Monday, 11 June 2012
Can anyone get rid of these pesky meddlers?
The reason we need a collapse on Wall Street is that it’s the only way for the economy to get back on its feet.
The Great Correction has to correct.
It has to clean up the mistakes. It has to sweep out the debris. It has to un-screw up the economy.
Who screwed it up? The fixers... the world improvers... the meddlers... the Democrats and Republicans...
Now, stocks have to fall. Banks need to go out of business. Companies need to go broke... and households need to default...
Asset prices need to go down. Unemployment needs to go up.
The pieces have to fall... or you can never pick them up.
If the feds would just leave well enough alone Mr Market would have handled the whole thing. And we’d be out of this Great Correction by now. He would have knocked down almost all of Wall Street. He would have put dozens of our leading companies into Chapter 11... blown up trillions of dollars in derivatives... and forced thousands of bankers, brokers, businessmen and hedge fund managers into early retirement.
That problem of unequal distribution of wealth... the rich getting richer, and all? He would have taken care of it!
And he would have done it all in a few short weeks in late 2008. By now, we’d have full employment again. And people building real wealth.
In other words, if the feds had not poured trillions of dollars down so many rat-holes... good money after bad... the whole thing would be over by now. We’d have a growing economy. We have real businesses producing real stuff... and paying real wages to real workers.
But the feds are on the job. And the job they’re on is to protect their voters... and their campaign donors... from Mr Market.
Of course, all they can do is delay the fix. They can make the problem worse. They can make the losses bigger. But they can’t fix anything.
Fixing requires pain. And the feds try to avoid pain at all costs... especially when they are the ones who will feel it.
So, they borrow and spend... and then print and spend... until the whole thing blows up.
Bill Bonner
Tuesday, 22 May 2012
Why you’ll pay for the Greek exit
Well I’m sure you’ve had your fill of the 'Grexit' story. It was all over the news and papers at the weekend... everyone’s talking about it.
Of course the very real possibility of a Greek exit from the eurozone is hardly news to us here.
So let’s move on to the bigger question. And that is: Who pays if Greece exits?
You pay!
The Greeks are, how shall I put it, very upset.
They’re upset with the main political parties, who many feel have sold them out to the wicked Europeans. Youth unemployment is over 50%, while in Germany, it’s fallen. Greek banks are haemorrhaging cash, while it piles up in Germany. Greek bond yields are heading out of the ball-park, while the German government can borrow for practically nothing.
The words the public want to hear are uttered by an effervescent young-gun politician called Alexis Tsipras. And his calming words are something like: Let’s just dump our debt obligations.
And the obvious question we should be asking ourselves is...
Who loses?
If Greece exits the euro, then the question is, how much will lenders get back? Of course nobody knows, nor do they know which currency they may get back. But we do have an idea of who’s holding the debt.
As the graphic shows, Greek debt holders can be split into three distinct groups, all of them with about a third each. There’s the ECB/IMF, who have bought in to try to stabilise the Greek debt market. There’s the Greek and Cypriot banks, that bought in for regulatory reasons (a risk-free asset for bank reserves) and pension savings. And last, but not least, there’s everyone else, or the ‘market’ – and that could include your pension fund.
But don’t worry too much, as it’s much more likely to be French pension funds or banks left holding the baby. The following graphic explains why...
Who does Greece owe?
Source: BBC
I can see 41 billion reasons why the French are keen to keep Greece within the eurozone!
But an exit will hurt the Greeks most
Though I have argued strongly that it’s in Greece’s interests to leave the eurozone, I’m not for one moment suggesting it’s going to be easy.
The rest of the world can probably cope with Grexit. It’s only if other countries follow her out the door that we’re in big trouble. But for Greek banks and pension funds, it’ll be shocking. They’re filled to the rafters with their own Greek debt.
Older (and wealthier) factions of Greek society will pay a very heavy price in the event of Grexit.
It’s little wonder that euros are heading out of Greek bank accounts. If you face losing a large chunk of your pension, then you’re not going to run the risk of your cash going up in smoke too.
Greek businesses will be next to suffer
I remember when Argentina faced a similar exit. I remember it well, because I was in the throes of an important business deal with an Argentinean. And it nearly bust my business...
Argentina faced an exit from its dollar peg. Argentina was in a similar situation to Greece today. Basically, her currency was ‘pegged’ to the US dollar, and had been for ten years. But given the distortions caused by an ill-fitting monetary union, it couldn’t hold on. Deficit spending and debt had become too onerous. So the Argentineans needed loans from the IMF to keep up the charade of monetary union.
