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The Daily Reckoning | Wednesday, June 1, 2011
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The Daily Reckoning Presents Where the Wildest Things Are
Today, your California editor will pay homage to the classic picture books of our generation - Where the Wild Things Are, Green Eggs and Ham and Goodnight Moon - with a special "Financial World in Pictures" edition of The Daily Reckoning.
Eric Fry
As it turns out, not all of the world's wild things are in Max's bedroom. Some of the wildest things of all are in the accounting ledgers of various national governments. Greek finances, for example, aren't just wild; they're scary too.
The Greeks are short of cash, plain and simple. But a variety of European leaders and finance officials refuse to see it that way. They want to imagine, like Max, that they can become "king of all wild things" and tame the savage debt crisis that's prowling around in the euro zone... But we doubt the finance ministers will fare as well as Max. The Greek debt monster will not return to the closet without mauling a few bondholders along the way.
Financial markets around the globe rallied yesterday on the "good news" that the European Union and the IMF would continue bailing out Greece. Never mind that last year's $157 billion bailout failed to make the insolvent Greeks solvent, the EU pooh-bahs are cobbling together a new $60 billion bailout which, as Joel Bowman pointed out yesterday, "does little more than to give false hope to a doomed scenario."
"If the medicine isn't working, increase the dose. That, at least, is the treatment plan being pursued by the saviors of the euro in Brussels," Germany's Der Spiegel cynically observes. "Hardly anyone believes anymore that Greece can avoid a restructuring, or a debt haircut. Its mountain of debts has grown to more than 150 percent of gross domestic product this year. Meanwhile, the economy is shrinking, partly because of the austerity measures.
"The country is stuck in a vicious circle," Der Spiegel continues. "Investors refuse to lend Greece money at affordable interest rates because they are convinced that Greece is over-indebted. This forces the government to accept bailout loans from its partner countries, which further increases debt levels while reducing creditworthiness."
Greek finances have entered the hopeless stage - a fact that is obvious to the Man on the Street, but opaque to the men and women in the conference rooms of Northern Europe. "A total restructuring of Greek debt is not an option and nobody is planning it," Luxembourg Prime Minister Jean-Claude Juncker reiterated yesterday. A few days earlier, the French Finance Minister, Christine Lagarde, declared, "A restructuring of Greek debts is absolutely out of the question." Likewise, German Finance Minister, Wolfgang Schäuble, is on the record saying, "A debt restructuring is not under consideration and is completely speculative."
These vehement official declarations can mean only one thing: A debt restructuring is absolutely certain and everybody should be planning on it.
"The question is no longer whether Greece will restructure its debt, but when." says Peer Steinbrück, the predecessor of Germany's current Finance Minister. Oxford economist, Clemens Fuest, agrees, "Europe's governments must face reality. [They] cannot keep behaving as if Greece were not insolvent, while constantly imposing new burdens on taxpayers for the bailout."
Despite these self-evident observations, the EU will continue fighting against the inevitable for a while longer. "We will try to solve the Greek problem by the end of June," says Juncker. Conveniently, Juncker specified only the month, but not the year.
A solution will certainly arrive, but it will certainly not look anything like the solution EU finance ministers are implementing...and it will certainly not be painless.
"Large segments of the [Greek] population favor a quick fix, like the one Vassilis Sarantopoulos, 50, the head of a small Greek publishing company, recommends," Der Spiegelrelates. "The 'solution' to Greece's debt crisis is obvious, says Sarantopoulos: 'Withdrawal from the euro zone, return to the drachma, non-recognition of the government debt.'... Sarantopoulos is one of the advocates of a new movement in Greece called 'I Won't Pay.' The name speaks for itself."
Yes it does. But this "new movement" is as old as the Caveman's first IOU. "I won't pay" isn't painless, but it is an elegantly simple solution...and it always works. It always solves insolvency.
Alas, Greece's feeble finances are not the only wild things roaming around in the financial markets "roaring their terrible roars, gnashing their terrible teeth" and "showing their terrible claws."
The US housing market is also looking pretty scary. The Case-Shiller 20-City Index of home prices has dropped to its lowest level since mid- 2003. After adjusting for inflation, the index has tumbled to 1999 levels. "Prices have now fallen further since the bubble burst than they did during the Great Depression," the Associate Press reports. "It took 19 years for the housing market to regain its losses after the Depression ended."
