FedUpUSA

Archive for the ‘Greece’ 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.

I return from a wonderful vacation — beardless, tan, and rested … but also very wary of the unfolding events:

Just when everyone thought the debt crisis was over … giant deficits didn’t matter … and the global economy was on the mend …

We have witnessed a sudden shift in global events … and the shift is about to hit the fan!

Here are the facts:

First, the European sovereign debt crisis has exploded back into the headlines with a surprise new collapse in the Spanish bond market.

The underlying reason: Spain is caught in the same vicious cycle as Greece …

• The more the government tries to cut spending to reign in its bulging federal deficit, the more its economy sinks.

• And the more the economy sinks, the bigger the deficit, mandating still deeper budget cuts.

The evidence: Last month, Spanish unemployment soared to a record high, forcing the government to admit that Spain’s national debt will be a lot bigger than expected, and mandating a second round of austerity measures.

Indeed, just four years ago, Spain’s debt was just 35.8% of GDP. This year, Madrid estimates it will soar to more than DOUBLE that level, at 79.8% of GDP. And with the vicious cycle now in full swing, it could hit 100% soon thereafter.

Meanwhile …

National labor strikes and mass street protests paralyze the already-weak economy even further …

The government responds with measures that are even MORE Draconian. And …

The cycle continues to accelerate.

Consider the actual scene of just a few days ago:

Spanish workers stage a 24-hour general strike to protest the government’s new labor reforms, austerity cuts and soaring unemployment. Riot police in Barcelona block the street near Catalunya Square. Picketers, in turn, block trucks from delivering produce.

Shopkeeper Mireia Arnau, 39, is in shock. She stands in tears behind the broken glass of her computer supplies shop, stormed by demonstrators.

The coup de grâce will come when global investors dump Spanish bonds, making it impossible for the government to roll over its debt — the same dark cloud of looming default that’s been hovering over Greece.

The big difference: Spain’s economy is nearly FIVE times larger than Greece’s!

So if you thought the impact of the Greek crisis on global financial markets was big, imagine the impact of Spain’s!

And for anyone who thought the crisis was over, the latest eruption in Spain is proof positive that they’re dead wrong.

But as a reader of Money and Markets, none of this should come as a surprise to you.

You know that ALL of the PIIGS countries — Portugal, Ireland, Italy, Greece and Spain — are still hanging by a thread, still caught in the same vicious cycle of bulging deficits, forced cutbacks and shrinking economies.

You know that even some of the stronger EU countries, France and Germany included, are also embroiled in the crisis — their banks swimming in toxic sovereign debts … their own budgets strained by the ever-greater demands for bailout funds … their people rebelling against the entire concept of a European Union … and more.

And you know that the ONLY thing that has managed to temporarily tamp down investor fears in recent months has been the unprecedented outpouring of funny money by the European Central Bank — more than one trillion euros pumped straight into private banks, who in turn, have used most of that money to buy distressed sovereign bonds.

But what you may not be fully aware of is this: Now, for the first time in many years, the money-printing central banks around the world are running smack into the natural — and totally unsurprising — consequence of their actions:

The Looming Specter of Surging Inflation

Just last week, the UN’s Food and Agriculture Organization (FAO) announced that global food prices rose in March for a third successive month, putting food inflation firmly back on the economic agenda.

And never forget: About one year ago, it was surging food prices that gave rise to the wave of civil unrest now known as the Arab Spring. It was also surging prices that helped fan the fires of the protest movements that swept through Europe at around the same time. And the U.S. was not immune, as similar protests erupted here.

But it’s not just food. Overall consumer price inflation is rising steadily in Europe, the U.S. and in most emerging markets.

And what’s most remarkable is that it’s rising DESPITE faltering recoveries and even outright recessions!

Sure, for those of us who vividly remember the double-digit inflation of the 1970s, today’s inflation rates in the neighborhood of 3% or even 4% may not sound like much.

But just remember this critical fact: Back in those days, the global economy was booming. Today, it’s doing precisely the opposite!

And this is not just a debate for ivory tower theorists; it’s a hard-nosed double-whammy for billions of people around the world:

• No improvement in wages due to the weak global economy, and at the same time …
• Surging costs for essentials like corn, soybeans, gasoline and heating oil.

That’s the main reason protest movements spread across the planet last year … and why an even bigger wave of revolts could strike again this year.

