The Gloom and Doomers and The EU Drama

The new plan put forward today by Merkel and French President Sarkozy was more about austerity and less or nothing about helping, to the chagrin of the gloomsters.

Helping here should be recognized for what it is, a euphemism for bailing out. Critics say, as they nearly always do, setting and holding fast to strict rules won't help the peripheral countries pay off their bad debts. This in our opinion is more of the same linguistic currency debasers love to use to get their way. Many of them are just trying to protect and, in some cases, to save their carcases. Others are ones who helped create the mess and now pretend that they know the way out.


Meanwhile, the US Fed held rates steady as she goes causing as least one pundit to argue that the Fed needs to lend more help to resolve the Euro mess (Yea, we know; that word lend is troublesome, to say the least!) and the ECB needed to fire up its printing press. Don't be too surprised if the the current administration tries to figure out a surreptitious way to put American taxpayers on the rescue docket too, similar to the TARP deals. The US financiers who stand to lose big in any meltdown have friends in high places.


By the way, it appears that no one on the planet earth knows exactly where all that supposed-paid-back TARP money actually is. If you think we're kidding try to find out; call your representative in Congress and see if you can get not any answer but a straight answer.


The UK continues to ruffle egos and political feathers with it hard stand against joining any collusion designed to aide and abet more of the same financial recklessness. But the Germans, long the whipping objects for allegedly holding the line on fiscal and monetary austerity, recevied some support from an unlikely source, Muhtar Kent, the chief executive of Coke-Cola. In a story by Alan Rappeport in the Financial Times, "Coke chief lauds "sane" Germany," Rappeport quoted Kent: "The reason Germany is the only sane place in Europe today is because of what Gerhard Schroder did....back in 2004."


"He cleared the mist, changed labour laws, went against the unions...and created really good incentives for small and medium-sized enterprises." Kent went on, according to the story, to point out, Schroder lost his job doing it, but it "marked the most effective era in recent German history. Those small companies in Germany are making things that go into things and people want those things."

Sounds like really good advice. Now if some brave politicians here in America want to put the future of the nation above their jobs and be brave enough to possibly lose them, we're on to somehting big. But don't hold your breath.

And here's a little sidebar on Germany and those companies that make little things from another FT story published 12/13/11. "German employment hit another post-unification high in October...."
Are you listening, politicians?

Verbal Legerdemain and the EU Mess

RL Ellison

 A lot of people believe that God whipped up the heavens and earth in six days and on the seventh, exhausted, flopped into a lounge chair with his feet up.


But what if He didn't? What if He used that seventh day to create the concept of credit, investment banking and along with them the genesis of Wall Street and all their political allies?


In college certain courses require prerequisites. There's a reason. One could make a sound case that debasing a language is a prerequisite for debasing a currency. Those hard-headed, self-centered Germans most economic and political pundits are complaining about today understand that all too well. And that's the problem; they get it.


Debasing a language is not much different from debasing a currency; there are prices to be paid. And they both begin, as one of Hemingway's characters in The Sun Also Rises points out when asked how he went bankrupt: "Gradually, then suddenly."


In 1964 George Orwell published an essay, "Politics and the English Language." The first paragraph pretty much says it all.

Most people who bother with the matter at all would admit that the English language is in a bad way, but it's generally assumed that we cannot do anything about it.Our civilization is decadent and our language--so the argument goes--must inevitably share in the general collapse. It follows that any struggle against the abuse of language is sentimental archaism, like preferring candles to electric lights and hansom cabs to aerolplanes. Underneath lies the belief that language is a natural growth and not an instrument that we shape for our own purposes.


Orwell didn't stop there. He pointed out that the decline of a language inevitably has political and economic causes and those causes are not simply owing to the bad influence of a few individual writers. An effect, Orwell wrote, can become a cause "reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely."


He was particularly harsh when it comes to politicians. "Keeping out of politics" in today's
world is impossible. "All issues are political issues," he wrote, "and politics itself is a mass of lies, evasion, folly, hatred and schizophrenia. When the general atmosphere is bad, language must suffer."


The Germans and some others simply want to hold the mark on the language agreed to in the Maastrich Treaty. That language called for fiscal and monetary responsibility. Their critics obviously see it differently, taking the just-this-one-time-it-won't-happen-again path to justify their stance. Even Bill Gross, the Pimco bond guru whose performance this year has been anything but sterling, in his latest screed chimed in, taking his cue from a quote on a 12-year-old coffee mug he received as a gift: "You can always tell a German, but you just can't tell him much." Quite cute to be sure, but really just another round of verbal legerdemain.