Everyone could see what was happening. Bank accounts were being emptied as holders feared a currency devaluation.
I’d just started a food import business. And one of the first deals I did was the sale of two containers of organic honey to a large UK buyer.
I had signed a contract that promised to deliver. But suddenly our Argentinean supplier didn’t want to go through with the deal. He didn’t want our dollars – he was frightened that once received, the cash would be debased. He said he’d rather sit on his honey. For him it was literally liquid gold.
And he was right... upon exit, the value of the peso fell to about a quarter.
Thankfully I was able to wriggle out of the deal with the UK buyer. But they weren’t happy, and they could have made me go out and buy the honey elsewhere and deliver it to them at a massive loss.
The point is, when you start publicly debating the exit from monetary union, international business grinds to a halt. Nobody does anything for fear of converting their hard work into debased currency.
I say if Greece heads out the door, it should be done as quickly as possible. Greece can’t afford a drawn out withdrawal. Every day spent in limbo causes more and more economic heartache.
The pain is going to be shocking. But not as shocking as hanging on.
Somebody ought to tell the politicians.
Bengt Saelensminde
Of course the very real possibility of a Greek exit from the eurozone is hardly news to us here.
So let’s move on to the bigger question. And that is: Who pays if Greece exits?
You pay!
The Greeks are, how shall I put it, very upset.
They’re upset with the main political parties, who many feel have sold them out to the wicked Europeans. Youth unemployment is over 50%, while in Germany, it’s fallen. Greek banks are haemorrhaging cash, while it piles up in Germany. Greek bond yields are heading out of the ball-park, while the German government can borrow for practically nothing.
The words the public want to hear are uttered by an effervescent young-gun politician called Alexis Tsipras. And his calming words are something like: Let’s just dump our debt obligations.
And the obvious question we should be asking ourselves is...
Who loses?
If Greece exits the euro, then the question is, how much will lenders get back? Of course nobody knows, nor do they know which currency they may get back. But we do have an idea of who’s holding the debt.
As the graphic shows, Greek debt holders can be split into three distinct groups, all of them with about a third each. There’s the ECB/IMF, who have bought in to try to stabilise the Greek debt market. There’s the Greek and Cypriot banks, that bought in for regulatory reasons (a risk-free asset for bank reserves) and pension savings. And last, but not least, there’s everyone else, or the ‘market’ – and that could include your pension fund.
But don’t worry too much, as it’s much more likely to be French pension funds or banks left holding the baby. The following graphic explains why...
Who does Greece owe?
Source: BBC
I can see 41 billion reasons why the French are keen to keep Greece within the eurozone!
But an exit will hurt the Greeks most
Though I have argued strongly that it’s in Greece’s interests to leave the eurozone, I’m not for one moment suggesting it’s going to be easy.
The rest of the world can probably cope with Grexit. It’s only if other countries follow her out the door that we’re in big trouble. But for Greek banks and pension funds, it’ll be shocking. They’re filled to the rafters with their own Greek debt.
Older (and wealthier) factions of Greek society will pay a very heavy price in the event of Grexit.
It’s little wonder that euros are heading out of Greek bank accounts. If you face losing a large chunk of your pension, then you’re not going to run the risk of your cash going up in smoke too.
Greek businesses will be next to suffer
I remember when Argentina faced a similar exit. I remember it well, because I was in the throes of an important business deal with an Argentinean. And it nearly bust my business...
Argentina faced an exit from its dollar peg. Argentina was in a similar situation to Greece today. Basically, her currency was ‘pegged’ to the US dollar, and had been for ten years. But given the distortions caused by an ill-fitting monetary union, it couldn’t hold on. Deficit spending and debt had become too onerous. So the Argentineans needed loans from the IMF to keep up the charade of monetary union.
Everyone could see what was happening. Bank accounts were being emptied as holders feared a currency devaluation.
I’d just started a food import business. And one of the first deals I did was the sale of two containers of organic honey to a large UK buyer.
I had signed a contract that promised to deliver. But suddenly our Argentinean supplier didn’t want to go through with the deal. He didn’t want our dollars – he was frightened that once received, the cash would be debased. He said he’d rather sit on his honey. For him it was literally liquid gold.
And he was right... upon exit, the value of the peso fell to about a quarter.
Thankfully I was able to wriggle out of the deal with the UK buyer. But they weren’t happy, and they could have made me go out and buy the honey elsewhere and deliver it to them at a massive loss.
