Muni Madness

"Investors are ignoring warning signs in the $2.8 trillion municipal-bond market, raising the risk of a reckoning, according to some market specialists. Numerous municipalities are struggling financially. ... But municipal-bond prices aren't reflecting much concern. Yields of municpal bonds, maturing in 2020 stood at 3.15% Friday, up slightly for the week but down from 3.3% in April. ... [Defaults] represented about $6.4 billion, or just .002% of outstanding municipal debt', [Matt Fabian] says", Ianthe Jeanne Dugan at the WSJ, 14 June 2010, link: http://online.wsj.com/article/SB10001424052748704067504575304782084631368.html.

Fabian, $6.4 billion / $2.8 trillion = .0023, not .002%. Check your arithmetic. Does anyone at the WSJ proofread anymore? I agree, the muni bond market is a disaster waiting to happen.

IA Short-Sells Dollar!

Recently I short-sold the dollar for 30 years. In lieu of a good fath deposit with a commodities dealer, I made a down payment on a house "purchase". In the US a good way to issue long-term fixed-rate debt is to "buy" a house. So I did. WC Varones, I salute you, see WCV's 12 January 2010 post:

http://www.wcvarones.com/2010/01/how-i-learned-to-stop-worrying-and-love.html. Houston real estate is cheap compared to that in Los Angeles. I estimate my house would have cost 4X as much if in say Woodland Hills, CA, about 25 miles northwest of downtown LA. Zimbabwe Ben help me pay my mortgage. No exit! Tax credits! Panem et circenses!

Einhorn on Truth

Greenlight Capital's David Einhorn (DE) has an interesting 27 May 2010 post at the NYT:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html. DE asks, "how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts--that is, by the printing of money? ... Despite the promises by the [Fed] chairman, Ben Bernanke, not to print money or 'monetize' the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics. ... " DE raises other issues I have. My bottom line: eventually all will see the emperor is naked.

Mark Faber's Positions

"Central banks will never tighten monetary policy again, merely, print, print, print. ... Americans must re-think what constitutes a safe asset. ... '[T]he Federal Reserve will keep interest rates at 0 precisely 0. ... in real terms.' ... Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money. ... Eventually there will be war and one will want physical commodities 'not paper from UBS or JP Morgan.' ... 'Mugabe is the economic mentor of Ben Bernanke.' ... Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money. ... If deficits didn't matter as many like the Economist James Galbraith argue today, why should citizens even pay taxes?," my emphasis, Andrew Mellon at Big Government, 23 May 2010, link:

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

I agree with Faber. Apparently the notion that he's Zimbabwe Ben is getting around. Why pay taxes indeed?

Henny Youngman, Central Banker

"The principle of central-bank independence, a mainstay of economic orthodoxy for two decades, has taken a battering over the past week. Investors should be on their guard. ... Allowing central banks freedom to set interest rates without political interference is the best way to anchor inflation expectations, reducing borrowing costs and deliver faster growth. ... But independence also allows central banks huge power with limited accountabilty. ... The ECB's decision to start buying goverment debt is even more troubling. it says it is responding to dysfunctional' bond markets. How does it know high goverment borrowing costs reflect liquidity problems rather than legitimate solvency fears that will expose the central bank to losses? ... Might its decision to buy bonds increase moral hazard, removing the incentive for governments to tackle their deficits?," my emphasis, Simon Nixon at the WSJ, 14 May 2010, link:

http://online.wsj.com/article/SB10001424052748704635204575242400983963766.html.

Of course that's the intent: to enable deficit spending! What principle? Independent of who? I have another way to "anchor inflation expectations": gold. My more basic question: "high borrowing costs", as Henny Youngman would ask, "compared to who"?

