Bill, Bill, Bill . . .

Okay, I like Bill Clinton. He was a fun President and he did it in a fun time. He may have just been lucky in getting into office at an optimal time, but his eight years was a great ride for the U.S. The economy grew, the deficit was cut and all looked well. Sure he lied about having "sex with that woman" but I try to separate the personal issues (so long as no crime is committed) from the political achievements.

But while things went quite well during his tenure, he did make one massive mistake - beyond Monica. He signed into law the repeal of the Glass-Stegal Act. The repeal was known as the Gramm-Leach-Bliley Act, which was signed into law in November of 1999. This basically ended limitations between banks doing traditional banking business and doing more investment type activities. I attach an article I found from the time:

http://www.ratical.com/corporations/DErulesUD.html

Bill was quoted as saying:

"This legislation is truly historic," President Clinton told a packed audience of lawmakers and top financial regulators. "We have done right by the American people."

Now do not just blame him, it passed the Senate 90 to 8 and House 362 to 57. Someone did quite the sell job. Note as well how the article states that financial company winners that day in the stock market included the likes of J.P. Morgan, Citigroup and Merrill Lynch, companies that needed taxpayer support in the last crisis, one of which being bought out to survive.

Perhaps the most significant quote in the article, however, is as follows:

"'With this bill,'" Treasury Secretary Lawrence H. Summers said, 'the American financial system takes a major step forward toward the 21st Century -- one that will benefit American consumers, business and the national economy.' Opponents said it would have the opposite effect, creating behemoths that will raise fees, violate customers' privacy by sharing and selling their personal data, and put the stability of the financial system at risk."

Wait a second, isn't this Summers the same idiot that Obama hired as the Director of his National Economic Council? Well yes it is. Why the hell would Obama hire as one of his key economic advisers someone who praised the bill that made the whole mess possible in the first place? Why would he hire someone who did not see the train wreck coming and indeed told the engineer to heap on more coal to get that engine running? WHY?? Seriously - I REALLY REALLY WANT TO KNOW AS IT SIMPLY SHOCKED ME AND STILL DOES TO THIS DAY THAT OBAMA WOULD HIRE SUCH A STUPID IDIOT!!!

Now I voted for Hillary Clinton in the primary and think she would have done a much better job. I voted for Obama for President as he seemed to have good intellect, McCain seemed to be bending over too far for the far right and I did not want Palin one bullet from running the country. But now I am wondering if Palin would perhaps have done a better job than Obama. I think she is not nearly as intelligent, but someone of lesser intelligence doing nothing (or even the wrong thing) is better than someone of enhanced intelligence doing the wrong thing. In my book, Obama was a fool to follow the advice of Geitner and Summers. So far, the proof of this is in the pudding.

I really have no idea who I will vote for next election. I have voted Republican before and suspect I will this time if the Republican candidate is not a worse fool than Obama. I simply am horribly disappointed in Obama. And so I must say I am also horribly disappointed in Bill for supporting him still, which he does here:

http://www.bloomberg.com/news/2011-07-01/bill-clinton-predicts-speedier-unemployment-drop-will-aid-obama.html

Still, I cannot say I am surprised. His wife, after all, works for the guy.

Let me end by noting that while some barriers have been put up to prevent the problems we saw this past decade, I think we need to fully reinstate the Glass-Stegal Act. It is kind of like the Constitution; the folks that put it together had learned some very hard lessons, hand-in-fire, and they sought to protect future generations from the pain they had suffered. We repealed it and - surprise - we felt their pain. We should bow down to their intelligence in enacting it in the first place and reenact it in full.

Disclosures: None

Oh Tay Buckwheat!!

All is fine and well in the world of the euro. Greece seems to be getting its big ass payday (assuming their austerity passes, which seems in the cards), its creditors are seemingly willing to roll over debt (assuming that is not called a default) and all is well again in the world. Time to celebrate - and the markets are doing just that. Yep, all that is wrong in Greece and the rest of Europe is gone and all is fine and well. Yep, just honky dory. No need to worry about a thing, man, no need to worry about a t'ing.

http://www.bloomberg.com/news/2011-06-27/euro-rises-on-optimism-greek-debt-to-be-rolled-over-budget-cuts-will-pass.html

And the U.S. is also honky dory. Sure consumer spending is a bit stagnant, wages are stagnant, the housing market wishes it was as good as stagnant, etc. etc., but the sun will come up tomorrow - tomorrow.

Well, maybe not tomorrow as QE2 is ending this week. That's right shoppers get your blue light specials now as the sale is almost over. Now the sale did not really do much other than provide reserves to banks so the FDIC could do a more orderly wind down of insolvent institutions. I consider that is/was a good reason for it, which unfortunately continues to exist. If spurring economic growth was the reason, well it was a total failure. A lot of the money went to foreign bank reserves, it did not really spur lending or spending, and, well, it was mostly just for show anyway.

