FedUpUSA

Archive for the ‘Europe’ Category

Our markets have a recent history of missing important warnings. It’s no different now as investors deny the obvious and the economy stumbles along.

I have been in the investment business for more than 30 years now, so I have grown accustomed to seeing lunacy, naiveté and just plain stupidity more often than one would think possible, given that investing is supposed to be about being smart.

It seems extraordinarily obvious to me that the economy is, in essence, broken because of the stock and housing bubbles we have experienced, and that the Federal Reserve is trapped. It also seems clear that at some point we will have a funding crisis (bond yields will leap and/or the dollar will tank) due to excessive government borrowing. (Click here for more on this funding crisis.)

However, that’s not going to occur until certain attitudes shift, so I can see why this is taking some time to unfold. What I cannot understand is how folks don’t recognize the fact that, since the economy has been unable to create jobs for three years now, it isn’t going to start magically generating them now.

Nor do I understand why there is such denial about inflation. The everyday cost of living has been increasing steadily, and at an increasing rate. Just because house prices have collapsed and certain products that folks buy, especially those heavily laden with technology, are cheaper does not change the fact that we are experiencing inflation, and that the environment is really one of stagflation. It is obvious, as are the consequences.

Nevertheless, to a large degree in the investment community, Goldilocks rules.

Déjà eww

The mindset seemed familiar to me, and about a week ago I was thinking of past moments in time where the obvious was there for all to see but maddeningly few seemed to see it. What popped into my head was the spike in first payment defaults leading up to the housing crisis. When that started occurring, as early as August 2006, it spelled the end of the housing bubble (while at the same time proving it was bubble behavior, since people were missing their firstpayments).

I actually decided to search my subscription site, www.fleckensteincapi​tal.com, for references to “first payment.” Lo and behold, one of the headlines that popped up was “Goldilocksters see oil prices as bullish, up or down,” which ran on Jan. 11, 2007 (that is, more than a year before Bear Stearns’ liquidity problems came to light). Here are some key excerpts:

“I wanted to share an email from my insider friend in the subprime arena, whom I’ve quoted so liberally. It’s sort of incongruous to read his thoughts on a day when subprime and other financials were going wild, but this (first payment defaults) is a problem that I guess won’t matter until the day it matters — and then boy is it going to matter.

“He wrote: ‘We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built, but it was in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant — worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.’

“‘The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.’”

Note that I received that email on a day when subprime and other financial stock prices were rallying big time, the market completely oblivious to what lay ahead.

Selling yesterday’s news

Just as folks were late in figuring out the severity of the housing crisis, I think they still tend to be late in facing current realities. Case in point: For most of this week, it was as if markets in Europe and the U.S. had suddenly realized that the government in Greece was in disarray; that we were about to have a socialist running France; and that Spain, Portugal and Italy are each a teetering financial house of cards, even though none of that should be “news,” especially to supposedly sophisticated market participants.

In the old days, markets tended to discount events (that is, they reflected expected negative outcomes through lower asset prices, or vice versa). If that were still the case, markets should have declined into last weekend’s European elections as they anticipated the results, as well as other problems. But what we saw were markets that appeared notto have discounted the seemingly obvious news.

I have commented on this phenomenon a number of times over the past 10 years: that only after an important event happens (which was usually pretty obvious) does Mr. Market have a heart attack. I don’t really know why that is, although I think a lot of it has to do with how the government’s money printing has warped the markets by causing people to expect to be bailed out.

You can see a million trees and still not recognize the forest

Where our current path is taking us has been predictable for quite some time, and I think that continues to be the case. Unfortunately, we have elected officials who are completely incompetent, if not criminal, and the Fed is even worse. None of that is going to change until change is forced upon us (i.e., them) by a crisis. So while events seem to play out at a glacial pace, where we are headed couldn’t be clearer.

On the air

I participated in a rather timely interview with Eric King this week. Those who are interested can listen to it here.

Bill Fleckenstein for MSN Money

So this morning comes and not only has there been no “progress” on Greece but opinions are hardening, as I expected.

“This is not finished: it is about Greece, but it is also about Spain, and Italy and maybe France,” said Jacques Porta, who helps manage 500 million euros ($657 million) at Ofi Patrimoine in Paris. “The whole thing seems very dangerous. You have to be cautious, and that translates as not being in equities but being in cash.”

No, really?  What have I been saying now for four years?  We’ve done exactly nothing to resolve the problems that underlie our banking system — excessive leverage.

What’s important is to understand why.

