Thursday, April 29, 2010

Europe's Fiscal Fascism

¹²Europe's Fiscal Fascism Brings British Withdrawal Ever Closer

By Ambrose Evans-Pritchard, | 14 May 2010

Just when you thought the EU could not go any further down the road towards authoritarian excess— it gets worse. The European Commission is calling for EU powers to vet budgets of the 27 member states before the draft laws have been presented to the House of Commons, the Tweede Kamer, the Folketing, the Bundestag, the Assemblee Nationale, or other national parliaments. It applies to Britain even though we are not in EMU.

Fonctionnaires and EU finance ministers will pass judgement on the British (or Dutch, or Danish, or French) budgets before the elected bodies of these ancient and sovereign nations have seen the proposals. Did we not we not fight the English Civil War and kill a king over such a prerogative? Yet again we are discovering the trick played on our democracies by Europe's insiders when they charged ahead with EMU, brushing aside warnings by their own staff economists that monetary union was unworkable without fiscal union.

Jacques Delors knew perfectly well that this would lead inevitably to a crisis, but it would be the "beneficial crisis" that would force sovereign parliaments to submit to demands that they would never otherwise accept. This is now playing out before our eyes. Club Med governments have built up €7 trillion sovereign debt under the cover of monetary union, which shut down the warning signals for borrowers and creditors alike. We are now near— or beyond— the point of no return.

Eurozone states must go along with this cynical entrapment, or risk economic catastrophe. The conspirators have succeeded. The €750bn shock and awe package agreed over the weekend clearly alters the character of the European Project, crossing the line towards an EU debt union and an EU Treasury. How long will it be now before the EU acquires direct tax-raising powers?

As French president Nicolas Sarkozy said: "We have a veritable economic government". I hope the excellent and proud French people realise what this means before it is too late, as it is for the Greek, Irish, Portuguese, and Spanish peoples. They are being forced by the logic of the economic machine to squeeze fiscal policy at a time when they are either in recession or trapped in a deeper perma-slump without offsetting stimulus.

A Deutsche Bank note to clients said these countries have given up all three instruments of economic control: fiscal, monetary, and exchange. They are powerless. We are under an "EU protectorate", said Spain's opposition leader Mariano Rajoy last week, though it was empty, useless rhetoric since he does not draw any of the necessary conclusions from this intolerable state of affairs. In Brussels, Mr Barroso wants EU powers to monitor current account deficits and credit growth— under pain of sanctions— in order to stop booms running out of control. "We must get to the root of the problems," he said.

Notice how one-sided this is. The entire adjustment burden falls on the people of the Club Med states— including his own nation, Portugal— though they are already trapped in debt-deflation. There is no recognition that the EMU system itself is fundamentally dysfunctional because the euro was painted on a cultural canopy that cannot possibly be deemed an "optimal currency area", nor that these countries have been grossly violated by the entirely predictable— and predicted— perversions of EMU. There is no hint that intrusive EU surveillance powers should be used to compel Germany to increase spending and tolerate higher inflation so that the EU's North-South divide can be bridged by the both camps meeting each other half way.

All responses are tilted in one direction: deflation, fiscal austerity. This is the Gold Bloc fallacy of Continental Europe from 1931 to 1936, the policy that led to Bruning's destruction of Weimar and Laval's near destruction of the Third Republic in France with his deflation decrees. It was a precursor to Laval's fateful role as the Nazi enforcer of Vichy. He was later executed by firing squad, vomitting from a botched suicide with cynanide.

The reactionary character of the EU system is astonishing to behold. Mr Barroso— a Maoist student protester on the revolutionary barricades, turned Thatcherite, turned what exactly— a Salazar, a son insu?— is becoming a serious danger to civil society and the survival of European democracy. Señor Barroso, a decent man, needs to step back and ask himself what on earth is going to be achieved by imposing a deflation death spiral on a large swathe of Europe.

Nor is there any recognition at all that the European Central Bank was itself partly responsible for the crisis that has now engulfed the South. We all forget that the ECB ran a persistently loose monetary policy during the bubble— Greenspan Lite, let us call it— and an overly tight policy after the bubble burst. A double whammy for the GIPS.

It missed its own inflation target every year, and by the end it was tolerating an 11% growth rate in the M3 money supply (against a target of 4.5%, but by then it had abandoned its Bundesbank tradition of monetarism). This was pouring petrol on the property fires of Ireland and Spain.

The ECB has since let M3 contract, doing its own part to ensure a replay of 1931, at least until Europe's politicians read the riot act on Friday and forced it to buy Greek, Portuguse, Irish, and Spanish bonds, albeit sterilized and injecting no net stimulus into the euroland system. This resassertion of political primacy is entirely appropriate. The idea that central banks should not be accountable to democracy is monstrous and untenable. Besides, they had their chance.

They showed themselves unfit for independence. Their doctrines were found to be pseudo-science. Why did the ECB pursue policies that were so destructive for the GIPS? Because it was helping to nurse Germany through its long post-reunification slump in Phase I, and then bowed to Germany's phobia of non-existent inflation in Phase II from 2008 onwards. ECB policy was twisted from the start to help one (mentally unhinged?) country. Let us at least be honest about this.

I do not envy David Cameron and George Osborne as they navigate these lethal waters. As Bruno Waterfield reports from Brussels, they will face their first clash next week when the new Chancellor is presented with the Barroso proposals, that is to say proposals for a reversal of the English Civil War and the re-establishment of Stuart monarchical absolutism. The truth is that no British government can ever put Europe on the back-burner and hope it goes away. It hits you in the face, again, and again, and again. This is why so many British ministers end up feeling a visceral hatred for the project.

In my view, the EU elites overstepped the line by ignoring the rejection of the European Constitution by French and Dutch voters, then pushing it through under the guise of the Lisbon Treaty without a popular vote, except in Ireland, and when Ireland voted 'No', to ignore that too. The enterprise has become illegitimate— it is starting to exhibit the reflexes of tyranny.

The moment of definition is fast arriving from Britain. The measures now being demanded to save monetary union cannot and will not be accepted by this Government, Nick Clegg notwithstanding. The most eurosceptic people I have ever met are those who have actually worked for the European Commission, though it takes a while— and liberation from Brussels— for these views to ferment. The outcome— un véritable gouvernement économique— will put Britain and the eurozone on such separate courses that it will amount to separation in all but name. The sooner we get the nastiness of divorce behind us, the better.


Portugal Takes Its Punishment With Fresh Taxes

Portugal is to impose fresh austerity measures to cut the budget deficit and regain the confidence of bond markets, becoming the fourth country on the eurozone periphery to tighten fiscal policy before a durable recovery is underway.

By Ambrose Evans-Pritchard | 13 May 2010

Socialist Portugese premier Jose Socrates aims to cut the deficit by an extra 1% of GDP to 7.3% this year and 4.6% next year, but has refused to follow yesterday's move by Spain for broad-based cuts in public wages owing to constitutional constraints. The package relies on revenues, including a rise in VAT to 21%, higher income tax, and a range of corporate levies. "I ask my countrymen to make this sacrifice to defend Portugal, defend the single currency, and defend Europe," he said.

Paul Portas, leader of the free market conservatives, said the mix of policies amounted to a "fiscal bombardment of the economy" that would crush wealth creation and fail to put the country on a viable path back to recovery. The austerity plan follows a dramatic crisis last week when yields on 10-year Portuguese bonds surged to over 6%, above the level that led Greece to request an EU-IMF bail-out. Escalating distress in Portugal— and the risk of contagion to Spanish banks that hold €86bn of Portuguese debt— is what forced EU leaders to put together a combined package of €720bn to defend EMU over the weekend. The European Central Bank has been buying Portugal's bonds on the open market to force down spreads.

The quid pro quo was a pledge by Mr Socrates for further belt-tightening, no easy task for the leader of a minority government. Opposition leader Pedro Cassos Coelho said his party would back the measures since the country faces a "state of emergency". The combined austerity packages in Greece, Ireland, Spain, and Portugal cover a substantial part of the eurozone and may have broader ramifications. Italy is also considering a public sector wage freeze.

