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Thread: Some of the RTFers wondering...

  1. #1
    Senior Member Uncle Bill's Avatar
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    Jan 2003
    Rapid City, SD

    Default Some of the RTFers wondering...

    ...about the monetary problems in Greece, and what THAT may mean to us, here's a column by Eric Fry that might clear up some of your questions...or not. UB

    Eric Fry, reporting from the Golden State with the tarnished finances...

    Let’s begin today’s edition with a riddle:

    What location in the world is famous for its sun-drenched beaches, azure seas, arid Mediterranean climate, rugged coastlines, olive trees, earthquakes, smoggy cities, hedonistic mythology, dismal government finances and well-preserved antiquities?

    That’s right, California.

    If you answered “Greece”, you did not read the riddle carefully. The antiquities of Newport Beach are far better preserved than anything you could find in Athens. Furthermore, Greece’s government finances are not merely “dismal,” they are horrific.

    California is facing a budget deficit this year of about $40 billion, which is roughly equivalent to 2% of the state’s $2 trillion economy (GSP). That’s dismal. But over on the Mediterranean, Greece’s budget deficit is on track to hit $50 billion, which is a very big number for an economy that is one fifth the size of California’s. In fact, that’s a horrific number. What’s more, Greece’s accumulated debt totals $443 billion – a whopping 113% of GDP.

    Neither California nor Greece can print their own currencies, of course. So both of these borrowers must rely on traditional remedies, like cost-cutting and bailouts...or just bailouts. This is where the chart below comes into play. It tracks the pricing of credit default swaps (CDS) on 5-year bonds from California and Greece. [Simply stated, a CDS is an insurance policy against default. The higher the CDS price, the higher the cost of the insurance. At the moment, the price of a 5- year Greek CDS is about 375 basis points, meaning it would cost about $375,000 to ensure $10 million worth of Greek government bonds for five years].

    For most of the last 15 months, CDS investors have been assigning a higher probability to a California default than to a Greek default. About a month ago, however, investors changed their minds...but not by much. At yesterday’s quotes of 375 bps for the Greek CDS and 325 bps for the California one, the pricing differential between the two is little more than a rounding error. So what do these CDS prices imply? Are the finances of California and Greece merely the twin sons of different mothers?

    Probably not.

    The sky-high prices of California CDS may have more do with the state’s sky-high profile than its large deficits. According to yesterday’s CDS prices, for example, California (and Greece) were both riskier credits than El Salvador, Bulgaria, Lebanon or Kazakhstan. Heck, they were riskier than New Jersey. Greece might belong in this company. California probably does not.

    Net-net, the surprising similarity between California and Greek CDS prices probably says more about their respective prospects of a bailout than about their underlying finances. California’s finances are poor, but so far the federal government has refrained from offering assistance. Greece’s finances are abysmal, but the nations at the core of the European Union are rushing to help.

    So what’s all the fuss about? Why would France, for example, worry about saving Greece? The answer may be that France doesn’t care about Greece at all. But France does care about France.

    As it turns out, French banks are sitting on $75 billion worth of loans to Greece. Even more troubling, French banks are sitting on another $775 billion worth of loans to the other “Club O’ Med” countries (Portugal, Spain, Ireland, and Italy) that reside on the fringes of EU viability.

    Therefore, as London’s Daily Telegraph observes, “Germany [and France] face a Hobson’s Choice: if loan guarantees for Greece turn into a slippery slope towards implicit support for the whole of the ‘Club O’ Med’ (Portugal, Spain, Ireland, and Italy), EU creditors could be tainted by contingent liabilities worth trillions. Yet failure to reach a deal risks a sovereign version of the Lehman crisis.”

    No wonder then that Germany and France are diving into the water to rescue the drowning Greeks. But did you ever see how a drowning man treats a lifeguard? The lifeguard dives into the water and speeds toward the drowning man. Once the lifeguard arrives, however, the drowning man, in an effort to keep his own head above water, grabs hold of the lifeguard and plunges him under the water.