The point is, when you start publicly debating the exit from monetary union, international business grinds to a halt. Nobody does anything for fear of converting their hard work into debased currency.
I say if Greece heads out the door, it should be done as quickly as possible. Greece can’t afford a drawn out withdrawal. Every day spent in limbo causes more and more economic heartache.
The pain is going to be shocking. But not as shocking as hanging on.
Somebody ought to tell the politicians.
Bengt Saelensminde
Thursday, 17 May 2012
Cash is King, deflation begins
“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
Down, down, down...
Oil is at a five-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.
Everything is going down. Even gold.
Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.
So what’s going up?
Cash!
Cash is going up against oil, houses, stocks, copper, commodities of all sorts... and just about everything else.
Cash is king.
Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits... encouraging investors and business people to do things that they will later regret. They build houses no one can afford... and shopping centres no one really needs. Then, these things – and the loans against them – appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits... you name it.
Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.
Labour rates fall too. There are fewer projects that “make sense”... and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.
As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.
That’s why so many people are willing to lend money to the feds for such low interest rates. They figures it’s as good as cash.
All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on... and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down...
... and then, the economy could get up, dust itself off, and get back to work.That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 – two years later.
Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 – six years later.
The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard... but short. Recovery began two years later.
The Panic of 1873 led to a five-year depression. And the Panic of 1893 hit even harder – with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.
The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick – two years later it was over.
And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.
When it was time for a correction, Mr Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away... and it was off to the races again.
Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand... Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.
That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.
And it worked. Scarcely 24 months after the beginning of the depression it was over... with unemployment back to 5%.
But the world changed between ’21 and ’31. By the ‘30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture – which would result in millions of deaths by starvation. And in the Western democracies, the meddlers were taking over too.
Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.
The gist of the new policy was that corrections must be stopped – at all cost. Depressions must be fought. Bankruptcies must be prevented... Markets must be controlled! By bureaucrats!
This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ‘30s... and the ‘40s too. It didn’t really end until the 1950s.
You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.
Learn? Are you kidding. We’re now in the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?
Nope?
The feds have fought the correction every step of the way... with everything they’ve got. They’ve tried monetary stimulus – taking rates down to zero.
They’ve tried fiscal stimulus – with $1 trillion budget deficits for the last four years... and no end in sight. They’ve tried 'unconventional' measures too – such as QE 1, QE II and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.
So, put on your seat belts. Sit back. Relax.
Eventually, the correction will do its work. But it could take a long, long time.
- Andrew Mellon
Down, down, down...
Oil is at a five-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.
Everything is going down. Even gold.
Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.
So what’s going up?
Cash!
Cash is going up against oil, houses, stocks, copper, commodities of all sorts... and just about everything else.
Cash is king.
Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits... encouraging investors and business people to do things that they will later regret. They build houses no one can afford... and shopping centres no one really needs. Then, these things – and the loans against them – appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits... you name it.
Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.
Labour rates fall too. There are fewer projects that “make sense”... and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.
As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.
That’s why so many people are willing to lend money to the feds for such low interest rates. They figures it’s as good as cash.
All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on... and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down...
... and then, the economy could get up, dust itself off, and get back to work.That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 – two years later.
Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 – six years later.
The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard... but short. Recovery began two years later.
The Panic of 1873 led to a five-year depression. And the Panic of 1893 hit even harder – with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.
The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick – two years later it was over.
And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.
When it was time for a correction, Mr Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away... and it was off to the races again.
Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand... Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.
That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.
And it worked. Scarcely 24 months after the beginning of the depression it was over... with unemployment back to 5%.
But the world changed between ’21 and ’31. By the ‘30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture – which would result in millions of deaths by starvation. And in the Western democracies, the meddlers were taking over too.
Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.
The gist of the new policy was that corrections must be stopped – at all cost. Depressions must be fought. Bankruptcies must be prevented... Markets must be controlled! By bureaucrats!
This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ‘30s... and the ‘40s too. It didn’t really end until the 1950s.
You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.
Learn? Are you kidding. We’re now in the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?
Nope?
The feds have fought the correction every step of the way... with everything they’ve got. They’ve tried monetary stimulus – taking rates down to zero.
They’ve tried fiscal stimulus – with $1 trillion budget deficits for the last four years... and no end in sight. They’ve tried 'unconventional' measures too – such as QE 1, QE II and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.
So, put on your seat belts. Sit back. Relax.
Eventually, the correction will do its work. But it could take a long, long time.
Bill Bonner
Tuesday, 8 May 2012
What the European elections mean for you
As we’ve noted before, politics holds the key to the euro’s future.
