept a bailout is out of fear that the Irish will simply default.. and this would be insanely bad for European banks, beginning with the ECB itself, which has been lending huge sums to Irish banks, which then turn around and purchase Irish Govt bonds, which are then repo'd back to the ECB. For perspective on just how much the Irish Govt (and their banks) owe foreigners, the figure put out by the CIA just last year lists Ireland's External Debt at $2.287 Trillion {this compares to Greece's $552 billion}. And yes.. Ireland is a small country and this equates to.. get this.. $515,000 per Irish citizen: http://3.bp.blogspot.com/_5JJarCb6DPo/TOK_Y_vIj8I/AAAAAAAABnY/01i2zgc-LJM/s1600/external+debt.png

Speaking of our good friends the Greeks, a new report out by Eurostat (they do the accounting in the EU as well as national governments) states that Greece's statistics were.. shock.. wrong for a fifth (or sixth ?) time and that the situation is.. you guessed it.. much worse than what the Greeks are saying it is. Eurostat said that the Greek Gov't deficit is 9.6% of GDP (right about what ours is). They also revised the 2009 figure to 15.4%. These figures are well above the EU bailout guidelines. Saving Greece looks increasingly like an open ended commitment instead of the three year plan they all greed upon. But.. will the Greek people put up with more austerity in order to pay off bankers ? That's a big if in my opinion.

Then we come to Portugal, who is waiting on the sidelines for their turn at the bailout trough. Portugal's Finance Minister Dos Santos said yesterday: "The risk is high because we not facing just a national problem. It is the problems of Greece, Ireland and Portugal together.. this has to do with the stability of the Eurozone, and that is why contagion in this framework is more likely.. markets look at this together because we are all in the Eurozone". Mr. Dos Santos hit the nail squarely on the head; look for Portugal to follow Ireland at the EU bailout trough. Portugal's budget deficit last year was 9.7% of their GDP, roughly what our is this year. This year they were to slim this down to 7.3%, but this is looking very unlikely. The markets are thusly punishing Portugal, though not nearly as badly as Greece and Ireland.

But will the other Eurozone members be there to support their brethren ? Today Austria came out and said that since Greece did not meet their budget targets, Austria will not be participating in another Greek bailout package. Within the hour, Finland was rumored to have nixed any aid to Ireland. This was very badly timed to say the least on both of their parts, and a very ill omen. At the hour of greatest need for unity, it appears a few links in the chain are weakening.

The EU's President, Herman Von Rompuy, had this to say yesterday: "We're in a survival crisis. We all have to work together in order survive with the Eurozone, because if we dont survive, the European Union will not survive. But I''m confident we will overcome this". Unfortunately, the Austrians and Finns missed this speech.

Any solution will require large amounts of cash to be made available. In the past, the call was made across the Atlantic to Ben Bernanke, who then opened up what are known as "swap lines", which essentially amount to us printing money to help the EU. In addition, the US is on the hook for what amounts to 20% of any IMF bailouts. Were the EU to make the call again, they might not find us nearly as accomodating; it would put enormous pressure on Bernanke and Obama, though in the end I see them riding to the rescue, but not with the support of the Republican House of Reps, where opposition to this would be intense.

We are slowly approaching a critical moment in the EU. In the end, I see Ireland and Portugal getting bailed out, the US opening the swap lines again and the financial system as a whole surviving this mini crisis. But if Spain and her 9.3% of GDP budget deficit were to falter, the odds of success drop below 50% in my very humble opinion. Given enough time and the fact that none of these nations can solve a problem of debt with more of it in combination with austerity, the chances of the Euro surviving are grim indeed.