"The whole tendency," Orwell noted, "of modern prose is away from concreteness." He included activities like public speaking and speech writing.  Germans admire the concrete, debasers the abstract. The Germans are trying to hold the line against abstraction, one of the main tools the bebasers of language and, apparently as it follows, a currency, love to use. Take a look at the so-called $1.2 trillion spending cuts our illustrious President recently claimed he would steadfastly veto any attempts to trim after the super-duper committee went snap, crackle and popped. On his part it appears to be an admirable stand against the economic philistines.


The key phrase is spending cuts. Anyone who thinks those are real cuts in real spending as in real deficit reductions should look again. It's obfuscation, a euphemism for lying, of the worst kind. Orwell no doubt would deplore the use of such a highly Latinate word like obfuscation. It's precisely what he wrote about, the dishonest use of dishonest words to deceive, the hallmark of politicians, bureaucrats, statesmen and other assorted species of the gas-inflated.


We've yet to hear anyone suggest that maybe the initial project was too ambitious to begin with. Even Jacques Delors, the man credited with creating the euro, is deflecting blame. In a recent interview in the UK scribe, The Telegraph, Delors states "surveillance" was a problem (An interesting choice of words for a European.), as bureaucrats, the Council of Ministers, failed to police member states to ensure they followed economic convergence criteria. Dont' know about you, but that sounds like they reneged on an agreement they signed.


Even the word science, Orwell pointed out, isn't immune. It's a word like many others--e.g., patriotic, democracy, justice, realistic, to name a few: "Words of this kind are often used in a consciously dishonest way. That is, the person who uses them has his own private definition, but allows his hearer to think he means something quite different."


Like a blanket of soft, fresh snow the doomsayers wallowing in their gloom fest are all over the problem. So what if a few countries opt out of the monetary union? It's happened before, more than 80 other times since the 1940s, and most ended so horribly that hardly anyone can remember. It isn't like the EU bureaucrats and politicians didn't know what they were getting, especially with Greece and Italy. So who are the naive here, bureaucrats and politicians who cooked up this scheme, expecting a quick religious conversion, or those of the so-called peripheral, weaker countries?


Perhaps this whole mess is a clear warning to the rest of us about international bureaucrats and politicians who keep pushing for globalization, one-world government and the end of local sovereignty, a clear signal just how dangerous these supposed know-it-alls are.


For many of Germany's critics the outcome of no bailout represents a kind of living Dante's Inferno. Worse still, a clutch of investment bankers and their ilk will likely take a big hit. The repercussions could provide another round of shock and awe. But maybe, just maybe that's what the entire system needs. Maybe then, just maybe words and meaning will carry some real meaning.

A Look Back

Sometimes it's fun to take a look back at something you wrote a while ago to see just how relevant it turned out given what you thought might happen. This article originally appeared on http://www.safehaven.com/ way back in 2006. It was actually a companion article with another one we wrote around that time about the local California real estate market that was beginning to show signs of a downturn. There's an old saying: Early is as early does.

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Helicopter Commander

By: Ron Ellison | Sat, Jan 28, 2006                                      



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"Counterfeiters are generally reviled and for good reason." - Murray N. Rothbard, The Case Against the Fed

What economic fate Americans have. You could hardly conjure a more questionable one when it comes to monetary policy. We've had 18 years of the Maestro Man and now we're getting Helicopter Commander, Ben Bernanke, the new Fed chairman select.

It's a gray, dreary winter afternoon in the not too distant future. The stock market has plummeted and housing prices went south with the flock of migrating birds several months earlier. Unemployment is nearly as high as a spring stack of Kansas wheat and business activity is moving slower than an Alaskan glacier.

A lonely unmarked black helicopter hovers over the canyons of Gotham. Several miles above the helicopter a pair of jet fighters crisscrosses the bleak, wintry sky. Suddenly over the racket of the rotating blades the intercom crackles to life.


HC: What the hell are you guys doing back there?"
Crewmember (Obviously out of breath and somewhat startled): "We're doing our best, sir!"
HC: "Well, what's taking so long?"
CM: "We're dumping the stuff as fast as we can, sir."
HC: "All right. Just hurry it up. Drop the rest of that crap and let's get out of here. It's getting cold. I've got an FOMC meeting to chair tomorrow and a trip up to Capitol hill later in the week."
CM: "Yes, sir! We only have three bags of money left to go, sir."
HC: "How many is that for the day?"
CM: "I don't' know, sir. I lost count."
HC: "OK. Just close that damn door as soon as you can and let's get the hell out of here. I'm freezing."
CM: "Yes, sir."