"This Club Med tightening is deeply worrying," said Charles Dumas from Lombard Street Research. "Some of these economies are going to be contracting at an annualized rate of 4% by the end of this year and that is going to spill back into Germany". Southern Europe is having to squeeze fiscal policy without offsetting stimulus from monetary policy or the exchange rate. Deutsche Bank said membership of EMU had deprived these states of all key instruments of economic management. This is not what political leaders expected in embracing the euro.

There is a risk of populist backlash if citizens start to think that they are powerless, with no clear way out of a deflation trap. Fernando Texeira dos Santos, the finance minister, said he expected "violent episodes" comparable to those in Greece but insisted that there was no other option. The CGTP trade union federation vowed to mobilize its forces. "Either we come up with a very strong reaction or we will be reduced to bread and water," he said.

While Portugal's public debt is average for EMU states at around 84% of GDP this year, the private sector is heavily indebted and reliant on external funding. Fresh EU data shows that Portugal's total debt is 331% of GDP, compared to 224% for Greece. The IMF said Portugal's labour market is the most rigid in Western Europe.

Brian Coulton, director of Fitch Ratings, said the new measures are a great improvement on the "underwhelming" plan put forward earlier this year. The agency has a rating of AA— on Portuguese debt with a negative outlook. "The country has already made substantial progress on spending cuts over the last four years and is replacing every two civil servants who retire with just one, so it make sense to rely on taxes to raise revenue quickly," he said.


EU Imposes Wage Cuts On Spanish 'Protectorate'.
Calls For Budget 'Primacy' Over Sovereign Parliaments.

Spain has followed Ireland and Greece in imposing 1930s-era wage cuts to slash the budget deficit, complying with EU demands for further austerity in exchange for the €720bn 'shock and awe' rescue for eurzone debtors.

By Ambrose Evans-Pritchard | 12 May 2010

Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5% this year and frozen in 2011. "We must make an extraordinary effort," he said. Pension rises will be shelved. The country's €2,500 baby bonus will be cancelled. Aid to the regions will be slashed and infrastructure projects will be put on ice. Mr Zapatero's own monthly pay will fall 15% to €6,515.

Mariano Rajoy, the conservative opposition leader, said years of ostrich-like denial by the Zapatero team had reduced the country to an EU "protectorate". Commission president Jose Barroso unveiled plans for EU control over national budgets, including an incendiary demand that Brussels should vet budgets before their first reading in Westminster, the Bundestag, and other parliaments. Current account deficits and credit growth will be monitored. Brussels can imposing sanctions on states that let booms run out of control. "We must get to the root of the problems," he said.

Such a plan would greatly improve the working of the EMU system, but it would also entail a drastic erosion of sovereignty. The intrusive surveillance is a wake-up call for states that have tended to view the euro as a free lunch. Mr Zapatero— who long prided himself on being an "anthropological optimist"— plans to cut the deficit from 11.2% to 6% of GDP this year, with further cuts next year. The fresh move is to placate bond vigilantes and to calm German fears that eurozone 'discipline' is breaking. He has already raised income taxes and lifted VAT from 16% to 18%.

US President Barack Obama played a key role behind the scenes, pleading with Mr Zapatero for "resolute action". The telephone call from the White House is a clear indication that contagion from Greece and Portugal to the much larger debt markets of Spain had become a global systemic threat by late last week. "The markets were going in for the kill: the eurozone itself was on the brink of collapse," said Jose Garcia Zarate from 4Cast. The austerity package has gained time but investors are eyeing the response of the Spanish people.

"Just months ago the government said it would never cut wages, so this is a very humiliating U-turn. There will be protests, but we don't know yet whether there will be a general strike," he said. Spain's UGT union federation warned of "social conflict" and vowed to inflict "maximum punishment" on the government. However, the nation as a whole has so far handled a property slump and a rise in unemployment to 20% with stoicism, befitting the tradition of the Spanish-born Stoic philosopher Seneca.

Javier Perez de Azpillaga from Goldman Sachs said Spain has climbed rapidly up the technology ladder. Its exports have grown faster than those of Italy or France. It has a low public debt of 53% of GDP, but a "highly leveraged" private sector. Real estate companies have debts of €445bn, or 45% of GDP. "Banks may not be able to recoup large parts of these loans. These losses will have to be recognized eventually, bringing down many institutions and forcing the government to recapitalize them," he said.

The 'Cajas'— public sector banks— have assets of €1.3 trillion and account for most mortgage debt. Many are struggling. The saving grace is that the two giants, Santander and BBVA, have global portfolios and are in "excellent shape". Caixa Catalunya said the stock of unsold homes in Spain reached 926,000 at the end of last year, equivalent to 6.5m in the US. It expects the market to touch bottom this year with real falls of 20% to 25% from the peak. Spanish households have been able to draw on a very high savings rate of 17.9% to absorb the shock.

Spain's wage cuts amount to an "internal devaluation" within EMU. Stephen Lewis from Monument Securities said the EU is pushing a clutch of countries into contractionary policies at the same time. These will feed on each other, creating a deflation bias across the region akin to the 'Gold Bloc' in the 1930s.

"It is not a viable policy. Weakening demand will cause the tax base to shrink. If the population could see light at the end of the tunnel, they might put up with it, but there is no light: it is a long dark passage leading nowhere," he said. The EU cites the Irish austerity plan as a model, but Ireland has an open economy with a dynamic export sector, and may be sui generis. In any case, Ireland's nominal GDP has fallen 18.6%, with no commensurate fall in debt. Ireland is not yet safely out of its debt-deflation trap.


ECB Risks Its Reputation And A German Backlash Over Mass Bond Purchases

The European Central Bank risks irreparable damage to its reputation by agreeing to the mass purchases of southern European bonds in defiance of the German Bundesbank and apparently under orders from EU leaders.

By Ambrose Evans-Pritchard | 11 May 2010

Jean-Claude Trichet, the ECB's president, denied there had been any political interference. "We are fiercely and totally independent," he said. It is clear, however, that the two German members of the ECB's council voted against the move, a revelation that may cause a catastrophic political backlash in Germany. Axel Weber, ultra-hawkish head of the Bundesbank, told Boersen-Zeitung that the emergency move over the weekend had been a mistake.

"The purchase of government bonds poses significant stability risks and that's why I'm critical of this part of the ECB's council's decision, even in this extraordinary situation," he said. The rebuke is devastating. The ECB draws it authority from the legacy and aura of the Bundesbank.

The European Commission made matters worse by announcing the decision in the small hours of Monday morning before the ECB had spoken, fuelling suspicions that monetary policy is being dictated by the political authorities. French President Nicolas Sarkozy further enraged Berlin by claiming that 95% of the $1 trillion "shock and awe" rescue package was based on French proposals. "Germans are watching this in horror," said Hans Redecker, currency chief at BNP Paribas. "If this ends up in full-blown quantitative easing, people are going to be up in arms."

As recently as last Thursday Mr Trichet said the governing council had not even discussed buying bonds. Julian Callow, of Barclays Capital, described the volte-face as incredible. "The ECB has ripped up its exit strategy. They have always prided themselves on transparency and consistency, and now they have done this abrupt U-turn."

The ECB said it was intervening in "those market segments that are dysfunctional", almost certainly buying Greek, Portuguese, Irish and Spanish bonds. It will sterilise purchases through other means so that the action will not add net stimulus or undermine monetary policy, at least for now. Spreads on 10-year Greek debt fell 467 basis points to 7.75% in euphoric trading. Crucially, spreads fell 163 points to 4.62% in Portugal and 51 points to 3.92% in Spain.

Marco Annunziata, chief economist at UniCredit, said the ECB alone is powering the market, raising concerns that any rally will be short-lived. "The spread tightening has so far been driven mostly by ECB purchases and some short-covering, with much less buying interest from real money accounts," he said. Mr Redeker said China and other emerging powers have lost confidence in EU management and stopped buying Club Med bonds, leaving the euro vulnerable to further sell-offs.