In addition to the misery on the Olde Continent, something wierd is happening here; the Muni Bond markets, perhaps spooked by the impending bankruptcy of Harrisburg PA, are seriously tanking.. over 10% in two days: http://1.bp.blogspot.com/_J8L-e47yFE0/TOLAT3Y4sVI/AAAAAAAAAqE/PhBadIH1uA4/s1600/munis.png

Sunday, November 14, 2010

Ireland bites the dust


This last week, Ireland's benchmark ten year bond rose to over 8.8%, which means essentially that nobody is willing to buy Irish debt on the open market. There were rumors Ireland was in talks with EU officials for a bailout package. As we speak, only the ECB is loaning money to Irish, Greek and Portugese banks, which then purchase their own government bonds courtesy of this ECB funding. The ECB will not purchase these nations' debts outright, something that is happening with abandon here in the States. But the ECB risks inflation if done to extreme, which the Germans hate.

How did this happen ? In a word, a property boom and bust. Anglo Irish Bank, who's debts were guaranteed by the Irish Gov't, went waaayyy too deep into overpriced mortgages, and the Irish state is now paying dearly for this. Last year, Ireland knew it was in trouble, and did what nobody, especially Greece, did.. they instituted severe budget cuts proactively to nip the crisis in the bud. For most of this year, Ireland was looked at as the poster child for budgetary discipline, a role model. The cuts were indeed severe; most public servants took an immediate 15% cut in pay, there were layoffs, pensions were slashed. It worked; rates on Irish Bonds came down nicely; Greece became the problem child and the world simply forgot about the Emerald Isle.

But of late two things have crept up to bite the Irish: First was the announcement that Anglo Irish's losses were dramatically higher than previously reported, thus making the Irish state responsible for far more than previously thought. Second was from the mouth of Angela Merkel, Germany's Chancellor, who put forth the suggestion that when sovereigns and banks go under, the bondholders should accept a part of the haircut and not simply throw it all on the public. It also seemed like a blueprint to change the EFSF (see below). This particular statement had the effect of spooking bondholders, who began demanding a higher interest rate in response to their increased risk. And the usual suspects.. Greece, Ireland and Portugal.. have been paying the price.

As a result, there are increased concerns that the EU's bailout mechanism, called the European Financial Stability Facility {aka EFSF} could be called in to save the day. This was the $440 billion rescue programme announced in May at the height of the Greek Crisis whereby the governments of the EU all agree to cough up a percentage of the cost of the rescue. The problem is, these things take time to do.. parlaiments don't act within 24-48 hours. Worse, many of these nations are themselves in serious trouble.. I have serious doubts that Spain, Greece and Portugal will willingly cough up tens of billions to save the Irish state, leaving the EFSF burden to be increased on Germany, Holland and other better off Germanic states. This will not sit well in Germany to say the least. Chancellor Merkl walks a fine line; she knows her own people do not like bailing out irresponsible and corrupt governments.. yet she herself knows the possibly cataclysmic consequences of failing to do so. Not only is it these nation's governments that are in trouble, it's also their banks and their state and local governments as well. Irish banks have borrowed over $10 billion from the ECB in just the last month alone.

Another concern is the amount of risky loans (Greek, Irish, Portugese) the ECB is taking on. After all, the ECB is a bank, and it in theory can fail like all others. These concerns have led the Euro to tank this week, going from above $1.40 to under $1.37 at one point. Portugal's bond rates are also creeping up, despite a tough new austerity budget announced just last month. In addition, this came out this morning in Portugal: "Portugal Foreign Minister Reportedly Warns On Euro Exit LISBON—Portugal may be forced out of the euro zone if it fails to tackle its economic challenges, the country's Foreign Affairs Minister, Luis Amado, was quoted as saying in an interview with local weekly Expresso. At some point, the people of these nations will, in their own way, protest the coming Depression. The danger here is that at some point, one of these nations will elect a leader who will simply say "Sorry guys.. we're not gonna pay". Iceland did this just this year in a special election, where over 90% of Icelanders said "No" to paying back some of the money to England and Holland. They then chased their PM out of the parlaiment building. As Ireland and Portugal near the Keynesian End recently reached in Iceland and their version of The Depression sets in, their leaders need to reread their history books on the storming of the Bastille.