    The lifeguards in Europe may be slipping under the waves already. During the brief period of time that the French and Germans have contemplated a Greek rescue package, the perceived risk of a French government default has more than doubled, according to CDS pricing. At the same time, 10-year French and German bond yields have both jumped about 15 basis points.

    Your California editor has no idea how the Greek crisis will unfold. Nor does he have any idea how his beloved state will make it from paycheck to paycheck, or what lifeline Governor Schwarzenegger will attempt to latch to the state’s budget. But your editor suspects that every lifeline in the water – whether it is latched to California or Greece or AIG or Portugal or Goldman Sachs – is secured on the other end by a tragically flawed economic theory and/or a printing press.

    So if you are a nimble investor, go ahead and try to trade off the bailout headlines. But if you aren’t, buy a little gold. And whatever you do, avoid long-term government bonds – our Daily Reckoning short- sale of the decade!
    When the one you love becomes a memory, that memory becomes a treasure.

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  3. #2
    Senior Member Hoosier's Avatar
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    Feb 2008


    Don't you ever sleep UB

  4. #3
    Senior Member Uncle Bill's Avatar
    Join Date
    Jan 2003
    Rapid City, SD


    From the same Daily Reckoning comes the musings of the snow-bound editor, Bill Bonner. UB

    Not much action in the financial markets yesterday. The Dow fell 20 points...completely inconclusive. We don’t know whether the final stage has begun or not. We think it has...but we’re not sure.

    The big action was in the bond market, where the US government tied its all-time record by borrowing $25 billion worth of 10-year notes. All in all, the sale went well...but yields rose 3.69%. At some point, bond yields will rise decisively to the upside. But whether that has begun or not...we don’t know yet.

    Ben Bernanke says he will raise the discount rate “before long.” The inflation numbers are coming in higher than expected. At some point, Mr. Bernanke will have to raise rates to stop inflation. But we suspect that that will not happen any time soon. We have a depression to live through first.

    But we strongly suspect that Mr. Bernanke has no idea what he is doing.

    In short, we don’t know what will happen or when it will happen. But we’re pretty sure that Mr. Bernanke understands even less than we do. (For reasons we elaborate below...) Still, we’re counting on him to guide us. We just watch what he does...and listen to what he says...and head in the opposite direction!

    In the meantime, we are snowed in least three feet of snow is outside our door.

    Washington went from panic to desperation yesterday. The snow came down lightly...but then the wind whipped it up. Local officials ceased road clearing operations when it became ‘too dangerous’ for them to operate. They couldn’t see where they were going or what they were doing.
    Local motorists were told to get off the road. This seemed unnecessary, from our point of view, since it was impossible to get on the road...or even to tell where the road was. Still, we were warned to stay off so that emergency vehicles could get by.

    Wind gusts up to 60 mph were reported. Power went out for thousands of homes. Then, the power company stopped trying to fix the downed wires. They judged it too dangerous to continue working.

    Then, the police too, announced that they could not respond to calls. They might as well have sent out an invitation to criminals: Rob a liquor store; please.

    Fortunately, the miscreants were holed up too. Nobody wanted to go out. And those that did risked their least, that was how the authorities made it sound:

    “If your car is stuck, remain in your vehicle. Do not attempt to walk to safety. You may become disoriented by the white-out conditions.”

    They were afraid you would fall into a snow bank. Then, when the giant snow-blower came through, your frozen body might damage the machine.

    And so the nation’s capital and surrounding suburbs went quiet. No one moved. No one went to work...because there was no work to go to. No one went shopping because there were no shops open. Schools were closed. Edward – who escaped to a friend’s house before the snow began – has the whole week off.

    This winter is setting records in the Mid-Atlantic region. Fine by us. Our juice works. We have a gas fire in the living room. And we stocked up a supply of wine that would last us through the apocalypse, if necessary.

    We are comfortably snowed in. Warm. Well-fed. Even content.

    Our refuge yesterday was marred only by one thing – our own thoughts.

    “What about the poor people in hospitals and old-age homes?” asked our mother...88 years old. “People can’t get in to work. Who looks after them?”

    “Well, it’s probably time for a little culling,” we joked. “Nature has to assert herself from time to time.”

