This week your Outside the Box offers two views, one from the US and one from Europe, both dealing with banks and financing. First, back in July, my friend Chris Whalen at Institutional Risk Analytics wrote an important comment about how the situation in the housing market is blocking efforts by the Fed to stabilize the US economy. IRA is a rating agency that follows every US bank and consults for a number of large commercial and governmental institutions on bank performance and risk.
(You can see the IRA reports of all the failed banks since 2008 on their website. The folks at IRA have a retail website (www.irabankratings.com) that allows you to follow your bank’s performance for just $50 per year or subscribe to see all US banks for $1,000 per year. Many large corporations, investment advisors, insurers, and banks use the retail IRA bank ratings for counterparty risk management and other bank credit tasks. It is a great value for people who want to sleep soundly at night with reliable knowledge about their banks.)
One of the things that Chris has been writing about for the past several years is how the policies followed by the top four banks – Citigroup, JPMorgan Chase, Wells Fargo, and Bank of America – plus Fannie Mae and Freddie Mac, are preventing millions of American homeowners from refinancing their homes. While banks and corporate issuers of debt have benefited greatly from the Fed’s low-rate policies, consumers have been locked out. At long last, we now see President Obama and other politicians talking about the need to refinance American homeowners. Chris and his colleagues in the mortgage market, like Alan Boyce, are largely responsible for educating policy makers on this issue. Hopefully they are not too late to make a difference.
The second and shorter part of today’s OTB is two articles from Ambrose Evans-Pritchard of the Telegraph, on the current crisis in Europe. You need a scorecard to keep up with the latest developments, and he certainly provides one. Things could get very volatile, if he is even close to correct.
Have a great week, and my sympathies to all my friends who have “issues,” as in no power, etc., in the Northeast. Makes 100+ degrees seem like nothing.
Your waiting for cooler weather in Texas analyst,
This will be one of the more controversial Outside the Box posts in a great long time. Indeed, I debated with myself at some length. It will make some readers mad, but I decided it is more important to make most readers think. And, as it happens, there are parts of this week’s essay that I rather aggressively disagree with. That being said, there is a great deal of truth here. This represents a serious body of thought that is being debated, and we need to hear all sides, rather than just the ones we like.
Michael Hudson is a research professor of economics at the University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College, which is a serious place, so this is no ill-informed screed. I generally like their stuff.
Hudson first lays the European crisis at the feet of banks and the institutions (ECB, IMF, and the EU) that are taking the Greek (and other) bank debt and putting it into public hands. He has a very real point. Then he points out that Greece is far better off just walking away, a la Iceland (at least read the last part of this post, on Iceland). And in polls he cites, 85% of the Greek people are against taking on the debt and paying the banks.
As I wrote last week, there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors. Ireland will be watching. There is no easy way out. If there is a referendum on this new “troika” proposal, it is likely to lose. This is not over.
Hudson offers a a lot of facts with his analysis. This is a little longer than most Outside the Boxes, but I encourage you to take the time to read it. It will make you think, that at least I can promise.
(Thanks to Yves Smith for posting this at Naked Capitalist.) And if you like this, be aware that I read scores (if not hundreds) of pieces each week for Outside the Box (yes, even here in Tuscany). And now I'll bring you the 5-10 best of the best each week as part of my new subscription service, Over My Shoulder. If you like Outside the Box, then you're going to love Over My Shoulder. It's like having your own personal filter – with decades of analyst experience and access to exclusive resources. If your time is as valuable to you as your investments, click here to find out more about how I help you home in on the essentials.
Tuscany is renewing my soul. What a contrast. Such beauty to view while I think about the ugliness of Greek debt. My good friends and old business partners Gary and Debi Halbert just showed up to spend a few days, and we have a local sommelier coming in to do a wine and cheese tasting in a few minutes, so I am going to call it a day. Have a great week.
Your getting ready to sample some Tuscan wines analyst,
Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 BILLION in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees. Not sure what that translates into for Britain or Canada or Australia.
I can swallow the Fed dollar swaps to the ECB. Don't really like it, but I can deal with it, as I don't think it will ultimately put US tax-payers at risk, as long as the swaps are in dollar terms. But the IMF bailout is just wrong.
Interestingly, the euro shot up on the announcement in what was now clearly short covering. As I write this, it is almost back down to where it started. That seems to me to be a vote of "I don't believe you." We will see. But if the ECB actually goes ahead and floods the market with liquidity, that will be very good for all types of risk assets.