So far, as its only Ireland and Portugal, its containable. But should this spread to Spain in a serious way.. well.. I'll let Ambrose give you a scenario:

Thursday, November 11, 2010

Veterans Day


When I was a handsome lad of 20 and in Navy Hospital Corpsman School, our CO announced that all of us would be doing three or four day stints on six different wards at San Diego's old Balboa Hospital. The first ward I went to was the burn ward. I did'nt do much, but noticed what a howling torture burns are, especially the daily removal of gauze from the burned skin. The unit had six Marines, all of whom got their wounds in Beirut when they happened to be in the barracks blown up by a jihadi car bomber. Over the next few days, I got to know the patients in the unit as people. Most of these guys were seriously maimed and would never lead productive lives, never know the warmth of a wife at night, never hear the pitter patter of rug rats. I was never in any combat, but nonetheless it struck me that these guys had sacrificed everything they had and would ever have for that mission. Whenever I hear people describe sacrifice, I remember the burn ward and know in my heart what real sacrifice is all about. To my mind, the most important of all holidays is not Christmas, Thanksgiving or Labor Day, yet these days are paid days off at my employer. Today was not. I was saddened that so many of my co-workers had no idea it was a holiday today; everything was open, including our office. Most just shrugged their shoulders and went about their day's work. Far too few of us have seen what I have seen. The only "Happy Veterans Day" I got was from another vet in the office. I fear that their sacrifice is being watered down in our nation. As for me, I remember.

Tuesday, November 9, 2010

Ben's Last Bullet


Watching The Fed is at times rather like watching the Vatican; waiting for the lofty Cardinals to let loose the white smoke, signaling a decision has been made. There is much politicking within the hallowed confines of 20th and Constitution, and each Chairman operates differently. From what I've read, Greenspan was rather like a dictator, allowing no real dissent, and he had enormous power in his time and would easily overcome any real internal resistance quite easily. I've read Bernanke, who was a Princeton academic before taking the baton from Greedspan, is more like a Chairman of the Board, listening intently to dissenting voices, but in the end doing what he wants. "Fed Watching" has become something of a skill, rather like "Palace Insiders" hopping around Buckingham Palace. Inside information obviously helps, and so the first amongst equals in this new arena is the WSJ's Jon Hilsenrath. The Fed quite obviously wields enormous power, and is indeed well worth watching. Not only do the internal politics play a role, but external politics as well.. pressure from the President, the Chinese, as well as economic factors such as the serious signs of deflation that were appearing this last spring. Consider me a rank amateur, but one with a blog, and so here I go !



It's my assertion that the winds of change are approaching hurricane strength. The elections in the US will bring a Republican majority to the House and gains in the Senate. The House Subcommittee that oversees The Fed will be chaired by Bernanke's harshest critic, Rep Ron Paul (R-TX). Ron Paul's son, Rand Paul, has won a Senate seat in Kentucky and has promised to stop the spending spree in DC by filibustering any attempt to raise the debt ceiling. Come January, there will be a couple new voting governors of the FOMC, all of whom appear to be hawks: Mssr's Plosser, Fisher and Kocherlakota, who will join noted hawk Thomas Hoenig from the KC Fed. The hawks want an end to money printing. They are also becoming more vocal and more media savvy.. this morning comes a report from the Dallas Fed that their President (and new FOMC member) Dick Fisher, said in an interview something quite startling and in reality unconstitutional: "For the next eight months, the nation's central bank will be monetizing the federal debt". Along with it, he passed a warning shot: "Here is the message: The Fed is going out of it's way to be a good citizen. It's time for Congress to do the same". Fisher will get an assist from Rand Paul and the newly elected Republicans, and well they should. No nation can continue to borrow 1/3 of it's entire budget forever and fill the void with printed money.



Money printing has a few drawbacks, among them is that it devalues the worth of US Gov't Bonds as well as the value of the currency. Our largest creditor, China, is none too thrilled with watching their $2.1 trillion in US dollar assets being devalued time and again. A few high ranking Chinese officials have openly advocated selling these assets lest they become even more devalued.. and were they to do this, it would be an utter catastrophe for the US. During the 2008 Lehman Crisis, Russia did just this and was urging China to join them in sinking the US economy, which was indeed within China's ability to do, and still is. Bernanke, as well as the Obama Administration, will need to begin listening to Hu Jintao. So far this year the Chinese have not become net sellers of US Treasuries, but neither have they stepped up and bought them in large quantities.



