Surprises of the Crisis

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I.M.F.’ed

Last week’s edition included the following claim:

“The most concerning news of the week was when the IMF reported that everything was A-OK and the world would grow by over 4% this year. When the IMF says that, it’s time to run for the hills. Having ruined many developing nations with their loans, the IMF now has its fingers in the Greek pie as well.”

On cue, all hell broke loose in Europe. Markets fell, bonds plummeted, and the cost of insuring debt went through the roof. Dan looked into it all on Wednesday.

Case in point is Portugal’s woes. The cost of insuring Portugese debt reached a record of “619,000 Euros per 10 million Euros of exposure.”

Better still was when the yield on 2 year Greek debt managed to get to 38% (p.a.).

But the Daily Reckoning has been telling you about all this for a while now. It shouldn’t be a surprise.

That’s not to say there weren’t plenty of surprises anyway.

Amid the crashing markets was a shining beacon of hope. A lone and lonely stock managed to post a gain out of all 79 companies in the S&P 500 financial index. Any guess which one?

Hint: its CEO was getting drilled at a Senate hearing for its role in the financial crisis.

It’s as if hanging out with politicians guarantees profits to come, no matter what the circumstances.

More on this below.

Other ridiculous revelations include the fact that Ireland and Portugal, among other cash strapped, deficit posting nations, will be contributing to the hypothetical Greek bailout. Yes, despite the fact that their bonds are right in the middle of the turmoil, they have decided to cough up dough for Greece.

Actually, they will have to borrow the money they intend to hand to Greece, so they won’t even get to cough it up in the first place.

The European Central Bank’s Jean-Claude Trichet had been reassuring everyone that there is no reason to fear contagion on sovereign debt problems. Like he makes that decision! And what on earth is his definition of contagion?

Dan’s is obviously different. Let alone the OECD head Angel Gurria, who used a clever simile and said that the crisis was like the Ebola virus. Apparently, the Ebola virus is very contagious, but nobody knows how it spreads. How the Fiscal Ebola virus spreads is blatantly obvious – Keynesianism. It’s more like a mental illness, which makes governments pile on debt and then jump off the edge of their debt mound. What are bond holders supposed to do? Buy more of the stuff? No way – sell, sell, sell.

Angel’s simile gets better though:

“This is like ebola. When you realise you have it you have to cut your leg off in order to survive.”

What could that leg be? Hmm. Angela Merkel chimes in with the following:

“In 2000 we had a situation when we were confronted with the question of whether Greece should be able to join the eurozone,” she said. “It turned out that the decision [in favour] may not have been scrutinised closely enough.”

Angel and Angela – quite a team. And they are making those spenders sweat!

Germany continues to be the thorn in the Greek bailout’s side, refusing to do its bit without a credible deficit reduction plan from the Greeks. What a novel idea – a credible deficit reduction plan.

Perhaps the Greeks should take inspiration from Obama…

Brain Deficit

O-bummer has launched his 18 member Debt Commission to examine the problem of the remarkable deficits that the US is racking up. He could just decide to spend less, but that sounds boring compared to a “Debt Commission”. Especially this Debt Commission. The two Co-Chairmen launched their media effort with the following on Fox News:

“This is a suicide mission. And I’m glad that my fellow Erskine Bowles and I are jumping without a parachute.”

Talk about inspiring confidence! The poor anchor tried to steer the conversation back on track:

“Do you worry, as you go after the deficits, about possibly pushing this fragile economy back into a recession?”

“Well, I don’t worry about anything.”

But that doesn’t mean the Deficit Commission Co-Chairmen haven’t been busy:

“I’m a stalking horse for my grandchildren.”

And they have big plans for the future of the Debt Commission too:

“This is a situation where I hope in my naive green pea way that we can get all 18 of these fine people to say, this is where we are. This is – this is where we are.”

As for where they’re going, they haven’t got a clue either:

“Somebody said, well, is the new health care bill off the table? I said, nothing is off the table, absolutely nothing.”

But seriously, if we created a fictional scenario where a Debt Commission was formed to tackle government debt, and we came up with the above interview, you would all just scoff at it. And yet, here it is on Fox News:

“Well, let’s see, you’re going to do taxes first or spending first? I haven’t the slightest idea.

“But I know one thing. If we can get the figures before the American people, then we’ll sit down and then all bleed and bitch from there.”

“Yes, Erskine and I are involved in a project, screw the American people, fool them, fake them out.”

Well, you can’t fault them for honesty, even in sarcasm…

But, bless Fox News, the anchor managed to get at least some sense into the interview:

“Over the course of the last two decades, there have been four separate commissions on some of these issues and none of their recommendations on tax reform, Medicare, Social Security, none of their recommendations have become law.”