The bank is predicting parity against the dollar by early 2011, but the immediate panic is over. "The ECB has done what it had to do: if spreads had continued to widen after what happened on Friday we would have faced a death spiral," he said. Marek Belka, head of the IMF's European operations, said the show of financial power buys time but cannot solve EMU's deeper structural crisis.

"It has a potential of calming the markets for a moment. I obviously don't treat it as a long-term solution. This is morphine that stabilises the patient, and the real medication and the real treatment has yet to come," he said.

Fresh EU data shows that total debt is 224% of GDP in Greece, 272% in Spain, 309% in Ireland, and 331% in Portugal, each with a heavy reliance on external finance that can dry up at any moment. They are all being forced to impose austerity measures, risking a slide into deeper slump and a potential debt-deflation trap. Details of the rescue plan are becoming clearer.

The EU has invoked the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty to beef up the EU's balance of payments fund from €50bn to €110bn. The money can be used to bail-out countries within the eurozone for the first time. This is a "Euro Bond" by any other name, evoking the German nightmare of an EU debt union.

The eurozone will create a Special Purpose Vehicle able to marshal a further €440bn. This is to be a outside the EU institutions on German insistence in order to circumvent the EU's "no bail-out" law. The hope is to head off trouble at Germany's constitutional court, though it is certain to be challenged anyway.

The IMF will match this with another €220bn or so, taking the whole package to roughly €750bn. Ulrich Leuchtmann, currency chief at Commerzbank, said it is far from clear whether EU states can cover their pledge, since most have their own debt problems. "Not even the eurozone as a whole has sufficient finds to provide for member states in trouble. The volume of aid is likely to be much smaller than the official figures suggest," he said.

The ECB resisted the purchase of state bonds after the Lehman crisis, arguing such action would amount to a subsidy for the most indebted states. But it also made no secret of its disdain for quantitative easing by the Bank of England and the US Federal Reserve, viewing this as the start of a slipperly slope towards "monetisation" of deficits. ECB board member Lorenzo Bini Smaghi went so far as to deride QE as an inflation policy, saying: "It is not what people in Europe want". The sudden change in policy will come as a shock to those who see the ECB as last bastion of orthodoxy in a world of heretics.


Europe Prepares Nuclear Response To Save Monetary Union

Are Europe's leaders grasping the nettle at last? Faced with the imminent disintegration of monetary union, they appear poised to create the beginnings of an EU debt union and authorize the European Central Bank to step in immediately to stabilize the eurozone bond markets.

By Ambrose Evans-Pritchard | 9 May 2010

"It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government," said French president Nicolas Sarkozy, once again basking as Europe's action man. "Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning we will be ready to defend the euro."

Great caution is in order. German Chancellor Angela Merkel has so far said little. The descriptions of the deal agreed by EU leaders in the early hours of Saturday are coming from the French bloc and EU bureaucrats. How many times during the Greek saga of the last four months have we heard claims from Brussels that turned out to be a distortion of what Germany had actually agreed, causing each relief rally to falter within days? They had better get it right this time.

But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU 'rescue' mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble— apparently €60bn, with a separate facility that may be able to lever up to €500bn— is to go far beyond the Lisbon Treaty.

This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes. No EMU country will be allowed to default, whatever the moral hazard.

Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and— the two clinchers— Spain and Italy. "We have a serious situation, not just in one country but in several," she said. The euro's founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or— put another way— that Germany would go along rather than squander its half-century investment in Europe's power-war order.

Whether the German nation will acquiesce for long is another matter. Popular fury over the Greek rescue has already cost Mrs Merkel control over North Rhine-Westphalia and with it the Bundesrat, dooming her reform agenda. The result was a rout. Events are getting out of hand, and not just on the streets of Athens.

For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps even worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt. Bond risk on European banks as measured by the iTraxx financial index reached even higher levels late last week than in the worst moments of the Lehman crisis. The safe-haven flight into two-year German Schatz was flashing the most extreme stress warnings since the instruments where created forty years ago.

"We're seeing herd behavior in the markets that are really wolfpack behavior," said Anders Borg, Sweden's Finance Minister. Credit specialists in Frankfurt, London, and New York feared a blow-up by Thursday afternoon, when ECB president Jean-Claude Trichet said the bank's council had not even discussed the 'nuclear option' of buying Club Med bonds. The ECB seemed to be on another planet.

It was the fall-out from that press conference— at a moment when markets were losing all confidence in EU leadership— that had much to do with the DOW's 1000 point drop in New York hours later. This is not to blame Mr Trichet. He did not have a mandate to go further at that stage. The Bundesbank had blocked him, knowing full-well that ECB purchases of bonds is the end of monetary discipline and the start of a Primrose Path to Hell.

As they say in Frankfurt, a central bank should be like pudding: "the more you beat it, the harder it gets". It is pointless to fault either camp in this clash of Latin and Teutonic mores. The euro was never an "optimal currency area", which is to say it was never an "optimal legal and cultural area".

It was a late 20th Century version of the same Hegelian reflex of imposing ideas from above— making facts fit the theory— that has so cursed Europe. Schopenhauer said Hegel had "completely disorganized and ruined the minds of a whole generation". Little did he know how long the spell would last.

But I digress. There is a difference between 'quantitative easing' by the US Federal Reserve and the Bank of England for liquidity purposes, and use of this policy to soak up the debt of governments dependent on external finance to cover structural deficits. The lines are of course blurred. One purpose can leak into the other.

But whatever the objections of the Bundesbank, it seems that Europe's elected leaders pulled rank this weekend— and high time too says the French Left. The reaction in Germany has already been fierce. "The ECB is going to crank up the printing presses," said Anton Börner, head of Germany's export federation. "In five to ten years we will have a weak currency, with rising inflation and higher rates of inflation that will act as a break on growth."

I don't agree with Mr Börner. The M3 money supply is contracting in the eurozone, pointing to the risk of a Japan-style slide into deflationary perma-slump, although the panic response to that down the road may well be to call in the printers. But there is no doubt that Mr Börner represents German opinion.

The EU is invoking the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty, arguing that the euro is subject to an "organized worldwide attack". This is a legal minefield. A group of professors has already filed a case at Germany's Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder.

The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal.

One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads. Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure.

The rot set in when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11% rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.

The answer to this— if the objective is to save EMU— is for Germany to boost its growth and tolerate higher 'relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend 'deal' demands yet more belt-tightening from the South.

Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.

While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.


Monetary Union Has Delivered A 'German Europe' After All

We now know the answer to Henry Kissinger's question: "Whom do I call if I want to call Europe"? Only one person matters. The Chancellor of Germany.

By Ambrose Evans-Pritchard | 2 May 2010

Berlin was Europe's capital last week, basking in summer heat of 79 degrees (F). The heads of the European Central Bank and the International Monetary Fund (IMF)— both French, oddly— arrived as supplicants, pleading with Chancellor Angela Merkel and a stern finance committee of the Bundestag to save monetary union. Nowhere else mattered. The markets have stopped listening to Paris or Brussels.

If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a "European Germany" with the silken chords of EMU, they failed. Monetary union has delivered a "German Europe" after all. It has taken a Club Med bond crash and a contagion threat to German Landesbanken to force Berlin to blink. Backing for the €100bn (£87bn) bail-out for Greece— or €120bn, or €140bn— will be rushed through the Bundestag this week.

Let us be clear what has happened. This is a one-off rescue. The money is in the form of bilateral loans, not an EU bond. Mrs Merkel has refused to be bounced into an EU debt union or into acceptance of fiscal federalism.

By defending German sovereignty— as she must under the 1993 Maastricht ruling of her consititutional court— Mrs Merkel has left the eurozone in exactly the same dysfunctional state as it was when the Greek crisis first erupted, and therefore equally ill-equipped to cope with the next tremor. The damage already done to EMU credibility is huge.

"The crisis has shown to the whole world that Europe is unable to manage a monetary union: it has had to call in the IMF," said Wim Kosters, Monet Professor of European Economics at the Rhine-Westphalia Institute.