Apparently, no one wants to buy a house. In a recent survey, 92% of all homeowners said they believe it is a bad time to sell a house. Visibly, an even higher percentage of folks - like about 100% - believe it is a bad time to buy house. The pace of new home sales has plunged to the lowest level since JFK was sharing afternoon teas with Marilyn Monroe. Folks are simply too fearful or too credit-strapped to buy a home.
They do not want to buy a house.
They will not buy one with a mouse.
They will not buy one with a spouse.
They do not like home prices that fall. They do not like these things at all.
Home prices seem destined to continue falling for a while. Pending home sales plunged 12% in April, according to the National Association of Realtors. Meanwhile, foreclosed inventory continues flooding into the market. CoreLogic estimates that 1.8 million mortgages are more than 90 days delinquent, in foreclosure or bank-owned. This "shadow inventory" will swell the number of unsold homes by nearly 50%!
The housing mega-bust is no mystery, of course. Folks without jobs or savings tend to buy very few homes. Americans, by and large, are in the retrenchment stage. They are trying to solidify their shaky finances by shopping less and saving more...or saving anything. They are struggling to re-pay debt the old-fashion way - by defaulting and/or curtailing consumption relative to incomes.
The Greek government will get there eventually...and when it does, the repercussions will certainly extend beyond its borders. French and German banks, to name two obvious victims, will suffer blows to their balance sheets. But who knows how far and wide the repercussions might spread?
Perhaps the resulting trauma will cross the Atlantic and wound a few financial institutions on our own shores. Already, Goldman Sachs is exhibiting some uncharacteristic frailty. For the first time in recent history (and probably ever) the cost of insuring Goldman's debt against default is more expensive than the cost of insuring Citigroup's debt against default. 
In other words, professional investors are saying that Goldman is riskier than Citi. Why? Perhaps it's because the Justice Department is sniffing around in Goldman's books and records; perhaps it's because an ex-Goldman guy is no longer Treasury Secretary; perhaps it's because Goldman's profitability remains hyper-vulnerable to financial market distress, like that kind of distress that could result from the simultaneous defaults of two million American homeowners and two or three European governments.
At that point, it would be time to say, "Good night."
Good night Greek banks.
Good night banks that hold Greek bonds.
Good night US housing market.
Good night banks that hold mortgage-backed securities.
Good night quantitative easing.
Good night Ben Bernanke.
Good night global bond markets.
Good night financial firms that receive federal indictments for lying to clients.
Good night Goldman Sachs.
Regards,
Eric J. Fry
for The Daily ReckoningThe book the US Congress never wanted you to see...
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We're spreading the word... Click here to find out more.Bill Bonner How Zombies Get Rich and Drive the US Economy
Reckoning from Baltimore, Maryland...
Bill Bonner
First, let's look at what Mr. Market is doing to see if he will give us a hint of what is going on. He's supposed to know everything. And he's supposed to look ahead and tell us what is coming.
So already, Mr. Smarty-Pants, what's up? Alas, Mr. Market seems as confused as we are.
Stocks rose yesterday...for no apparent reason. Oil went up a little too. Gold stood still.
Interestingly, bond yields continue to fall. The 10-year note yields only 5 basis points over 3%. Since the government's own calculation of inflation over the last three months puts it over 5%, this leaves the real yield negative by more than 200 basis points. What are bond buyers thinking? Beats us.
We only know what we're thinking. And we're thinking that anyone who buys bonds with a negative yield...while the Fed shows every intention of raising inflation rates further...is a moron.
Of course, he could turn out to be a very clever moron...or a lucky moron. Yields could continue to sink as the Great Correction does its work. The Fed could buy even more bonds - driving prices up (and yields down) further. But count us out. We're not that clever. Nor that lucky.
Meanwhile, the housing slump has now wiped out 8 years of price increases.
Bloomberg is on the story:Home prices in 20 US cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery.
Did you notice? Only the zombies' houses are rising in value. Alone among major metropolitan centers, Washington, DC posts real estate gains.
The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent from March 2010, the biggest year-over-year decline since November 2009, the group said today in New York. At 138.16, the gauge was the weakest since March 2003.
Other reports today showed consumer confidence unexpectedly declined in May to a six-month low, and business activity in the US cooled more than forecast.
Nineteen of the 20 cities in the index showed a year-over-year decline, led by a 10 percent slump in Minneapolis. The exception was Washington, where values climbed 4.3 percent.
Prices in 12 markets dropped to fresh lows in March from their 2006, 2007 peaks: Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland, Oregon, and Tampa.