Greece Today, America Tomorrow

"Are Europe and America headed to where Athens is today? ... Protected by the [US] through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita. ... As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector. ... The fertility rate of Greece and every European nation fell below 2.1 births per woman needed to replace an existing population. Greece's birth rate has been below zero population growth for three decades. ... Were Greece a company, the solution would be bankruptcy. ... Because, should Greece decide not to take a chainsaw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. ... Rather than savage their welfare-state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look ageeably at default. ... For how much longer will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time? ... But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging population. ... And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe. States like California and New York, larger than Greece, look a lot like Greece. ... While the temptation is great for Washington to bail them out again, the [US] government itself has now begun to attract the concerned notice of holders of US debt", my emphasis, Pat Buchanan at World Net Daily, 6 May 2010, link:

http://www.worldnetdaily.com/index.php?pageId=150649.

"Crisis--from the Greek word 'Krisis'--is one of the many English words we owe to the ancient Athenians. Now their modern descendants and reminding us what it really means. ... So serious was the situation that it took a European version of the 2008 TARP bailout of US banks to save the euro. ... If fully implemented, it will be the mother of all bailouts--and one of the biggest admissions of error in modern financial history. The design of the European currency has been fatally flawed from the outset. It just took the Greek crisis to expose it. .... It would end forever the exchange-rate volatility that has bedeviled the continent since the breakdown of the Bretton Woods system of fixed exchange rates in the 1970s. ... A single European currency also seemed to offer a sweet deal. Countries with excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark. ... But the worst defect in the design of the Economic and Monetary Union (EMY), we argued, was that it united Europe's currecies but left its fiscal policies completely uncoordinated. ... The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don't create a formal procedure for something you would rather not happen, that doesn't mean it won't happen. ... Problem solved? Unfortunately not. ... For one thing, it's simply not credible that the Greek government will be able to deliver the fiscal tightening it has promised at a time of deep recession. ... It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the [US] is actually worse than that of the euro zone", Niall Ferguson at Newsweek, 24 May 2010, link:

http://www.newsweek.com/id/237645.

In about 1985 I remember reading a Fortune interview of Barton Biggs (BB). The substance of what BB said was, "The notion of 250 million South Americans slaving away in the hot sun to repay some New York banks does not comport with my notion of political reality". Well said BB Mine neither. Between now and 2017 I expect the "Venezuelanization" of most of Europe and the US. Got bonds? Sell while there's still time.

I disagree with NF. The Greek bailout did not save the euro. It saved banks holding Greek paper. It will kill the euro. There is nothing any European country could have done with respect to taxing and spending before the coming of the euro it couldn't do after. The euro was and is a "whole lotta nuttin". The euro was sold as a piece of financial engineering!

That Four-Letter Word Again

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. ... But there is an alternative. The US could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons. ... The value of a gold standard was proven in the 19th century. ... Countries that adopted to international gold standard prospered. This remarkably successful monetary system only blew apart with the outbreak of World War I in 1914. The reason it came apart then--and not at other times when countries abandoned the gold standard to finance wars with deficit spending--was that World War I was the first conflict to affect every major economically advanced country in the world. ... This might not have mattered, and the major economic powers might have re-established a monetary system similar to what existed before the war if not for the central reason why political elites dislike the gold standard: It leaves them little room to run the economy and claim credit for its successes. ... But their deeper reason is that they prefer to retain power over the economy that they would not have under a gold standard. ... But foreign central banks don't stack their greenbacks in vaults. They maintain monetary reserves mainly as interest-bearing US government-backed debt securities--in effect, as unsolicited loans to the US government. ... That increase in borrowing capacity creates liquidity that is unrelated to any need of Americans involved in economic transactions. ... The government of Charles DeGaulle, president of France from 1958 to 1969 and a supporter of returning to the gold standard, once assailed this American liquidity advantage as as 'exorbitant privilege.' ... Now Ben Bernanke's Fed is repeating recent patterns of keeping interest rates too low for too long, creating new bubbles and risking a whack-a-mole encore: 1970s-style stagflation. ... The first step in cutting off the addictive flow of foreign central-bank capital to Washington is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace their dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard. ... Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the [US]", my emphasis, Sean Fieler and Jeffrey Bell (F&B) at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052702303695604575181693906532202.html.

Absent repealing the Federal Reserve Act any US gold remonitization will be another scam to be reversed at Uncle Sam's whim. F&B work at the American Principles Project. See my 8 January 2009 post:

http://skepticaltexascpa.blogspot.com/2009/01/galbraiths-dialectic.html.