The euro is a political construct, not an economic one. As it stands, the euro cannot function in the long term, from an economic point of view. The various countries involved are too different.
So the main thing holding the euro together so far is that European voters, by and large, still want it. Voters might be angry at Germany, or angry at their own leaders, or angry at eurocrats in general.
But they don’t yet blame the currency for their woes, this could be the year that all that changes
Forget growth versus austerity – it all comes down to defaulting
Sharing a currency and nothing else is a recipe for disaster for smaller countries. Scotland plans to keep the pound if it pursues independence. But it perfectly sums up the problems that the eurozone faces.
Forget all the stuff about austerity versus growth. It’s good column fodder for economists, but it doesn’t get us any closer to understanding what will happen on the ground.
The austerity mob argues that countries need to do what it takes to pay back their debts. Instinctively, this feels like the ‘right’ decision. Most of the time, if you’ve spent too much money, then yes, cutting back for a while and rebuilding your savings is the smart thing to do.
But there comes a point where the hole you’ve dug is simply too big. That’s when your creditors need to share the pain. People seem to forget that when a lender writes a cheque, they’re taking a risk. If they haven’t assessed that person’s credit risk correctly, then the rules of capitalism dictate that they should lose some or all of that money.
So austerity without explicit default cannot work.
The growth mob, on the other hand, seem to think that you can borrow and spend with impunity. This is wrong, and they know it. What the growth guys are really arguing is that Germany should take the leash off the European Central Bank (ECB).
If the ECB is allowed to print money, then Greece and all the other countries can service their debts the easy way – the Anglo-Saxon way, in fact. Over time, these economies will recover.
It does mean that you confiscate money from savers across the eurozone in the form of inflation. It also means that you are implicitly defaulting – you are repaying your debts with devalued currency.
And it creates moral hazard – neither countries nor lenders have any incentive to change their behaviour if they believe that there is always a bail-out at the end of the road.
So these are the choices: an implicit default or an explicit default. In an implicit default, German taxpayers agree to stand behind other nations’ debts (in the form of ECB money-printing, or a common eurozone bond issue – it all boils down to the same thing). That leads to a weaker euro.
In an explicit default, Greece tells its remaining creditors (the ones it hasn’t already defaulted on) that it can’t repay them.
Trouble is, any eurozone country that unilaterally decides not to pay its debts would be stiffing other eurozone countries too. In particular, a whole lot of Greek debt is held by other European banks, as well as the ECB. That’s why it would be hard to default, and also to stay in the euro.
So an explicit default by Greece (or any other country for that matter), involves leaving the euro and going back to the drachma.
So what’s the European endgame?
Which of these routes will be chosen all comes down to the voters. So what have they said?
The key country is Germany, of course. And they have no intention of budging. As Reuters reports, Volker Kauder, one of Angela Merkel’s “closest allies”, said: “Germany could end up paying for the Socialist victory in France with more guarantees, more money. And that is not acceptable. Germany is not here to finance French election promises”.
Merkel is only reflecting the desires of her population. So while Francois Hollande can talk about growth all he wants, the best he’s likely to get is some sort of fudged ‘growth pact’ that is all words and no action. That won’t please the French people. But they’re not at the stage where they are ready to jack in the whole euro project as yet.
The Greeks, on the other hand…
In essence, the outcome of the Greek election was a mass vote for “anything but this”. Greeks voted for Communists, Neo-Nazis, and all the colours of the political rainbow in between. Putting a coalition together from that lot is going to be tough. In fact, it seems likely that there’ll be another election in June. Although, chances are, that would result in an even more polarised result.
Citigroup reckons that there’s now a 75% chance of Greece leaving the euro by the end of 2013. That seems more than reasonable. The question is, how much damage could it do?
Private debt holders have already had their holdings written down substantially. So it’s hard to believe that losing the rest would deliver a knock-out blow to the global financial system.
However, it would still be incredibly messy, but it would also get the markets watching for the next candidate to leave – probably Portugal.
The one thing that a Greek exit might do, is shock the rest of the eurozone into deciding that defaulting via money-printing is the best way to go.
In the meantime, I’d keep your exposure to the eurozone to a minimum. But have some cash in your portfolio, ready to take advantage of any opportunities that arise. If the ECB does have its arm twisted into money-printing, a rally is almost guaranteed.
John Stepek
Sharing a currency and nothing else is a recipe for disaster for smaller countries. Scotland plans to keep the pound if it pursues independence. But it perfectly sums up the problems that the eurozone faces.
