 | | The Daily Reckoning | Thursday, December 2, 2010 | - The Big Fix and a worldwide, faith-based rally in stocks,
- A few words on debts and unfunded liabilities in Europe,
- Plus, Bill Bonner on the “Inter-Galactic Bailout Fund” and more...
------------------------------------------------------- | The Big Fix
| World markets snap their losing streak...based on more losing data
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
“Hey why’s the market up big?” your editor asked a stockbroker friend yesterday.
“Because everything’s great today?” the friend deadpanned.
“But wasn’t everything broken yesterday?” your editor persisted.
“Yes,” the friend replied. “But today it’s fixed.”
“Even Europe?” your editor asked incredulously. “Wasn’t Europe super-broken yesterday? Wasn’t Ireland bankrupt? And wasn’t the euro falling to its lowest level in nearly a year?”
“Yep,” said the friend. “But that was yesterday. Today, Trichet [the President of the European Central Bank (ECB)] came out and hinted the ECB might launch a European-style quantitative easing program. The ECB, in other words, might start buying up shaky bonds from Ireland, Spain and Portugal.”
“And that’s good right?” your editor joked.
“Yeah,” the stockbroker answered, “that’s good because any time any government steps in to fix a problem, you can be sure it will be fixed. So if the Irish borrowed more money than they can repay, no problem, the ECB can fix that, just by lending the Irish more money on different terms, while also printing euros to buy up a bunch of Irish bonds. It’s perfect really.”
“So is that the only reason the Dow is up 250 points?...Because the ECB fixed the Irish debt problem?” your editor wondered.
“No,” the friend replied, “the US economy is also doing just great, according to all these bozos that are showing up on CNBC today. Everything is just great. You can’t sell a house and you can’t get a job, but, hey, don’t worry about that, the ISM number was better than expected.”
“You’re sounding a little sarcastic there, buddy,” your editor cautioned. “Maybe you should try buying some call options for a change. As I keep writing in the Daily Reckoning, the stock market might be a short, but the bond market is a better short. This quantitative easing stuff is NOT bearish for stocks; it is bullish. Think about it; the housing market is flat-lining, the commercial real estate market is sketchy, all the TV people say gold is in a bubble and short-term bonds pay pitiful yields. So the money HAS to go somewhere. The stock market at least offers the hope of something better. I’m not saying things ought to be this way, just that they are this way.”
“Yeah, maybe your right,” the bearish stockbroker groaned. “But it’s hard for me to invest by default.”
“I don’t blame you,” your editor replied. “But just remember that cash isn’t the riskless trade it used to be. Thanks to quantitative easing – and sundry other dollar debasement schemes – cash is sort of the ‘new safe’ – certain to lose value, but probably not very quickly.”
The stockbroker laughed, but he wasn’t really laughing...and neither was your editor. Whatever the theoretical merits of Ben Bernanke’s quantitative easing experiment, the actual demerits are considerable. For starters, printing dollars is a strange way to instill confidence in the dollar...or in the economy that generates 13 trillion dollars worth of GDP every year.
For another thing, governments and bureaucracies fix far fewer items than they break, especially if the item happens to be complex...like a $13 trillion economy. The government does a decent job fixing potholes, but not such a good job fixing things as complex as ethnic strife in foreign lands or medical insurance, or even automobile registrations.
Governments muck things up. That’s what they do. That’s what Ben Bernanke is doing. Maybe, by some modern miracle, QE1, QE2 and whatever additional QEs may follow, will succeed in stimulating economic activity without also stimulating inflation. But we doubt it.
“We have to reinforce the authority of the public authority,” Trichet declared yesterday. “It is on the authority of the public authority that we can continue the resistance to an environment which is very demanding and will continue to be demanding for a period of time.”
Translation: We have to have more money to throw at the identical tactics that are already failing.
Our response: Falsum in uno, falsum in omnibus.
Translation: “False in one thing, false in everything.”
The curative power of currency debasement is a false concept – just as false as the “benefit” of every other governmental intrusion into the private sector. [Think: Social Security]. Neither Jean-Claude Trichet nor Ben Bernkanke needs “more authority”...or more money to indulge their monetary fallacies. They need more time in a La-Z-Boy doing crossword puzzles.
Let the debtors default and let the capitalists pick up the pieces.
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| The Daily Reckoning Presents
| The Pain in Spain...and in Ireland
| |  | | Dan Amoss |
Financial markets underestimate just how deep the rot extends into the euro zone’s banking systems and economies. Since early 2010, when credit spreads on the euro zone’s periphery started blowing out, I’ve viewed the EU bailouts as futile efforts to refinance themselves out of a solvency crisis. If you’re truly bankrupt, trying to put it off by refinancing never works out.