Low Yields?

"As bond yields soar across Western Europe, other countries once considered much riskier as issuing debt at among their lowest interest rates ever. Russia, returning to the market for the first time since defaulting on its debt in 1998, recently sold 10-year bonds with a yield of 5%. Investors charged Egypt 5.75% on its 10-year bonds. In contrast, Portugese bonds are yielding 6% and Ireland's are yielding 5.8%", Tom Lauricella at the WSJ, 6 May 2010, link:

http://online.wsj.com/article/SB10001424052748703322204575226721369616334.html.

Narrowing spreads between US Treasury interest rates and those of other governments may be saying something Timmy Boy Geithner might not want to hear. You should. Bonds are a sell! Even US Treasuries? Yes.

Greece and California

"In formally requesting Euro45 billion ($60 billion) from the [IMF] and [EU] Friday, Greek Prime Minister George Papandreou sought to end the drama over whether Greece can pay its bills. ... What it would do instead is open a wide new world of moral hazard--for Greece, for the countries providing aid, and for the future of the entire euro-zone. ... Thursday's market turmoil left Greek bonds in emerging markets territory at 8.7% on 10-year debt--5.7 percentage points about the German benchmark. This came after the EU's statistical agency, Eurostat, said it still lacked confidence in Greek figures and raised its 2009 deficit estimate to 13.5% of GDP from 12.7%. ... Meanwhile, tens of thousands of Greek public workers took to the streets to protest the government's austerity measures, such as they are. Could there be a greater disconnect? ... But over the next five and a half years, Greece will face some Euro240 billion in debt-service and refinancing costs-roughly equal to Greece's gross domestic product. ... Loans might delay, but cannot prevent, a radical restructuring of Greek debt. ... Further austerity measures demanded as a quid pro quo might take some domestic heat off Mr. Papanderou, but the IMF's policy history does not bode well for future economic growth. ... If Greece is bailed out, the markets will rightly conclude that a line has been crossed, and that Portugal and even Spain will be rescued too. Even the Germans don't have that much money. ... Mr. [Wolfgang] Schauble is so worried about Berlin's finances that he opposes tax cuts for Germans, but he nonetheless wants to bail out a spendthrift Greece. In an interview Monday in Der Speigel, he warned that, 'We cannot allow the bankruptcy of a euro member state like Geece to turn into a second Lehman Brothers,' adding that 'Greece is just as systematically important as a major bank.' ... Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and to demonstrate to markets that there won't be a rolling series of bailouts. To adapt Mr. Schauble's Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman. ... Greece's problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country's anemic economic growth. This is what has to change, but it won't as long as the Greeks marching in the street believe their standard of living will be salvaged by German or French taxpayers", my emphasis, WSJ Editorial, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200013667934980.html.

I agree with the WSJ noting the WSJ does not cite Islamic immigrants as a welfare-state problem in Europe. Nor does it compare Greece to California. Or the US. So I will.

Where is Eugene Fama on Portugal?

"More than a decade ago, the low interest rates that came from the euro's imminent creation were supposed to propel investment and efficiency gains. Instead, they created the appearance of prosperity. Underlying problems, such as low productivity and a bloated public sector went ignored. ... The cautionary lesson from the euro zone's 10th-largest economy--that monetary union and a common currency are no substitute for a skilled and productive work force and budget discipline--is apparent here amid the once-busy clothing factories and fabric mills in the hills outside the coastal city of Porto", my emphasis, Brian Blackstone at the WSJ, 28 April 2010: http://online.wsj.com/article/SB10001424052748704471204575210533489119748.html.

The Los Angeles investment group I was a member of debated the euro's significance when it was created. My opinion was the euro was not important. That over the long run, only real forces matter. This reminds me of a tenet of "Fama-Miller" finance, investment and financing decisions are separable. Why be surprised Portugal's new numeraire did not affect its real economy? The US should study Portugal's plight. Zimbabwe Ben can print all the dollars he wants. Without government spending decreases the US will continue capital decumulation and American living standards will fall. This article was titled: "Euro Masked, Amplified Portugal's Problems". Amplified? How? If a carpenter measures wood in meters instead of yards, how is that a problem?

