Choosing Words Carefully

There are few folks on Earth that choose their words more carefully than the Fed. Indeed, interpreting their verbiage is virtually a science. So when I read that the Fed told GOP senators that it does not have the intention "or the authority" to bailout Europe, you have to wonder exactly what they mean by that. Seriously, hundreds of millions of support by the Fed over the past few years directly went to assist European financial institutions. Did they lack the "authority" for that? Is support for their financial institutions not support for Europe? Does the Fed not intend to support European financial institutions if things take a dive, which odds are good they will eventually do in some countries? And are the GOP Senators asking the right questions?

http://www.washingtonpost.com/business/markets/bernanke-to-discuss-european-financial-crisis-with-republican-senators/2011/12/14/gIQAoZbEuO_story.html

So what else can I say - China real estate prices in decline (as the government there has pushed to do), old news. The shine wearing off the recent EU pact for a cure with bond rates climbing again (new news but hardly unexpected). Politicians kissing babies and otherwise in NH to get votes, an age old game.

Disclosures: None

We Are the 75%!!

I attach a revisionist history from CNN.

http://finance.fortune.cnn.com/2011/12/08/blame-bankers-occupy/

The point they seek to make is that the big banks did no better than the poor in terms of government help and bailouts this past recession - seriously! They make truly stupid comments like, under the Dodd-Frank bill:

"Wall Street is now subject to the most massive new regulation to be imposed on it since the 1930s"

Now if "massive" is just a reference to the number of pages, they may be correct, but they imply it is massive in impact. The final bill was so watered down and gutted it was a waste of paper. And indeed, the financial institutions have already figured out ways around any financial impact from the bill. In the six months before Dodd-Frank, I paid virtually nothing in fees and charges to my bank for the privilege of having them hold my money pretty much interest free. In the past six months, over $150, mostly with new fees/service charges they inacted six months ago. They are making up for any losses just fine.

CNN argues that the big banks during the real estate/lending/derivative bubble were making the same they were making 15 years ago. Opps, I am sorry, not exactly what CNN said. It actually said:

"The industry has made no more money over the past five years than it was making 15 years ago, and in 2007 and 2008 it suffered the greatest losses in its history."

Now this is a bit tricky to decipher, but read it carefully. It implies that during the bubble the industry was not making any more than it did 15 years ago, but what it truly says is that over the past five years - which by definition includes the worst two in history - they still did about the same as they did 15 years ago. So you had years where the banks were gluttons preying off the gullible, off-set by the two worst years in history, to lead to results commensurate with historical earnings. Yep, the banks really paid the price for their foolish ways.

The other key point made by CNN is that the debt crises is a two-way street. You have the big banks offering no income verification loans and if you can fog a mirror you can get a loan, loans. And you have everyone who can fog a mirror getting a loan. Now let's set aside for a moment the relative financial sophistication of the big banks versus the mirror foggers, and focus on a lost fact in all this; these two groups aside there is a big group that fits neither camp. I say 75% in the title to this but it could easily be 10% higher or lower. Nonetheless, there is a majority of Americans who did not take out loans they could not afford, who had income they could prove and who are still making payments. We are not the 99% and I resent the "Occupy" crowd from lumping us in to their 99%.

The point here is that there were a lot of irresponsible folks taking loans they could not afford, many of whom not financially sophisticated enough to perhaps understand it but certainly many as well trying to game the system and play the real estate bubble, but there were also a host of big banks gaming that same bubble massively. And if CNN believes folks on the short end of the stick got relief similar to what the big banks got, they are truly smoking something good.

So both ends of the candle are to blame, but the majority of Americans sit in the middle and are paying the price. When it comes to what I am calling the "We are the 75%" neither the big banks nor the occupy crowd get to tout superiority in message. So stick that in your pipe and smoke it CNN (which I assume does not have tobacco in it.)

I think it is the 75% that need to start a revolution!

Disclosures: None.

Bubble On, Bubble Off, Bubble On, Bubble Off . . .

Let's talk China. It was not so long ago that they were increasing bank reserve requirement ratios to a high 21.5% to cool an overly hot real estate market, a/k/a bubble, fueled by the same easy lending that cooked us here in the U.S. Now the economy there, rosy by most countries' standards, is too slow to support its massive population, so last week it cut the reserve requirement to 21% and is fully expected to cut more in January. This, in addition to some coordinated central bank moves in Europe and the U.S., is credited for last week's rather incredible market advance.

But here is the problem - China was right about the bubble and right to cool it. Most global investors, as it turns out, predict a banking crisis in China in the next five years - go figure - and China is now doing steps to make it worse. Makes you kind of wonder why the markets responded positively. Well, they are a tad fixated on the short term and the need for China to overheat its economy to keep the world from falling into an economic black hole. They do not care what happens there in five years as long as it moves to keep things chugging along for the next few years. Just my take, of course. Hopefully by the time their bubble bursts the rest of the world will be back on its feet and able to keep is chugging. Any takers on this prospect?

http://www.bloomberg.com/news/2011-12-07/poll-investors-predict-china-bank-crisis.html

By the way, holding your breath about the EU? Good luck with that. Read the following and get a grip.

http://www.nytimes.com/2011/12/08/business/global/as-europes-bond-market-dries-up-traders-fear-for-jobs.html

http://www.reuters.com/article/2011/12/08/us-ratings-eu-idUSTRE7B62GQ20111208

http://www.bloomberg.com/news/2011-12-07/japanese-futures-little-changed-before-summit-australian-shares-decline.html

http://www.reuters.com/article/2011/12/07/us-citi-jobs-idUSTRE7B61P720111207

I could attach a lot more, but you get the picture. Seriously, the lipstick is off these PIIGS.

Disclosures: None.

That's Going to Leave a Bruise

Everything was sailing fine. Central banks circling the wagons, governments saying some smarter things, I got my closet cleaned out - everything was simply dandy. Then that old fuddy duddy S&P had to come out this evening with a credit rating watch (like expect a downgrade for some soon) on several EU countries, including France and Germany (okay, France has been suspect for a while but Germany?, seriously). I suspect the strong market gains we have seen of late are going to be shaved back a tad. Nothing too terrible, but a shave nonetheless - at least for now. Long term, I do not see a tad, but I am not about to try to predict how long the powers that be in EU can keep this ship afloat. They already surpassed my expectations by at least a year. But the darn thing will sink in time.

http://www.bbc.co.uk/news/business-16042346

Good to be Prepared

Here is a nice piece on what some companies are doing to prepare for a possible collapse of the Euro, or at least certain contries perhaps leaving the EU. Good to plan, but as certain companies are finding, there is not a lot they can do. Some stuff yes, but not a lot.

http://www.reuters.com/article/2011/11/30/us-euro-zone-contingency-idUSTRE7AS0H020111130?feedType=RSS&feedName=topNews&rpc=71&google_editors_picks=true

Also worth noting is Standard & Poors downgrading of a bunch of big banks. They announced this was coming, so no surprise, but tell that to the downgraded banks.

http://www.reuters.com/article/2011/11/30/sp-ratings-idUSN1E7AS23C20111130

Housing prices also dipped in September, after months of small increases. Go figure:

http://www.latimes.com/business/realestate/la-fi-home-prices-20111130,0,3352737.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+latimes%2Fmostviewed+%28L.A.+Times+-+Most+Viewed+Stories%29

But hey, all is well, the Victoria's Secret Fashion show is on tonight:

http://popwatch.ew.com/2011/11/29/victorias-secret-fashion-show-reasons-to-watch-the-best-special-of-the-season/

"A New Plan"

I am linking an article from MSNBC on why stocks are up dramatically today, but I simply have to quote here part of the first line:

"U.S. stocks jumped Monday as optimism grew that European leaders would come up with a new plan to resolve the region's debt crisis . . ."

http://bottomline.msnbc.msn.com/_news/2011/11/28/9073132-stocks-surge-amid-euro-zone-consumer-hopes

If you live in a cave, you may have missed the fact that EU has been under a good bit of financial stress for at least three years. Even I predicted in January 2009 (yes - nearly three years ago) that the EU might lose a few members, and at that time I specifically mentioned Greece, so the problems in the EU are no recent development and have been obvious for a very long time, even to me. And if you follow the press, European leaders have been flying all over the place to meet, falling over each other to throw out words of confidence and doing all that they can to right the ship. Indeed, those leaders unable or unwilling to tote the EU line are now or soon to be gone. None should ever dare put the vote of their own citizens in the line ahead of EU unity or financial interests. That would be blasphemy.

