 | | The Daily Reckoning | Monday, October 3, 2011 |
- Newsflash: Greece can’t pay its bills! Eric Fry is on the euro-scene...
- Chris Mayer discovers an accidental investment theme in New York,
- Plus, Bill Bonner on the death of “more” and where the good news ends...
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|  | | | Enough is Enough | | Discovering a Growing Disapproval for Greek Bailouts | |  | | Eric Fry |
Reporting from Amsterdam, Holland...
Hey, what’s this? Greece can’t pay its bills?!
Yes, it’s true, Dear Reader, the Greek finance ministry disclosed once again yesterday that its deficit will be “higher than expected.”
“The deficit this year will likely be 8.5 percent of its gross domestic product,” the Associated Press reports, “higher than the 7.8 percent previously anticipated, and blamed a deeper-than- expected recession for the failure. The Greek economy is projected to shrink 5.5 percent this year.
“The revelation,” the AP continues, “that Greece is finding it increasingly difficult to reduce its borrowings in spite of all its austerity measures has raised fears that international creditors will effectively pull the plug.”
The AP’s matter-of-fact conclusion echoes the one matter-of-fact observation your editors have been issuing for nearly two years: Bankrupt entities tend to go bankrupt.
Greece will default...eventually.
“The bailout funds — no matter how large they grow — will merely slow the march toward inevitability,” we observed last Friday. “The destination is certain; the timetable is variable.”
Your editor is here in the Old World conducting a week-long “Farewell Euro Tour.” From the Netherlands to Switzerland to Italy, he has been querying folks on the “straats,” “strasses” and “vias” about the Greek bailout and about the euro’s chances for survival.
Generally speaking, support for “saving Greece” is tepid at best. And this grudging support seems to be waning with each passing day.
Although most folks expressed some vague notion that rescuing Greece was worth trying because it was probably in the public good, most folks also expressed a strong preference for their old national currencies. The Dutch, in particular, preferred their guilder. But the Germans preferred their marks and the French their francs too. Even the Italians preferred their liras.
In other words, the EU’s bailout schemes seemed to have captured the minds of Europe (like a hostage), but very few hearts. Resignation is the dominant emotion, not resolve.
Resignation to an intellectual argument may be capable of winning a few battles with the heart, but it rarely wins the war. Sooner or later, probably sooner, the widespread — and heartfelt — contempt for the Greek bailouts will spark a rebellion against the EU’s bailouts schemes.
Ironically, the emotion side of this debate may also possess the intellectual high ground. The EU and its European Financial Stability Facility (EFSF) consider it intelligent to rescue Greece, and also to begin building a war chest to rescue Portugal, Spain, Ireland and Italy...if need be.
In their hearts, most Europeans seem to recoil at the idea of funneling ever-larger piles of euros down to their southern neighbors. The bailouts just don’t feel fair. Fair would be to let the bankrupt nations go bankrupt. And bankruptcy might also be desirable. The process is not painless, but it is proven...and it is very effective... Which brings us to Slovakia, the poor, little central European nation that is tugging at the heartstrings of rich neighbors.
It is saying, “No! No more bailouts!”
Even though the German Bundestag approved a €250bn increase in the EFSF (to a total of €440bn) last week, all 17 eurozone members must approve the increase. The Dutch and Maltese governments are expected to give their approval soon, which would make Slovakia the sole dissenting voice.
Slovakia, which pursued an arduous path to eurozone membership, and finally joined the currency union two years ago, is not keen to dilute the membership credentials of the club it worked so hard to join.
“The rescue fund is simply buying time in an incredibly costly way, but it’s not solving the problems,” complains Richard Sulik, Slovakia’s Freedom and Solidarity party leader.
Sulik’s reasoning seems sound...and heartfelt. The bailout funds may delay whatever fate awaits Greece and the euro, but they won’t prevent it.
The EU’s answer to every new sign of financial distress in the PIIGS nation is “more euros.” Since May 2010, the Greeks have received about $150 billion in bailout funds from other eurozone countries and the International Monetary Fund. When it became undeniably clear last spring that $150 billion would not be enough, the EU leaders arranged another $150 billion package. Even though the details of this second bailout are not yet final, the EU cooked up an even larger bailout facility.