Among the other drawbacks of money printing is that it makes the currencies of other nations go up in value, thus making them increasingly uncompetitive as their exports compete with US exports and our weaker currency. First and foremost amongst the nations hurt by this is Japan, who's currency rose to another record level versus the USD last night. Because of the economic straightjacket Japan finds itself in, they are not as able as we are to simply print money. Their exports will suffer as a result, and this comes at a time when Japan can ill afford it. The EU is also being hurt by Bernanke's printing presses as the Euro passed the $1.40 mark a couple days back, thus hurting their ability to export. Other nations have taken matters into their own hands. Brazil, Korea and Vietnam have all imposed capitol controls as a way to halt the rise in their currencies versus the Dollar, and a few have done so with verbal broadsides.. notably Brazil's Finance Minister at the G20 Meeting, and rightly so. Canada and Australian dollars have reached parity with the USD this year as well for the first time.



Because of all of these factors, it's my humble belief that when the effects of this money blast begin to wear off this coming spring and summer, Bernanke will not be able to do a repeat performance. Bernanke will issue pages and pages of threats and hot air.. which actually do have an effect.. but I don't see him overcoming the internal and external opposition. The chamber is empty now, and next summer the deflationistas might yet be proven right.

Monday, November 1, 2010

The Big Week


In thinking about what I was going to post this morning, the two obvious hot topics came up: the US mid term elections and Ben's upcoming QE2 on Wednesday, both of which I'll cover below. But as I looked at the morning's financial news, something so astounding and right jumped out at me. The Governor of the Bank of England, Mervyn King, has proposed changes so astounding that it quite obviously made my headline. The good Governor has proposed four reforms:

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.

2. The Volcker Rule: enforcing the breakups of banks into standard and speculative arms.

3. The Kotlikoff Rule: forcing banks to match each pool of risks with an adequate reserve of capital and preventing losses in one arm from spilling over into another one.

and the duzzy:

4. "Eliminating Fractional Reserve Banking explicitly recognizes that the pretense that risk free deposits can be supported by risky investments is alchemy. If there is a need for genuinely safe deposits the only they can be provided, while ensuring that cost and benefits are fully aligned, is to ensure that such deposits do not coexist with with risky assets"

To wit: In the current system we all have, for every dollar deposited in a bank, the bank is entitled to loan out 10 dollars. This produces what's known as a 10-1 leverage ratio. If the bank therefore loses 1/10th of their loan portfolio, the bank is toast. In Europe, this figure approaches 40 and 50-1. In bigger US banks, the ratio is about 25-1. This system is how we hopelessly indebted ourselves. King's proposal would eliminate this.. for every dollar in the bank, the bank can loan out only that dollar.

Back here in the US, Ben Bernanke has talked about going the exact opposite direction: "The Federal Reserve believes that it's possible that, ultimately, it's operating framework will allow the elimination of minimum reserve requirements, which impose cost and distortions on the banking system"

My belief is, quite obviously, that fractional reserve banking must end, as do all leveraged transactions. It's these two things that blew up Wall Street.. and the problems are still there. The current system allowed our nation to hopelessly indebt itself. King's solution, if imposed, would make it impossible to so indebt ourselves. For even suggesting these things, I believe Her Majesty should Knight Mervyn King. He probably recieved an ugly text message from Ben this morning.