Forget all the stuff about austerity versus growth. It’s good column fodder for economists, but it doesn’t get us any closer to understanding what will happen on the ground.
The austerity mob argues that countries need to do what it takes to pay back their debts. Instinctively, this feels like the ‘right’ decision. Most of the time, if you’ve spent too much money, then yes, cutting back for a while and rebuilding your savings is the smart thing to do.
But there comes a point where the hole you’ve dug is simply too big. That’s when your creditors need to share the pain. People seem to forget that when a lender writes a cheque, they’re taking a risk. If they haven’t assessed that person’s credit risk correctly, then the rules of capitalism dictate that they should lose some or all of that money.
So austerity without explicit default cannot work.
The growth mob, on the other hand, seem to think that you can borrow and spend with impunity. This is wrong, and they know it. What the growth guys are really arguing is that Germany should take the leash off the European Central Bank (ECB).
If the ECB is allowed to print money, then Greece and all the other countries can service their debts the easy way – the Anglo-Saxon way, in fact. Over time, these economies will recover.
It does mean that you confiscate money from savers across the eurozone in the form of inflation. It also means that you are implicitly defaulting – you are repaying your debts with devalued currency.
And it creates moral hazard – neither countries nor lenders have any incentive to change their behaviour if they believe that there is always a bail-out at the end of the road.
So these are the choices: an implicit default or an explicit default. In an implicit default, German taxpayers agree to stand behind other nations’ debts (in the form of ECB money-printing, or a common eurozone bond issue – it all boils down to the same thing). That leads to a weaker euro.
In an explicit default, Greece tells its remaining creditors (the ones it hasn’t already defaulted on) that it can’t repay them.
Trouble is, any eurozone country that unilaterally decides not to pay its debts would be stiffing other eurozone countries too. In particular, a whole lot of Greek debt is held by other European banks, as well as the ECB. That’s why it would be hard to default, and also to stay in the euro.
So an explicit default by Greece (or any other country for that matter), involves leaving the euro and going back to the drachma.
So what’s the European endgame?
Which of these routes will be chosen all comes down to the voters. So what have they said?
The key country is Germany, of course. And they have no intention of budging. As Reuters reports, Volker Kauder, one of Angela Merkel’s “closest allies”, said: “Germany could end up paying for the Socialist victory in France with more guarantees, more money. And that is not acceptable. Germany is not here to finance French election promises”.
Merkel is only reflecting the desires of her population. So while Francois Hollande can talk about growth all he wants, the best he’s likely to get is some sort of fudged ‘growth pact’ that is all words and no action. That won’t please the French people. But they’re not at the stage where they are ready to jack in the whole euro project as yet.
The Greeks, on the other hand…
In essence, the outcome of the Greek election was a mass vote for “anything but this”. Greeks voted for Communists, Neo-Nazis, and all the colours of the political rainbow in between. Putting a coalition together from that lot is going to be tough. In fact, it seems likely that there’ll be another election in June. Although, chances are, that would result in an even more polarised result.
Citigroup reckons that there’s now a 75% chance of Greece leaving the euro by the end of 2013. That seems more than reasonable. The question is, how much damage could it do?
Private debt holders have already had their holdings written down substantially. So it’s hard to believe that losing the rest would deliver a knock-out blow to the global financial system.
However, it would still be incredibly messy, but it would also get the markets watching for the next candidate to leave – probably Portugal.
The one thing that a Greek exit might do, is shock the rest of the eurozone into deciding that defaulting via money-printing is the best way to go.
In the meantime, I’d keep your exposure to the eurozone to a minimum. But have some cash in your portfolio, ready to take advantage of any opportunities that arise. If the ECB does have its arm twisted into money-printing, a rally is almost guaranteed.
John Stepek
Monday, 30 April 2012
The true cause of Britain’s stagnant housing market
“Britain is back in recession!” screamed the newspapers last week.
“Tell us something we don’t know”, shrugged the markets.
Neither the FTSE 100 nor even the pound seemed particularly perturbed by the news that Britain’s economy had shrunk for a second quarter in a row.
Even if the figures are correct (they’re preliminary estimates after all), the reaction of some sections of the press and politicians was over the top.
You want to know why Britain is in recession?” We had a boom. Now we have a bust. That’s the way it works. It’s as simple as that. In 2008, we were in a serious mess. You can’t then expect, less than four years on from that cliff-edge, for everything to be booming again.
In the US, things seemed to have picked up much more quickly. But there is a reason for that. If the US is indeed recovering now, it’s because – despite the best efforts of the Federal Reserve – they had something closer to a proper crash.