Should anyone be surprised that some Europeans are starting to say, “Enough!”?
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| | The Daily Reckoning Presents | | The Perfect Stock for a Dangerous World | |  | | Chris Mayer |
I was in Manhattan a few days before the 10th anniversary of Sept. 11. There were reminders of the upcoming anniversary all over the city. The date inspired a lot of reflecting on how America has changed since that horrible day.
When I arrived in New York City, I didn’t intend to find an investment theme that grew directly out of the events of Sept. 11. I stumbled on it, by accident, at the Gabelli 17th Annual Aircraft Supplier Conference.
My beat is financial markets. So I don’t want to write a treatise on all the ways America has changed in the last decade. But I do want to focus on one important way it has. It directly affects our next investment idea, which is a remarkable company doing some extraordinary things. The stock ought to easily double in 2012 if management can come anywhere close to hitting the numbers it laid out.
Let me go back a few days before the conference. I happened to watch an episode ofFrontline, called “Top Secret America.” It’s based on the work of Dana Priest and William Arkin. I admire Priest, who is a legendary reporter at The Washington Post. Her expertise is on matters of intelligence and the “war on terror.”
What Priest uncovered as part of a near two-year investigation was a secret America growing up in the wake of Sept. 11. After Sept. 11, America’s intelligence, surveillance and counter-terrorism agencies basically got a blank check to fund their efforts. The CIA got a billion dollars right away. So did the National Security Agency (NSA). “What we found in the years immediately after Sept. 11 was that the existing agencies grew enormously,” Priest says. “They doubled in size, many of them, and new organizations were created as well, big ones.”
There was a boom in new agencies geared to fighting this new war. Consider that in 2002, there were 34 new organizations created to work at the top-secret level. In 2003, government created 39 more; in 2004, 30 more; in 2005, another 35; and more each year since. “Every year,” Priest goes on, “more than two dozen, sometimes three dozen, entirely new federal organizations dedicated to counterterrorism [were] being created after Sept. 11.”
And each agency, after its creation, grew and grew. One example is the Office of the Director of National Intelligence. The DNI started as 11 people in the Old Executive Office Building. In short order, it grew to a couple of hundred people and moved to a bigger building. It had two floors in the massive Defense Intelligence Agency building. Still, it grew. “So they moved to some of the priciest real estate in the Washington area,” Priest says. “And now they are gigantic — 500,000 square feet, five Wal-Marts stacked on top of each other.”
At the conference, the big topic of discussion was defense spending. Everyone is expecting defense-spending cuts. They are inevitable. And this will affect many of the companies at the conference because they have large defense businesses.
But there is one aspect of defense spending that isn’t going go to go down. In fact, broader government spending on intelligence and surveillance and covert warfare is only to go up.
What’s going to be cut are the traditional battlefield programs. The big stuff: Tanks. Submarines. No one is going to let the air out of a ballooning secret America. “No one’s talking about turning them off,” Priest says. “It’s not like they’ve got mobile trailers that they’re up in, and then when the floods recede, they’re going to take them away.”
The rules also changed, greasing the skids. Government made it easier to higher contractors to skirt the slow process of hiring more federal workers. Now, when they want to grow quickly, they turn to the private sector. Priest talks about how the big defense contractors — CACI, Lockheed Martin, L-3 — and others saw this boom in intelligence, surveillance and the like.
The “war on terror” is not one that needs tanks and submarines and fighter jets. It needs to gather information. It needs to analyze that information. It needs surveillance equipment. Smart weaponry. Unmanned drones. It’s a top-secret America.
Priest talked about how she discovered that nearly a million people have top-secret clearance. That’s 2.5 times the population of Washington, D.C. There are 1,900 companies and 1,100 federal organizations that work at the top-secret level.
It also seems independent of political affiliation. President Obama has shown an affinity for the covert, as David Ignatius reports in a column titled “The Covert Commander in Chief.” Obama stepped up the pace of Predator drone attacks over Pakistan. He approved the raid on Abbottabad that killed Osama bin Laden. He has favored the covert on many other occasions. “The president appears to be ratcheting up intelligence and paramilitary operations,” Ignatius writes, “even as he withdraws uniformed troops from Iraq and Afghanistan.”