Which brings us to Wednesday morning.. Ben Unleashed. The question of the day.. how much. Ben's idea is to do it BIG TIME. But according to his mouthpiece {Jon Hilsenrath of the WSJ} he seems to be running into some serious resistance from the other Fed Governors and possibly China, who owns over $2 trillion in USD denominated assets and would'nt like to see then depreciated by 10% just this week. So.. my fearless prediction: $600 billion over the next six months, with a note attached saying that more maybe necessary. Look for Japan and others to either pick up the pace of money printing to keep up or impose yet more capitol controls. At the end of the day, this money has to go somewhere.. and the stock markets are the likely recipients. But none of this will actually trickle down here to us serfs. For us, the price of gas and food will continue to creep northwards and the unemployment rate will remain stubbornly high. For us, there is no recovery. For Wall Street and Government, however, the recovery is going splendidly.. bonuses and benefits have never been better.

Now onto the last hot topic.. the US elections. It's known here in the States that the Republicans will body slam Obama and the Democrats; it's a near certainty that the US House of Reps will go over to the Republicans, with a slim chance of the Senate going over as well. I fully believe this as well.. the House will flip, but the Dems will maintain a slim majority in the Senate. This will bring about a few changes: first, there will be no more stimulus or bailouts. Second, Tim Geithner is likely going to be sacrificed, and rightly so. There is also the chance that ObamaCare will begin to be hacked down piece by piece.

Can we make Mervyn King our King ?

Wednesday, October 27, 2010

Bill Gross.. Unleashed


Bill Gross is the co-CEO of the gigantic investment firm Pacific Investment Management Co, otherwise known as PIMCO. This company is about as big as any bank in America. Bill Gross himself is a very intelligent, very soft spoken guy who is very careful what he says when microphones are near. Last May, when Greece was going under, Bill described Greece's financial position as "challenging", when most were using terms like bankrupt, basketcase, hopeless etc.

Thus the letter he released yesterday was utterly shocking. It appears that Herr Gross just had his "Jerry McGuire Moment", empty flask and all. It's a long letter, aimed mostly at the worthless politicians we elect; I'll just post some of the more interesting comments: "We are being conned, folks.. by Republican and Democrat alike. Shame on them and of course shame on us. We're getting what we deserve. Vote NO in November.. no to both parties. Vote NO to a two party system that trades promises for dollars and hope for power, and leaves the American people high and dry". A little further down: "We are, as even some Fed Governors admit, in a 'liquidity trap' where interest rates or trillions in QE2 asset purchases may not stimulate borrowing or lending. Escaping from this liquidity trap might be impossible, much light trapped in a black hole". A tad further down another shocker: "Check writing in the trillions is not a bondholder's friend, it is in fact inflationary, and truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a ponzi-like characteristic. Now, however, with growth in doubt, it seems the Fed has taken Charles Ponzi one step further. The Fed is, in effect, telling the markets not to worry about our fiscal deficits because it will be the buyer of first and perhaps last resort. There is no need.. as with Charles Ponzi.. to find an increasing amount of future gullibles. We'll just print the money and write the checks ourselves. I ask you.. has there ever been a Ponzi scheme so brazen ? I call it the Sammy scheme, in honor of Uncle Sam and the politicians that we elect every two years" Lastly, he shoots us a prediction: "The Fed wants to buy, so come on Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. Either way, it will likely signify the end of a Great 30 year Bond Bull Market"

Remember, PIMCO manages nearly two trillion dollars in wealth. Imagine if the CEO of Citibank had stood up and said such things, or Goldman's CEO. They'd be run out of Wall Street by way of a swank rehab clinic confessing sins alongside Charlie Sheen. Probably a good thing Bill's company is located in California. In that last comment, what he's saying is that the interest rates the US Government pays on its Bonds will have to rise, and perhaps precipitously.
In other news, Jon Hilsenrath of the WSJ (otherwise known as Bernanke's publicist) came out with an article today suggesting that QE2 might actually disappoint.. in the $200 billion neighborhood. If this is so, why even bother ? I don't believe this. If Bernanke is going to go thru the hassle (and the expected public flailing) of doing more money printing, he's going to do it right. I still look for another trillion. If it is indeed a trillion or more, I look for the ten year US Bond to go south of 2%. with mortgage rates headed near 3% even. In yet more commentary from people of note, Peter Orszag, Obama's former OMB Chief, had this to say about Bernanke's upcoming PrintaPalooza: "by perpetuating an artificially low 10 year government bond rate, the Fed maybe delaying the very fiscal policy action that the nation most needs while doing little to boost an economy who's primary problem is not high long term interest rates"
Ben's friends are becoming fewer and fewer in number. But how much of this is his fault ? He's charged with inducing an economic recovery.. at the same time that the US Government needs to borrow one dollar out of every three it spends.. and at a very low rate.. to keep itself solvent. Ben does not have the power to take a chainsaw to the budget, recall troops home from abroad, slice entitlements or lower the capitol gains taxes, all of which he has in the past told Congress it desperately needs to do. The US Gov't simply spends money like a drunken sailor and tell Ben to fix it all. If he was'nt making a bazillion dollars a year, I myself would pity Mr.Bernanke.