"We created rules that nobody followed. It wasn't the Commission that put a stop to the game, the markets had to stop it," he said, to warm applause from German fund managers at a Euromoney forum in Berlin. Across the street, Czech President Vaclav Klaus was enjoying equally warm applause at Humboldt University as he savaged Europe's "fair weather" currency with his usual gusto. "I thought I would be pelted with eggs and tomatoes. Something has changed in Europe," he said.

Indeed it has. A German chancellor has talked of expelling EMU violators. A chorus of German MPs— Free Democrats and Bavarian Social Christians (CSU)— has said Greece should leave, that the "taboo" must be broken. Broken it is. EMU looks more like a fixed exchange rate system, and less like the sacred union, "with the solidarity of a nation", it was billed.

Nor is this rescue a done deal. Four German professors will file a complaint at the constitutional court days after the bill is signed. They will allege a breach of the EU's "no bail-out" clause (Article 125) and try to block loan transfers. They will cite the court's 1993 ruling that EMU is compatible with Basic Law only as long as it remains an area of "monetary order" and stability.

The court will first have to decide whether to accept the case. This hiatus— probably a few days— might prove sobering for markets. If the court agrees to proceed, it will become even more sobering.

Bielefeld law professor Frank Meyer thinks the case will go nowhere. The no bail-out clause says only that Germany cannot be forced to rescue an EMU member. It does not prohibit voluntary help. Mrs Merkel says the rescue is to ensure EMU stability, not to help Greece.

This creates a legal loophole. Yet if the package is €120bn over three years, it clearly goes beyond liquidity support. Greece is being propped up.

When the next eruption hits, Germany's political class will be in a sour mood. Berlin is already gearing up for cuts to comply with its balanced budget law, newly written into the constitution. The crisis may come from Greece again, perhaps because Pasok leader George Papandreou cannot or will not deliver on the "great sacrifices" he unveiled yesterday, a cut of 16% in effective public wages, and a further rise in VAT to 23%; or because the policy of cutting the primary deficit by 10% to 12% of GDP in three years will tip the country into a death spiral. Athens said public debt will reach 140% by 2014 even after the cuts.

Or the eruption may occur in Portugal or any other EMU state that has suffered a deep erosion of competitiveness, and is now trapped in a deflationary currency union at an overvalued rate. Each has its own slow-burning political fuse, regardless of contagion. What is undeniable is that Club Med and Ireland are being told to implement the same policies that crippled Europe in the early 1930s, that led to Laval's "deflation decrees" in France, and led in different ways to Hitler, Franco, Antonescu, and Metaxas in Greece. Is that a good idea?



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Six Investing Rules For A Worst-Case Scenario

¹²Six Investing Rules For A Worst-Case Scenario

By Paul B. Farrell, Marketwatch | 28 April 2010

ARROYO GRANDE, Calif. (MarketWatch)— So Congress enacts financial reforms. Big deal. Wall Street must be drunk on Dom Perignon, celebrating the huge paid-offs from their successful $400 million investment in "kill reform" lobbyists. And that GOP concession? Phony. Wall Street will reward them for the loopholes denuding Dodd's financial reforms.

And even with all his rants about fat-cats, Obama wins. Expect Wall Street to spend another $400 million to keep Obama in office for a second term. "Change? Yes we can"? That's funny today. Obama is now Wall Street's best asset, their new Trojan Horse replacing Hank Paulson, a troika with Ben Bernanke, Tim Geithner. Wall Street always gets what it wants.

And you can bet they'll cough up yet another $400 million keeping lawyers and lobbyists busy fighting SEC regulations, to make sure its back to 'business-as-usual' with free-market Reaganomics capitalism. (See also [1], [2]) Spending $400 million is chump change compared to the hundreds of billions Wall Street gets cheap from the Treasury and Fed, by playing us taxpayers for suckers after screwing up the economy and triggering the 2008 meltdown.

Yes, we're suckers, and Wall Street will take advantage of us the next time they melt down, coming soon. What can you do? Shift focus from them to you. You need a whole new strategy. Are you ready? OK.

First, let's assume you really are tired of the pain of fighting Wall Street. You are? Good. Then you've had an epiphany … an awakening … you've had one of those rare ah-ha! moments … what Zen masters call enlightenment … you finally see the light … the futility of denying reality … and as you see into this new reality, you surrender the fight, you accept these six secret wisdoms [as fundamental to] your new investment strategy:

1. Accept That Wall Street Money Calls The Shots In Washington. Period!

Seriously, you stop fighting Wall Street. They won. Admit it. You join with Wall Street in spirit. You flow with this new reality, without being tortured by inner anger because it's eating you up, worse than marching with the Tea Party. Acceptance works for the president, he's obviously "at one" with Wall Street. Peace of mind is more important.

Besides, if you think about it, there's nothing you can do about it. Voting out the bums? That'll just increase gridlock. Wall Street loves gridlock, makes Washington even easier to manipulate. But if you're one of the new enlightened investors you accept this new reality even if you're certain Wall Street's insatiable greed will eventually destroy America's cherished democracy and capitalism (which it will).

2. Accept That Population Is A Ticking Time-Bomb Set For 2050

Yes, if Wall Street's takeover of Washington won't kill us, the global population bomb will. So you must also accept the larger, global reality: That absent a global disaster of epic proportions, the world population will increase 50% from 6.3 billion to roughly 9.1 billion by 2050, largely in developing nations, as the U.N. predicts. And you realize adding 2.8 billion new humans, all demanding an upgrade to the American Standard of Living will place unsustainable demands on the world's natural resources.

The coming population boom was highlighted recently in Mother Jones magazine, exposing huge golden investment opportunities for the future. Julia Whitty's article, "The Last Taboo," exposes the global cover-up uniting "the Vatican, lefties, conservatives, environmentalists and scientists in a conspiracy of silence". Cover-up? Yes.

Denial that this population explosion is destined to deplete the planet's limited resources and destroy civilization. Get it? This conspiracy will make certain absolutely nothing is done to rein in future demand for commodities, putting ever increasing demands on limited natural resources, driving up prices and creating fabulous opportunities for enlightened investors.

3. Accept That Commodities Growth Rate Lags Population Demand

In a second incredible Mother Jones piece, Clive Thompson challenges us with the other self-sabotaging economic taboo in the our blind disregard of the limits of growth: "Nothing Grows Forever. Why Do We Keep Pretending the Economy Will"? Why? Because the human brain cannot face the truth.

And the truth is that world governments and the planet's 6.3 billion people are on a collision course with the limits of our planet's resources. Our civilization is on a path of self-destruction, we are in denial and suicidal. Not like a psychotic playing Russian roulette, more like a divinely inspired kamikaze pilot.

So with open eyes, you accept this new reality that most commodities and natural resources are not renewable [[or indefinitely substitutable: normxxx]], and have a low (or no) growth rate that is insufficient to keep up with the long-term population growth rate of the planet. In short, you accept that absent a miracle, this simple equation clearly means that human civilization is destined to self-destruct. And as crass, materialistic and amoral as that may seem, you realize that this reality presents investment opportunities for 'enlightened' investors.
[ Normxxx Here:  Ah, but thanks to human ingenuity and adaptability— even to the most noxious conditions— that's likely to be a lot longer off than anyone thinks— including Farrell.  ]
4. Accept The Same Ethics As The Goldman/Paulson Conspiracy

Yes, for the near future, you decide to live by the same code of ethics that Wall Street leaders will live by, the same amoral code used by the greedy souls who packaged and sold toxic debt and bogus derivatives to clueless retirement funds, without disclosing their conspiracy's deceits, like secretly shorting the same securities they were selling. You go long on obvious opportunities. You also short your bets wherever possible.

After all, that's the new 'American way' [[the 'old' way remains, but only for the 'suckers': normxxx]], the new code of ethics used by Wall Street and sanctioned by Obama's Washington. That's the ethics Goldman and co-conspirators like John Paulson [[and Timothy Geithner?: normxxx]]now play by. That's also the same code of ethics spread across Washington earlier when Hank Paulson, Goldman's former CEO, was Treasury secretary.