Martin Weiss – Money and Markets

Our government is a pack of fools.

They, like the Greeks, had the opportunity to take banksters and arrest them for their crimes, giving them a fair and public trial and then imprisoning them.

Instead they fell into league with them, engaging in hinky derivative deals and other scams, effectively being their co-conspirators.

And now, one man has taken his own life and left behind a note — a call to revolution.

“The Tsolakoglou government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting (although if a fellow Greek were to grab a Kalashnikov, I would be right behind him), I see no other solution than this dignified end to my life, so I don’t find myself fishing through garbage cans for my sustenance. I believe that young people with no future, will one day take up arms and hang the traitors of this country at Syntagma square, just like the Italians did to Mussolini in 1945” the note said.

This reminds me of what John F. Kennedy (yes, President of the United States) once said:

“Those who make peaceful revolution impossible will make violent revolution inevitable.”

Peaceful revolution is not yet impossible in the United States.  But continued pandering to the banksters, covering up and refusing to prosecute their frauds along with the incessant whines from people like Geithner who prattle on about how government can borrow forever without regard to the cost whittle away at that margin.

Exactly where the corner is — where the people of this nation, or those of Greece — decide that peaceful revolution and reformation of their government and enforcement of the rule of law through political means has become impossible is in and of itself impossible to determine with certainty.

But that the corner exists is also known with certainty.  It is just blind to all who look for it, as it comes in fickle form not born of reason but of emotion, fear and destitution.

History says that those who believe that the incessant screwing of the American people, or of any people, will be tolerated forever are wrong.  Old men like this one will choose to take their own lives rather than scrape on the ground like dogs seeking a tiny scrap of food.  But eventually, one of those old men will have a young son, and he will judge the injustices that he sees to be intolerable and that there is no longer recourse before the law.  He will see the death of his father as a reason to take other lives — the lives of those who he judges to be responsible.  The spark of his father will fall on dry tinder and catch fire.

I pray, during this Holy Week, that our government and those across Europe recognize that we are long past the point where the entanglements with these banksters should have been unwound, the frauds prosecuted and the deficit spending stopped, for I do not wish to live in a nation where that spark has fallen onto a patch of dry grass, or worse, into a jar of gasoline.

Yes, unwinding these frauds, prosecuting them and halting the lies — in short, facing that our governments cannot be all things to all people and must live within what they can tax in the present tense, will be difficult.

But it will be less difficult than the alternative.

Hmmm…. I was asked about this in an interview yesterday (it’ll be published in the next few days) and thought it was worthy of a Ticker comment as well:

Washington, DC—At the request of CME Clearing Europe Limited (CMECEL), pursuant to Section 7 of the Commodity Exchange Act, the Commodity Futures Trading Commission issued an Order on March 13, 2012, vacating the registration of CMECEL as a derivatives clearing organization.

The Order of Vacation is available on the CFTC’s website (see Related Links).

Why?

Well, the firm did ask — they didn’t get thrown out, they walked off.

One can only surmise that they have detected a potential problem that they don’t want to be a part of.  Might it be a question of whether the CDS on European debt have any sort of actual margin against them, and if not, whether they might get “urged” (or worse) to backstop those bets?

I suspect so.  I further believe, as I’ve repeatedly noted, that the European banking system is dramatically over-levered and no attempt has been made at all to take that leverage down.  This was remarkably stupid prior to 2007 but now is into the realm of criminally stupid, not that anyone seems to care from a regulatory point of view in the EU.  A good part of the reason for that willful blindness is simply the structural flows from Germany (in particular) to the periphery — in short the entire European “experiment” is predicated on continuing to hide the transfer of wealth from German citizens to the periphery who cannot afford the goods exported from Germany to their nations.

If and when the Germans decide they’ve had enough of this crap — or the rest of the PIIS decide to say “since Greece got to pay half, we demand equal treatment or you’ll get nothing” the game will truly be over — and that blowup is likely come with little or no warning. Now add to that backdrop the oft-repeated CME claim (right up until MF Global blew up) that no customer of a CME firm had ever lost a nickel of segregated funds and you’ve got the making of a real mess.  The system survived the first “dislocation in the farce” but would it survive another?

Probably not.

This move by the CME thus looks to be defensive — and well-founded.