European asset values and GDP, taken together, will not be sufficient to satisfy both debts and unfunded liabilities. In other words, the real economy in the euro zone is too small to subsidize enormous banking systems and bloated government budgets.
Greece was the first sizeable bailout, and Ireland is the second. There will be others, including Spain. The problem with Greece and Ireland – at least from the perspective of pro-Euro EU bureaucrats – is that the political will to stick with austerity programs is weak. Irish citizens are rightfully upset that their economy has suffered in order to bail out reckless Irish banks. We’re already seeing the emergence of a popular revolt against the bailout from the Irish Green Party. As Greece’s economy continues to spiral downward, we’ll see a popular drive to end plans of budget austerity, and a movement to default on Greek government debt.
Europe faces a solvency crisis because its banking systems grew wildly out of proportion to its economies. Also, when you start to appreciate its terrible demographic profiles, most European countries owe far too much in the way of unfunded liabilities (like pensions and healthcare).
Bureaucrats, nevertheless, will always seek to sustain an unsustainable status quo. They have gone to great lengths to avoid a painful but necessary restructuring of the banking system and welfare state. The parallels to the US financial crisis are clear: bureaucrats are imposing huge current and future costs on taxpayers and innocent bystanders in order to bail out reckless banks and government budgets.
Since early October, yields on 10-year Spanish bonds have jumped from 4% to 5%. They will continue to rise. Interest expense will start eating up a larger and larger amount of Spanish GDP. This is bad news for an economy that saw capital misallocation on a monumental scale into residential housing and “green energy.” Both of those sectors remain on life support, propped up by the government, and there’s little hope for growth or employment in other sectors. Just like in the US, housing will remain in a depression as long as the government prevents markets from clearing and title from changing hands to better-capitalized owners.
The problems in Spain lie not so much in its government debt, but in its banking system. The opaque accounting for bad mortgage and construction loans throughout the Spanish banking system makes the US look like a model of transparency.
Consider the shenanigans these banks are employing just to maintain access to European Central Bank lending facilities. In his excellent Inner Workings blog, David Goldmandescribes how Spanish banks are buying defaulted loans out of the mortgage backed securities they sponsor in order to avoid ratings downgrades for these MBS. The ECB requires minimum investment-grade ratings for the mortgage securities it’s willing to accept as collateral for loans.
Spanish banks must take capital charges when they repurchase soured loans out of MBS. They must also shoulder the costs of bringing more non-performing real estate onto their balance sheets, so this is truly an act of desperation. Goldman calls this process “the financial equivalent of a derelict selling blood to buy booze.”
“Spain will have to cut government spending drastically,” Goldman continues. “The trouble is that government is nearly 50% of GDP, so that the economic effect of cuts in government spending and its adumbrations upon the failing real estate market are all the worse.”
Considering this backdrop, I had to laugh when I saw Spanish government officials recently denying that they have any problems. It reminded me of former Treasury Secretary Hank Paulson’s misleading statements about the health of Fannie Mae and the US banking system in mid-2008.
The bottom line regarding why this matters for US financial markets: the Euro is likely to continue falling against the US dollar. Many holders of Euros will soon conclude that the ECB will dramatically debase the currency in the near future, much to the chagrin of what you might call the “Bundesbank honest money” camp.
The inflationists at the ECB will eventually win out as we see more riots, strikes, and social turmoil in Europe. The ECB has a lot of catching up to do in order to match Ben Bernanke’s turbocharged printing press. A falling Euro is bearish for risky assets, so we’re likely to see a continuation of the “risk off” trade.
Regards,
Dan Amoss,
for The Daily Reckoning
Joel’s Note: Want to know how to avoid the fallout from the next round of global financial meltdown? Dan outlines his game plan in his Strategic Short Report. You can get the details right here.
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| | Bill Bonner
| The Inter-Galactic Bailout Fund
| |  | | Bill Bonner |
Reckoning from Mumbai, India...
The Fed is now bailing out the whole world! But who will bail out the Fed?
After the news came out yesterday, the Dow rose 249 points. Gold was up $2.
Here’s the latest from Bloomberg:Stocks jumped, sending US benchmark indexes to their biggest gains in three months, while the euro and commodities rallied and Treasuries slid amid improving data on the American and Chinese economies and speculation of a larger effort to end Europe’s debt crisis.
The Standard & Poor’s 500 Index gained 2.2 percent, the most since Sept. 1. The MSCI Emerging Markets Index rose 2.2 percent, its biggest gain since Aug. 2. The euro rebounded above $1.31 while Spanish 10-year bonds snapped an 11-day drop. The rate on 10-year Treasury notes increased 17 basis points to 2.97 percent, a four-month high. Oil and copper advanced more than 3 percent. After the US close, S&P 500 futures added 0.1 percent at 7 p.m. in New York and Japan’s stocks rose in early trading.