Since Bush brought Goldman and Wall Street into Washington, all of America has lost its moral compass. Accept it, or be consumed by anger. Think positive, see the opportunities; just as does Goldman, Paulson, even Obama and those lobbyists with their $400 million.

5. In Acceptance You Discover Peace Of Mind

Yes, to remain sane, you must accept life on life's terms, without fighting the 'new reality'. Scott Peck opens his classic "The Road Less Traveled" with an eternal message of The Buddha: "Life is difficult. This is a great truth, one of the greatest truths" but "once we see the truth, we transcend it. Once we truly know that life is difficult— once we truly understand and accept it— then life is no longer difficult". In acceptance you can, as my mentor Joseph Campbell put it, "go to your death singing".

The rare enlightened investor understands and accepts that Mother Jones two last taboos will continue blinding the vast majority of the humans on Earth until it's too late to prevent the inevitable— underscoring "one of the disturbing facts of history that so many civilizations collapse," as Jared Diamond warns us in "Collapse." Throughout history, many "civilizations share a sharp curve of decline," where their "demise may begin only a decade or two after it reaches its peak population, wealth and power."

We wrote about Diamond's 12-part equation last year in "The Coming Population Wars: A 12-Bomb Equation." Now, with the open mind of an enlightened investor, please go back and look closely at Diamond's 12-part equation as 12 sectors for investing opportunities in stocks, bonds and derivatives. Think like the guys in the Goldman-Paulson conspiracy, because that is the only way to invest in the future.

Remember, Wall Street has indexes for every one of those 12 sectors. Ride their growth in prices up, and short their declines, with no moral qualms. Do whatever's necessary to take full advantage of all the opportunities on the planet just like the soulless Goldman-Paulson conspiracy that's the new winning strategy for 'enlightened' investors.

6. Accept Life And Live To The Max, Knowing The End Can Come Any Time

Prepare for the coming Big One, which can happen at any time: Tomorrow, 2012, 2050, or maybe "Avatar's" mythic 2154, a mere four generation in the future. So here are three suggestions to help you plan ahead:

First, adopt the "Swiss Family Robinson" strategy of hedge fund manager Barton Biggs, Morgan Stanley's former chief strategist. Buy a remote self-sufficient farm; a "safe haven capable of growing some kind of food well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc". And guns ready to fire "a few rounds over the approaching brigands' heads."

Next, listen to Richard Clarke, author of the new "Cyber War," the guy whose al-Qaida warnings Bush ignored before 9/11. Forbes says Clarke located the headquarters of his $125 million antiterrorist consulting firm in "Culpepper, Va., just beyond the nuclear blast radius of Washington equipped with backup generators and a cellar full of Pinot Noir."

Finally, invest in a stockpile of supplies for near-term wars and also the collapse of civilization. Go to Life After the Oil Crash site. Echoing the message of Biggs and Clarke, LATOC reminds us that "civilization as we know it is coming to an end soon. This is the scientific conclusion of the best paid, most widely respected geologists, physicists, bankers and investors in the world". Check out LATOC's Preparedness Store where you'll find: NitroPak freeze-dried food, Micro-Solar generators, Polar Fleece military clothing, Alpine tents, hand-crank radios, NIMB rechargeable batteries, water filtration units, even good old reliable Coleman stoves. Everything you need that your investor friends next door probably won't have because they think you're too paranoid.

Bottom line, you enlightened investors now have a two-pronged strategy: A stockpile of provisions for the Big One that could detonate tomorrow with a nuclear attack in a major American city, as worries Clarke. But that may not occur for decades, perhaps not until around 2050 as the United Nations hints.

Either way, you're protected. In addition, your new investment strategy keeps you active in the market, taking advantage of "Goldman-Paulson[[-Geithner?: normxxx]] Conspiracy" opportunities while continuing to live happily in the everyday business world at least until that moment of destiny when, as Diamond would say: "Civilization and the planet experiences a sharp and rapid curve of decline that cannot be stopped."



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Wednesday, April 28, 2010

Cost Of Insuring Portugal Debt Hits Record High

ECB's Stark Warns Of Full-Blown Sovereign Debt Crisis

Wed Apr 28, 2010 5:30am EDT
Related News
Merkel demands faster Greek rescue, Spain downgraded
6:23pm EDT
Battered euro, U.S. stocks get lift from Fed
5:03pm EDT
Europe shares hit 7-wk low; banks hurt by Greece
4:57am EDT
ECB's Stark says should not compare Portugal to Greece
4:39am EDT
ECB's Stark warns of full-blown sovereign debt crisis
3:31am EDT

By Marc Jones, Reuters | 28 April 2010

(Reuters)— The onus is on governments to ensure financial market troubles do not develop into a full blown sovereign debt crisis, European Central Bank Executive Board member Juergen Stark said on Wednesday. In a speech given in Berlin in the wake of Greece's recent request for euro zone and IMF aid, Stark sent a fresh warning to governments.

"The current trend in fiscal policies is simply not sustainable. … The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis.

"Averting it will require very ambitious and credible fiscal consolidation efforts. In fact, substantially stronger consolidation efforts than those conceived so far."

The speech closely mirrored one he recently gave in Washington. It also echoed remarks from the IMF in its recent World Economic Outlook, which warned the Greek situation "could turn into a full-blown sovereign debt crisis, leading to some contagion". On Tuesday, rating agency S&P added to the woes, cutting Greek debt to junk status. Worries about other euro zone members were also stoked as S&P cut Portugal's rating by a chunky two notches to A-.

However, Stark said separately that there is no comparison between the situations of Portugal and Greece. "I see no connection between Portugal and Greece, Greece is an individual case," Stark told reporters in Berlin when asked if Portugal was being treated unfairly by markets. Asked if the ECB was discussing buying Greek bonds, Stark said: "I think this is not an issue".

Later on Wednesday ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn will brief German political leaders on the latest plans to help Greece.

Carefully Watching Prices

Stark reiterated that record low euro zone interest rates were "appropriate" against a background of subdued inflation and lingering questions on the health of the economy. He said the euro-zone rebound would lag the United States this year but repeated the ECB was in a position to gradually unwind the support measures— mainly accommodative lending to banks— brought in during the crisis. Axel Weber, an ECB member and head of Germany's Bundesbank, warned recently that inflation risk were now on the upside. Stark, a German like Weber, is seen as one of the ECB's fiercest inflation fighters.

"We expect inflation in the euro area to remain moderate over the policy-relevant horizon," Stark said. He did, however, give a nod to rising commodity prices and strong growth in advancing economies. He said the ECB would "follow very carefully all developments in particular price developments in commodity markets and in the emerging market economies, and their impact on global inflation trends."

He also said the impact of the current fiscal woes needed to be monitored. The ECB kept interest rates at a 1.0 percent for the 11th month running this month and put a heavy focus on the debt problems facing governments such as Greece in its post-decision statement. Economists have been pushing back expectations for the first ECB rate hike into next year in the wake of Greece's problems.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Tuesday, April 27, 2010

The Ten-Year Cycle

¹²Market Trends: The Ten-Year Cycle

By Clare White, CMT, Optionetics.Com | 15 April 2010

Initial discussion of a decennial pattern in the stock market is attributed to Edgar Lawrence Smith in 1939 in the book, Tides and Affairs of Men. His observations focused on ten-year periods for the markets rather than tenth-year findings. Since then the pattern has been broken down and assessed a bit more closely by a variety of other analysts and traders.

Pattern & Cycle Resources

Whether it's a matter of timing in someone's progression as a trader or simply preferred authors, I began to better appreciate the importance of patterns and cycles after reading The Right Stock at the Right Time, from legendary trader Larry Williams. The book has nice depth on the topic from a trader's perspective— inclusive of pitfalls and benefits. Definitely consider it to develop your knowledge of the full pattern while staying grounded in the fact that a 'forecast' is not a stand-alone trading tool.