Another Impossible Product

"Some big changes are happening in funds favored by safety-seeking retirement savers. ... 'What the credit crisis exposed is that these vehicles are much more complex than people assumed,' says Steve Deutsch, who tracks the funds at investment-research firm Morningstar Inc. ... This added protection allows investors to trade in and out at a relatively stable value rather than at the underlying portfolio's actual market value, which can bounce around. ... Some funds' market value dropped sharply, making them more reliant on their wrap contracts to deliver book value to investors. That, combined with general bond-market upheaval, made issuers more reluctant to offer the protection. Though the market has stabilized, there is still a significant shortage of wrap contracts, causing higher fees and other headaches for stable-value funds [SVFs] and their investors. ... The Employees Retirement System of Texas, which administers 401(k) and 457 plans for state employees, late last year decided not to renew its contract with its stable-value provider. Its fund's market value early last year dropped to just 89% of book value--helping to push the 'crediting rate,' essentially the yield investors receive, to 3% currently, down from 4% at the start of 2009. ... The shortage of wrap contracts is causing come managers to hold bigger cash stakes, a drag on performance. ... Given the great demand and limited supply of wrap contracts, the issuers of these contracts have plenty of power to dictate their own terms, which aren't always favorable to investors. One outcome: higher fees. ... The wrap provides 'can be as strict as their want to be on terms,' says Chris Tobe, a senior consultant at Bridenbach Capital Consulting who helps employers review [SVFs]. ... All this adds up to lower returns for investors. The average [SVF] delivered 3.1% last year, down from 4.6% in 2008, according to Hueler Cos., which tracks the stable-value industry. ... Investors may also find tighter restrictions on their ability to move from the funds to other investments. Many [SVFs] have long considered certain other investment options, such as money-market funds 'competing funds.' ... Stable-value investors also are vulnerable to rising interest rates. When rates start to rise, yields of money-market mutual funds will likely tick up faster than those on [SVFs]. ... Many newer stable-value products have a number of different wrap-contact issuers, ensuring that investors can trade in and out at book value. Amid the shortage of wrap insurance, though, some firms are seizing the opportunity to reintroduce older types of stable-value products that are backed by a single insurer and carry considerable risks", my emphasis, Eleanor Laise at the WSJ, 1 May 2010, link:

http://online.wsj.com/article/SB10001424052748703572504575214723494032604.html.

SVFs always struck me as a scam. They are sold as if they are bank deposits. If you want to be able to redeem your "investment" at par, you should hold bank deposits. But they pay lower interest rates than other "investments". Precisely. The limit to how "strict" the wrap providers can be is the bank interest rate. The existence of SVFs is another result of Zimbabwe Ben's zero interest rate policy. Of course SVF interest rates change slower than money-market funds. SVFs have longer maturities than money-market funds. Mencius Moldbug has done some fine work describing maturity transformation, which is what SVFs try to sell.

Even Bill Gross!

"'Bonds have seen their best days,' [Bill] Gross told Bloomberg Radio in a Mar. 25 interview. Real [inflation-adjusted] interest rates are moving higher.' ... When rates go up, bond prices go down, and that means a bearish market for bondholders. ... Pimco, which announced in December, it would offer stock funds for the first time, is advising investors to buy the debt of countries such as Germany and Canda that have low deficits and higher-yielding corporate securities. ... Gross's global forces extends beyond bonds. The No 1. thing Americans should do to try to make back wealth is to 'move outside of the [US] ' in choosing stocks, he says. ... Whatever approach investors take with their bonds, Gross suggests a wise motto to adopt in his latest investor commentary: When evaluating sovereign debt, 'Don't trust any government and verify before you invest'," my emphasis, Tom Keene & Susanne Walker at Businessweek, 12 April 2010, link:

http://www.businessweek.com/magazine/content/10_15/b4173072286105.htm.