    Of course, mankind is always trying to get the upper hand against nature. In matters to do with science and technology, he has clearly succeeded. His efforts, compounded over generations, make it possible for your editor to enjoy one of the fiercest blizzards to hit this part of the world in 100 years. He is able to watch the snow through his double-paned, insulated glass windows...while drinking a glass of wine that came all the way from South America. He is able to check the financial news from all over the world on his laptop computer...and then pass on his own opinions and thoughts to hundreds of thousands of readers all over the planet.

    To nature, man is master. But to human nature he is still a slave.

    Ah...dear reader...that is the kind of thought you get in a blizzard... A thought worth having but one that, on a normal day, would have driven by like a Post Office van. But yesterday, it was stuck in a drift...right in front of the house, impossible to ignore.

    Yes, dear makes progress in things he can touch and feel...twist and hammer. He can fashion himself a warm house...and a truck to deliver the newspaper.

    But there are many things he can’t get a grip on. Even in the 21st century, despite all the study of domestic relations, he gets along with his spouse no better than Henry VIII got along with his...and he fares no better with his children than Jacob did with his boys.

    But wait... You’re probably thinking that this snow is causing your editor to go a little stir-crazy...right? He has a case of cabin fever, maybe...he’s getting pretty far afield from his Daily Reckoning subject matter, right?

    Well, you are wrong.

    One thing that man cannot get a grip on is central banking. Or, more broadly, economics.

    Wait a minute. If he can send a man to the moon he can certainly make some progress in economics, right?

    Wrong again!

    Economics is not a hard science. It’s a human science. Like psychology or’s an observational science. A decent historian observes what happens and does his best to tell the story faithfully. He is a fool if he thinks he can control it or make it turn out differently. An honest psychologist, also, can sometimes help people understand what they are doing. At the margin, he can even change human behavior – perhaps. But he cannot really change the way people think or feel. Because he cannot change human nature.

    Likewise, an economist with a residual trace of dignity and integrity admits that he is only half-capable of describing how people get along in their economic undertakings. At best, he has a dim, vague idea of what is going on. He may even be able to give some good Dutch-uncle advice from time to time. ‘Don’t spend more than you earn,’ he might tell his nephew. Or, ‘a penny saved is a penny earned.’ Or, ‘don’t put all your eggs into one basket.’ That kind of thing. At the margin, this advice might even be helpful.

    But never in his wildest delusions does he imagine that he can improve or control an entire economy. In a theoretical sense, this would mean improving human nature...and he knows this is impossible.

    Human nature expresses itself in an infinite variety of ways. One man wants to work hard. One wants to spend every penny. One likes gaudy automobiles. Another is afraid it will be a cold winter...he spends all his money stocking up on food and firewood. Who’s right? They all are expressing their own fears, desires, and ideas – through the markets and the economy. Any action an economist takes to improve things necessarily means bending these people away from what THEY want towards what HE thinks they should have. And since prosperity makes no sense outside of the voluntary choices of the people themselves, the meddling economist inevitably makes them poorer. Because his interference shifts time and resources away from what people really want.

    The economist is human too. As such, he is prone to human error...and a prisoner of human nature.

    What do all these people in Washington do?

    Well, we got a copy of the free local paper – The Politico. Want to get a job in the capitol? Just look in the paper. There are dozens of jobs on offer.

    “Energy Analyst,” says one. They ask for a “proven analyst,” whatever that is.

    Another ‘trade group’ advertises for a “Director, Policy and guide its policy/research initiatives...”

    Still another wants a “Vice President for Government Affairs.” What is that? “Lobby experience” required, it explains.

    How about this: “Legislative Assistant.” Senator Bob Corker is looking for someone to handle “energy and natural resources” issues for him. What kind of government is this, dear reader? The people’s elected representative knows nothing; so he hires a policy wonk.

    Gosh...there a dozens of jobs on offer. And none of them seem to require any real skill...except a talent for BS: Congressional Relations...Federal Relations...Director of Public Policy...Government Affairs Director...

    If none of these people ever came to work again, would the Republic be worse off?


    Bill Bonner,
    for The Daily Reckoning
    When the one you love becomes a memory, that memory becomes a treasure.

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