The point here being that European leaders do not have any new plan. They have no new thoughts, no new agenda, no ground breaking approach. They have nothing more for us than they did last week, last month or last year. Nor can they. There are no great or even good options for the EU. They have a list of options and the best they can do is try to pick the least painful, but due to the EU being made up with a bunch of independent countries with independent agendas and priorities, the odds of them ending up with the least painful alternatives are relatively low. A betting man might wager that the EU's fate will simply be whatever happens if they cannot agree on something else to happen, i.e. default. They cannot and will not get their collective act together, but who cares. At the end of the day a collective decision by the EU is not likely to lead to a much better outcome than a failure to act. Sovereign default in some form is in the cards for a number of members, elevated bond rates are in the cards for all members and holding the EU together (perhaps with a few less countries) is going to be probably the best they can muster out of this long term.

Let me put it this way. Any plan that calls for austerity to work and lead to a substantive reduction in debt at the PIIGS so that they can pay their debts and not default is a plan that will take over a decade to complete, if they are lucky. Seriously 2020 and beyond. Do you really think the citizens of Germany, France or the PIIGS are willing to suffer that long? Heck, I am tired of this as is everyone else following the action. Seriously EU, stick a fork in it, those PIIGS are done!

Now the other part of the article (which by the way everyone is pointing at, not just MSNBC) is that heavy Black Friday spending is spurring retail stocks. Yes baby, the consumers are back in the game! Let me hear ya' shout out!!

I know the logic here. Consumers buy stuff. Stores do well and become optimistic. Stores order more goods to fill shelves and build inventories. Manufacturers build more goods and hire people to build the goods. More people have jobs and an income and can afford to buy stuff. Repeat cycle and everything is honky dory. But let me repeat the cycle with a bit of (my sense of) reality:

Heavily indebted consumers with underwater homes buy stuff, thereby increasing their debt burden. Stores that slashed prices dramatically to draw in customers think they did well and become optimistic. Stores order more goods to fill shelves and build inventories in the hopes consumers keep up the buying. Manufacturers build goods overseas in cheap labor countries and hire people overseas to build the goods. More people overseas have jobs and an income and can afford to buy stuff overseas. Repeat cycle and everything is where we started except consumers have more debt and stores have more idle inventory.

You judge - am I a pessimist or realist?

EU Bonds

One solution that seemed to make sense a couple of months ago was the EU, as a union, issuing bonds, so that those with high rates - like Italy, Greece, Spain and the like - can finance with better rates by financing with those with low rates, like Germany. Well, it seems Germany is starting to run into a smidge of a ripple in rates. Nothing too serious just yet, but bond rates is a confidence business and the minute those buying the bonds get a bit spooked, the rates go up. All this means that the prospect of a EU unified bond sale is becoming more problematic. Obviously, there is still a quantum leap between German rates and say Italian rates, but is seems to me a common EU bond will price toward the negative, like Greece, Italy and Spain, and not toward the positive. The buyers are already getting a bit edgy about Germany and the fact that its banks are heavily exposed to EU sovereign debt.

China seems to be slowing too, which is no big surprise. With its biggest export markets sucking wind and a domestic real estate bubble, hard to believe anything else will happen.

Disclosures: None.

Take Your Medicine

Good things come to those who take their medicince up front and put the problem behind them as quickly as possible. Admittedly, Iceland's problems were so severe it had no other choice, but the fact it is already on the rebound is telling.

http://www.bloomberg.com/news/2011-11-23/iceland-s-outlook-revised-to-stable-by-s-p.html

Mama Needs a New Pair of Shoes!!

We have been waiting, and waiting, and waiting, and waiting for that other EU shoe to drop. Perhaps it is a stylish Italian leather shoe or a spicy Spanish one with big flaps and straps sticking out. Is a French stiletto soon to be in the mix? Ireland isn't known for its shoes and I am pretty sure the same can be said for Greece and Portugal. But somewhere out there is a major shoe about to drop and - pleeeeaaassseee - let go of that sucker already, cause Mama needs a new pair of shoes.

http://www.reuters.com/article/2011/11/21/eurozone-idUSL5E7ML3UK20111121

Pressure is mounting and the chess pieces keep moving but I have yet to hear anyone (who has no direct stake in the game) say that the EU can work this out without some major defaults. It is going to happen . . . I almost hear the wind around a falling shoe shaped object. Yes Spain and Italy - as in the too big to save category - are both seeing unsupportable financing rates on their bond sales. France is facing a possible credit downgrade. New leaders in Greece are not ready to announce good plans yet (like they have one) . . . and on and on.

This side of the pond, the "not so" supercommittee failed to make their recommended cuts - surprise, surprise, surprise!! Seriously, did anyone think that a committee split between Dems and the Dem nots would agree to over a trillion in cuts. Heck, they probably cannot agree on where to order lunch.

http://nbcpolitics.msnbc.msn.com/_news/2011/11/21/8934763-panel-fails-to-cut-deficit-12-trillion

Add in Hank Greenberg (die already) suing the U.S. government for $25 billion over a loser company the U.S. spent way, way too much saving and it really is a nice mess.

http://www.businessweek.com/news/2011-11-21/greenberg-s-starr-sues-u-s-for-25-billion-on-aig-bailout.html

Perhaps China is ready to swoop in and save the day - NOT. Japan is sucking wind and where do you think emerging economies will be when the EU and US are screwed. Yep, I am seeing roses coming up everywhere - especially in New Hampshire in late November.

Disclosures: None.

FAIL ALREADY!!

I for one am tired of all the blah, blah, blah about the EU failing, some of it of course from me as well. It is a story where everyone knows the ending and I am tired of hearing about it, tired of waiting for that magical moment when the cards fall down and, really, really, tired of all the false promises that a fix is in the cards. Shhhhhh... listen in closely . . . . and I will give you a deep, dark secret. Ready? THERE AIN'T NO FREAKIN' FIX.

The PIIGS are toast and everyone knows it. EU has been kicking the can hoping to save the banks, not the PIIGS, but even that is not working. Given the debt loads, they would need to kick the can for another decade just to get past the worst of it. Do you think the governments or voters in the EU countries are willing to wait this long? Are you ready to keep reading about this issue for another decade? I pause for a minute while you chew on this . . . . . . . . . . . . . . (imagine the background track from the last question in Jeopardy playing right now) . . . . . . . . . . (ding!). Your time is up. If you voted more can kicking, leave this blog now and never come back. And beware, natural selection is likely to catch up to you soon. If you voted, let the PIIGS default and deal with it (and the rest of the world deal with it of course), then you have my thanks.

Okay, it will be another major financial meltdown and it will impact all corners (like there are any on a globe) of the Earth, but better to deal with it now than lose a decade or two and then have everyone vociferating (you like it when I use big words) about how we should have pulled the plug earlier. Seriously, default is a bad word, but countries tend to get over it in time. And if your are one of many, you tend to fade to the background.

Sure some big banks in the EU and US and elsewhere will go under or need further government support (I support the former by the way) but there is plenty of capital sitting around on this globe in corporations to weather the storm. Wait another decade, I am not so sure.

So folks, I say pull the trigger, pop the bubble, yank the cord, pull the plug or whatever you catch-phrase seems to be, but let's do our best to let defaults happen, put it behind us, control the damage and move on. There simply is no better choice.

Okay, let me retract on that last statement. If the EU were to be a true union and all the countries joined together for common government financing and they agreed to print the hell out of the euro to devalue it, then maybe the EU could survive without massive defaults. But try to sell this idea to Germany.

Disclosures: None.

All Focus on EU

It is the month of the EU. Sure, anyone with common sense would have focused on the EU problems for a few years now, but things are really starting to percolate. Seriously, Berlusconi and Papandreou both going down in the same month would have been unimaginable a few months ago. And why all the fuss.

Let's break it down. EU countries - focus on the PIIGS - are being required to do Severe austerity plans (that is with a capital S). Severe austerity is not conducive to growth in GDP, reduction in unemployment, or anything of the like, so these plans actually worsen their ability to pay their debts (how smart is that). It is a recipe for several hard years ahead to bring government spending within manageable means. It is a bit of a recipe for disaster as the cure is something that worsens the disease for perhaps a long time. Now I personally agree that austerity is necessary in proper measure and timing, especially for countries on the verge of bankruptcy, but I recognize it is not a cure. The better cure in my book is fessing up, defaulting, going bankrupt, and putting it behind you. Just my take. And by the way, the first ones into the default pool are likely the first ones to come out the other side cleansed of the default negativity. I mean who wants to by bonds of the last country that should default when you can buy bonds of a country that has already cleaned their debt slate. Bond investors care more about the future than the past. Your future ability to pay is all that matters.