Saturday, October 23, 2010

Presidential Holiday


I generally try and stay away from politics on this blog unless something really torque's me wrong, but today is one of those days. I came across an article today gave some of the details of Obama's upcoming trip to India. During a time of economic Depression for most of us, the details of this simply boggle the mind: "To ensure fool-proof security, the President’s team has booked the entire the Taj Mahal Hotel, including 570 rooms, all banquets and restaurants. Since his security contingent and staff will comprise a huge number, 125 rooms at Taj President have also been booked, apart from 80 to 90 rooms each in Grand Hyatt and The Oberoi hotels. The NCPA, where the President is expected to meet representatives from the business community, has also been entirely booked. The officer said, “Obama’s contingent is huge. There are two jumbo jets coming along with Air Force One, which will be flanked by security jets. There will be 30 to 40 secret service agents, who will arrive before him. The President’s convoy has 45 cars, including the Lincoln Continental in which the President travels.” Since Obama will stay in a hotel that is on sea front, elaborate coastal security arrangements have been made by the US Navy in consonance with the Indian Navy and the Coast Guard. “There will be US naval ships, along with Indian vessels , patrolling the sea till about 330-km from the shore. This is to negate the possibility of a missile being fired from a distance,” the officer said"

Now I understand the need for security, but really ? Could'nt they have simply arranged a meeting between trade officials in a hotel in downtrodden Detroit ? After a little digging, I came across a list of Obama's vacations this year:

-Full family Christmas and New Years in Hawaii.

-March spring break-first lady Michelle Obama, mom Marian Robinson, and both daughters hit Broadway.

-Memorial Day in Chicago with the family.

-Three days in July in Maine, primarily tony Bar Harbor.

-Last week, the president traveled to Chicago for a birthday party with Oprah and others.

-Michelle and Sasha spent much of last week on Spain's southern coast, ending it with a trip to Majorca to meet the king and queen of Spain.

-Florida this weekend for a night on the Gulf Coast.

-August 19-29 on Martha's Vineyard.

The Obama's are also known to throw large, elaborate celebrations at the White House, mostly for personal friends, sports legends and the like. He also does a lot of golfing as I understand it. To say that these vacations are both exorbitant and in poor taste is the height of understatement. I dare say that most Americans would resent the hell out of this very Regal Presidency in the face of such misery on Main Street. It's not a Democratic thing; Truman was frugal to the point of fault, whereas Reagan was also quite elaborate, as were the Clintons. Geo W Bush nearly always went home to his ranch in Crawford. The difference is, these were not times of Depression. Real unemployment (U6 measurement) is near 17%. The Federal deficit is (again) north of $1.4 trillion. To my mind, it has to do with the man's ego and the lifestyle he believes he deserves at a time when the nation can ill afford it. How about we balance the budget, not indebt my grand children.. then talk about vacations ?