Here it’s quite simple.  It’s why politicians won’t talk about it, including Presidential candidates Romney and Johnson along with President Obama.

The credit money that these banks “created out of thin air”, if it is removed from the system (and removing the excessive leverage must inevitably mean removing that credit money) immediately reverses the monetary inflation that has powered higher prices in stocks, education, and (believe it or not, still) housing.  This credit money has been and is nothing other than legalized counterfeiting of the currency.

When, not if, this is forced to stop all that monetary inflation comes out of the system.  Prices collapse, especially for assets.  And the feral government’s addiction to deficit spending, which has falsely inflated GDP by more than 10% for the last four years, instantly ends, all at the same time.

Some of the politicians involved appear not to understand this — Gary Johnson being one of them.  But others, particularly Mitt Romney who has the chops in the investment world to grok this, most-certainly does understand.

But none of them will have this discussion with the American people, and yet we must, because this is part and parcel of rationalizing the size of government — and returning it to a size in which every dollar of spending that the government undertakes on behalf of the people is supported with a dollar of current tax revenue — and not borrowed funds.

We’re not doing it here and they (in Spain, Greece, France, etc) are not doing it “there.”

But we all must have this conversation, and we must do so now, as the wolf is literally at the door.  We’ve spent our resources on “mitigating” the dislocation in 2008 and do not have the resources to attempt to stop a second collapse — a collapse that is certain to come unless the policies that are making it mathematically inescapable are altered.

Until that conversation takes place and is brought front and center in the debate on policy and politics, replacing the puerile and stupid distractions such as “gay marriage”, the only “respect” that any of these candidates or office-holders deserve is an upturned middle finger.

The wise person with exposure to the markets considers and executes a plan that hedges his exposure with full and due consideration that the alleged “safety” of his or her funds at so-called “sound” banks and other financial institutions in fact may be nothing more than claims on counterfeited credit money that does not actually exist.

A day at Wimbledon

This week, Mervyn King, the long-standing Governor of the Bank of England, said about the 2008 financial crisis, ‘We should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so called ‘light-touch’ regulation hadn’t prevented any of this.’ Since one of King’s colleagues, Andrew Haldane, has estimated the total global impact of the fiscal crisis at somewhere between $50 and $200 trillion, you’d think that any failure to hit the early-warning alarms would prompt a somewhat fulsome apology.

But no. King is largely unrepentant, saying, ‘the power to regulate banks had been taken away from us in 1997. Our power was limited to that of publishing reports and preaching sermons. And we did preach sermons …’ In short, and to use a local London-ism, ‘It wasn’t me, guv.’

The same absence of contrition is equally apparent in the United States. Giving testimony to the House Committee on Oversight and Government Reform, former Chairman of the Federal Reserve Alan Greenspan,did admit that, ‘Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.’ And yet, those moments of almost-apology never lasted long and thinned out the more they were tested.

The Maestro fiddled while Rome burned

Same thing in Europe. At a press conference given as he was standing down from the presidency of the European Central Bank, Jean-Clause Trichet responded angrily to a questioner (who was, by the way asking, quite reasonably, about the ECB’s shocking accumulation of poor-quality sovereign debt). Trichet snapped, ‘Can I remind us, that in 2004 and 2005 some important governments in Europe were asking for weakening the Stability and Growth Pact? Do you remember that? Do you remember which governments? [A dig at France and Germany.] …We have delivered price stability over the first 12 years and 13 years of the euro — impeccably, impeccably. I would like very much to hear the congratulations for an institution which has delivered price stability in Germany better than what has ever been obtained in [that] country over the last 50 years.’

Congratulations?

Triangulating between these comments gives, roughly, the gist of the central bankers’ case for the defence. They kept inflation low. They warned about the coming risks. But, hey, what could they do? They didn’t have the regulatory powers that would have enabled fiercer action and, sadly, their great and silvery wisdom had a blind spot: they couldn’t quite imagine how dumb other people were.

And this is all wrong. Completely wrong. Central Bankers did as much to cause the financial crisis as any other group in the world. Arguably, they were the most culpable single group. One role of their job was to restrain inflation, an essential role which they chose to construe as narrowly as possible. The consumer prices (excluding food and energy) did indeed remain relatively subdued (constrained, very largely, by the flood of cheap goods from China), but excess money has to go somewhere. If it wasn’t feeding a classic wage-price spiral in the real economy, it would have to boost asset prices.

The US housing market was the most obvious bubble, but that bubble spawned smaller ones in a thousand other places. Mortgage backed securities were wrongly priced. Credit default swaps, keyed off those securities, were also mispriced. As for the banks that held or issued these things, their debt was misvalued too.