I should reconsider my position. I agree with Gross. In part. Did Gross discuss this with Zimbabwe Ben (ZB)? If so, what did ZB say? As long as you don't buy financials, I don't see what's wrong with US stocks. Now Gross tells us not to trust governments.

Gold and Conservatives

"Within the American conservative movement, opponents of the gold standard--any form of gold standard--have always dominated the leadership. Newcomers may be unaware of this. ... Debates are usually limited to whether the FED is wise in holding to, or changing, the federal funds rate. Few readers of the '[WSJ]' or viewers of CNBC could tell you exactly what the federal funds rate is, why it is important, or how the [Fed] controls it. ... No one raises the fundamental issue of why and how it posses the legal authority to set the federal funds rate, enforce banking rules, and control the money supply--sort of. No one argues that the [Fed] is the most powerful private agency that is covered by a veneeer of public accountability. ... Ron Paul for the first time in American history made the [Fed] an issue in a Presidential campaign. He called for the re-establishment of the gold standard. ... The early years of the Great Depression were a time of monetary deflation. ... One economist who predicted this was Ludwig von Mises. he warned in the late 1920's about the coming contraction. He was opposed by an American economist, Irving Fisher of Yale, who announced a plateau for the American stock market in September 1929. ... Mises argued that the gold standard has arisen as a market phenomenon becasue gold is the most marketable commodity. ... In sharp contrast, Fisher in Chapter XII dismissed the gold standard as an historical accident. he said the gold standard would be difficult to dislodge, but someday people would abandon it. Why? Because gold 'is a substance, of which the supply is excessive.' The most famous advocate of Fisher's monetary theory was Milton Friedman. Through Friedman, the academic free market economics community became committed to fiat money after 1950. Friedman was the dominant free market spokesman after 1960. He held a position at the University of Chicago There was not a single gold standard proponent in the economics department in 1950 or later. ... Critics of the FED have long been segregated out of the movement by the leadership. ... Only in the last decade have pro-gold standard economists appeared on the scene through http://www.mises.org/. ... Friedman viewed gold as just another commodity. ... in 1986 ... [Freidman] admitted that his advocacy of a fixed rules for the expansion of central bank-created money had been a waste of time. Such restraint was not in the self-interest of central-banking officals. ... The [Fed] has been the problem ever since 1914", Gary North at Lew Rockwell, 25 February 2010, link:

http://www.lewrockwell.com/north/north817.html.

Chicago had no gold standard advocates when I was there in the early 1970s. If I recollect correctly, Uncle Miltie's gestalt was when he realized the Fed must lie to the public to influence the economy.

Bailout Bargain?

"It's way too early to tally the costs of the government's various efforts to help out our nation's financial institutions survive the credit debacle. But that hasn't stopped anonymous Treasury officials from claiming in recent days that their Armageddon-avoidance will wind up costing far less than many feared. One Treasury estimate, leaked to the [WSJ] last week, put a price tag on $89 billion on the financial bailout. That's far below the $250 billion the Congression Budget Office estimated last year or other analyses that put the all-in-number at $1 trillion or more. ... And given that the Treasury is run by Timothy F. Geithner, the man who doled out billions as president of the Federal Reserve Bank of New York, his current minions certainly have an interest in peddling the view that the price of those rescues has become less onerous. ... But if the Treasury wants to provde a full assessment of the costs of this financial debacle, it will have to add some more beads to its abacus. ... A major factor missing from the Treasury's math is the vast transfer of wealth to bank firm investors resulting from the Fed's near-zero interest-rate policy", Gretchen Morgenson at the NYT, 18 April 2010, link:

http://www.nytimes.com/2010/04/18/business/economy/18gret.html.

By George, Gretchen's got it!

Crony Capitalism's Foundation

"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepeneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited to (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. ... Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the [SEC] the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. ... Are we to believe that regualtors were unaware? ... The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. ... Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated... In a paper for [Fed's] Jackson Hole Conference in 2008, economist William Buiter described 'cognitive capture,' by which regulators become incapable of thinking in terms other than that of the industry. ... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. ... We call that system not the free market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ... Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. ... Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html.

I have said things like GO for decades.

Iowan Thinking In Greece!