All of this costs a lot of money.
I am not going to pass judgment on what’s happening here. You can decide for yourself. I would encourage you to read Dana Priest’s and William Arkin’s work. There is a lot out there on the web, too, in addition to a book, plus the Frontline episode.
Some of their work is mind-blowing. If you were to start talking about this stuff at a dinner party, your friends would think you were a conspiracy theorist. But this is real. I mean, we’re talking about massive nondescript buildings in the Washington area that might be one or two floors up, but go 10 stories down. One of the guys on TV said they have shops and restaurants down there “just for them.” I’ll never look at the Washington suburbs in quite the same way again. What are they are all doing? No one knows for sure.
Anyway, my main focus here is how we can invest intelligently to secure our own financial futures, given the world as it is. And the above mark an unmistakable trend and a big change from the way we used to think of defense and security in a pre-Sept. 11 world. This will have an impact, positive and negative, on a slew of companies.
But I have a favorite that will benefit from the proliferation of top-secret America. It is, as far as I know, the only pure play on the theme.
Out of consideration for the subscribers of Mayer’s Special Situations, I can’t reveal the name of the company. But here’s a hint: It was one of the company’s that presented at the Gabelli conference.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel’s Note: Join the Mayer’s Special Situations email list and get an inside look at the back page — which includes ALL of the companies Chris has recommended to his readers...along with price action, per cent gain/loss since recommendation, research notes, in- depth analysis and more — right here. Chris’ next alert is due out this coming Friday.
| | | | | Bill Bonner | | The Developed World Shifts from “More” to “Better” | |  | | Bill Bonner |
Reckoning from Paris, France...
Have we told you where we think the US and other developed countries are headed? No?
Well, things won’t necessarily be so bad. In a few words: the lust for MORE will become a lust for BETTER.
Yes, the age of easy growth is over. You probably won’t make any money buying stocks. And your house will never return to the levels of ’05-’06. And oh yes...you may not be able to get a job.
But that’s the good news. We’ll deal with the bad news some other day. Today, we’re going to stick with this good news. People in the developed countries are going to stop thinking so much about GDP, which measures the gross amount of economic activity. Instead, they will be thinking about the quality of it. They’ll switch from thinking about their standard of living, measured in dollars or pounds or euros, and begin worrying more about the quality of their lives. They’ll stop competing to accumulate more than their neighbors; they will want better instead.
First, let’s look at what happened last week...and last quarter. It was the worst quarter for stocks and commodities since 2008. Worldwide, stocks lost 17% — or about $8 trillion. The Dow took a big drop on Friday, ending the quarter just under 11,000. Commodities were hit hard too — with copper surprising the experts by dropping more than they expected. Of course, the experts are always surprised. That’s what makes them experts.
But the fall in copper is significant. Because copper is what producers use to make things. If you make a refrigerator, you need copper. Ditto a telephone. Or an automobile. Or almost anything. So, when copper goes down it sends a message: the economy is slowing down. Most likely, the whole world is slowing down. And the US will be back in recession this quarter. In the last quarter, US GDP growth was clocked at 1.3%. This quarter, it will probably be negative.
Not that it particularly matters. It is probably more accurate to say that the economy never fully came out of the recession of ’07- ’08. But no matter from what angle you look at it, the US economy begins to resemble the economy of Japan in the ’90s and ’00s. On- again, off-again recession...with a ZIRP (zero interest rates policy)...low yields...and a government that runs huge deficits in order to keep the economy from dying completely.
Yes, dear reader, the world is a lot poorer than it was in June. But back then people still thought the Bernanke team was engineering a ‘recovery.’ Now we know, recovery hopes were fantasies. This is not an economy that can recover. It has to die. Then, a new economy will take its place.