The crucial difference was that, unlike the Bank of England, the Federal Reserve was unable to lower the cost of mortgages rapidly. As a result, house prices collapsed – and remain about a third lower than they were at the peak. Unemployment rocketed – and remains extremely high. About a sixth of the population is on food stamps.
Don’t be under any illusions – the Americans have gone through a much more painful crash than us. But it means that their banks have been forced to write off debt.
We chose the stagnation route out of the slump instead. Debts that should have been written off – from mortgages to business loans - have instead been allowed to stagger on, by lowering the cost of servicing them. Given this misuse of resources, it’s little wonder that we are still in a recession.
The real reason no-one is buying houses
The struggling economy is also having an impact on the housing market, says MoneyWeek editor-in-chief Merryn Somerset Webb on her blog. “There is much talk about the low level of volumes in the UK market – and about how that is the thing that is keeping prices up.
“People, convinced their house is still worth a bubble number, won’t sell at the new market price. So supply is crunched and prices have stayed higher than they should have. Soon, or so the story goes, sellers will blink and cut their prices properly, allowing volumes to rise and markets to clear.”
But Merryn has a different theory. She draws attention to the fact that mortgage providers are raising their rates or making “sneaky” changes to contracts. Perhaps the problem isn’t that people are greedily holding out for an unrealistic price for their home, after all.
Instead, perhaps it’s “all about the price they have to pay for a new mortgage on the next house they buy. The Financial Services Authority has pointed out that the UK is home to hundreds of thousands of mortgage prisoners – people who can’t move because they can’t get a new mortgage at all. They have too little equity or too low an income for our newly prudent mortgage lenders to touch with a bargepole”.
Even those people who aren’t officially ‘mortgage prisoners’ might still be stuck, says Merryn. Falling house prices will have pushed up borrowers’ (they owe more as a percentage of their house’s value than they used to).
Combined with stricter terms from lenders, this means that even people who think they have ‘portable mortgages’ – the type you can take with you when you move house – will have to apply for a new loan. And that, in the current climate, means they will end up paying more.
So “the lack of volume in the market might not be about sellers not being able to cope with the price of houses, but something that lies behind that – sellers not being able to cope with the price of new credit”.
The blog led to a debate in the comments section below. Regular commenter Boris Macdonut felt that the increases by mortgage providers are not significant enough to affect the housing market. “The real reason is not a modest cost increase but fear and distrust.”
But as Dr Ray pointed out, while the numbers may seem small, in percentage terms they are quite big. For example “an increase from 4.27 to 4.6 isn't a 0.33% increase. It is a 7.73% increase”.
Meanwhile, Agabus25 put it down to various factors. “It's not one single thing but the combination: higher rates, fees that you can no longer capitalise, withdrawal of interest-only, no extended maturities (ie no longer than 25 year loans), no excessive salary multiples, no sky-high loan-to-value, plus the squeeze on middle class earnings. Combine just a couple of these and the total effect is substantial enough to become a deal breaker.”
The game is completely rigged
Money printing by the Federal Reserve and other central banks, means that the idea of a ‘risk-free’ rate – essential to calculating the value of anything in modern finance - is now obsolete.
Indeed, says Tim Price: “There’s one thing I know about investing today - the game is completely rigged”.
Tim, who writes The Price Report newsletter, isn’t one to pull his punches. As far as he’s concerned: “The world’s governments and their central bank cronies are conspiring to distort almost every investment you can put your money in right now. But they can’t do it forever”.
He has a pretty bleak view of where things are heading. “The plain fact is that we are in the midst of a devastating sovereign crisis.” Yet Tim thinks that investors – if they’re prepared – can protect their money from the coming storm. And that’ll leave them in a good position to take advantage of the opportunities that will arise from that.
Is the gold bull market over?
In the past few months the gold price has wobbled. Some have even said that the bull market for gold is over. Is it?
In the current bull market, gold has regularly had sharp run-ups, just as happened last year. And each time it’s happened, “a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases – if the preceding move has been large – the consolidation has lasted for over 18 months”.
So don’t worry. Gold is just having a breather. “I maintain we will eventually see new highs, just not any time soon.”
In fact, now could be a good time to stock up if you haven’t already. “If the patterns of previous moves continue to be our guide, we can expect gold to start creeping up from here – perhaps to about $1,800 before a pullback. I would like to see gold get above its 252-day moving average and stay above it.