And so the EU is still in the struggle, trying to hang on. I have no hope for a good outcome and only question the timing of when the worst will come to bear. Another unanswered question is whether all the kicking of the can has really bought any time for the banks to lower their risk. I suspect a little, but not a lot.

Disclosures: Not.

Finally

On January 1, 2009, among other predictions I noted I expected the U (as in Union) to leave the EU. I got some grief in comments on that post, folks noting I had no understanding of the EU. I admit at the time I did not fully understand the financial underpinnings of the EU and still do not today, but I do understand that the entire structure is not workable. You cannot have this many countries tied together in currency and not have a common governance, if not a common authority over matters financial. You simply cannot have a common currency among countries who are so disparate in their deficits, GDP and other areas. Cannot work.

And so my prediction of now nearly three years ago is perhaps coming to fruition. I do not see the EU disappearing just yet, but I do see it restructuring in the next year or two, with some countries leaving and, perhaps, some countries joining. We will see.

Whatever happens, the EU is toast in the medium term. I say medium as they seem to have titanium tipped boots that can really kick that can down the road. But the can - as Italy with bond rates over 7.5% is seeing, there is just so far you can kick this can.

Again, in my book it is better to do the defaults now and get past the pain as fast as we can. It will happen in time whether we force them to do so now or later. Now I am not good at predicting things (or at least their timing) but I am good at knowing what will happen at the end of the day. And at the end of the day, be it months of years from now, the EU is toast in its current form.

Disclosures: None

Is Greece in or Out

Only time will tell, but we should know in the next month . . .

http://www.ft.com/intl/cms/s/0/992a2cb0-0577-11e1-8eaa-00144feabdc0.html#axzz1cb8DVbTh

Put A Fork In It - Greece Seems To Be Done

If you have not seen it yet, then you must be living under a rock; Greece's Prime Minister Papandreou took the nuclear option and is letting the citizens of Greece vote in a referendum on whether to proceed with the just approved bailout package.

http://online.wsj.com/article/SB10001424052970203707504577012161940303868.html?mod=googlenews_wsj

While the EU scrambles to deal with this and the markets around the globe take a dive because of it, my hat is off to him. To him (assuming he is not taken out of office before the referendum), it is a win/win situation. If the citizens vote to approve the package, the heat is off him as the bad guy and he can tell protesters that the people have spoken. If they vote against the package, Greece takes a hard default, financial repercussions ensue, Greece probably has to leave the EU and being the first in line for default may well become the first to recover from this mess. You see, those buying your bonds seem to forget pretty quickly about your default, and if the default makes you a much more solid country for paying debts in the future, all the better. They would rather lend to you after a default than before an expected default.

I view our financial morass as a lot like gangrene. Earlier efforts cut some of it away, but not nearly all of it. "Let's leave some and try to treat it with antibiotics or other treatments." Well, it has not worked and will not work and, to me, the sooner we cut it out the sooner we will be on the way to recovery. It will be quite painful, but better a few years of big pain than perhaps decades of slow pain. Not that I like either, but I think getting it over with is better. Sure, financial institutions will go under, but last I checked most corporations out there are in pretty good shape (financial institutions aside) and there is plenty of capital to fill the voids. Moreover, the big banks are not exactly doing a lot of lending or other activity to help the average Joe out, so who needs them. Seriously, $5 a month to have a debit card so you can spend your own money.

We will see what happens. I tend to doubt the referendum will ever happen and then Papandeou can point the finger at someone else for nixing it. Nevertheless, it is just a matter of time before the voters in some country get so fed up they vote in whoever is against the EU plans and this house of cards comes tumbling down. Do we really want that hanging over our heads for many more months to come?

Disclosures: None

The Easy Work in the EU is Done . . . Now for the Tough Stuff

So the EU got creditors to take a 50% haircut on Greece, agreed to boost (if they can get China to fund it) their fund for saving the day and all is well in the world. The DOW is up like 1200 points in a month, which is freakin' incredible, and all our problems are behind us. Well, tell that to Italy.

http://online.wsj.com/article/SB10001424052970203554104577003401844568884.html?mod=googlenews_wsj

It seems that the sixth biggest economy and the country with the fourth most debt in the world is not quite getting the benefit of all this. Their ten year bonds are still requiring 6% and that is hardly bearable. They have relatively low unemployment, lower than the U.S., but they also have an incredibly low population percentage wanting to work, with a lot of people retiring before 50, so that artificially alters the unemployment numbers. You see, unemployment numbers are based on those who say they want to work who cannot find work. Those who have given up do not count. If they did, the U.S. rate would be well into double figures.

So let's get back to Italy. They make Greece's issues look like the flea on the tail of the dog. I mean we are talking serious dollars to bail out Italy and it just isn't going to happen (especially after Italy has been doing a good job of pissing off officials in France and Germany, who likely consider Italians lazy bastards). Even after the great EU news Wednesday, Italy has seen no relief in what they are having to pay to refinance their debt. In other words, they are still screwed. And if you think China is coming in to save the day, then you have underestimated the intelligence of the Chinese. Now I am not saying China will not do it, but if they do China will have a lot of stings attached that long term will benefit China and hurt the EU. But hey, beggars cannot be choosers.

Sure, with or without China, things will sail for a while, but that Italy ship is coming into port soon and it has a certain stench to it. Prepare thy self. I do not think China is willing to put enough at risk to stem the tide.

http://www.nytimes.com/2011/10/29/business/the-spotlight-now-shines-on-italy-common-sense.html

Disclosures, none other than I think I have some Italian shoes.

Congress Disgusts Me (and everyone else)

Let me say I was disgusted when Obama hired Geitner and Summers as the heads of his financial group. Nothing like putting the foxes in charge of the hen house. When I voted for the bit O, he had Volcker on his financial recovery team, but right after election, Volcker was quickly relegated to a back seat. I like Volcker, a straight talk kind of guy who really gets what is going on here. And at last we have a regulation that bears his name; not his idea, but his name.

You see Mr. Volcker would love a three or four page regulation prohibiting banks whose deposits are federally insured from trading for their own benefit. No trading, no derivatives, no nuttin'. It is simple in it's origins. Indeed, before 2000 it existed in the form of the Glass-Stegall Act. You see, banks since the Great Depression, i.e. 1932, were prohibited from doing the investment cha cha. They had taxpayer money and federal guarantees and had to be just banks. Boring yes, but they did not have a window to throw us into the chaos that we just suffered.

Now in 2000 Glass-Stegall, which had been around for nearly three quarters of a century was repealed. The act to do so was sponsored by three Republicans and was known as the Gramm-Leach- Billey bill. It was done under the watch of (and signed by) Bill Clinton, who I otherwise think did a good job (despite his cigar proclivity). It was torn up with great fanfare with a number of Republicans and President Clinton almost consumed in jubilation.

Well, the Volcker Rule, as it is now called, was basically meant to but Glass-Stegall back into place. What began as a three page letter by Volcker has turned into a Republican bastardized 298 page piece of legislation filled with more holes than Swiss cheese. Volcker himself is disgusted with this and you should be too. All we really needed to do is repeal the legislation that repealed Glass-Stegall. It worked for nearly 70 years and could work again. Better that than 298 pages of loopholes.

http://www.nytimes.com/2011/10/22/business/volcker-rule-grows-from-simple-to-complex.html

I have been involved in more politics lately than I would like. Given I majored in political science you would think that I would love this, but it is all about money these days. Politicians go to the highest bidder on a regular basis and I am disgusted by it all. I see it every day and yes they do go to the highest bidder. Money talks and what is right walks. The new 298 page Volcker Rule legislation is proof that money talks. And those against it will blame it on Paul Volcker, who had nothing to do with the bastardization of his very good suggestion. I am truly disgusted. And you should be too. You need to know that a lot of folks we vote for are not representing us; they are representing the big banks and corporations that provide them monetary support, either in campaigns or under the table. Absolutely disgusting.

Disclosures: I am disgusted.