Martin Pring is another trader-plus-author whose incorporation of economic cycles with intermarket work provides really nice context for different patterns and cycles. His 2010 outlook paper titled, "The Decennial Pattern, the Presidential Cycle, Four Year Lows and How They Affect the Stock Market Outlook for 2010," is available via search on-line. The chart techniques provided here were definitely inspired by some of his work and reviewing this paper will provide better context for different influences at play. Again, the idea that a forecast is not a stand-alone plan is driven home.

As a more timely resource that is readily accessible, take a look at Jay Kaeppel's articles and commentary at the Optionetics site. Even if he is addressing a different pattern or cycle, his trader's-approach— given current market movement— will help you translate knowledge into a potential tool for your own trading. At the end of the day it is really important to stick with a style— including analysis— that is well-suited to you.

Tenth-Year Returns

Since I find I have to get into the data myself to avoid having my expectations for the market override the reality of the market, I exported Dow Jones Industrial Average (INDU) daily close data from the Worden Brothers, Inc. TeleChart© package. I generally need to create a few different types of charts and hopefully have included in my articles those that provide the best view for you. Keep in mind that regardless of how well versed you may be in past price movement, it's managing risk today that matters.

Using daily data from 1920 through the first quarter of 2010, the first 250 trading days of each tenth year were assessed. (Note: 1950 had 249 trading days so an "unchanged" data point was used for day 250.) Figures 1 & 2 combine daily data for the 9 periods and applies average and median returns to a $1,000 initial investment. Keep in mind it does not constitute statistically significant results. However, when broken down into quarters, the increased sample size displays a [decidedly] negative bent for a market that tends to display a positive one over time [[ie, about two-thirds of the time! : normxxx]]

Table 1 provides a breakdown of returns for the tenth year by quarter. Top performance and worst performance are highlighted in green and red, respectively, with mean and median measures also provided.

Table 1: Quarterly Return Data for Decennial Years

Click Here, or on the image, to see a larger, undistorted image.

When aggregating the returns to obtain mean and median data, the impact over the 250 day period to an initial investment of $1,000 is displayed as Figures 1 & 2, respectively. Note there is a substantial difference in year end results compared to the median chart ($923 versus $1,062) suggesting that there are loss outliers skewing the average returns downward. The problem of "fat tails" in market returns which can create a very real problem for investors.

(For a more learned discussion of "fat tails" in probability distributions, see "Fat tail".)

Figure 1: Daily Returns for Aggregated Decennial Years Using Mean Values (1920-2009)

Click Here, or on the image, to see a larger, undistorted image.

Figure 2: Daily Returns for Aggregated Decennial Years Using Median Values (1920-2009)

Click Here, or on the image, to see a larger, undistorted image.

What do the extremes look like? Figure 3 displays the highest daily return with the lowest daily return for the 250 day period. Note the linear regression line drawn through the data is slightly further from the zero-axis on the downside.

Figure 3: Daily Extreme Returns for Decennial Years (1920-2009)

Click Here, or on the image, to see a larger, undistorted image.

Going Forward

I imagine even raging bulls would welcome a moderate pullback of the broad averages to improve the probability of a sustained upward movement over the long-term. While 2010 could certainly have positive returns for all four quarters, it feels like the more time it takes for a retracement to occur, the deeper it could potentially be. It seems even a Gaussian normal (aka, 'average') corrective move would take people by surprise at this point.

Trend and momentum measures still favor bullish positions; however, a recent volume increase may be the start of a blow-off top leading to a correction. Bearish trades remain contrarian in the stock market, but relatively low volatility (for now) may offer a good environment for some proactive risk management with a little bit of time to expiration.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Disaster For Stocks?

¹²This "Line In The Sand" Marks Disaster For Stocks

By Brian Hunt, Growth Stock Wire, Stansberry & Associates | 19 April 2010

[[Note: this article is a week old.: normxxx]]

After ticking higher nearly every day since the beginning of March, stocks finally had a big "scare day" on Friday. The benchmark S&P 500 index fell 1.6%. Financial stocks— whose moves often precede broad stock market moves— fell 4% spurred by a 13% fall in shares of investment bank Goldman Sachs, which is now facing an SEC lawsuit.

For months, investors have been hearing claims that stocks are way too expensive, way overbought, and way overdue for a major correction. So the question now is, "If Friday was the start of a correction, how far can the correction go"? Today, we'll consult a little "common sense technical analysis" for the answer.

Below is a chart of the past year's trading in the S&P 500. As you can see, the market has enjoyed a huge rise since mid-February. This rise ended (for now) with last Thursday's close at 1,211.67.

As you can see, a small decline— say down to 1,100 (-9.2%) or 1,125 (-7.1%)— would scare many investors to death, but would be a normal occurrence in a stock bull market. It would be no cause to dump everything and move to a fallout shelter in Montana. If Friday's decline is the start of a more significant amount of selling, the S&P 500 could suffer a big correction down to the 1,075 area and still remain in the confines of a "higher highs and higher lows" uptrend. This would be a decline of 11.3%.

What would be cause to get seriously worried? After all, any good investor or trader keeps an eye on the "worst case scenario" the biggest risks to his or her wealth. Worst case, take a look at points (A) and (B) on the chart.

Those two points were the lowest lows the sellers managed to push the stock market down to in the past six months. Should the stock market break these lows, the potential problems of overvalued stocks, more subprime aftershocks, and government spending gone crazy and getting worse [[possibly?: normxxx]] creating [[another?: normxxx]] severe bear market. Whichever camp you fall into stock market bull or stock market bear— keep an eye on those A and B levels.

Chances favor a moderate correction. But if you see a break below those levels, you might want to start shopping for real estate in Montana. [[But perhaps not just yet; I am still looking for a 'solid' pullback of from 10% to 20%, but from which we'll still have a positive end-of-year rally— until sometime next year, when we may see part two of the Great Recession stock market bear.: normxxx]]

Good trading,

Brian Hunt



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Saturday, April 17, 2010

Imagine The Bailouts Are Working

¹²Imagine The Bailouts Are Working

By Andrew Ross Sorkin | 17 April 2010

Joseph Stiglitz, the Nobel-prize winning economist at Columbia University, said the bailout would never really be repaid. But what if, after all that panting over Washington's bailout of the financial system, we learned that it actually worked? And what if, after all that vitriol over the government's risking hundreds of billions of dollars to rescue Wall Street from disaster, it turned out that taxpayers might actually lose nothing, or even make a profit?

Could it be? Really?

Every couple of months the Treasury Department takes a moment to strategically leak some good news about the bailouts. It happened again on Monday, when a Treasury official told The Wall Street Journal that America's coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion. It's enough to make us all feel rich, isn't it?

Inside the Obama administration, there are whispers of even greater optimism, with some officials suggesting that if the economic recovery continues apace, the bailout program could eventually turn from red to black. That may seem far-fetched to anyone who remembers the dire predictions about banks like Citigroup, but the numbers tell a different story. The government's $45 billion investment in Citigroup alone is on track to make a profit of nearly $11 billion, plus $8 billion or so in interest and other fees.

People inside the administration no longer refer to Citigroup as the "Death Star"; now it is a "profit center." Of course, we're still expected to lose $48 billion on the government's rescue of the American International Group. But two people close to the board suggested to me that as the company recalculates the value of assets in its portfolio that were once considered "toxic," the government could actually claw its way back to even, even on that investment, if it holds on to its stake long enough.

A year ago, by the way, these same people told me they expected the government to take a "$100 billion bath" on its investment in A.I.G. And then there are the banks that have settled up with Uncle Sam, like Goldman Sachs, Morgan Stanley and Bank of America. We've gotten all our money back from them, along with several billion dollars in interest.