I wrote last month I think QE3 is baked in the cake. It will be a while before the cake cools and is ready for icing, but me thinks late fall or winter will be a good time for that treat. Ben needs a bit of time to save face and come up with some new economic distress (and lack of inflation) to justify another bold move. But hey, he is the man of bold moves (just look at that beard). It will take time for him to convince others on the Fed to do it and they all voted against QE3 this past week (can you say strong fake sign of support for continued growth in the economy). Their mood will change pretty quickly in my mind, but it could well be early 2012 before they break down and do the next round. If I really believed the economy was on its way to recovery - albeit in a slow fashion - I would predict otherwise, but I think we are about to do the double on the old double-dip.

So you know what is really encouraging about the current economic climate? Honestly, I am asking you as I do not know. Okay, from the optimist side of me, let me note that a lot of corporations are sitting on pretty good stashes of cash - enough to get them through several more bad years. They have also continued to increase productivity and efficiency, which unfortunately sometimes leads to reduced workforce and increased unemployment.

Strange cycle, ain't it. People need to buy stuff for companies to make money, people need to have money to buy stuff, people need jobs to make money and companies are cutting jobs to be more efficient so people can afford their stuff. This economics stuff really sucks wind. Seems we need to devalue the dollar so other poor souls will buy our crap and we can create jobs. Hey, I think we are secretly doing that (shhh, don't tell China).

So the long slog continues and it will for a while.

Disclosures: None.

I Am an Optimist!!

Seriously I am. I am the half glass full kind of guy. I frustrate my wife with my up beat view on things. Yet for three or so years I have been "a the sky is falling" kind of guy on the economy. Now I am looking at long term fundamentals and will be the first to admit my timing on what is going to happen has sucked big time. This is why, in part, I have posted little in the past couple of years as the markets have not behaved rationally given what I view as reality. But I would be remiss to diss the markets when nonsense is boosting them.

I have begun posting again as I think things have finally gotten to a critical stage where the positive hype is not going to win the day and my predictions are coming to the front, perhaps later than I expected. Let me spell out a few factors here:

• housing in the U.S. is still sucking wind and with shadow inventory will likely do so for a couple of years;


• China is trying to cool down real estate and other bubbles forming there (my hat is off to them for trying to do so) so its economy is bound to cool a bit, which will have a chilling effect on the world economy;


• Greece and the other PIIGS have really no alternative in the long run other than to default (but I have no doubts they (as in EU and IMF) may kick this can for a few years before their toe hurts);


• unemployment is not improving in any significant way soon (Ben supports me on this)


• the economy is sluggish at best and will continue so this year (Ben agrees); and


• Ben ain't doing squat to support us for now (I do however see QE3 late this year or early next)

All said and done, the next six months are difficult at best. It will be interesting!

Disclosures: None.

Buy on the Rumor sell on . . .

If you have not heard, Papandreou got his vote of confidence last night. Really folks, does anyone truly have confidence he can pull this off. The markets were up yesterday on the prospect of this happening, but now that it has happened they are pretty lackluster today. Perhaps this is because the vote of confidence is not the final say even for this go around of EU/IMF support (bailout). Greece still has some tough austerity issues to pass in the next week. I agree it seems likely these will pass now, but the protests in Greece continue and passage is not a sure thing. Either way, passage just buys more time and pain.

Hark back to last year when a package of austerity measures were passed to get the initial bailout package. Unemployment in Greece was a mere 11.6%. It now stand at 16.2% and this decline is in large part due to the austerity measures. Now Greece is going to compound this with further austerity measures, which undoubtedly will worsen an already very weak economy and employment picture. Add to that no reduction in debt, the bailout being lent a relatively hefty interest rates (albeit far below what they could get otherwise) and the need for a lot more bailout money next year and you have a real mess on your hands. The only good news I have read is that the new austerity measures include a crack down on tax cheats in Greece, where cheating on taxes seems to be a national past time for the rich.

Things will undoubtedly get much more dire in Greece before they get better and this can will easily need to be kicked for a good 5-10 years for a default to be avoided. I have a nagging sense that neither the voters in Greece nor the voters in France or Germany are likely to have the appetite for it going on that long. Frankly, no one does.

Disclosures: None (though I do have a Greek friend)

Spin Doctors

So CNNMoney is reporting that the market is up due to hopeful expectations on a vote of confidence in Greece and, I qoute:

"a smaller-than-expected decline in existing home sales."

Okay, the decline was to 4.81 million units and the expectation was 4.8 million units. What really happened here is the number for May was revised downward so that the percentage decline from May to June was less than expected. Slap me in the face here! How is it good news that the decline was smaller because last month's number was wrong to the up-side? Isn't a revision down to last month's number bad news?