Thursday, October 14, 2010

Frazier-Lemke II


In the midst of the Depression, North Dakota Senator Lynn Frazier and North Dakota Rep William Lemke, with the blessing of FDR, introduced the "Frazier-Lemke Farm Bankruptcy Act" which was passed on 28 June 1934. This act effectively delayed the banks right to repossess a farmer's land for five years, though the farmers did have to pay the banks rent, with the amount determined by a judge. It was extended until 1949. Other measures adopted by individual states and the creation of the Home Owners Loan Corp eventually prevented about 90% of all foreclosures from 1934 onwards. For many banks, this was a crushing blow, though it must be said that this act did provide societal stability, which was under far more stress than most of us realize. The Nebraska state capitol was stormed by angry farmers. 25,000 famished war veterans camped in front of the US Capitol were charged with naked sabres by the US 5th Cavalry.. led by one George Patton. Repossessing a home took a lot of courage; many such repo agents were shot; in many cases, the local police refused to help the agent. Banks had shut down in most states; most states in the deep South could'nt pay teachers. In the Depression, a very large part of the nation's food was produced by small farmers, and a decent portion of the population was indeed rural. In many ways, Frazier-Lemke was in large part responsible for keeping the nation from falling apart, which Eleanor Roosevelt fully believed would happen.

Here in the Great Recession {Depression if you are not on Wall Street or Government employees} something has arisen in the last week or so that could lead to the passage of something akin to Frazier-Lemke. The first is the forclosure clusterf*ck, which I explained in my last post. Second is the impending QE2 (Print to Infinity), which promises to, in one way or another, destroy the value of the US currency. The banks, in their haste to foreclose and sign bad mortgages, left some pretty serious errors in the paperwork. Some of it is outright fraud.

Today, a couple in Simi Valley,CA.. Jim and Danielle Earl, upon advice of their lawyer, forcibly repossessed their foreclosed home, which had already been resold to another buyer. The police, stumped as to what was actually legal, went about their business of eating doughnuts and watched helplessly, especially after the lawyer called in the local media. This comes on the heels of Bank of America's announcement to halt all foreclosures, with JP Morgan, Ally and Wells Fargo doing so in about half the states. On Fox News Sunday, US Rep Debbie Wasserman-Schultz (D-FL) went on to advocate a complete ban on foreclosures on a family's primary residence. Increasing numbers of articles are coming out advocating this foreclosure ban as well. For millions of Americans, such a ban would seem to be a Godsend. The momentum is building; if it keeps building, it's going to get proposed in a bill in Congress. Something in the same vein as Frazier-Lemke, whereby people would simply be ordered to pay a percentage (say 35%) of their take home pay to avoid foreclosure on their homesteaded property. All second homes and vacation cabins would be, however, fair game for repossession. President Obama, already under severe pressure due to the economy and from his own party, would almost have to support it. The Republicans, usually on the side of big business, would likely oppose the deal.

The problem is, today's banking system and mortgage markets are vastly different than they were in the 1930s. In the 1930s, the bank loaned you the money (usually you would need 20% down) to get the home and you paid the bank back. Today, the "right to be paid back" on the mortgages are rolled up into what are known as Mortgage Backed Securities, which are packaged and sold by companies such as Goldman Sachs, JP Morgan and Wells Fargo, and then sold to investors.. including these very same institutions. The MBS market is in the trillions of dollars in size. Worse, these same banks wrote Credit Default Swaps on these MBS.. and these CDS's also amount to many trillions. If something similar to Frazier-Lemke were to pass, these MBS's would become nearly worthless as they no longer entail the "right to be repaid". The financial tsunami this would unleash could very well crash the entire financial system.

My bet: Frazier-Lemke II is not enacted due to the incoming Republican House majority; Obama thrashes the Repubs for being "pro-business" and it's quietly buried. But there is the possibility that it's actually passed before the Repubs take office, despite the howls from Wall Street. Many Republican Congressmen are from states like Nevada, California and Florida where foreclosures are highest. In such states, opposing Frazier II would be political suicide.. and they might simply sit this one out, allowing it's passage. The Senate would be a tougher nut, but it is in Democratic hands and there are a few liberal Repub Senators. If it gets past both houses of Congress and arrives at Obama's desk, he will have the most painful of choices.. help his constituents and possibly crash the system or commit political suicide and veto it. The pressure is building to "do something" about foreclosures. Interesting times indeed.