European Central Bank President Jean-Claude Trichet said yesterday that investors are underestimating policy makers’ determination to halt the region’s debt crisis and shore up the euro ahead of a meeting of the bank’s Governing Council tomorrow.
The Dow Jones Industrial Average surged 249.76 points, or 2.3 percent, to 11,255.78. The Dow has rallied in December more than in any other month over the last century, according to Bespoke Investment Group. The 30-stock gauge rose 1.3 percent on average in the month during the past 100 years and gained 1.5 percent and 1.7 percent over the last 50 and 20 years, respectively, the Bespoke data show.
Stocks and the euro extended gains after Reuters reported that an unidentified official said the US may support enlarging a European financial rescue program by adding cash from the International Monetary Fund. The US is not discussing extra IMF money for Europe, a US official in Washington told Bloomberg News. “Whoa...did you see that?” asked an Indian analyst we met this morning. “This is it. They’re really turning on the presses now. They’re trying to bail out the entire world. I never would have believed it. But it makes sense.”
The US official may not be discussing it openly, but Fed figures show that the US central banks is already bailing out foreigners. Reports tell us that 35 foreign banks took advantage of its EZ money policies. It appears that the Fed is supporting Europe’s banking sector.
And it would not be surprising if the US also backed the IMF. It’s not just the banks that are in trouble in Europe. Governments are deep in debt too. They are so intertwined, that it’s hard to know where private debt ends and public debt begins.
Americans may see the dollar rising against the euro and feel a little patriotic pride. But this is not a good thing for Americans. If Europe comes unhinged, the crisis will waste no time in hitting American banks and the US economy. Ben Bernanke has been trying to get the dollar to go down. A rising greenback makes Germany’s products less expensive and US exports less competitive. It contributes to the threat of deflation...and encourages a long, drawn-out Japanese-style slump by prompting people to save, rather than spend.
Not only that, collapse of European economies would kill world trade. Exporters would be out of business. Importers would be out of money. The whole planet would be out of luck. The crisis would make its way around the world like a giant tsunami...wiping out stock markets immediately...and then swamping almost all economies.
Yes, dear reader...this is the downside of globalization.. One region’s problem can easily become a disaster for everyone.
So, what’s going to happen? We wish you wouldn’t ask us questions like that, dear reader.
But we’ll take a guess.
The European situation is more dangerous than most Americans realize.
It could still melt down. US authorities must know this. And they must know too that if Europe melts down, so will the USA.
So, the rumors will probably turn out to be true. The US will back the IMF. The IMF will back Europe. Europe will back Ireland. Ireland will back its banks. And the banks will back their lenders.
Meanwhile, the euro will be backed by the dollar, which will also back the US economy, US banks, the US government, and about half the households in Christendom...not to mention the others!
Who’s got the kind of money you need to do all this backing?
Ah...there’s the rub... There’s the weak link in this strange and magical chain.
Let’s see, if all the world’s debts are guaranteed by paper money...isn’t the paper money itself impaired by the amount of the losses? Won’t the losses be passed along to dollar holders everywhere?
Yes. But, no one knows how much the losses are. And no one knows how much extra “stimulus” money the feds are going to put out. And no one knows when people will get scared and flee the dollar...the euro...and all paper currencies. And no one knows what a panic out of the dollar would produce. And no one wants to find out.
So, what’s the solution? We won’t bother to offer a solution to the world’s financial authorities. They won’t pay any attention anyway.
But how about a solution for you? Did you buy gold when we suggested it, dear reader?
We hope so.
And more thoughts...
The New York Times tells us that astronomers had seriously underestimated the number of stars in the universe. They can’t see the little ones. Which means, their last count was probably a few trillion off. Or maybe a few gazillion off.
Which suggests to us that astronomers and federal debt analysts must be using the same calculators. Both are trillions off the mark.
But the reason we bring this up is to give dear readers hope. Maybe...circulating around one of these invisible stars...a few billion light years away from earth...is a habitable planet. And maybe, the people who live there are very good with figures...and money. And maybe they’re also very accomplished space travelers. And very generous.
And maybe they’ll show up – any time now – and offer to bail out the whole Milky Way ...if not the whole damned universe.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com |
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On precisely the same weekend in November as the Republican victory parties in and around Washington, the Fed celebrated its centennial far away from its DC home at Jekyll Island, Georgia. One hundred years ago, seven US Congressmen and bankers gathered together in secret at this highly remote location to lay the political foundations for what would become, in 1913, the Federal Reserve Act.
India: Land of Hope and Growth
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| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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