Odd Thought of the Day

So I am reading that we have achieved all we can with military effort in the Middle East and, indeed, are only making things worse there with our continued presence. We are beginning to build even more resentment and creating future generations of those who will hate us. So I say we get out as quickly as possible (I know Obama has a plan) and only supply the support they truly need and request.

This goes for the rest of the world. We still have bases with soldiers all over the globe and this costs a lot of dollars and puts folks in harms way. Let's shut as much as we can down within reason and this should create hundreds of billions of dollars.

Now I am not saying shutting down the military. I am saying bring our boys and girls back home and use the savings to better use. This is a long term thought, so stick with me.

We take the savings from shutting down bases and fund college research on alternative renewable fuels. Mostly through colleges but we can do viable private industry too. Catch is, for colleges that get money they do scholarships and caps on tuition increases, so kids can get an education without coming out with a mortgage. For both colleges and private companies, the government shares in the rewards. Any intellectual property developed belongs in part, perhaps large part, to the government. And they focus on fuels the government can use. The colleges and private industry can capitalize on their findings financially, but the government does too, reducing government spending.

And do not tell me the military has no need for green renewable technology. They are major consumers with ships, jets, jeeps, tanks and the like, so this will be a wise investment for them. And the results should give American companies and Universities a valuable commodity to market.

Yes I have read all the crap about how better drilling technology gives us decades more of cheap oil, natural gas and the like, but this stuff will run out and we need to spend money now to prepare for the future.

By the way, I am watching Bill Clinton on TV with David Letterman and the guy is talking smarter than any Presidential candidate I have seen. Seriously, he gets it and has some great ideas, so if you can find reruns, go for it. Worth the watch and relatively bipartisan.

He says no new taxes right now and we need to go full court against the mortgage problems in this country.

Whether you like him of not he is a very smart guy.

Chew On This

China has been a major stabilizing factor in the global economy. Without its continued growth, things would have been a lot worse these past few years. Well the Hang Seng is now down roughly 35% from its peak last November.

Death, Taxes and Greek Default

Two out of three of these are unavoidable. Ironically, the Greek debt problem proves that taxes are avoidable as tax evasion is apparently an art form in Greece, so that just leaves death and Greek default. Nothing new here, just folks coming to reality. Seriously, anyone with brain cells should be able to read the stats and know that Greek default is in the cards and has been for well over a year. Problem is, most people do not read the stats. Well, they are ugly - worse than even shave the dog's butt and teach him to walk backwards - ugly. It is just irrational to me that the folks in the EU are keeping it on life support. Either let it die or come together and do a Euro bond that all the EU supports (sorry Germany but it is time to decide whether to get out of the pool).

Now I am really pissed off. Five weeks ago I had to sell some put options on AMR - you know the parent of American Airlines. I had these for like a year and they were up a bit but I had to sell before I wanted as I had to pay a contractor for work on the house. Today, these options closed 157% higher than where I sold a mere five weeks ago. Unfreakin' believable! But I still have puts on Alcoa that did quite well today. Oh well.

Now here is the deal. I would assume that a Greece default is already baked in the cake on stock prices. It is not a big surprise as it has clearly been coming for over a year. I admit the fallout is what has folks disturbed and what that will be no one knows. We will see.

By the way, I have no doubt the EU will come in and save the day and not let Greece default - yet. Their banks have too much at stake and they are still in kicking the can mode. Greece will default, but probably not just yet.

Disclosures: none

"Great Prices on Stocks and Bonds"

So I am watching this commercial for a brokerage company that does retirement planning and the like. You can use them to buy stocks and bonds and the like. They will hold your investments in an account and advise you on investments. In this commercial, they had some worldly guy saying that they can get "great prices on stocks and bonds."

SERIOUSLY!! You are advertising getting me good prices on stocks and bonds?!! Do you get some special deal the rest of the brokers do not get? Do y0u know something the rest of us do not know? How can you say this in a TV commercial?! These companies are idiots!

I digress from my usual programming but this commercial simply set me off a bit. People buy into this BS and it upsets me.

So I hate to say this (my son says we do not say hate) but we are very, very close to where the "can" cannot be kidked any more. Not saying it is here just yet - but I am listening for that pin to drop. It will.

Y0u are reading this thinking it is BS with no substance, I agree on no substance as I am too busy to put that in. I will in time but meanwhile, watch out.

Brief Things to Chew On

So it looks like Germany approved today putting on a bigger boot and kicking that can further down the road. Now my view is that Greece and several other European countries are going to need more than just a few months to turn things around; just a gut feeling on my part. Indeed, given their economies, austeritiy measures and the like, I would hazard a guess that a decade or more is not out of the question before they get back to stable. Think about that, a decade or more for the PIIGS to perhaps turn things around. Chew on it. Think about it. Now spit it out. Not a good taste in your mouth, is it.

Just my thought for the day.

Hell of an October Ahead

So EU is putting on a bigger boot to kick that can. We will see Thursday if Germany agrees to tie the laces for this to happen. I assume it will happen - as the markets are certainly assuming this to be the case - so we buy more time. That, however, is all we buy.

Listen folks, the sovereign debt problems in the EU are not going away in weeks or months, they will take many years to resolve. Kicking the can buys time but it does not buy resolution. Think about it; how many years will the voters and politicians in Germany or France support this - or for that matter the other countries in the EU. This is a union that is hardly unified. They have already had one contentious battle after another holding their union together and supporting each other. All it takes is one throwing in the towel. So you tell me, what are the odds of the sticking together for perhaps the next decade while this works itself out before anyone throws in the towel? What are the odds that voters in Germany, France or even Greece voting back in the folks trying to make this work. I personally am very tired of this hanging over the international economy and cannot imagine having to live with this for years to come. The fatigue of dealing with it will insure folks in the EU will stop dealing with it in time.

Even it you believe the countries will stick together, let's ask ourselves whether it will work even if they do. Greece and the rest of the PIIGS are broke. Severe austerity measures will only make them more broke. Many, many years will pass before they have any real chance of coming out of this. What are the chances of this happening? I think anyone with a brain realizes there will be a haircut and the banks are going to lose at least 50% on Greece. Percentages will vary with other countries. Then the question becomes the extent to which governments and voters in the EU have an appetite to support the financial institutions suffering on these haircuts. Therein lies the real problem as this could be a major issue no one can gauge.

So watching the market rebound this week was a bit interesting for me. Undoubtedly partly due to the end of the quarter and people shuffling their investments, but it seems driven by what the EU is doing, which is short term at best in my book. You may have a different book, but I am sticking with mine for now. I admit this could take many months to play out, but I am still anticipating a very interesting October, very interesting indeed.

And I read an interesting article today on real estate in China taking a dive, developers having issues and banks in China (while enjoying record profits at the moment) having sever problems going forward. Many investors are shying away from them. If this happens, look out.

Disclosures: None.

EU Splitting?

A full two years ago I posted a prediction that the the EU will break up. I think I called it the time the EU losing the U. This was a post by me that got a lot of negative feedback then- as in it was an insane proposition. Let me simply say, I stand by my original proposition:

http://online.wsj.com/article/SB10001424052970204010604576592830020996482.html

EU

So Where From Here?

I honestly have no idea. At least short to medium term I gave up a long time ago on trying to figure it out. I focus on macro issues and the market does not. I have learned the hard way that I can be wrong for a very, very long time only to be proven right later in time after losing some money investing on my beliefs. I have made no new investments for pretty much the entire year as I am disgusted at the irrational behaviour of the markets. Ironically, I know that irrational markets are the norm so it is irrational for me to expect anything else.

So, as much as I still hope I am wrong, I fear now my macro beliefs are proving true and we have some relatively severe pain ahead. I simply see no way around it despite what our inept politicians do to stop it. More significantly - and pay attention here - I do not think we should figure out a way around it. Instead, we need to figure out a way to allow - perhaps even make- it to happen but with the least collateral damage possible. Ask Japan (my heart goes out to them with all the natural disasters this year including today) whether it makes sense to kick the can. They have been doing it for roughly 20 years, seriously 20 years. We need to take our medicine, figure a way to take out the garbage with the least pain, and move on with it. As Moody's or S&P or whoever said in its downgrade this week of the big boys - you know Bank of America, Citigroup, and WF, their downgrade was based in large part upon their belief that the U.S. government no longer considers them too big to fail and may allow them to fail in a new financial crisis; not that a new crisis will happen or the U.S. will do this but the odds have increased.