"Greek Prime Minister George Papandreou met President Obama in Washington yesterday, hoping to win US support for a crackdown on speculative traders. 'Unprincipled speculators are making billions every day by betting on a Greek default,' the Prime Minister said Monday, adding yesterday that Mr. Obama's response was 'very positive.' ... These days, of course, any purchase of Greek debt is a form of speculation--a fact reflected in the 320 basis-point spread over German bonds that Greece was forced to pay. ... As soon as Athens presented its latests E4.8 billion austerity package last week with across-the-board spending cuts, the pressure on the euro and Greek bonds eased. ... Unfortunately, this demonstration that the markets could be assuaged by some more-vigorous belt-tightening did not put Greek conspiracy theories to rest. ... These protests do real real economic harm and thus reduce government revenues, and Mr. Papandreou also does his economy no favors by railing against the very 'speculators' he needs to buy his debt. ... The bets against Greek solvency are the result, not the cause, of Greece's debt problems. The way to turn speculator profits into losses is be reining in government and reviving private growth", my emphasis, WSJ Editorial, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704784904575111233555121958.html.

"'It has dawned on investors that solvency is a major issue--not a minor issue,' says Stephen Jen of the hedge fund BlueGold Capital Management. ... European Union President Herman Van Romply told several European newspapers on Friday that the bloc 'will be ready to step in if the Greeks ask.' French President Nicolas Sarkozy and Italian premier Silvio Berlusconi echoed those remarks, saying at a news conference that their countries were ready to help. ... The country's debt load totals more than 113% of its annual economic outpout and is rising. ... If Greece needs to restructure its debt, bondholders would find themselves sitting on big losses. ... The fundamental problem is that Greece is adding to its debt every year because of its big annual budget deficits. ... If that situation persists, Greece will never be able to pay off its debts without creditors agreeing to cut the amount they are owed. ... A big package could give Greece time to do a 'real devaluation'--a painful program of wage and price cuts, and a sharp drop in economic output, that could put it in a better position to pay off its debt, says Uri Dabush, director of the Carnegie Endowment for International Peace. ... But restructuring comes with a downside: A country that reneges on its debt would likely be shut out of global markets", my emphasis, Charles Forelle & Marcus Walker at the WSJ, 10 April 2010, link: http://online.wsj.com/article/SB10001424052702304703104575174203024119926.html.

Government officials frequently blame "speculators" for causing their problems. No. Speculation against Greek debt results from Greece's imprudent policies. Is Papandreou so stupid as not to understand that price stabilizing speculators make money. Price destabilitizing speculators lose money absent government bailouts. Now it's time for a war story. In 1974 I was auditing a subsidiary of a Midwestern utility for a Big 87654 firm. The subsidiary manager complained of a "cabal" of "Jews and speculators" who made the price of copper rise. Copper hit $1.44 in 1974, about $10 per pound today. I didn't have the heart to tell him, if the "Jews and speculators" were wrong about future copper demand they would lose their shirts. Does His Obamaness understand this? Who cares?

Why is Greece a worse credit than Uncle Sam? Because Unc issues debt in his own currency. Now. Got gold? Get more. Got any government bonds? California, Ireland, Greece, Unc, even Germany, yes Germany. Sell now! Now people realize Greek solvency is an issue. Where were they for years? Does Unc add to his debt annually? Greece will never pay its debts. Unc defaulted on his obligations to pay gold for dollars in 1971. So? Imagine, some people think Unc is a better credit than Exxon. They probably also believe in the Tooth Fairy and Easter Bunny. See my 15 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/forbes-capitalist-fool.html.