What will that new economy look like? Here is an article from the Wharton School that helps understand it:
Sandy used to eat lunch out five days a week, indulge in premium cable on-demand and duck regularly into Starbucks for $4 coffees. Then the recession hit, and business at the jewelry boutique she had just opened tanked. By the time she started her YesIAmCheap.com blog in January 2009 as a way to make herself more accountable for her spending, her business had failed and she was $105,665.31 in debt. Today, the 33-year-old New Yorker owes $85,605.73. She packs her lunch, limits movie nights to $1 Redbox videos and mostly opts for coffee from Dunkin’ Donuts — with the occasional splurge for a Starbucks pumpkin spice latte. “They’re small changes but they add up over time,” notes Sandy, who will not divulge her last name but shares the details of her finances online.
Moreover, she says she doesn’t plan to change her spending habits when the economy improves because she has “embraced the cheap.” Although she used to prefer the word “frugal” because she thought it sounded French, “it’s not as negative as it [once was] to be called cheap. It’s almost a badge of honor.”
After more than three years of belt-tightening, the word “cheap” is losing its stigma. Experts at Wharton and elsewhere say the recession has shifted priorities for consumers, who are now more willing to trade quality for a lower price. While some argue that consumers will go back to spending freely as good times return, others say Americans have permanently embraced a cheapskate philosophy, and are unlikely to go back to their spendthrift ways anytime soon.
Many people are also getting back to basics, rethinking what matters in life, and concluding that expensive products may not be worth the cost. Wharton marketing professor Cassie Mogilner, who studies the relationship between time, money and happiness, has found that time is a more “personally meaningful resource” than money for most people. Our interpretation of these facts...below...
And more thoughts...
More is dead. Long live better.
Everywhere we look in the developed world, more no longer pays.
You can’t sell more products, because population growth is slowing...or actually turning negative.
You can’t build bigger houses — who’s got the money to buy them...or heat them?
Bigger automobiles are out too — the price of gasoline is rising. For the first 200 years of the machine age, we had the whole world’s energy resources almost to ourselves. They were close at hand...and cheap. Now, they are deep...distant and difficult...and we have to compete with 3 billion people in the emerging markets for them.
You can forget about using more energy to grow your economy. That was the formula for 200 years. But now we’ve passed the point of diminishing returns. More energy inputs — at higher prices — don’t pay.
You can’t spend more money — because you can’t get more. You can’t borrow more either, because you have no way to pay it back.
So, the developed world shifts...from more to better. You can see it clearly here in Europe. People don’t necessarily care about having more stuff. Or more energy. Or even more money. They look for ways to save what they’ve got...and to enjoy it more. They don’t want more house...they want a better house. They don’t want more food...they want better food. They don’t want more money....they want a better quality of life with lots of holidays!
Trouble is, the institutions that have developed over the last 200 years depend on more, not better.
France, for example, can give people longer retirements and more health care, but only when the economy is growing. Otherwise, they can’t afford it. Sure, it can tax the rich. But as taxes rise, the rich flee...or become poor. When that juice is used up, it can tax the future. It’s easy, at first. Because babies don’t vote! But when the supply of babies falls, the government soon runs into trouble. The future runs out of money. Lenders can see what is coming. They know future generations won’t be willing or able to keep up. Then, the model no longer works.
Without growth, governments must cut spending to only what they can raise in taxes. But then, the whole bargain falls apart. Modern government depends on MORE...getting more and more tax revenues...increasing benefits...borrowing more and more money...and spending more. Voters have to believe that they will get more in “benefits” than they pay in taxes. But without growth, they will get less in benefits than they, collectively, pay in taxes. Because government is a wasteful, parasitic enterprise. It doesn’t add to GDP, it subtracts from it. And when GDP is stagnant anyway, the extra drag of a leech government may be more than people will stand.
Households, corporations, economies...and governments...will be forced to make the transition, from more to better. How many of today’s major developed-economy governments will survive in their present form?
None is our guess.
And which one is LEAST likely to survive? The USA.
Because the USA is the only one that still believes that MORE is the solution to every problem.
The world economy is in a slump. Europe tries austerity. America sticks with more. No serious effort has been made to trim the US government budget. US economists argue for more spending, not less. And Obama’s latest jobs program is merely another spending scam.
The US also has an over-developed confidence in its military forces. Their solution to every geo-political issue? More force...more weapons...more meddling.
This is where the good news ends.
Regards,
Bill Bonner,
for The Daily Reckoning |
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