Greece On, Greece Off, Greece On, Greece Off

It seems markets around the world are still quite focused on Greece to see what will happen. The same thing happened last year, they were bailed out and the can was kicked. Here we are again and Greece is, if anything, worse off than it was a year ago. So they may get another bail out for a while to ward off the evil spirits, but only to temporarily delay the pain. We will get there (i.e. haircuts or perhaps Greece leaving the EU so it can devalue its own currency), the math makes any other alternative virtually impossible to conceive, but the EU is putting its head in the proverbial sand and hoping that day never comes.

I could link articles but they are everywhere these days on Greece's problems and how it is just the first domino in the PIIGS game. Curiously, what I am not seeing in the press is the well recognized problem in Greece that a significant number of citizens there that make big dollars are not paying the taxes they owe. One might think that cracking down on tax cheats when cheating is rampant might help a tad in their fiscal issues. And for you idiots in Greece not paying your taxes, you will soon pay the price for it. Seriously, the goverment cannot survive for free and the poor being the only ones paying what is due will not make ends meet. I take solace that the tax cheats in Greece may end up paying the price in time, and I think they will. Perhaps better now to save the country and themselves from something worse they should start paying up and consider paying off some back taxes. Just a suggestion.

Greeece's debt will undoubtedly get funded for now and push the press coverage on its problems off until the fall, when once again the markets will focus on the default risks. And by then many others in the chain will have their credit downgraded and the problems simply keep getting worse. Personally I am simply tired of this axe hanging over the world economy. It has been there well over a year and is not going away. It is like unemployment and housing issues in the U.S.

QE2 is coming to a close and we are really not much better off than when it started. This summer looks likely a replay of last summer with the economy cooling, unemployment continuing, markets struggling, housing still in the dumper and Bernanke and Obama trying to explain why their moves to date have not worked as planned. When the PIIGS finally go under, things will get worse - for a while - but letting them hang on with no real hope is simply agonizing for everyone.

So if anyone living in the PIIGS is listening, let me ask one quesiton: do you think the first country to default or the last will do the best? If you have a doubt, ask Iceland.

Disclosures: None

Default, It's Greek to Me

Back at the beginning of 2009 I did some predictions. The one that led to the most offense to some commenters was that the EU would in time lose members, though I did not expect it to happen that year, 2009. I personally am surprised they have held their act together this long. Their model is broken as such diverse countries and economies need diverse currency and ability to react to economic downturns, which is currently being highlighted for the EU.

Though my prediction was in 2009, things are this year, at the latest next year, coming to a head. It is somewhat of the immovable object versus the irresistable force story. The force is the EU and the current object is Greece and its citizens. You see the citizens of Greece seem to be a bit unwilling to take the dive for all of Europe - surprise, surprise! Yes, the austerity that is being required of Greece for it to further kick the can down the road is not popular with the citizens of Greece, who are violently protesting. I am with the citizens as even with kicking the can it is virtually inevitable there will be a default eventually, so let's get it over with now and move on. Oddly, on this point, I am finally in agreement with Alan Greenspan.

http://www.bloomberg.com/news/2011-06-16/default-by-greece-almost-certain-greenspan.html

Now I read an article today that said this would not have any substantial impact directly on U.S. banks, but I also read an article earlier this week that noted U.S. banks have over $40 billion in exposure to Greece on indirect CDS positions for European banks. Go figure.

Some say this will be equivalent to the Lehman Brothers collapse and the connected financial collapse. I tend to think not. Yes, it will lead to a double dip and very well could lead to limited defaults by the likes of Italy, Spain, Portugal and Ireland, but I think most investors are already assuming this is likely. Greece presently is viewed by those who issue CDSs on its debt as having a 78% chance of default, so that is already baked in the cake. Do not get me wrong, default will be a major event and undoubtedly will lead to a double dip rescesssion, but I think it needs to happen, so do it and get it over with.

Here is the kicker. Banks around the world that we, the taxpayers, just saved a couple of years ago, are still making stupid investments in derivatives. They have not learned thanks to the willingness of the government to step in and save them. Can you say moral hazard? Say it with me again loudly - MORAL HAZARD!!!

The CEOs there want big bonuses and they will not get them being conservative. So they continue to have an investment bank side and they continue to take stupid chances with our money. I, for one, want the governments of the world to say screw you and the ship you came in on. Let the banks go belly up. Better for the government to directly do lending for a while than for spoiled brat banks to take advantage of our graces. Let them fail. Just like a default from Greece, we will survive after a period of severe pain.

So here is what I see happening. I have written about it multiple times before but it now seems to be coming to a head. Greece will not, at some point, be able to pass necessary austerity measures or make needed payments and it will default. The ratings, and cost of borrowing, will escalate for the rest of the PIIGS immediately and this will lead to some restructuring on their part as well. The citizens in these countries understand they are being asked to take the pain for banks in Germany, France and the US and they are to the point where they will say no, so banks in Germany, France and the US will once again look to the government to save them. When they do, what will we do this time? You know where I stand.

Disclosures: None