Talk about bursting their bubble…

Where Our Taxes Go … Going … Gone

According to a government investigator in the movie V For Vendetta, the most reliable government records are the tax records. If that is the case, the Australian government has a problem on its hands. After several extended botch ups, the ATO’s new and $200 million ($200,000,000) over budget computer system (that’s just how far they’ve gone over budget) has come up with its latest error: The font is too small.

Better still is the fact that this breaches the Occupational Health and Safety Act.

The $200 million over budget side of things doesn’t breach anything though.

To keep up with the fun, the taxpayer funded Comcare decided an investigation into the new system was warranted. But what exactly did they investigate? A number of useful things of course, including several complaints made by those operating the system.

The investigation concluded that the complaints of excessive scrolling required to use the system were not valid, as “the ATO have effective reasonably practicable control measures in place” to deal with this issue.

Scrolling as in scrolling down the page on your computer screen…

The next time you consider buying a government bond, consider that this is the sort of thing the money is spent on.

The Golden Boy

Bill Bonner stuck to his guns and stood up for the underdog again on Tuesday. Poor Goldman Sachs. They faithfully facilitated Congress’ affordable housing policy by securitising loans, provided the service of allowing people to invest in mortgages, and invested their shareholder’s funds wisely, only to become the world’s scapegoat for its own greed.

In other words, serving your customers and being prudent with your own cash is no longer a viable strategy. No wonder Goldman puts congresspersons on their payroll / donation lists.

What would a greedless, altruistic investment bank have done during the housing bubble?

In this case, doing the right thing was to tell your clients to bet against the US housing sector. But doing the “right thing” during a housing bubble just wouldn’t sell so well. Bubbles are characterised by euphoric buyers, not wise contrarians.

Goldman couldn’t control what its clients wanted. Besides, its job is to serve their wishes. Meanwhile, it has to make sure that its own investments are sound.

If people want to be unreasonable, then they shouldn’t be the ones controlling capital flows, or the bubble would just get worse. Let that capital go to those with the brains to know where it will be used profitably. That is what profit and loss does.

But there ends Goldman’s innocent streak. You see, betting on derivatives doesn’t create wealth. Having liquid hedging markets is great, but Wall Street is well beyond that.

Then again, with a joke of an economy to invest in, one can’t really blame Goldman for sticking to pessimistic derivatives.

According to Bloomberg, emails are emerging that Goldman specifically tried to unload those securities which were going to be problematic (“shitty”) when things turned bad. And they told their clients to buy them.

Not to worry though. Goldman will simply hire the University of East-Anglia public relations staff to smooth all that over with their “tricks“.

Small Town USA

Back in 2009, several Illinois cop cars were repossessed by banks. Now it seems two Illinois state representatives are requesting for the National Guard to be deployed in their communities because the police can’t handle the gun violence. Over in Pennsylvania, the state capital is considering filing for bankruptcy. All across America, pension funds are coming up well short. And yet, all the focus is on Greece. For how much longer?

If you would like to try your hand at balancing California’s budget, check out this link.

It’s bad enough when a country is struggling with an economic mess, but the political turmoil is extending to other facets as well now.

Back in Arizona, a county Sherriff has decided he won’t enforce the law. That’s right, a policeman. He says the new immigration law is racist and stupid, so he just won’t bother. Of all the places for this sort of revolt to begin, it’s with a Sherriff!

Also, it turns out that CIA drone pilots slip through a sort of legal loop hole – only in a bad way for them. Because they are not classed as direct combatants, it turns out they aren’t protected by the laws of war. In other words, they are locally liable for prosecution, wherever their drones operate. That means a Pakistani judge could issue a warrant for a US based drone pilot…

Having the rule of law become fuzzy and break down, as all of the above seem to indicate, isn’t a good sign for a country’s future. Is American dominance dead?

Is trouble brewing?

The Henry Review is looking ominous for resource companies and anyone who has a job. Mining royalties and compulsory Super are set to increase. Apparently this ushers in a new “generation of prosperity

… tax review … prosperity …. what?

Dr Alex Cowie at Diggers and Drillers is on the case as to what it might all mean for resource stocks. As for the Super, you will have to check out past editions of the Weekend DR. It’s been covered enough and makes people queasy when they read about it. Perhaps because they have no choice in the matter.

The Mogambo is back in style

There is no better way to finish the week than with some wise words from the Mogambo Guru. Keep in mind that his investment strategy outperformed others’ significantly over the last 10 years.

“Well, in the middle of [my family’s] rude hooting and making snide remarks about the adequacy of my mental processes and other of my various, although associated, personal faults and shortcomings, I heard, muffled yet distinct, the Federal Reserve Alarm (FRA) ringing in the Mogambo Big Beautiful Bunker (MBBB)! Something is up!