“If it doesn’t and gold starts to creep down, I will be nervous. But continue to hold your gold. The fundamentals have not changed. And if you don’t own any, I would say the odds favour now as a decent opportunity to accumulate.”
James McKeigue
“Tell us something we don’t know”, shrugged the markets.
Neither the FTSE 100 nor even the pound seemed particularly perturbed by the news that Britain’s economy had shrunk for a second quarter in a row.
Even if the figures are correct (they’re preliminary estimates after all), the reaction of some sections of the press and politicians was over the top.
You want to know why Britain is in recession?” We had a boom. Now we have a bust. That’s the way it works. It’s as simple as that. In 2008, we were in a serious mess. You can’t then expect, less than four years on from that cliff-edge, for everything to be booming again.
In the US, things seemed to have picked up much more quickly. But there is a reason for that. If the US is indeed recovering now, it’s because – despite the best efforts of the Federal Reserve – they had something closer to a proper crash.
The crucial difference was that, unlike the Bank of England, the Federal Reserve was unable to lower the cost of mortgages rapidly. As a result, house prices collapsed – and remain about a third lower than they were at the peak. Unemployment rocketed – and remains extremely high. About a sixth of the population is on food stamps.
Don’t be under any illusions – the Americans have gone through a much more painful crash than us. But it means that their banks have been forced to write off debt.
We chose the stagnation route out of the slump instead. Debts that should have been written off – from mortgages to business loans - have instead been allowed to stagger on, by lowering the cost of servicing them. Given this misuse of resources, it’s little wonder that we are still in a recession.
The real reason no-one is buying houses
The struggling economy is also having an impact on the housing market, says MoneyWeek editor-in-chief Merryn Somerset Webb on her blog. “There is much talk about the low level of volumes in the UK market – and about how that is the thing that is keeping prices up.
“People, convinced their house is still worth a bubble number, won’t sell at the new market price. So supply is crunched and prices have stayed higher than they should have. Soon, or so the story goes, sellers will blink and cut their prices properly, allowing volumes to rise and markets to clear.”
But Merryn has a different theory. She draws attention to the fact that mortgage providers are raising their rates or making “sneaky” changes to contracts. Perhaps the problem isn’t that people are greedily holding out for an unrealistic price for their home, after all.
Instead, perhaps it’s “all about the price they have to pay for a new mortgage on the next house they buy. The Financial Services Authority has pointed out that the UK is home to hundreds of thousands of mortgage prisoners – people who can’t move because they can’t get a new mortgage at all. They have too little equity or too low an income for our newly prudent mortgage lenders to touch with a bargepole”.
Even those people who aren’t officially ‘mortgage prisoners’ might still be stuck, says Merryn. Falling house prices will have pushed up borrowers’ (they owe more as a percentage of their house’s value than they used to).
Combined with stricter terms from lenders, this means that even people who think they have ‘portable mortgages’ – the type you can take with you when you move house – will have to apply for a new loan. And that, in the current climate, means they will end up paying more.
So “the lack of volume in the market might not be about sellers not being able to cope with the price of houses, but something that lies behind that – sellers not being able to cope with the price of new credit”.
The blog led to a debate in the comments section below. Regular commenter Boris Macdonut felt that the increases by mortgage providers are not significant enough to affect the housing market. “The real reason is not a modest cost increase but fear and distrust.”
But as Dr Ray pointed out, while the numbers may seem small, in percentage terms they are quite big. For example “an increase from 4.27 to 4.6 isn't a 0.33% increase. It is a 7.73% increase”.
Meanwhile, Agabus25 put it down to various factors. “It's not one single thing but the combination: higher rates, fees that you can no longer capitalise, withdrawal of interest-only, no extended maturities (ie no longer than 25 year loans), no excessive salary multiples, no sky-high loan-to-value, plus the squeeze on middle class earnings. Combine just a couple of these and the total effect is substantial enough to become a deal breaker.”
The game is completely rigged
Money printing by the Federal Reserve and other central banks, means that the idea of a ‘risk-free’ rate – essential to calculating the value of anything in modern finance - is now obsolete.
Indeed, says Tim Price: “There’s one thing I know about investing today - the game is completely rigged”.
Tim, who writes The Price Report newsletter, isn’t one to pull his punches. As far as he’s concerned: “The world’s governments and their central bank cronies are conspiring to distort almost every investment you can put your money in right now. But they can’t do it forever”.
He has a pretty bleak view of where things are heading. “The plain fact is that we are in the midst of a devastating sovereign crisis.” Yet Tim thinks that investors – if they’re prepared – can protect their money from the coming storm. And that’ll leave them in a good position to take advantage of the opportunities that will arise from that.