Note that in last Friday's letter I quoted Trichet where he said we would not do what he agreed to do over the weekend. What a turn-about. So much for ECB independence. The European leadership must have realized the wheels were coming off and brought out the nuclear option in order to stave off a very serious crisis. In my opinion, this buys time but does not solve the problem.
The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a MASSIVE misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.
Now, with that off my chest, let's turn to this week's Outside the Box, which is an essay by a name that is familiar to readers, Michael Lewitt. He has written a brilliant book, the Death of Capital, which should be on your short reading list. I asked him to give us a note for Outside the Box and he graciously complied. It is a thoughtful and fun read with wonderful lines you will want to read again peppered all the way through this all-too-short piece. The book is a ringing indictment of both the regulatory and money management worlds. Get it at Amazon.com.
Your how can I get even more outraged analyst,
Let me start this week's Outside the Box by venting a little anger. It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can't tell you how outraged that makes me.
What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.
I don't think I signed on for that duty. Why should my tax money go to help European banks? This is just wrong on so many levels and there is nothing seemingly we can do. Oh, well. Thanks for listening.
This week we look at an essay by my friend Tony Boeckh, who from 1968 until 2002, was chairman and editor-in-chief of BCA Publications, publisher of The Bank Credit Analyst. He has written a very important book called The Great Reflation. Tony feels that one of the most important things for investor to understand is money flows, whether from debt or monetary easing. The ebb and flow of money can both create and burst bubbles and we are now in what he calls a Great Experiment where governments around the world are trying to again reflate the economy (and are succeeding). What bubbles will this create and how does it end? How should we then invest?
My good friend Marc Faber has this to say about The Great Reflation:
"The Great Reflation is by far the best economic and investment book that I have read in the last ten years. Tony is a seasoned historian, economist, and strategist with a unique ability to explain complex issues in simple, readable terms. These are illustrated with numerous charts on economic and financial trends that put current conditions in a historical context."
—Marc Faber, Editor, The Gloom, Boom & Doom Report
The book is in most bookstores and you can of course get it by going to www.amazon.com and you save 34% and it is available on Kindle. So, let's enjoy Tony's essay.
Your never did like the IMF anyway analyst,
It has long been my contention that we are entering an extraordinary period of time in which using historical analogies to plot market behavior is going to become increasingly problematical. In short, the analogies, the past performance if you will, all break down because the underlying economic backdrop is unlike anything we have ever seen. It makes managing money and portfolio planning particularly challenging. Traditional asset management techniques just simply may not work. Buy and hope strategies may be particularly difficult to navigate.
Part of the reason we are co challenged in our outlook is that we are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope. And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency? This week's Outside the Box gives us some very basic data points that illustrate the challenge very well. But the problem is that even though we can see the challenge, it is not clear what the final outcome will be, other than stressful volatility as the market reacts.
This week's OTB is by my good friends and business partners in London, Niels Jensen and his team at Absolute Return Partners. I have worked closely with Niels for years and have found him to be one of the more savvy observers of the markets I know. You can see more of his work at www.arpllp.com and contact them at firstname.lastname@example.org.
I've been in this business a long time. Some days it feels like a very long time. But never in all the years that I've been in the financial markets have I felt like business per se has less impact on my investment decisions. Let me explain.
GM shares have gone from being a claim on earnings from car sales to being a call option on whether the US government will extend another lifeline. Banks' capital structures have gone from being the province of Boards of Directors and CFOs to the "expertise" of Congressional committees and appointed regulators. Used to be when I thought about Financial Centers New York and London came to mind. Instead now I have to think about Washington and Brussels.
My friend George Friedman and his team at STRATFOR are where I turn when I need help thinking about these new realities. George's team provides me context and understanding of the environment in which financial developments are going to take place. I may tweak him about his ties, but if you saw George speak at my conference in La Jolla, you know that he's an absolutely compelling speaker. And it's small wonder that his latest book spent those weeks on the New York Times bestseller list too.
Below you'll find STRATFOR's 2Q Forecast. I hope you find it as helpful as I do in formulating my plans. What I can tell you with certainty is that if you're not taking into account the impact of geopolitical events on the markets, it's no different than trading agricultural futures without a weather forecast. George and his team provide their Members - myself included - with forecasts and on-going analysis that's invaluable in understanding the seachange in the global economy. And in exchange for me not teasing him any more, he's offering my readers a special rate on a STRATFOR Membership. Click here to join STRATFOR at this special rate and get access to a full year of the same geopolitical intelligence I use in my strategic planning. You'll be glad you did.