Going Greek


Going Greek

The Age has come up with a brilliant new term for struggling debt laden businesses; “Going Greek”. In this case it refers to Intralot, an Australian subsidiary of a Greek gambling company. But still, “Going Greek” would work just as well for companies without the actual Greek connection. And why stick to companies? It’s sovereign debt that continues to make the news.


An ideological war is underway. Only your editor got the setting wrong. It’s not going down at the ECB, but between the parliaments on either side of the Atlantic.

We should have known that central bankers would behave like … central bankers. They headed straight for the printing presses (their keyboards these days). But politicians are accountable to their people. And if the people know what excessive deficits and their monetisation means, then they will vote with that in mind.

So the Europeans, conscious of their last run in with hyperinflation, have picked up on the necessity for austerity. Meanwhile, the Americans have yet to learn their lesson. And if they don’t get their budget in order sometime soon, they will learn the hard way. Thus, the chasm of the Atlantic separates two test subjects of alternative economic theories in action.

On the eastern side of the pond the catchphrase is “austerity measures”. We have the British voting in a hodgepodge government (the Con-Dems) to implement spending cuts that “will change British life“. “Hungary Is Preparing Public for Austerity Plan” and Ireland is sticking to its existing one. Spain has strikes over its plans and Romania’s are being worked on in Parliament.

Despite being considered the safer debt issuer in Europe, the Germans feel the need to join in with their own “Decisive” cuts. This caused quite a ruckus in the German media – but not necessarily a negative one.

It seems like the media generally is a bit lost on all this. The papers are trying to gauge the opinion of the public before coming out with their own views. Who would have thought that austerity was politically viable?

Then again, at least the media doesn’t just come up with some completely foolish policy stance. Which is how we get to the other side of the Atlantic.

On the western side, the Americans, lead by Treasury Secretary Timothy Geithner, have been urging the Europeans to follow the American’s lead: Stimulate and if that doesn’t work, increase the amounts. But Angela Merkel will have none of it. “We can only spend what we receive in income,” she informed Geithner (indirectly).

What a novel concept. Geithner probably has no clue what she means.

Keynesian Endpoint – We’ve reached the long run

In making her comment, Merkel may have picked up on something without realising: When you borrow money to stimulate an economy, you are only reshuffling money around. The money you borrowed would have been used elsewhere.

The best analogy on this concept is trying to cool a room by leaving the fridge open. Sounds like a good idea. But anyone will tell you that no fridge is 100% efficient. For every unit of cold air produced, slightly more warm air will be coming out the back. The inefficiency means your room ends up warmer, not colder.

Now think of the most inefficient thing you can imagine (cue: government) and you will pick up on how stimulus has a detrimental effect on economic growth, not a beneficial one. It might feel nice when you open the fridge door, but pretty soon things will get steamier than before.

The “Keynesian Endpoint” identified by PIMCO’s Crescenzi has been reached. The stimulus was “a magic elixir that has morphed into poison.” Slightly misleading was that the bearish article featuring Crescenzi was entitled “Pimco’s Crescenzi Sees ‘Endpoint’ in Devaluations”. Instead, he pointed out that “time, devaluations, and debt restructurings might be the only way out for many nations.”

So who will prevail? The European Austeritists, or the American Stimulists? The correct answer is probably neither. Dan went into it on Wednesday.

Europe is pursuing a more responsible course of action, but probably too late. Their economy is too reliant on government spending for it to survive austerity intact. Ireland, which implemented austerity early on, is an example of this. Financial pundits are clamoring to call the next Greece. They haven’t picked up on the fact that it’s largely irrelevant. Markets take a hit either way.

And the Americans are deeper in debt once you examine their unfunded liabilities. They might as well stimulate while they can, so that the politicians can prolong their career a little longer.

Safe as Houses USA

For now, investors seem to be betting on an American recovery.

Mike Dorning from Bloomberg goes through some interesting poll results here:

“The U.S. has supplanted China and Brazil as the most attractive market for investors as confidence in the global economic recovery wanes in the wake of the Greek debt crisis.”

It gets better:

“Investors are putting their money on President Barack Obama’s stewardship of the U.S. economy even as his job-approval rating has declined”

And just to complete the confusion:

“Forty-two percent of investors now believe the world economy is deteriorating, double the 21 percent who thought so in January. U.S. investors were the most pessimistic about the global economy, with 58 percent saying it is getting worse versus 31 percent of Europeans and 35 percent of Asians”

So a poll that was painted to be positive on the US is actually very negative. That’s why bearish contracts are at a record cost relative to bullish ones.

But the bulls remain out in force, regardless of what the data might say:

“While American companies cut down the workforce at their plants as fast before as they are now hiring workers back, European companies were not able to respond in a similar way,” said poll respondent Ofir Navot, 35, of Tel Aviv, head of global investments for Ramco Mutual Funds.”