“Abruptly springing to my feet, I sprinted outside to the bunker door, hurriedly threw it open and ran to the FRA to see what was (pant, pant) happening. My breath coming in ragged gasps, I was horrified to see that they had increased Fed Credit by a staggering $20.5 billion last week! Yikes!

“And then, to add insult to injury, the Fed bought up $21.5 billion in US government securities last week, bailing out their slimy buddies, like banks and miscellaneous mortgage holders, and/or monetizing the insane increases in the national debt that Congress is running up, which, at last count, jumped by a hefty $42 billion last week, too!”

If the US feds can find $42 billion in a week, what’s bothering those backward Europeans…?

Nickolai Hubble.
The Daily Reckoning 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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Comments

  1. Run for the hills indeed !
    When the truth of just how bad the major economies are is revealed, hell will be a nice place to be in comparison.

    Take the poor old USA :

    In addition to that official $12.8 trillion national debt, Washington has written $108 trillion in off-budget, unfunded IOUs on Social Security, Medicare, Medicaid, its prescription drug program, its veterans benefits programs and its Federal pension programs that must also be paid.

    That’s more than $120 trillion — and that’s not even counting the $1 trillion the new health care bill will cost them – or the trillions in NEW deficits projected over the next 10 years.

    So they’re talking a debt an order of magnitude higher than publicised.
    One can only wonder how many future generations will be needed just to pay off the interest alone.
    On top of that, the other major economies like the PIIGS, Japan the the UK aren’t much better off, and will pay the price for decades of mismanagement VERY soon.
    Good old Australia is statistically well off in comparison but we live and exist in a global economy and will collapse too, albeit later in the peace, when the inevitable global economic crash happens.

    Time to swap currencies for Gold !

    Rodney McLagan
    May 4, 2010
    Reply
  2. “Good old Australia is statistically well off in comparison but we live and exist in a global economy and will collapse too, albeit later in the peace, when the inevitable global economic crash happens.”

    That’s the big problem that many fail or deny to see…..

    Stillgotshoeson
    May 4, 2010
    Reply
  3. http://www.theage.com.au/business/not-so-easy-for-clive-peeters-20100504-u4w9.html

    The third retailer in almost as many days has slashed its sales forecast as consumers continue to retreat from shopping centres

    Only yesterday Fantastic Holdings, owner of Fantastic Furniture and Dare Gallery retail chains, blamed creeping interest rates and a pull-back in household discretionary income

    On Friday the nation’s biggest retailer, Woolworths, warned that sales this year would not match those seen in 2009 and it was forced to trim its own sales forecast for the 2010 financial year. Coles, Target, Harvey Norman, Kmart and Super Cheap Auto have also testified to a slowdown in consumer expenditure and more thrifty behaviour by shoppers.

    Well it looks like people are learning… Just highlights that the booming economy is not supported by real wealth but high levels of (becoming non serviceable) debt.
    Those high mortgages on overpriced houses are causing reductions in disposable incomes.

    Stillgotshoeson
    May 4, 2010
    Reply
  4. Gawd… sounds awful over there, Shoes.
    Think we’d better lock the Nullarbor Feral-Proof Fence!-

    Biker Pete
    May 4, 2010
    Reply
  5. I have noticed a few people having a go at DR for their continuing doom and gloom despite the rally and signs of “green shoots” etc etc. Forgive me if I am wrong but the theme of DR is that governments/companies/individuals cannot keep running deficits and incur increasing debt levels as there will be a “day of reckoning”. Admittedly the timing of that day will depend on the level of debt and deficits but eventually it will arrive, unless of course we reverse course and start to pay that debt back……..

    Reply
  6. “Comment by Biker Pete on 4 May 2010:

    Gawd… sounds awful over there, Shoes.”

    If you are sincere in your thoughts/remarks with this statement you may appreciate why so many here on the east coast are a little.. shall I use the word.. pessimistic about the state of the economy.

    Stillgotshoeson
    May 4, 2010
    Reply
  7. Speaking of economy, mining shares took another hosing today – ouchies! I wonder what the flow on effect to the super funds of all these devaluations will be. If this keeps up, Kevin will have “fixed” the problem of a two speed economy, just not in the way he wanted.

    Reply
  8. “Think we’d better lock the Nullarbor Feral-Proof Fence!-”

    Me… serious, Shoes?! Gotta keep us ferals on _our_ side of the fence, son!

    No mate, the day we let the Irish in, it was all downhill from there on. :)
    Take Kevin O’Ruddelly, for example…

    Super: Don, glad I’m in a defensive ‘cash’ cycle! I’ve extended my use-by-date* now that we know Super has some immunity, anyway.
    And the TTR is a regular monthly windfall… .

    * A few of you might argue I ‘went off’ years ago!_ :)

    Biker Pete
    May 4, 2010
    Reply
  9. bah.. that budget thing was easy…

    $4B surplus for my budget….

    Reply

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