On the streets below an icy wind wends its way between the tall buildings as thousands scramble to pick up the nearly worthless paper. Gotham City has seen its share of ticker tape parades in the past, confetti raining down on the cheering multitudes, but none to match this spectacle. The air is filled with dollar bills floating to earth. Suddenly a bullhorn appears at the slightly ajar door of the helicopter and a reverential, academic voice momentarily disrupts the commotion.

"Don't panic. We'll be back soon and dump some more!"

The bullhorn quickly disappears inside. The door slams shut and the intensity of the rotating blades increases. Then the helicopter makes a sharp u-turn and eerily fades into the overcast sky behind the huge buildings.

During the Greenspan years the monetary based increased at an annual rate of 6.8 percent from approximately $234 billion to roughly $783 billion. Money supply as measured by M3 during that time shot up 179 percent, going from $3.6 trillion to more than $10 trillion, given the most recent figures, a 5.8 percent annual increase in M3 during Greenspan's reign of monetary terror. That's a lot of liquidity sloshing around, looking for places it may not need to go since it could prove troublesome once it gets there.

The current account deficit, then at a record level of 3.5 percent of GDP, now hovers near 7 percent. Private sector debt has increased from 120 percent to 153 percent of GDP. U.S. personal saving rate during the Greenspan years has dropped from roughly 8 percent to -1 percent.




Though some argue this is not a problem, it remains to be told. Now along comes Ben Bernanke, a guy many feel, for whatever it's worth, is more of an inflation hawk than Sir Alan. In some ways that's a bit like saying he's the smartest kid in the dumbest row at school. And one wonders how long it will be before that becomes a sticker on the rear bumper of some proud parent: "My son is the smartest kid in the dumbest row at St. Stupid's."

When the hot money typhoon swamped those Southeast Asian Tiger economies in the late 1990s, one local leader blamed the currency boys. Greenspan over the years has conjured up his own villains, irrational exuberance being one of the most famous, since it was an indirect way of blaming investors. If the unthinkable becomes fact, it will be interesting if not downright amusing to see at just whom Bernanke wags the finger. In a sea of uncertainty one thing remains certain, it will not be the Federal Reserve Board in these United States of America.

The Naked Truth

                                        

In the old black-and-white days of television there was a hugely popular crime drama set in New York City about detectives in the 65^th precinct.

The show focused on real-life crime and ended each episode with perhaps one of the most famous lines in the history of television: “There are eight million stories in the Naked City. This has been one of them.”

Well, here in the Golden Bear State, we got around 34 million people; that’s the ones we know about. We don’t know how many of them know about this next story, but since next year is an election year, this is one they might want to know about.

California is the worst-run state in the nation.

50. California
> State debt per capita: $3,660 (21st highest)
> Pct. without health insurance: 18.5% (8th highest)
> Pct. below poverty line: 14.5% (tied for 21st highest)
> Unemployment: 11.9% (2nd highest)

California has moved down one slot on from last year to earn the title of the worst-run state in the country. In the fiscal year 2009, the state spent $430 billion, roughly 14% of all the money spent by states in that year. Compared to its revenue, the state spent too much — California had the 10th lowest revenue per person, and spent the 15th most per person. California is the only state in the country to be rated A-, the lowest rating ever given to a state by S&P. Despite the huge amount the state spends each year, conditions remain poor. California has the second-lowest percentage of adults with a high school diploma in the country, the second-highest foreclosure rate and is tied for the second highest unemployment rate in the U.S.

Read more: Best and Worst Run States in America — An Analysis Of All 50 - 24/7 Wall St. http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/#ixzz1fJiB0G6t

If you’d like to know more about the naked truth keep reading financialspuds.blogspot.com.

Credibility: Does It Matter?

RL Ellison

With the credibility of politicians around the world at record lows and that of bureaucrats and the media not far behind, pundits everywhere cough up all sorts of explanations when best-laid plans go south, pointing the fickle finger of certainty in every which direction.

Perhaps nowhere is this more apparent than in the debate whether the European Central Bank should suddenly become the monetary cavalry of last resort riding their trusty printing press to the rescue and forever clean up the critical, pitiful fiscal mess the European Union now finds itself wallowing in.

 The division is clear-cut. Hardliners say no, enablers, yes.

For the enablers it’s not so much: “Help us now and we won’t do it again.” It’s: “Help us now and we won’t ever have to do it again.” For the hardliners the problem with that is it relies to a certain extent on predicting the future, something no one can accurately accomplish.