Builders are gloomy and project demand will remain depressed into next year, Bill Wheat, chief financial officer of D.R. Horton Inc., told a housing conference in New York on May 11.
"We still see housing demand at very weak levels," Wheat said. "It could still be a struggle in 2012."
How is that possible? Oh don't pretend to be so naïve. You know what the zombies are doing. Almost all GDP growth in the past 10 years has come from government spending. And the majority of household income growth since the beginning of the crisis in '07 has come from government transfer payments.
The zombies are flourishing, prospering...gorging themselves on the blood of the nation. Your editor sees it first hand. He lives among them. He watches them coming and going. He has learned their zombie language and studied their zombie ways. From a distance, they look like normal people. But up close, you see that they are imposters. Only their lowest-ranking members do any real work - picking up garbage or teaching kindergarten. As you move up the zombie hierarchy you find managers with no real responsibility and intellectuals with no real ideas.
Just read Jeffrey Sachs in yesterday's Financial Times. Mr. Sachs is a member of the zombie intelligentsia: "The world economy is rife with lawlessness and recklessness," he laments, "with tax havens and regulation-free zones catering to the avarice of globally mobile capital. [The new head of the IMF] should be given the task of systematically shutting these venues down..."
That's right - hire more zombie regulators, tax collectors, and enforcers!
And more thoughts about zombies...
Why are zombies so rich? Here's part of the answer, from The Washington Post:It's no secret that members of Congress qualify as political insiders, but a new report strongly suggests that they also may be insiders when it comes to trading stocks.
*** Surely, the SEC is on the case! Demanding to see trading records of Members of Congress...probing into when...how...and why...the politicos made their trades, right? Nah... You really were born yesterday, weren't you, dear reader? Zombies rarely pose a threat to each other. Congress exempted itself from the SEC.
An extensive study released Wednesday in the journal Business and Politics found that the investments of members of the House of Representatives outperformed those of the average investor by 55 basis points per month, or 6 percent annually, suggesting that lawmakers are taking advantage of inside information to fatten their stock portfolios.
"We find strong evidence that members of the House have some type of non-public information which they use for personal gain," according to four academics who authored the study, "Abnormal Returns From the Common Stock Investments of Members of the US House of Representatives."
The professors reviewed more than 16,000 common stock transactions carried out by about 300 House members as revealed in the members' financial-disclosure forms from 1985 to 2001.
In a 2004 study, the same professors found that US senators also enjoy a "substantial information advantage" over the average investor - and even corporate bigwigs - when it comes to picking stocks. The latest study shows that members of the Senate outperform their House colleagues by an average of 30 points per month.
Despite the GOP's reputation as the party of the rich, House Republicans fared worse than their Democratic colleagues when it comes to investing, according to the study. The Democratic subsample of lawmakers beat the market by 73 basis points per month, or 9 percent annually, versus 18 basis points per month, or 2 percent annually, for the Republican sample.
*** Our old friend Doug Casey adds a comment:...the SEC, which should really be called the Swindlers Encouragement Commission, [is] telling people it's making sure everything's fair, thus luring the lambs to the slaughter. The investment world is full of sharks, and it always will be - all the SEC does is lower the average guy's defenses, which really does encourage swindlers. Just look at Bernie Madoff, a perfect example. The SEC has never prevented a fraud, to my knowledge. Rather, by making everyone think they're protected, it makes a fraud much easier to perpetrate. Lambs to the slaughter.
Regards,
It gets worse: adding insult to injury, the SEC costs business billions of dollars annually - probably scores of billions, if you take all the secondary and trickle-down costs into account: direct fees, legal fees, printing, mailing, and other costs of compliance. They have a direct budget cost of something over a billion dollars per year, but that's trivial relative to the indirect costs they impose on the economy. They ought to be ashamed, diverting a significant fraction of GDP from productive use into the pockets of parasites, in the name of protecting business and investors, when they do the opposite. The SEC is like a Pied Piper who attracts ravening hordes of rats with his flute instead of getting rid of them - and then charges people tenfold for the "service."
This is one agency I would abolish, immediately and completely. Not a single one of its functions should even be handed off to other agencies. The SEC serves absolutely no useful purpose whatsoever - just the opposite. It's not a question of getting it under control, or paring it back. It should be eliminated in toto.
Bill Bonner
for The Daily Reckoning
Thursday, 2 June 2011
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