Of course, there's a small problem with all this happy Washington math: it doesn't take into account the piles of cash we're likely to lose on Fannie Mae and Freddie Mac, the huge mortgage finance companies. The Congressional Budget Office estimates that figure to be about $320 billion. That would wipe away any gains made elsewhere. [[Of course, like the savings and loan fiasco before it, most of it went to buy some inadvertently subsidized housing for middle America.: normxxx]]

The overall math also doesn't account for the more than $1 trillion the Federal Reserve pumped into the system through loans to Wall Street that were virtually interest-free. But if you can put that aside for a moment— and I know that's difficult to do— do any of these numbers persuade you, the skeptical public, that we might one day declare the bailouts a victory? After all, at this point in the recovery, a fair observer could be forgiven for thinking we were, at minimum, saved from an economic nuclear winter. Newsweek declared on its cover this week that "America's Back." [[Lord, save us from those Newsweek and Times covers: at the least it is probably marking the peak of the first phase of this recovery!?!: normxxx]]

None of this math is likely to lead the American public to declare Mission Accomplished. Outside of Wall Street and Washington, the numbers will never look good enough, because to most people it's not about justifying the bailout but about avoiding another financial mess in the future. It's about moral hazard. It's about right and wrong.

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times's own Paul Krugman, declared that we should guarantee the liabilities of the banking industry and support a 'temporary government takeover' of certain failing institutions. They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

So were they wrong after all? Joseph E. Stiglitz, the Nobel-winning economist who was among the doomsayers, still isn't willing to declare victory, and he probably never will. "I think this is disingenuous and a real attempt to distract people," Mr. Stiglitz, the author of "Freefall: America, Free Markets, and the Sinking of the World Economy," said of the latest claims.

Mr. Stiglitz, who has made a career of seeing every glass as half-empty, said we're looking at the numbers wrong. Even if we get our money back, he says, that doesn't tell the full story. To calculate the real cost, he insists, we need to add in the lost interest on the money spent.

"Did we get back anything commensurate with the risk"? he asked almost rhetorically, before answering his own question. "Clearly the answer is no". Even at this feel-good moment, Mr. Stiglitz refuses to share in the love fest.

Like many of us, he is still upset that the government didn't attach more strings to the bailouts. He also warns of the 'moral hazard' that was created when the government made clear that it wouldn't let certain big banks fail. This, he says, will inevitably encourage more recklessness on Wall Street.

The next and perhaps final question is whether the government should hold on to its investments in companies like Citigroup rather than sell them off right away. The Treasury has signaled that it plans to wind down its Citigroup stake. But what if Citigroup's shares continue to rise, and the government misses out on an even bigger gain?

Had the government not let Goldman Sachs and JPMorgan Chase pay back their bailouts so early, taxpayers would have made out with even more money. But as the old Wall Street disclaimer goes, past performance is no guarantee of future results. I suspect that most taxpayers would be happy to take the advice of Kenny Rogers and quit now, while there are still chips to count.

The latest news on mergers and acquisitions can be found at



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

You're Awesome, America!

¹²You're Awesome, America!
Why The U.S. Recovery Will Be Bigger, Faster, And Stronger Than Economists And Politicians Expect.

By Daniel Gross, Slate | 11 April 2010

In the wake of the 2008 financial meltdown and the deep, long recession that followed, the decline of America has become the preferred intellectual preoccupation of the elite— left, right, and center. Joseph Stiglitz, the Nobel-winning economist, has argued that the Obama administration's tepid response to the recession and the financial meltdown will sandbag the U.S. recovery. Historian Niall Ferguson has made the case that high debt and profligate spending will cause the downfall of a once mighty American empire.

Harvard economist Ken Rogoff frets that the United States could become the next Greece. In January, French President Nicolas Sarkozy, once dubbed "l'Americain," delivered a blistering speech at the World Economic Forum in Davos that criticized the U.S.-led model of global capitalism. After the failure of Lehman Bros. in September 2008, industries and institutions tethered to the easy-money era were sliced nearly in half. And so was America's economic self-esteem.

Between the end of 2007 and the first quarter of 2009, $9 trillion of wealth evaporated. The relentless boom of China, India, and Brazil, with their cheap labor and abundant natural resources, emerged as a frightening new threat. The collapse coincided with other foreboding omens: $4-a-gallon gas, the rise of the Tea Partiers, an ungovernable Senate, an oddly blasé White House, unrepentant banks, and stubbornly high unemployment.

The broad unemployment measure that also tallies frustrated part-timers and those who have given up looking for a job remains at 16.9 percent. If the United States doesn't tumble back into recession, the consensus holds, we'll face a Japan-style lost decade. A 2009 NBC/Wall Street Journal poll found that only 27 percent were confident their children's standard of living would be better than their own.

Bleak is the new black.

But the long-term decline of the U.S. economy has been greatly exaggerated. America is coming back stronger, better, and faster than nearly anyone expected— and faster than most of its international rivals. The Dow Jones industrial average, hovering near 11,000, is up 70 percent in the past year, and auto sales in the first quarter were up 16 percent from 2009. The economy added 162,000 jobs in March, including 17,000 in manufacturing.

The dollar has gained strength, and the United States is back to its familiar position of lapping Europe and Japan in growth. Among large economies, only China, India, and Brazil are growing more rapidly than the United States— and they're doing so off a much smaller base. If the U.S. economy grows at a 3.6 percent rate this year, as Macroeconomic Advisers projects, it'll create $513 billion in new economic activity— equal to the GDP of Indonesia.

So what accounts for the pervasive gloom? Housing and large deficits remain serious problems. But most experts are overlooking America's true competitive advantages. The tale of the economy's remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace of efficiency— disciplines largely invented in the United States and at which it still excels.

America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably. "We are the most adaptive, inventive nation, and have proven quite resilient," says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the United States can remain an economic superpower well into the current century.

So what will our new economy look like once the smoke finally clears? There will likely be fewer McMansions with four-car garages and more well-insulated homes, fewer Hummers and more Chevy Volts, less proprietary trading and more productivity-enhancing software, less debt and more capital, more exported goods and less imported energy. Most significantly, there will be new commercial infrastructures and industrial ecosystems that incubate and propel growth— much as the Internet did in the 1990s.

The current pessimism is part of a historical economic-inferiority complex. To hear some critics tell it, things have been going south in this country since the cruel winter in Jamestown, Va., in 1609, when most of the settlers died. For most of the 19th century, America was the immature, uncouth cousin that required huge infusions of European capital to build its railroads. The United States emerged from World War II as the globe's industrial, financial, and technological leader by default— the rest of the developed world had destroyed much of its industrial capacity.

Yet Americans have been insecure about their rising status. In the 1920s, many Progressives returned from Mussolini's Italy convinced that Il Duce had a superior economic model. During the New Deal, bankers and industrialists earnestly fretted that Franklin Roosevelt would ruin the nation's prospects for growth by establishing a 'new safety net'.

The U.S.S.R.'s launch of the Sputnik satellite in 1957 inspired fears that the Soviet Union's presumed 'technological lead' would allow it to triumph in the Cold War. And in the 1980s, Japan threatened the United States with exports of electronics and cars and by buying trophy properties like Rockefeller Center and the Pebble Beach golf resort. "The Cold War is over, and Japan won," as Sen. Paul Tsongas put it in 1992.

Of course, the declinists were often wrong— Rockefeller Center and Pebble Beach returned to U.S. ownership within a decade. Just as exuberant projections are generally made precisely at the top (remember Dow 36,000?), prophecies of long-term decline usually gain traction after we've suffered a catastrophic fall. This time around, the chorus of naysayers reached its climax in March 2009, when Federal Reserve Chairman Ben Bernanke was widely mocked for his identification of "green shoots" of recovery.

In the first quarter of 2009, the economy was shrinking at a 6.4 percent annual rate. By the fourth quarter it was growing at a 5.9 percent rate. Consider the scope of that swing: The growth rate of a $14.5 trillion economy shifted by 12.3 percentage points in about nine months. Like a massive sailboat pivoting 180 degrees in choppy seas, this wrenching turnaround produced a massive wake and induced nausea among many of its passengers.

The recovery came quickly because the public and private sectors reacted with great speed. In the 1990s, Japanese policymakers deliberated and delayed years before embarking on a program that included interest-rate cuts, a huge stimulus program, expanded bank insurance, and the nationalization of failed institutions. In 2008 and 2009 it took the United States just 18 months to conduct the aggressive fiscal and monetary actions that Japan waited for 12 years to carry out. And the patient responded to the shock therapy, as the credit markets and financial sector bounced back.