Here is my proposal, flush the toilet and get rid of the stench. Let the weak players fail and clean up the mess. When they fail, let the governments of the world build more deficits, yes more, to clean up the mess, put it behind us and let the economy start to grow again so we can put this behind us and start reducing the deficits.

And behind my recommendation is a big secret. Listen close, yes put your ear up to the screen and listen carefully as this is a major, as in do not disclose, as in Max Smart talking into his shoe phone type of secret. Ready for it, well here it is: THERE ARE A HOST OF MAJOR COMPANIES IN THIS WORLD WITH AN ABUNDANCE OF CAPITAL SITTING ON THE SIDELINES WAITING TO BE PUT TO WORK BUT THEY WILL NOT DO THIS BECAUSE THERE ARE NO GOOD PLACES TO PUT IT TO WORK. TAKE OUT THE DEAD WOOD AND LET THIS CAPITAL BE PUT TO GOOD USE. THE CREATED FINANCIAL VOIDS BY TBTF COMPANIES GOING UNDER WILL QUICKLY BE FILLED. AND, BY THE WAY, SINCE NO ONE IS BORROWING ANY MORE, TELL ME EXACTLY WHAT FINANCIAL VOID EXISTS THAT WE WILL NEED TO FILL?

Just my take, sports fans.

Disclosures: None.

Twist and Turn, Twisting in the Wind, Twist and Shout, A New Twist, Twisted Ben

The headlines are flying and likely to fly more tomorrow on how my dearest friend Ben has announced his and the Feds (three dissented) to sell bonds with short term maturities and replace them with bonds with six and 30 years. In addition, mortgage backed securities they own now will be replaced with new ones to support the mortgage market. Plan is to lower long term rates below their already record lows. Every one and their brother recognizes that rates are not the problem and this is unlikely to do much, but Ben is not one to sit on his hands and the political environment is not there at the moment for more QE. Either the market did not like what is being dubbed "Operation Twist" or they did not like talk about "significant downside risks." Either way, they did a cliff dive. On the other side, they may just be waking up to the fact that there is little economically to be real happy about at the moment.

http://www.bloomberg.com/news/2011-09-22/asia-stocks-commodities-drop-on-fed-comments-bank-downgrades-won-sinks.html

I mean after all, poverty is up in the U.S., the middle class is making less than it did 10 years ago and effectively what it did 20 years ago and all the money in this country is increasingly consolidated in the very wealthy. Indeed, the collective worth in the Forbes American top 400 went up by 12% over the past year. Gates is at the top of the list followed by Warren Buffet. But here is something a bit odd, the person Forbes reported as the richest person in the world just a few months back was not on the list of the top 400 in America. I admit I did not read the entire list but back in March Carlos Slim Helu had $74 billion and I went down the Forbes 400 list to the $5 billion level and he did not appear. Either he has had a horrific six months or Forbes does not consider him an American. Last I checked America included a lot of countries and not just the U.S. Mr. Slim Helu is from Mexico, which is part of America just as much as the U.S. , Canada or a host of other countries. So maybe the list needs to be called the 400 richest people in the U.S., which I believe is what it represents. Just a thought.

Disclosures: None

Pulling a Japan

So, S&P just cut the Italian sausage.

http://www.bbc.co.uk/news/business-14981718

No big deal, just fate coming down the road. Hey, the EU is going to suck wind for years to come and all the moves there and in the U.S. are simply determining how long our problems will take to work out. Unfortunately they/we are pulling a Japan, so this could take a very, very long time. We need to take some pain now and stop kicking cans but politicians cannot take pain now as they need to get elected.

Tea Party/CNN Debate

Well I watched the debate, or at least most of it when I was not watching the Pats, and I must say I was not really impressed much by anyone. They all seemed to be pulling stuff out of their - hats. I had another word in mind other than hats, but you get the picture. Mind you, not a big fan of the one known as Obama, but I was seriously hoping the GOP slate could give a really good alternative. So far, ain't happening for me. Not saying I will vote for Obama, but there are certainly some on the GOP ticket I will vote against. The problem is, some of these I would vote against have a serious chance of being the Republican candidate next year.

Let me note a few things I heard worth noting. First, there was a question on how Republicans are going to garner the Latino vote. The responses immediately diverged into a discussion of illegal aliens and protecting our borders. Might I suggest that candidates realize there is a very substantial portion of our "legal" population that is Latino and ranting about illegal immigrants ain't necessarily going to win the vote of those who are legal.

One point Mr. Romney made that got some traction with me is the concept that medical care is in part expensive because after a deductible or copay the patient no longer has financial skin in the game. He did not suggest this, but let me do so; why not replace deductibles and co-pays as they now exist with insureds paying a percentage, say 10%, of every medical bill with the insurer paying the rest? Certainly would give folks financial skin in the game. Now this is done to a certain extent already. I know my co-pay varies on prescriptions, depending on whether I go name brand or generic, but I think more of this needs to be done.

There were a lot of stupid things said in the debate but the top on my list was by Ron Paul. I like the guy but he went down a rabbit hole on a hypo about a 30 year old single healthy guy deciding not to buy medical insurance. The guy gets seriously ill and cannot afford to pay for his care. Now Ron started off scoring for the Tea Party audience noting that it was this guy's choice and he should take responsibility, but he was then asked - should we just let him die? Ron's response was to note back in the day churchs would help out as well as friends and family. Excuse me, but this is absolutely stupid. Last thing I want is to have to pay the medical bills of friends and family or feel guilty for them dying. I much prefer to pay some taxes and let the government deal with it. And the last time I checked churches were not just gushing with resources to help out every Joe who either chose to or could not afford to buy insurance. And ultimately the cost is still shifted to the rest of it because we are not going to just let people die. If I were the moderator my next question would have been, let's assume there is no church, friend or family willing or able to pay the cost, do we let him die? So we let him die and there is no money to pay for a funeral, do we just leave his freakin' dead carcass rotting on the sidewalk?

Reading the surveys, most Americans agree we have no good choices right now and right now is a time when we really need some good choices. Where is the next Ronald Regan or Bill Clinton? We need a leader and we need vision. Moreover, we need the two parties to compromise for the better good. Will the next leader please step forward.

China to the rescue?

I heard that the late day rally in the U.S. market was due to Italy's request to China that it fund Italy bonds and help avoid an EU meltdown. This apparently was good news to the market, i.e. that Italy needs help from China. I guess it is possible China may do this to help the EU and protect one of the major consumers of its products, so we will see what happens, but China has a few issues of its own at the moment. If China does help Italy, however, who next? Spain, Greece, Portugal, the U.S.? China cannot save everyone and it may want to keep its resources to help its own people.

A Good Read

I am not saying I agree with it all but this is a very thought provoking - and extremely well written - piece that I think everyone should read. It should at a minimum lead to some very worthwhile discussions and debates. And do not think about responding to this blog if you have not read the attached link.

http://www.truth-out.org/goodbye-all-reflections-gop-operative-who-left-cult/1314907779

Hatred and anger fueled the rise of the Nazis many years ago. Are similar emotions fueling the rise of the Tea Party today? I personally think so and it is quite disturbing.

"Sudden"???

Here's a good one. In discussing what is up with the EU, USA Today noted today that there is a "sudden" realization that some EU countries may not be able to pay their debts. Heeeeeeeeeelllllllllllllllloooooooooooooo!! Where have you guys been? Seriously, this is "sudden?"

http://www.usatoday.com/money/perfi/stocks/2011-09-08-europes-debt-crisis_n.htm


Well, it is USA Today.

We Havin' Fun Yet?

I missed Mr. O's big speech tonight. Not because I wanted to but I had work obligations. So I do not know what he said. Seriously, I do not. I am guessing from leading up reports it will be something like spending hundreds of billions of dollars in stimulus to create jobs. Now I have read articles claiming that the first stimulus cost over $225K per job. Okay, I did read it on Fox and we all know they are not the best friends of Obama, but they claim to have it from the CBO. Either way, I tend to doubt it is much off.

http://nation.foxnews.com/stimulus-money/2011/02/24/cbo-jobs-created-or-saved-stimulus-cost-228055-each

So spending $225K+ per job for jobs that I assume are paying less than $50K does not seem to me to be smart math, at least in the way I understand math. What me thinks the problem here is is a lack of understanding on what the problem here is. More specifically, building government deficits to throw money at problems can work in certain situations and can work on certain problems, but it is not working here. Certainly not the way we are doing it.