Ofir must have missed the US jobs data released recently. The market didn’t. It took a dive. Job ads with the following are now common in the US: “The Unemployed Will Not Be Considered”. A former Secretary of Labour in the US has come out with the following headline: “Why We’re Falling Into a Double-Dip Recession”.

Optimism over Europe!

Europe’s version of Ofir Navot is Malcolm Polly, who oversees $1 billion at Stewart Capital Advisors. “This is a small glimmer of hope that Europe might be doing better,” he said, referring to rising German factory orders.

The banks and the markets thought otherwise:

“Overnight deposits with the European Central Bank rose to a record on June 4 as Hungary heightened concerns about a sovereign debt crisis that’s making banks wary of lending to each other.”

Dan Denning wrote on Tuesday about what that means. Another explanation came from Christoph Rieger, co- head of fixed income strategy at Commerzbank AG:

“There’s a strong risk that we are heading for a post- Lehman-type banking crisis again… As long as banks are not sure how much exposure the others have to countries at risk of default, they will not lend to them and rather leave the money safely with the ECB.”

Even the ECB is gloomy:

“The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.”

Bloomberg follows up with the analysis running through your editor’s mind at the same time:

“Money-market tensions are resurfacing even after the ECB started buying government bonds and said it would lend banks as much cash as they want for up to six months.”

A different Bloomberg poll revealed just how gloomy the European situation is:

“Greek Default Seen by Almost 75% in Poll Doubtful About Trichet”

The headline hardly needs elaboration. Except for this:

“Only 23 percent say they expect the region’s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government.”

Royal Bank of Scotland analysts agree with the pessimistic. After missing their own imminent demise, they are now biting the hands that fed them bailout funds.

The remarkable thing about all this is how the above views don’t seem to be priced into the markets. Surely a sovereign default (or 10) in Europe would cause havoc in markets. Instead, markets have been rallying as much as falling. Only the approval ratings of Central Bankers seem to be suffering:

“A plurality — 48 percent — give the 67-year-old central banker an unfavorable rating in the latest poll, while 41 percent view him favorably. In January, Trichet received a 60 percent approval rating, with 27 percent regarding him negatively.

“Trichet has sacrificed the ECB’s independence by helping to rescue Greece,” says Cyril Boudin, a participant in the poll and a derivatives trader at Unicredit Group in London.”

But what does Trichet think about all this?

“The Euro is a solid currency… A credible currency… A currency that has kept its value in terms of price stability….”

Trichet was going with the “repeat it and they will believe it eventually” strategy. His manner reminds your editor of Hugo Chavez, only without the fist thumping on the table.

But while reviewing the goings on of May, Bloomberg paints a heroic picture of Trichet. During the height of the sovereign bond plunge, Trichet was busily playing the strict grandpa for the Euro governments:

“My main message for the governments was: Some of you have behaved very improperly and have created an element of vulnerability for your own country, and by way of consequence for Europe… Now the situation calls for taking up responsibilities.”

No doubt that message will echo in his mind when inflation takes hold.

Bernanke is Back

It only takes a few words from the Moneyman to get things bubbling again. Bernanke commented that the US recovery remains intact and bingo, markets jump… for a while. But comments aren’t all rosy from the maestro. Stating the obvious, he also came up with this: “The federal budget appears to be on an unsustainable path.”

And goldbugs beware! Money Morning Editor Kris Sayce wrote about Bernanke’s understanding of Gold… or lack of it. The Wall Street Journal offers the following quote from Bernanke himself:

“I don’t fully understand movements in the gold price.”

So if Bernanke doesn’t understand the measure of value that has held since civilisation began, he probably doesn’t get much at all. Particularly concerning is that it his own eagerness to engage in money-printing that is causing gold to reach all time highs.

The Dragon is Exiting

Dan Denning’s predictions on China are gong mainstream. Mixed data has been released ever since his “Exit the Dragon” report, but more and more pessimism is spreading. Of course, China’s economic system is a rather odd one in the West’s eyes. This leads many readers to comment that Dan doesn’t know what he is on about. To inform yourself, check out this video for an understanding of how the Chinese housing market works. For Dan’s actual analysis, you will have to go to the Australian Wealth Gameplan website.

Golden Moment

The Goldman boys are back to their witty stunts. Supposedly they “sent more than a billion pages of documents” to the Financial Crisis Inquiry Commission. Dan’s imagination added a post it note on top of the stack that said something rather rude.

Quote of the Week

“Men who hold Japanese government bonds are popular with women!”

Ad run by the Japanese Ministry of Finance

Nickolai Hubble
for The Daily Reckoning Australia Week In Review

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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