High asset prices mean that the income yield generated by those assets looks paltry. So all that excess money and massive leverage went chasing off to find yield. Investors bought Greek bonds, they bought Spanish and Irish real estate, they bought the banks that traded these things, and they bought the bonds issued by the kind of highly leveraged companies which should have been filing for bankruptcy, not raising new capital. In market after market, prices and the amounts of insane leverage extended lost touch with reality. The collapse of 2008 showed up the costs of that inflationary failure.

Nor should we believe the central bankers when they say they knew all this and didn’t have the tools to fix it. That’s false and falser. Mervyn King stated in August 2007 that ‘Our banking system is much more resilient than in the past. Precisely because many of these risks are no longer on [bank] balance sheets but have been sold off to people willing and probably more able to bear it.’ He made these statements just as the subprime market was starting to collapse. If that’s what he means by ‘preaching sermons’ on risk, it’s little wonder that the sinners kept on sinning. Furthermore, far from adding resources to the Bank’s financial stability division, the Bank cut it. It was a similar story elsewhere.

Worse still: nothing has changed. No lesson has been learned. Central banks are still spraying the financial markets with money. Yields on government bonds ought to be higher at the moment because sovereign borrowers (including the US) are riskier now than for a very long time. Yet central bank intervention has driven those yields down to absurd levels. So everything else becomes mispriced too. I’ve written recently about Appleand Facebook, but you only come across egregious examples like these when the entire market is overhyped.The property market in Europe is still trading way over fair value. As for the impending crash in sovereign and bank debt, the potential costs there are so vast, it’s barely possible to quantify them.

And of course, none of this is new. The Alan Greenspan Doctrine, born in the mid-1990s, was roughly, ‘If the financial markets hit a rough patch, do everything you can to bail them out.’ That was the posture adopted in relation to the Asian financial crisis, the bailout of LTCM (a hedge-fund), the dotcom crash, and the subprime mortgage bust. It’s a doctrine, born in the US of A, which has spread almost worldwide, a doctrine now being most assiduously followed by the once-conservative European Central Bank.

The impact of these failures is colossal. Take, for example, the losses accumulating on the balance sheet of all these banks. When the Fed or the ECB accept dubious collateral for their cheap-money loans, they are exposing themselves to loss. Those losses were originally made in the private sector and should be borne by the private sector. That’s capitalism. By effectively taking responsibility for these lousy assets, the central banks are taxing all those who hold and have savings in the relevant currency.

Furthermore, capitalism works through a restless, destructive creativity. Bad companies and bad lenders need to face the consequences of their actions. Shareholders need to take a hit. That way, the ground will be cleared for better managed companies and stockholders will be reminded about the responsibilities of ownership.

And central bankers should take responsibility too. Failure should mean failure: loss of office with immediate effect. But I’m not holding my breath. The evasion of responsibility starts right at the top. When Congress is esteemed lower than pornography and polygamy, you know that voters are trying to send a message. It’s about time politicians – and central bankers – started to listen.

Mitch Feierstein – Planet Ponzi

It’s pretty simple, really.  The Treaty of Debt.

Put in place a “treaty” that requires:

• That all governments involved fund it on demand within 7 days.
• That the amount of said funding is determined by the entity, with no right of review or veto, and can be increased at any time.
• That there are no rights of review, not even to see the work product of the entity.
• That the entity can sue, foreclose, prosecute, etc — but nobody can sue, prosecute, foreclose or investigate the entity.
• That the people working for that entity enjoy absolute immunity — even against unlawful acts.

No, this isn’t a dream.  It’s the ESM.

And should any nation ratify this entity it is identical in form and function to selling the citizens into literal slavery, at which point said government’s legitimacy has been destroyed by its own hand and thus the citizens are well within their rights to refuse consent to further governance by that entity.

The Market-Ticker

Discussion (registration required to post)

In one of his most passionate speeches (which says a lot), UKIP’s Nigel Farage, on the May 9th celebration of the Euro, tells his European Parliament colleagues of his grave concern at the recent elections – which are very reminiscent of the elections in Germany in 1932. He warns that Europe faces the very real prospect of mass civil unrest and even revolution as the Euro project itself could even be the cause of (in it perfect irony as the initial solution to) a rebirth of national socialism in Europe. Farage pulls no punches but in three minutes provides a clear picture of just how concerned anyone who is not merely a head-in-the-sand status-quo muddle-through’er should be with regards Europe: “It is a European union of economic failure, of mass unemployment, and of low growth”

Zero Hedge