What we have is a debt problem. Sponsored by the US government, many folks got their collective arses in over their eyeballs in debt. We incentivized banks to give money to anyone who could fog a mirror. We allowed them to have bogus appraisals to justify such lending. We allowed credit agencies to give bogus ratings to securitize these loans. We just sat back and let it happen. And now we have a debt problem. Go figure!

While financial institutions do have somewhat of a financial problem (which they are not yet admitting), or at least a lot of them do - especially in Europe - most companies in the US are okay. They have capital, have reduced their work forces to an efficient level, etc. They simply have no customers or sales as their customers are heavily in debt, in other words, their customers are broke.

Now I read at the WSJ that companies simply want the government to get out of the way and strip out some regulations so companies can prosper and start hiring. Now I do agree with this to some degree as there are a lot of regulations on the books that only the bad players ignore and the good players spend tons on compliance (like SOX), but I do not see this needed step as necessarily what is in the way of economic growth at the moment. Removing the regulations does nothing to remove the debt of those we need to have start spending.

Perhaps we need to take the stimulus dollars and pay off some debt. I agree US debt needs to be paid off but if we are hell bent on spending tax dollars to stimulate, perhaps we should spend them by having Freddie and Fannie do loan mods that relieve debt and thinking of other ways to relieve individual debt. Perhaps we can allow consumers refinance high interest rate credit cards at lower interest rates through government programs. Perhaps we can assist loan mods at financial institutions other than Fannie and Freddie. The name of the game here is deleveraging and until we come up with a plan that does this in a serious fashion, the economy will not get back on track. No mistake here, a multi-year process, but we need to treat the cause, not the symptom.

Disclosures: None

Greek Default?

It looks rather inevitable that the situation in Greece is coming to a hear over the next few weeks, if not days. So Germany, what say you? Sink or swim?

http://www.bloomberg.com/news/2011-09-08/greek-credit-swaps-surge-to-record-signal-91-chance-nation-will-default.html

Not much Obama can say tonight to change this or its impact on US jobs. Really not much anyone can do at this point to stop this train and I think a lot of folks are finally waking up to that reality. Good or bad, there is a lot of pain ahead and perhaps it is best to let it happen and get it over with as best we can.

OK - More Mojo Macro

Now I am not going to do a lot of surfing to find it for the handful of people who read this, but I can if things take off on this blog and I get thousands of hits. I read recently that some group did a study that the world is operating at 150% of capacity. In other words, we are using resources to an extent that we would need another half earth to sustain our consumption. Let me repeat that so it sinks in - we are totally raping our planet and leaving it barren for future generations!

So we have millions of people being added to the world population each year, emerging economies buying all the resources that we all need and that are limited. Can we continue this path?! Please think about it.

Disclosures: None.

Macro-Macro - The Bad, The Ugly and, Perhaps, The Good

I obviously focus on macro-economic trends and ideas, but let's digress just a tad and focus on super-macro or macro-macro stuff. It is out there and you can find it, but it perhaps does not get enough attention. There is plenty I can say here but I will focus on a couple of areas and follow with more later.

Demographics

Let's start with demographics, i.e. that how old are your people thingy. Now let me add that demographics means a bit more than just how many old people you have and how old they are, but from an economic perspective, that is the demographic of concern.

There are certain countries that have very poor demographics, like Japan with a pretty aged population, those with poor demographics like the US and much of the EU, with a population increasingly in retirement age in the next 20-30 years, and those not too bad like India. China has bad demographics from an age perspective and dismal demographics from a gender balance perspective due to its one child policy.

I read last week that in the U.S. stock prices can be expected to go down overall for the next 15 years or so because of demographics. Simply speaking, PE ratios tend to go down as demographics/populations age so stock prices will go down simply because the population is aging. Now I question this a bit as stock prices in US markets are increasingly tied to other economies more than the US economies (i.e. US company profits are less domestically based), so the US demographics should over time have even less impact. Nonetheless, the fact that older populations correlate to lower PE ratios is not a stat worth ignoring.


Demographics is Nothin'

While we cannot ignore demographics, if you are focusing long term, i.e. 10-30 years, there are more important things happening. A lot of folks are betting on emerging economies. Money this past decade has been going into China, India and other emerging economies to the point where some may not even be considered emerging any more. So what happens when a few billion people start being consumers? What happens when they start buying homes, TVs, cars, different food, fuel, electricity, plumbing, clean water, etc. We in the US have been greedy bastards hording an overwhelming relative percentage of the world's resources. When the rest of the world wakes up - especially countries with populations of a billion or more - and start actively trying to bring a better life-style to their citizens, then the resources that might supply such life-styles become strained.

Let's face it, the world is incapable from a resource perspective to give everyone on Earth the life-style of the average American. We simply cannot do it. So while emerging economies strive to get to what we have, they simply make it even more impossible. We cannot all be gluttons. So, my friends, as you rush off to invest in emerging markets or you praise the life style gains in China, India and the like, keep in mind their growth helps seal every one's fate. Us gluttons need to fall back in our life styles to allow enough global resources to support their growth.

Many think we are already at peak oil. Absent some breakthrough in renewable energy, it is going to get a lot worse before it gets better.

China has been buying up precious metal supplies and has the current market cornered, which is causing a bit of an international dispute.

These and similar issues will continue to be regular headlines going forward, so get used to it.

Agriculture

To me, however, the biggest issue for the next 20-50 years will be food. The global population is still growing and we are still actively finding ways to keep people alive and for longer. While this all sounds great if you are one who was saved by medical miracles or who is living longer due to basic advances, it is not really a good thing overall just yet. Unless we can feed all these people, having more is a big problem. And from what I have seen some of the environmental changes are making sustainability - from a food source perspective - quite questionable. There are dozens of factors here from bad farming techniques - overuse of fertilizers, herbicides, insecticides, and the like - weather patterns, and short term goals for corporate farms. Overall, we have some very dangerous dynamics developing in terms of feeding the world and these are already leading to massive riots in various countries where families are literally paying over 50% of their incomes to put food on the table. This will get much worse before it gets better.

The bright side is that those looking for a job in the US may have a bright future in agriculture should they be wise enough to consider it. My maternal grandparents were farmers and it seemed family farms were a thing of the past by the time I grew up. Now I think properly run family farms that farm wisely are perhaps one of the best future industries in the US. We have the resources and if we use them wisely we can do quite well feeding a lot of the world. Unfortunately, too few are thinking this way. It is, however, a thought I hope to plant with my kids.

Disclosures: None.

No Job Creation - As in None, Nada, Zip, Forget About It!!

A bit ironic that going into Labor Day weekend we have zero growth in non-farm payrolls for the first time since 1945 (though you have to acknowledge that there was a bit of a major strike in the cards here distorting the figures).

http://www.msnbc.msn.com/id/44370462/ns/business/

And the numbers for job growth the past two months were decreased somewhat significantly.

http://www.calculatedriskblog.com/2011/09/august-employment-report-0-jobs.html

This is shocking - not that it happened, just that it is shocking that many did not expect it. I have done this drill a lot, but let's repeat. Government stimulus is gone and dead and, like it or not, the Tea Party is forcing us into a deficit reduction mode whether this makes present sense or not. Deficit reduction reduces GDP - it does not increase it. And while I agree it is necessary, I recognize a genuine debate on whether right now is the time. Like it or not, I think it is happening.

QE2 also dead, and no QE3 yet announced, though I still expect it to happen. EU on the ropes (a bit more below), States cutting back, China cutting back and a bunch of other cut-backs around the globe. While I agree most U.S. companies are sitting on a lot of capital and are not going belly up, they are also not hiring as they do not know where their sales growth is coming from enough to support hiring. And I do not either.