Is the gold bull market over?
In the past few months the gold price has wobbled. Some have even said that the bull market for gold is over. Is it?
In the current bull market, gold has regularly had sharp run-ups, just as happened last year. And each time it’s happened, “a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases – if the preceding move has been large – the consolidation has lasted for over 18 months”.
So don’t worry. Gold is just having a breather. “I maintain we will eventually see new highs, just not any time soon.”
In fact, now could be a good time to stock up if you haven’t already. “If the patterns of previous moves continue to be our guide, we can expect gold to start creeping up from here – perhaps to about $1,800 before a pullback. I would like to see gold get above its 252-day moving average and stay above it.
“If it doesn’t and gold starts to creep down, I will be nervous. But continue to hold your gold. The fundamentals have not changed. And if you don’t own any, I would say the odds favour now as a decent opportunity to accumulate.”
James McKeigue
Wednesday, 4 April 2012
Is now a good time to buy gold?
‘If you are going to panic’, I’ve heard it said, ‘Panic first. You can investigate later.’
Gold had another one if its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.
But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.
In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for.
Gold is consolidating after its 2011 excesses
My longer-term prognosis for gold remains unchanged.
When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes though a lengthy period of consolidation. It’s trying , it’s frustrating, but that’s what it does.
Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.
Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.
We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.
He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.
In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.
When gold hits this line, it’s usually a good time to buy
I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year.
Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.
You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.
These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.
From 2009 it hardly worked at all. Why? Because it didn’t have to.
From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.
But in September last year, as we all know, gold went too far too fast.
One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.
But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.
The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.
Will it continue to work? My bet is that it will.
I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first.
I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.
Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: ‘he’s a money printer’.
Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.
So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.
Dominic Frisby
Gold had another one if its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.
But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.
In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for.
Gold is consolidating after its 2011 excesses
My longer-term prognosis for gold remains unchanged.
When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes though a lengthy period of consolidation. It’s trying , it’s frustrating, but that’s what it does.
Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.
Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.
We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.
He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.
In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.
When gold hits this line, it’s usually a good time to buy
I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year.
Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.
You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.
These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.
From 2009 it hardly worked at all. Why? Because it didn’t have to.
From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.
But in September last year, as we all know, gold went too far too fast.
One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.
But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.
The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.
Will it continue to work? My bet is that it will.
I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first.
I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.
Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: ‘he’s a money printer’.
Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.
So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.
Dominic Frisby
South Carolina Acknowledges the Silver & Gold Manipulation
Silver price manipulation and gold manipulation has been alleged through out this bull market. This premise has been one of many reasons why gold and silver advocates have urged the public to accumulate precious metals.
The story begins on September 29, 2008 when the Wall St Journal reported that the CFTC would begin investigating allegations that 2 big banks had been controlling a large part of silver’s short positions-or bets that prices will decline-on the COMEX.
Since then the CFTC has issued press releases every now and then confirming that the investigation is ongoing. The CFTC has been reluctant to give a final ruling. This has only added fuel to the fire of speculation of some sort of conspiracy.
The silver manipulation story gets weirder. A London based precious metals trader by the name of Andrew Maguire became a whistle blower who revealed via an interview with GATA in April 2010 that silver manipulation does exist, confirmed JP Morgan Chase and HSBC as the main culprits and went so far as providing the SEC the algorithm used to suppress the price of silver based on the movement of gold. For three straight days his algorithm correctly and precisely tracked the price. The SEC should have had all they needed. That was the “smoking gun”. No charges were nor have been brought forth.
Andrew Maguire is quoted as saying, "JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer."
Maguire was even involved in a freak hit and run accident the day after his name was revealed at a CFTC hearing. Maguire of course believed it was an attempt on his life. It’s hard to argue especially when the authorities have refused to name the assailant and file charges against the assailant after having apprehended him and helicopter cameras watching the whole scene unfold from above!
But all this doesn’t matter anymore. Or at least it shouldn’t. While investigating the specifics on the bill advancing gold and silver as legal tender in the State of South Carolina’s website, we came across a study that was conducted by South Carolina’s State treasurer. The study was intended to provide state officials with advise on whether or not the State should invest State Pension funds in gold and silver. But what the document revealed was much more than that.
The state document acknowledged collusion between the Federal Reserve, the London Bullion Market Association, JP Morgan Chase and HSBC have engaged in artificial price suppression of gold and silver prices through massive naked short positions.
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