Obama, Corporatist

"Socialists believe that the way to paradise is for governments to own 'the means of production'. ... Today's neosocialists are smarter than their ancestors. Instead of outright takeovers, they are achieving much the same goal through rigid regulations. ... Entitlements go hand in hand with sweeping, overbearing regulations. President Obama wants higher education in this country to be free of charge, which is why his Administration is pushing for a government takeover of student lending. ... Senator Chris Dodd's (D-Conn.) recently unveiled package of financial regulatory reforms is a neosocialist's dream. It is also destructively stupid. The bill doesn't address the key causes of the recent economic crisis: the Fed's too loose monetary policy, the behavior of Fannie Mae and Freddie Mac in buying or guaranteeing almost $1.5 trillion in junk mortgages and the failure to properly regulate credit default swaps and other derivatives. ... In the name of fighting Washington's too-big-to-fail doctrine for major financial institutions, Dodd's bill is a de facto institutionalization of them. ... Thus these biggies, like Fannie and Freddie, will have lower costs of borrowing--debt is by far the biggest component of their capital--which will put their smaller competition at a crippling disadvantage. ... Thus the paradox of today: bargain-basement rates of interest for larger firms and higher costs--or no credit at all--for smaller borrowers. ... Chief among its tasks would be assessing the risk of banks and their products and activities, yet Washington has demonstrated that it is incapable of judging risk. ... Sensible debt-to-equity ratios, including stiffer equity requirements for volatile short-term debt, and clearinghouses for almost all derivatives would effectively accomplish what Dodd's monstrosity purports to do and manifestly does not", Steve Forbes (SF) at Forbes, 12 April 2010, link:

http://www.forbes.com/forbes/2010/0412/fact-comment-steve-forbes-neosocialists-obama-obamacare-marx-impressed_print.html.

Amazing. I agree with SF. The Dodd bill will not reform the TBTF banks. Feature or bug?

China Buys Dollars?

"China's chief foreign-exchange regulator suggested the country's appetite for further gold purchases may be limited and offered soothing words about China's role as an investor in US Treasurys. 'Gold is not a bad asset, but currently a few factors limit out ability to increase foreign-exchange investment in gold,' said Yi Gang, director of China's State Administration of Foreign Exchange. ... China rarely revels its thinking on investment of its foreign-exchange reserves, which at $2.4 trillion are the world's largest. ... Mr. Yi said the past 30 years have shown that the return on gold hasn't been that great and that given China's heft as a gold buyer, any move it makes to purchase the precious metal would 'certainly' increase gold prices. ... China is the world's largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council", Aaron Back at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704869304575110621920790934.html.

Suppose Yi is buying gold? Would he tell us? Got gold? Get more. Got bonds? Sell 'em to Yi. If he'll take them.

The Fed's Cross of Paper

"If you're a retiree who relies on interest income, you know that the tap is running dry. In fact, many investors in certificates of deposits, savings accounts and money market accounts are losing money once taxes and inflation are subtracted from today's extremely low yields. Less well known is that measly savings yields are central to the government effort to buy time for the banks to earn their way back to health. It is important to rebuild the banks. But more attention must be paid to the collateral damage from that effort. Here's what's happening: By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the [Fed] has enabled banks to borrow cheaply. ... The result is presumably healthier banks and certainly poorer savers", NYT Editorial, 18 January 2010, link:

http://www.nytimes.com/2010/01/18/opinion/18mon3.html.

Fed policy is: "Crucify savers on a cross of paper". Where is a William Jennings Bryan today to challenge the banksters and their apologists in the US government?

Pension Funding

"Public pension funds needing to boost their returns but frustrated with hedge funds and private-equity investments are turning to one of the oldest investment strategies--using borrowed money to boost performance. The strategy calls for leveraging pension funds' safest asset--government or other high-grade bonds--while reducing exposure to stocks. ... Low interest rates make it impossible to meet those targets with simple bond investments. ... That public pensuion funds would contemplate the use of borrowed money so soon after a credit crisis stoked by financial leverage is setting off alarms for some in the industry. ... In previous years, consultants pitched a strategy called portable alpha, an aggresive bet involving leverage and hedge funds that magnified returns when the stock market was surging but aggravated losses when the market turned down", Craig Kramin at the WSJ, 27 January 2010, link:

http://online.wsj.com/article/SB10001424052748704905604575027601300360196.html.

Depending on the rates the pension funds issue debt, this may turn out better for them than the skeptics think. That pension funds, like Wisconsin's, resort to this shows many pension funds are insolvent in substance. Do you still want to buy muni bonds?