And so we get to Europe. Oh my dear Europe. I personally do not see any realistic global recovery until the EU gets past its problems and I do not see that happening any time soon. Greek bonds, again moving sharply higher and what else would anyone expect. Just a matter of time before the EU takes its medicine and we may (as in undoubtedly will) get a foul taste from the same medicine in the U.S.

http://www.calculatedriskblog.com/2011/09/europe-update-greek-bond-yields-move.html

Now the rumors were in the market on this today and now it is news. The Federal Housing Finance Agency (FHFA) has sued 17 financial institutions over losses to Fannie and Freddie, including some officers and other individuals. Now I am sure you may have heard of a few of the institutions, such as Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, HSBC and the like. If you need it, here is the news release giving details:

http://www.fhfa.gov/webfiles/22599/PLSLitigation_final_090211.pdf

One might say that this is not a good time for this suit. I do not have the details but last I heard Fannie and Freddie (as in us taxpayers) were out about $200B on the situation, but still, many might say with the economy suffering this is the wrong time for this suit. I, on the other hand, think it is long over due. We built major moral hazard saving these institutions over the past three years and putting them to task for what they did is well over due. It may delay a recovery, but well worth the pain for the gain of damping down moral hazard of them continuing their reckless ways. Sure, they have gotten their act together on not lending to those with no credit but me thinks they are still playing fast and loose with the derivatives game and I am all for them paying the price on this. Lest you missed it the Madoff Trustee filed an $19B suit against JP Morgan Chase seeking to hold it liable for the losses to the Madoff Ponzi scheme. No comment on who wins, but moral hazard is something we need to cure before we can move forward.

Disclosures: None. Though I do personally bank with a subsidiary of RBS, which is one of the aforementioned defendants.

Read This

No time to post as I am on an office off-site but please read this, it is by someone who really knows what is going on. Hunker down, my friend, hunker down

http://seekingalpha.com/article/290445-the-end-of-the-world-part-i

A ONE BILLION DOLLAR PRIZE!!

I apologize to my usual audience, but I am simply doing a test to see what type of headline might get noticed. Simply research here so please go on about your usual way.

Blow the Party Horns!!

Yes, consumer spending "rallied" in July!! You heard it right - it rallied by .8%!! Now if you exclude the inflationary fuel and food spending, it was just up .2% - the same as June - but baby this sucker rallied!! But wait, spending increases exceeded income increases. So what does that mean? Does it mean a highly leveraged consumer went heavier into debt, largely to buy necessities like food and gas? Does it mean, after adjustments for inflation, disposable income actually fell? Does it mean you need to know what you are reading before popping the corks?

http://www.nytimes.com/2011/08/30/business/economy/us-consumer-spending-rallied-in-july.html?google_editors_picks=true

Yes, this consumer spending increase and the news that two Greek banks are merging (two negatives apparently do make a positive) have sent the market on a tear.

http://www.nytimes.com/2011/08/30/business/daily-stock-market-activity.html?google_editors_picks=true

God forbid the market actually had something truly positive to digest.

Disclosure: Unbelievable.

INCREDIBLE!!

The market is up today, continuing Friday's rise, on very low volume. This is just fantastic. I admit I did not see this coming. I mean, who could ever expect the wonderful financial news of the past few days that has inspired investors to buy in? I did not see it coming and, well, still do not see it here. Seriously, I see no significant financial or economic news to justify any market increase. If you have a clue on what is driving this then please help me out here as I have not seen any news to spur buying or negate selling. Just asking . . .

Yours, Clueless

Disclosures: None.

Ignore the Hole

All eyes seem focused today on what our friend the Ben is going to say at Jackson Hole, Wyoming. Well, all signs are that it ain't going to be QE3 just yet, though I would not rule out some symbolic economic trick to try to support the markets.

The bigger question in my mind is why this is getting all the attention when our friends in Greece are on the verge of losing their battle. Seriously, they have tapped into their Emergency Liquidity Assistance (ELA) for the first time and this is not a good sign, not good at all:

http://www.telegraph.co.uk/finance/financialcrisis/8723588/Greece-forced-to-tap-emergency-fund.html

And Finland's refusal to support more aid to Greece without collateral seems to be a roadblock the EU has yet to figure its way around. Greece is not the biggest domino in this game but it may be the first with the only question being whether it is big enough to knock over the next one in line, which I will leave you to define for yourself. Indeed there are probably two separate rows of dominoes into which a Greece default will fall; first is the banks and second is other sovereigns. I suspect there is nothing Ben is going to say in the Hole that can come close to eclipsing what we are seeing in Greece.

Update: Okay, ignore what I said above about Bernanke. He came out this morning and said exactly what I thought he should say (though not necessarily what I thought he would say). No QE3 or other stimulus from the Fed presently, economy slow but moving along, and it is up to Congress and Obama to fix this mess as there is little the Fed can do. Now I think he should have been saying this a year ago when he launched QE2, but better late than never. Mind you, if Greece defaults and banks start to fail, I see a quick reversal with QE3 in our future, but for now so far so good.

Surprisingly to me, the market has taken the lack of news (which was expected) quite well. Perhaps some folks agree that there is nothing for the Fed to do and doing nothing is better than wasting resources doing stuff that does not work. Still, the market being up on nothing from helicopter Ben is a bit surprising to me. I mean, after all, you have the worsening situation in the EU (which did impact EU markets heavily today), the reduction in consumer confidence (which was expected but not quite so low), the reduction in second quarter GDP (again expected but not so low), etc., but the market is up nicely. Go figure.

Disclosures: None

So What Changed?

Seriously, what changed? We went from a couple of weeks of high volatility, mostly in the down direction, to a relatively upbeat, low volume market. Spreads are down on sovereigns in Europe as well, mostly. Markets seem relatively calm. Now there is no outrageously positive news or anything to change the negative news that existed last week or the week before. So what changed?

I read that there is a Bernanke effect. He is speaking at Jackson Hole on Friday and many expect him, just like last year, to announce a new QE or some other "trick up his sleeve." I actually read someone's post today about how wonderful Bernanke is and how effective his QEs have been - seriously, I am not making this up. After noting a prediction of Ben pulling another stimulus out of his hat, the writer noted:

"The past QEs have been so darn effective! We had one of the biggest market rallies in history from March 2009 to March 2011. It's so powerful, why not use it?"

I kid you not, this is what the guy posted and while I initially thought he was being sarcastic (a concept my seven year old daughter gets), he was not in the least. This guy really believes that helicopter Ben is the next Messiah. He refers to Ben as the guy who saved us from the worst depression in history and calls him a "hero." And he apparently does not notice the coincidence between the market being oversold and down around 50% in March 2009 and then recovering somewhat, whether Ben did anything or not. I am not making this stuff up about what this guy says. He must be Ben's son or cousin or publicist or something. Don't believe me, read it for yourself:

http://seekingalpha.com/article/289499-bernanke-is-loading-his-gun

Now I believe this guy is sincere, but I also believe he has not done his math. Sure, Ben dropping money will help the market for a while but if you look the market is not significantly better than when QE2 was enacted, and it just ended a month ago. There are no discernible long term benefits from either QE. They did not solve or fix debt problems, they just provided short term liquidity. We still have a debt problem. It may turn into a liquidity problem as banks in the US and Europe soon have to struggle to survive, but it is now a debt problem (at least for the US) and QE does nothing to fix this. So Ben the hero - I think not!

Let me add a caveat here. Ben's largess supported banks in the EU as much as in the US. Governments there do not guarantee deposits like the FDIC does here. Greek banks have been having a run of people taking out their money and the concept of other banks seeing similar fate is not too far removed. If this happens, there could be liquidity issues as these banks do not have funds on hand to pay their customers back their deposits. Morgan Stanley had a similar problem in 2008. It had folks asking for cash back that it did not have on hand. It ended up borrowing over $100 billion from the Fed to fund this problem - more than even Citigroup, which is twice its size. Of course it noted this borrowing to its investors (not). So the Fed does address liquidity problems. These are problems that have and will continue to plague our financial institutions for years to come. Other than saving their collective arses and preventing a meltdown, this does not revive the economy. It simply allows a very debt ridden status quo to continue. Time to pop the corks and celebrate - not!

So I ask again, what has changed? Nothing in my book. PIIGS are still about to be slaughtered, housing in the US still is sucking wind, unemployment not better, etc. etc. So where do YOU think the markets are going in the next 12 months? Prepare yourself.

Something Fun To Do

Here is a fun suggestion I have for you. Next time your employer - assuming you have one - wants to have financial advisers come in to talk to you, do a little homework in advance. My company's retirement benefits are with Merrill Lynch, which had to be bought by Bank of America to survive, and we all know that Bank of America, after its CountryWide, purchase is doing so swimmingly well. Two years ago they had financial advisers from Merrill come in to tell me how to do my investments. I was not real happy to have a company that cannot survive financially tell me how to do so. My bank, where I have an adviser, is a subsidiary of RBS, which last I checked was down around 40% or so this past couple of months. Again, where are you getting your advice?