Grabbing the headlines on the Internet recently was a story entitled: “Half of Hollywood Is Broke.” The article focuses on several celebrities who, for various reasons, have bitten the bankruptcy bullet. For many it’s an attention getter. A closer look reveals that several of them surprisingly have gone BK more than once. After the first time, like a lot of things in life, it apparently gets easier.

Buried somewhere in this debate is the valid question: Why make laws if you’re only going to break them when it’s to your convenience? And buried in that question is another, more important one: What about credibility?

That seems to be the message of Otto Issing, a former member of the Executive Board of the European Central Bank. Issing, a German, in a Financial Times article, “Bond Buying by the ECB Would Result in Moral Hazard,” writes: “…the situation in the euro area is fundamentally different from the US or the UK. No one would argue that the Fed should guarantee the debt of individual states. No need because there are strict limits for debt financing by US states. (Someone apparently forgot to inform our legislators here in California!) This is also a fundamental principle of the European Union…”

Issing goes on to point out that it was precisely this principle that every EU member signed, according to the provision in the Maastrictcht treaty, to ensure a stable currency. Simply put, you agreed, should the need ever arrive, to have your feet held to the furnace. Now that the need is here, you want others who have honored that pledge to hold their feet to the flame. We hate to digress, but this sounds eerily like some left-wing-Barney Frank hatched screen play for an upcoming left wing Hollywood movie starring Sean Penn and Susan Sarandon.

Issing goes on: “Pressing the ECB into the role of buying public debt of individual member states would create the biggest conceivable moral hazard.”

“On top of these alarming and monetary consequences,” Issing continues, “providing monetary financing would break the law—a constitution ratified by all governments and parliaments…..How credible is an announcement of ‘strict future rules’ if at present violation of law is so widely, not only accepted, but requested?  

In case you may not recognize it, Issing is posing the famous unintended-consequences question here:

“If the ECB goes in the direction of becoming the ultimate buyer of the public debt of member states detailed consequences are hard to predict. However, one thing seems to be certain. It would be a daunting challenge to restore credibility,” he concludes.

We don’t know if Issing would ever consider renouncing his German citizenship and running for Congress here, but we believe someone who truly understands the danger of creating moral hazards, i.e. credibility, would win by a landslide.

Congressional Insider Trading and the Media

RL Ellison

Someone once remarked Hollywood is all about money and Washington all about power.

Money and power, however, strangely enough, are five-letter words; and when it comes to Washington completely fungible. Money is power. Power is money.

Count the number of lobbyists slurping and slinking around our Capitol. Question: How do you spell money? Answer: Lobbyists. It’s a local joke with non-local consequences.

There is another joke about the golden rule: Whoever has the gold makes the rules. In Washington whoever makes the law has the power. Whoever has the power makes the lucre. Enter from stage crooked trading on insider information.

If you’re Martha Stewart about now you should be not only pissed off but outraged. If memory serves, mostly Martha went to jail for insider trading.  Now Martha is hardly alone, just more profile, more example prone. For those fortunate, elected chosen few who occasionally ambulate through the hallowed halls of our nation’s Capitol, claiming to do some of the public's bidding, insider trading is legal. Wonder how that happened? (Notice we purposely left out ethical. One of the things one learns early on is never bring up ethical and Congress in the same sentence.)

We’ll spare you all those sticky little, boring details, plowing back through decades to the 1950s when legislation defining what constituted insider trading violations somehow omitted Congress. It was, as they say, an accident I’m sure, a brief oversight or cerebral lacunae in attention. That brief oversight, lacunae in attention recently somehow celebrated its well-over-50th birthday. 

As exclusive as this exclusive club is, it’s hardly one of those things that doesn’t get passed around. Just ask the current and the former speakers of the House. What brought all this sleeping-dogs-should-hopefully-stay-left-alone-stuff up is a recent book by Stanford professor Peter Schweiger, Throw Them All Out.

Now the watchdog of the world, our illustrious media, has apparently treated this unseemly subject like a hot potato, taking their cue from a line in a famous Willy Nelson song, “Don’t hold on to nothing too long. Just take what you need and leave….”

Here’s how the Security and Exchange Commission defines insider trading:

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include ‘tipping’ such information, securities traded by the person ‘tipped’ and securities traded by those who misappropriate such information.

Now we'll leave it up to you to decide if any of that at all is applicable to our august officials in Washington. We'd leave it up to the media, but they've already done what they do best, move on.