Since the announcements of the Treasury-imposed "stress tests" in May 2009, banks have raised more than $140 billion in new equity capital. In August 2009, not even the most cockeyed optimists could have projected that within four months, Bank of America, Citi, and Wells Fargo would return $100 billion in borrowed funds to the taxpayers. But they did.

CIT Group, the small-business lender that lost its way in an ill-timed foray into subprime, is a perfect example of those quick reflexes. It filed for Chapter 11 on Nov. 1, 2009. In five weeks it wiped out $10.4 billion in debt (including $2.3 billion of TARP funds) and emerged from bankruptcy. It has brought in a new CEO— John Thain, who had run the New York Stock Exchange and Merrill Lynch— and is now focusing on its core business of lending to small and midsize firms.

"Restructuring, whether it is done out of court or bankruptcy, is an accepted genre in the U.S., whereas overseas it still carries much more of an onus," says Stephen Cooper, a founder of Zolfo Cooper, which pioneered the business of administering triage to seriously wounded companies. Fixing broken financial structures is only the beginning. In periods of slack demand, the single most important factor that drives profitability is the ability to do more with less. Here again, Americans seem to have an innate competitive advantage.

Whether it was Frederick Taylor, the inventor of scientific management, walking around Victorian-era factories with stopwatches, timing workers' motions; or Henry Ford perfecting the assembly line; or W. Edwards Deming developing total quality management; or Wal-Mart's insanely effective supply chains— the pursuit of efficiency is as American as apple pie. In this crisis, companies embraced cost-cutting and efficiency. From the fourth quarter of 2008 to the fourth quarter of 2009, productivity rose 5.8 percent. In 2007 and 2008, productivity growth was 1.7 percent and 2.1 percent, respectively.

In the short term, the ruthless pursuit of efficiency translates into the uncomfortable— and unsustainable— dichotomy of rising profits and falling employment. But the focus on efficiency is creating new business opportunities for smart companies. At BigBelly Solar, a Needham, Mass.-based firm whose solar-powered trash compactors reduce the need for both labor and energy, sales doubled in both 2008 and 2009. "Cities and institutions like universities and park systems are eager to do more with less," says CEO Jim Poss. Leasing 500 compacting units has allowed Philadelphia to cut weekly pickups from 17 to five and will save it $13 million over 10 years.

BigBelly employs fewer than 50 people, but like many businesses in fast-growing markets it indirectly supports a much larger number of jobs. At Mack Molding, an Arlington, Vt., contract manufacturer, 35 workers are kept busy on two shifts producing compactors. "When you add the employees at the more than 50 component suppliers, this work is supporting another 180 jobs," says Joan Magrath, vice president of sales and engineering at Mack Molding.

BigBelly compactors, which are entirely made in the United States, have been exported to 25 countries. It's a drop in the bucket. But thousands of start-ups and small businesses are trying to crack the markets developing at home and abroad.

In fact, since bottoming in April 2009, exports have risen smartly, from $121.7 billion in April 2009 to $142.7 billion in January 2010— an increase of 17.3 percent. Boeing will deliver about 460 commercial planes in 2010, up from 375 in 2008, with the vast majority going to non-U.S. buyers. All well and good, the skeptics note, but we've got a long way to go. To recoup the 8.2 million jobs lost since December 2007, it'll take four years of growth at 170,000 jobs per month.

By definition, it's hard to identify the next transformative economic force— the next steam engine or interstate-highway system. White House economic adviser Larry Summers tells a story about the economic summit in Little Rock, Ark., after the 1992 election. In the thousands of pages of briefing papers and policy briefs, one word that didn't appear was Internet.

Beyond creating jobs for those who built and maintain it, the Internet functions as a powerful platform on which all sorts of new businesses— and ways of doing business— can be rolled out. And constructing entirely new ecosystems is another discipline at which the United States excels. "In a reset, we get great individual innovation," notes Richard Florida. But more important is the rise of systems innovation, as when Thomas Edison and George Westinghouse were building electrical systems: "That leads to new models of infrastructure and new kinds of consumption."

Apple launched the iTunes Music Store in April 2003 with a single product: songs selling for 99 cents. Seven years later, iTunes is a much larger business. Supporting hardware like the iPhone, iPod Touch, and iPad, the store now offers audiobooks, movies, ringtones, apps, and e-books.

It's a boon for retailers, movie studios, independent coders, analytics firms, and accessories makers. The market for cases, sleeves, and headphones alone for i-devices is north of $1.5 billion annually. In late March, the venture-capital firm Kleiner Perkins Caufield & Byers doubled the size of its two-year-old iFund, which backs app makers, to $200 million.

Now consider two interrelated systems: energy and auto manufacturing. In the past two years, the old policy of subsidizing housing and Wall Street has been replaced by a new one that seeks to boost national operating income through efficiency. Skepticism about the potential for millions of "green jobs" to materialize overnight is warranted. But in some areas, a process similar to the iTunes experience is developing.

The Danish wind-turbine maker Vestas in recent years has announced investments of nearly $1 billion in wind-turbine-manufacturing plants in Colorado, which, when completed, will directly employ about 2,500 people. But Vestas has also attracted a dozen-odd suppliers, including components producers like Aluwind, PMC Technology, Bach Composite, and Hexcel. And it's not just about the hardware. Renewable Energy Systems Americas, the largest manager of wind farms, moved its corporate headquarters to Broomfield, Colo., in 2008. Last month Colorado mandated that 30 percent of the state's energy be produced from renewable sources by 2020.

A similar dynamic is playing out in the wounded auto industry, in which even small gains in efficiency can produce big economic gains. Simply improving the mileage of the U.S. fleet by one mile per gallon would save 6.1 billion gallons of gas per year, or $17 billion at today's prices. To help the industry respond to a new mandate that the U.S. car and light-truck fleet reach average fuel efficiency of 35.5 miles per gallon by 2016, up from 20.5 today, the Energy Department is providing loans and loan guarantees to large companies— Ford has received $5.9 billion in loans to transform several factories— and to start-ups like Fisker Automotive.

Henrik Fisker, a veteran auto executive born in Denmark, started his eponymous company in August 2007 to produce a premium plug-in hybrid. "The U.S. is traditionally a nation of innovators, but the reason it makes the most sense to be here is because the consumer is also willing to take risks," he says. Fisker raised $250 million in venture capital, snapped up engineering talent on the cheap, and has tapped into the automotive supply chain, which is eager for new business.

Last October the company agreed to acquire a recently shuttered General Motors plant in Wilmington, Del., for the knockdown price of $18 million. Armed with a $528.7 million federal loan guarantee, Fisker plans to spend more than $150 million retooling the plant. It's preparing to ship the first Karma (retail price: $87,000) to dealers by the end of this year.

But the rollout of electric and plug-in hybrids also has the potential to create its own ecosystem— dealers, charging stations, accessories, software applications. Henrik Fisker says: "The development of this industry will influence how we make electricity in this country". Such Silicon Valley bravado may ring hollow in a period of 'diminished expectations'.

Yet even amid its historic humbling, the United States has shown an ability to bring new ideas to global scale rapidly. At Davos, where the world seemed to celebrate the demise of America as a vital economic force, the hottest ticket was the party thrown by Google. Elites elbowed for position at the bar, danced poorly, and tapped out text messages on their iPhones, made by Apple.

Google and Apple are the nation's third— and ninth-largest companies by market capitalization, respectively, with a combined value of $398 billion. Now consider that in early 2002, in the wake of the last meltdown and the post-Enron crisis in American confidence, their combined value was a few billion, consisting mostly of Apple, which traded for about the cash available on its balance sheet. Google was a privately held company with about 600 employees.

Now both are iconic global brands, major exporters, and spurs to innovation and growth— they represent America the way Chevrolet and McDonald's once did. The last two US expansions have been 120 months and 92 months, respectively. If the United States continues to adapt as it has, and if it produces a few more game changers like Google and Apple, there's no reason that the expansion that started in July 2009, against all the odds and predictions, can't last just as long.