Point is, these people cannot keep their companies alive and they are telling you how to invest your money. So research your adviser and feel free to ask during the investment meeting questions like "Your parent's stock is down over 40% in the past two months and has serious sovereign EU exposure, so why should I follow your advice?" Not saying their advice is wrong, just play with them a bit and take their advice with a grain of salt. They do not know everything and you need to do your own homework.

Disclosures: None.

I Need Data, I Need Data . . . Beep, Beep . . .

Okay, one day I read a NY Times editorial by Warren Buffet saying he is paying 17% in tax on roughly $35 million plus in income (my calculation), and then a few days later I see a former Charmian and CEO of American Express and AIG, Harvey Golub, saying he expects to pay between 80-90% in federal, state, local, Social Security and Medicare taxes this year. I am asking for more data here from anyone who knows as I a reevaluating my position on taxes but want some solid data on which to base my decision. And that I do not have.

Seriously, I am not an idiot and what I have read lately is causing me to reevaluate some things I have said here on taxes. I am not a politician so I am free to change my mind and be educated. Go figure.

I really do, as part of this education, want to better understand the differences between Buffet's 17% and Golub's 90%. I am not sure what Buffet is including in his 17%. I doubt it includes local or state taxes or real estate taxes, but cannot be sure. I am in a state with no local or state taxes, though there is a hefty real estate tax.

Still, even with these other taxes, 17% may become 30%, but no where near 80-90%. With the top federal rate at 35%, how in the hell is Golub paying 80-90%? Seriously! Maybe he is compounding the effects of income tax, capital gains taxes and estate taxes, but I would seriously like to see his calculations along with those of Buffet. Rhetoric gets us no where. And I have to believe a multi-millionaire like Golub (or billionaire)(he was after all CEO of American Express, Campbells Soup and AIG), can figure out a way to pay less than 90% in taxes, especially if Buffet is paying 17%. Seriously, Golub needs better accountants.

Now there is a lot of touting of 53% of Americans paying no tax. Here again, I would like some data. Perhaps they are making no money or not enough to be taxable. I suspect some (okay, a very small percentage) are millionaires with losses wiping out taxes or tax loopholes allowing them to pay nothing. Either way, the likes of Golub making millions saying those making a few thousand should share his pain is a bit hollow for me. Still, I want stats on how much the U.S. would make in taxes if we taxed the truly impoverished say 5% of their incomes. I have been in a place where I saved change to pay for meals and cannot imagine some in these situations (or undoubtedly much worse situations) to find 5% to pay in taxes to share the pain. They already have the pain - pain that Golub never has to feel.

Golub Challenge

Okay Mr. Gollub, here is my challenge. Let others manage your money and live in your mansion and control your money. You spend two years living off of $15,000 a year, living wherever you can afford and pay just $2000 a year to the federal government of that. If after two years of living that way - I have been there but paid more in tax - then you can decide whether those who cannot afford tax should pay it. Perhaps you have been there, but you do not act like it.

I am not saying coddle those abusing Social Security, Welfare or other programs. We need to actively investigate and end any frauds in these programs. They cannot continue with the fraud levels that exist. But fraud, tax evasion, and other illegal means of shifting the tax burdens to the honest folks need to be focused upon. Those cheating the system on both ends of the wealth spectrum need to be dealt with. But there are plenty of poor people who lived honorable lives and who have families to support and cannot help out the down and out Mr. Golub. I agree he should not pay 90% in taxes, but I have nothing that I can look at to calculate any rate for him anywhere close to this level.

And you want fairness? Well everyone pays the same rate on the same level of income, deductions and credits aside. Someone making $10,000 a year pays the same % on that $10,000 as someone making $10 million does on their first $10,000 in income. Seems fair to me.
Seriously, I DO want data on which I can analyze this issue further. I read that there are a lot of studies showing that tax increases deter economic activity. which is a proposition I do not really doubt generally. I would like stats on this and whether this still holds in the face of situations like we currently face where massive deficits are deterring economic activity. One economist I follow who bangs the bell constantly on how taxes deter economic growth is now saying we may need to bring down the deficit with higher taxes first to get our act in order. This to me spells a long slow recovery. Shh, do not tell anyone, but I have been for four years expecting a farily long recession and a very slow recovery and the government has been fighting this idea at every possible point. Indeed, they have actively been making the problem worse, so it will take longer -much longer - to fix. It is time for us to take our medicine and, unfortunately, live a decade or so healing our wounds. No one wants to face this prospect - especially with millions of baby boomers trying to retire - but sometimes the truth hurts. Open up and let it in. It will set you free.

Tell Me I Was Wrong

In February of 2009, yes well over two years ago, I supported nationalizing our big financial institutions, breaking them up and selling them off. This incuded big financial institutions like Bank of America and Citigroup. I said at the time:

http://www.blogger.com/post-edit.g?blogID=6953117324755503703&postID=8978388727868507518

Sit back and think about it. How much better off would we be if the U.S. and EU had tried to do this to the extent possible. Most of these institutions, despite trillions in liquidity support - yes I said trillions - are dead weight to the economy and their shareholders and they are still threatening economies on both sides of the pond. They still have too many bad assets, including derivatives, in their possession. We empowered moral hazard and they have not, perhaps because of it, seriously reduced their leverage and exposures. They should be gone, and this was evident well over two years ago.

Disclosures: none

QE3? Ben is an A$$

I wrote a couple of months ago that I though QE3 was baked in the cake. Odd thing is that most folks thought then it would never happen but a lot more are thinking now it might or likely will happen. Funny how a lot of market turmoil can change a lot of thinking. I am thinking right now, however, it is not too likely just yet, as three of the voters on the Fed voted against the relatively benign statement of keeping interest rates low until 2013. And that is the last time three dissented in nearly 20 years. Go figure.

http://www.businessweek.com/news/2011-08-21/jackson-hole-bankers-reflect-on-qe2-amid-pressure-for-stimulus.html

Mind you, I think helicopter Ben would do QE3 tomorrow if he could but there seem to be some more reasonable folks that he needs to convince - and let's all hope his powers of persuasion are not working too well right not. QE1 and QE2 were total failures so I am not too keen on a repeat.

Still, let's not fool ourselves on Ben's plan here or what he has been doing. He does not give a rat's a&& about the regular Joe on the street. He has been all about saving the big banks and providing them with liquidity. QE2 did this and much of it supported international financial institutions, not just domestic.

Seriously, Mr. helicopter loaned out over a trillion dollars with hundreds of millions going overseas. Don't believe me, read it here:

http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

This guy was on a tear and throwing money at any bank or financial institution that moved. And we now know how well that worked out.

LET ME SAY ONE THING HERE YOU HAVE TO DO, READ THE LINKED BLOOMBERG ARTICLE ABOVE. IT IS EARTH SHATTERING IN ITS REVELATIONS ON THE FED.

Bottom line, the Fed has been more of a problem than a cure for a long time. Between Greenspan and Ben there has not been a lot of proper analysis at the helm. It is in need of serious brain power and really soon.

Disclosures: none

Country to Country Comparisons

I posted the other day on how Greek and French are not as hard working as say Germans. I have heard this but I wrote it without stats. I have now looked up some stats, and here they are from CNBC:

U.S.

Average hours per week: 33.8
Per capita income: $46,400
Average vacation days; 25
Tax range: 10-35%
Statutory retirement age: 65

Germany

Average hours per week: 35.5
Per capita income: $34, 200
Average vacation days: 30
Tax range: 0-45%
Statutory retirement age: 65

China

Average hours per week: 44
Per capita income: $6,500
Average vacation days: 21
Tax range: 5-45%
Statutory retirement age: men 60 women 50

UK

Average hours per week: 37
Per capita income: $35,400
Average vacation days: 36
Tax range: 20-40%
Statutory retirement age: men 60 women 55

Greece

Average hours per week: 42.4
Per capita income: $32,100
Average vacation days: 37
Tax range: 27-40%
Statutory retirement age: 65

France

Average hours per week: 38
Per capita income: $32,800
Average vacation days: 40
Tax range: 0-40%
Statutory retirement age: 60

There are a lot more countries covered at the site, which you can find here:

http://www.cnbc.com/id/36017324/Workers_Country_By_Country

So, if these stats are accurate, the U.S. work week is pretty short compared to most (I note it has grown shorter during the recession due to part time workers and cut back hours), but we get less vacation than most and are generally forced to retire later than most, though not all. Rumors of the Greek being lazy may not be accurate, though nothing here dispels information that tax cheating is rampant there. So much for rumor or word of mouth.

Disclosures: None