You Gotta Love It

November 27,2011

                                                

European lawmakers recently rejected Ireland’s nominee to the European Court of Auditors, according to an Associated Press report.

Reason:  He made a small miscalculation when he helped calculate Ireland’s national debt—3.6 billion Euros or $5 billion. The candidate, Kevin Cardiff, a senior servant in Ireland’s Finance Department, was endorsed by the Irish government for the $370,000 a year position. The Luxembourg-based court audits EU finances.

It seems Cardiff was deeply associated with Ireland’s ill-fated bank guarantee program that ended up costing 70 billion Euros to bail out six troubled Irish banks. The Budgetary Control Committee of the European Parliament in Brussels rejected Cardiff in a 12-11 vote, the first time a candidate has been turned away since the Court’s formation in 1975. Several lawmakers apparently informed Cardiff that they had received numerous emails from Ireland requesting that his nomination be blocked.

Switch quickly to the Obama administration. Though now, given the fallout from the MF Global meltdown, they will most probably try to deny it, the administration was highly considering appointing Jon Corzine as the next Treasury secretary of the US. But Corzine it appears will be spending at least part of his pre-Christmas holidays testifying before a senate subcommittee investigating MF Global’s sudden demise, Corzine’s abrupt resignation and what happened to $1.2 billion in customer funds.

tm hatter

Open Letter to Super-Duper Committee

LET THE CUTTING BEGIN

There is an old saying in medicine whenever one is dealing with an open wound or a contaminated laceration: "The solution to pollution is dilution."

In some cases the more dilution the better. And when it comes to pollution, you can forget about carbon dioxide and ozone layers. What we're talking about here is government pollution.

From the silly legislation that prevents start-up businesses from starting up to burdensome, complicated tax codes more mysterious than the Da Vinci Code to wasteful government spending that would make every drunken sailor who ever lived blush, it's as obvious as Barney Frank's sexual preference: Too many chits out, too many IOUs, the sum and substance of politics everywhere.

Now before all you epithet-hurlers get worked too tight, Mr. Frank has publicaly awowed his preference; that makes it a statement of fact, one of public record. If beauty is in the eye of the beholder, so too must be malice. No malice intended here, just fact.

Irrigating a wound helps remove the unwanted bacteria and debris. The wrong bacteria in the wrong place is just another name for debris. And that's what government waste has become, just so much debilitated, dead debris that will soon include, if something sensible isn't done, the U.S. dollar, DOA. And the answer sure isn't setting up a bunch of trade barriers, hello Chuck Schumer.

As is sometimes the case with wounds, irrigation often isn't enough. Unwanted waste must be excised. That usually means taking a scalpel and some scissors to cut away the unwanted so the remaining healthy tissue can florish. That's just about where we are today as a nation.

So forget all that political nonsense about bipartisanship; it never was and never will be. Just send your elected official a scalpel and a pair of scissors.

Drug Screens and Inventories

Inventories matter.

High inventories equal low demand or a bottleneck, meaning you can't get the stuff out faster than demand is building up or coming in. Think bathtub here. Low inventories are usually just the opposite, very little demand or can't keep up with what demand there is. If housing or energy, as in oil or natural gas, come to mind, you're onto to something. But you could just as easily toss in things like credit, money and jobs. Or Drug screening.

Drug screening is a huge part of employment these days. Companies routinely require it for many new hires. They also do random drug screening. Back when the economy was riping and roaring, a friend of mine who owns several industrial medical clinics used his own private economic indicator, pre-employment physicals. When the economy is good and firms are hiring, his daily numbers soared.

One day he called me, somewhat exasperated: "Man, I'm going to have to hire more staff.  It's so tight out there, a lot of firms are even hiring people whose tests are coming back positive. They don't care." They needed bodies. Supply wasn't keeping up. Anyone who really wanted a job back then could've had it. So much for the cry-babying-full employment crowd. They never get it. Not everyone wants a job.


A funny thing happened in late 2007. His numbers started to change. Like many things at first it was just a trickle. The rest of the story we already now know. With unemployment much higher than the government wants us to believe, an over-built housing market and a horde of tapped out consumers, an administration and a Congress that apparently haven't got a clue, the Ben Bernanke Printing Company, one could ask oneself: what's the nation's inventory?

Just for kicks, toss in the fact that the EU has a severe case of fiscal ptomaine poisoning and is looking for a place to conveniently upchuck; and you may get some idea that, as one of America's great metaphysical philosophers, Yogi Berra, said: "It ain't over until it's over."

How long is it going to take? As long as it takes. In the meantime, keep your eye on those inventories, especially your own.