If an EU Leader Says It, Don't Believe It

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

German leader Angela Merkel revved up the markets on Thursday by saying once again that she and the other EU leaders would do everything possible to save the euro. If traders realized how reliable previous official statements concerning the Eurozone debt crisis have been, markets would have experienced a major selloff.

When the debt crisis first appeared in Greece, Merkel said there would be no bailout and the Greeks would have to solve their own financial problems. ECB President Trichet made it clear that Greece wouldn't receive any special treatment. It wasn't long before they both backtracked on their public statements. On April 11, 2010, a €30 billion bailout was agreed to and this was raised to €45 billion on April 16th. By May 2nd, a total package of  €110 billion had been arranged. This amount was meant to fix Greece's debt problems once and for all. The Washington Post reported that IMF director, Dominique Strauss Kahn, and EU Commissioner Olli Rehn stated, "the plan would lead to a more dynamic  economy that will deliver the growth, jobs, and prosperity that Greece needs in the future". If there were a worst-forecasting-prediction-of-all-time award, both Strauss-Kahn and Rehn could be potential winners.

Not only did the Greek economy not prosper, but it went into a tailspin. Other claims made by the EU proved to be equally absurd as well.  As reported by BBC News, the Greek debt to GDP ratio was supposed to rise from 115% at the time of the bailout to 149% in 2013, when it would then fall. Instead it rose to 165% in 2011. Greece's budget deficit was expected to be down to 3% of GDP (the EU target rate that all members states are obligated to meet). If Greece is lucky, it's deficit will only be 7.3% of GDP this year. It is expected to rise again in 2013 however to 8.4%. So much for that.

Even though Greece missed the EU and IMF's projected targets by a mile, this was only possible because a much bigger bailout took place in 2012. Greece received an additional €130 billion  and got to effectively write off almost 75% of its government debt held by private bondholders (the ECB and IMF were exempt from the write down). Certainly Greece must be better off after €240 billion in bailouts and writing off a big part of its debt, isn't it? Well, no it isn't. Before the first bailout in 2010, Greece had around €300 billion in government debt. Just released figures indicate in now has €303 billion in debt. While debt is no lower, GDP has collapsed, falling over 9% in 2011 alone and currently on target for an over 6% drop this year. Unemployment has skyrocketed with the someone under 25 being more likely not to have a job than to be working. By almost any criteria you wish to chose, the EU, IMF and ECB program has been a complete failure.

Now the EU and its partners are preparing to bailout Spain. Already a €100 billion loan has been committed for Spanish banks. This doesn't include any funds to bailout the government. How bad is the situation in Spain?  Well, Reuters has reported that one of Spain's regional mayor robbed a number of supermarkets last week and distributed the stolen food to the poor. As a member of  a regional parliament, he is immune from prosecution. Government stealing from those that have is of course nothing new, but apparently in Spain there's no attempt to hide it.

It looks like Spain will be asking for a full-fledged bailout soon. The EU will then directly take over its finances.  The total bailout could easily involve a trillion euros or more, unless some EU country stops it after realizing the damage this is going to cause the EU itself, let alone Spain. The long-term implications are likely to be quite ugly for both.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

EU Summit Implies Massive Money Printing on the Way

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Perhaps the EU is finally realizing that a debt crisis can't be solved by issuing more debt. The proposals emanating from their recent summit in Brussels will require massive money printing instead, especially if the EU doesn't wind up issuing eurobonds.

While EU leaders didn't state that they were going to start running the printing presses at full speed, it is the only way they can produce sufficient funds to actually implement their new policy initiatives. They may not be willing to do so however. Until there is an actual big increase in money printing, there is no reason to believe that the EU will implement any of the proposed fixes for its financial problems.

All the ideas that came out of the summit have been bandied about before. Some, such as direct recapitalization of banks (described as a "breakthrough"), had already been announced before (perhaps it should have been called a re-breakthrough). This was done in response to the EU's disastrous bailout of Spanish banks that went through the Spanish government causing significant downgrades to its credit rating and thereby raising its borrowing cost significantly. A joint banking supervisory board is now going to be added though. This seems sort of late in the game, considering the teetering insolvency of many EU banks.

As a summit attendee stated, lending money directly to banks means the loans won't have to be put on a government's books. He should have followed up with, "at least not immediately". The way Ireland got into serious trouble and required its first EU bailout was that its banking system failed and the debt had to be assumed by the government. The IMF now says it will need another major bailout soon. As long as the EU is willing to commit unlimited bank bailout funding this will not happen in other EU countries.

One new approach that did come out of the summit was a relaxation of conditions for receiving bailouts. This was not described as applying to all bailouts however. Only countries that are "well-behaving" will not have stringent conditions applied to them when they ask for a handout. This of course begs the question of why a "well-behaving" country would need a bailout in the first place. While this is an attempt to treat Spain and Italy better than Greece, Portugal and Ireland, it will not work in practice. All the previous bailout countries will demand that they be allowed to spend more money and run bigger budget deficits. Since they can't raise funds in the bond market, the EU will have to increase the amount of their bailouts. This will require a continual stream of additional payments from the EU. Where will the money come from?

The short answer is sharing debt through jointly issued Eurobonds. Not that this can happen in the near future. First a report on its feasibility will be issued in October. Then all the EU countries will have to agree to it. Whether Germany will be willing to do so remains to be seen (Angela Merkel supposedly said that this would take place over her dead body). Even if this eventually happens, and 2013 would be the earliest that it would, can bonds that mix subprime borrowers and prime borrowers be successful?  The history of this is not encouraging. This is what created the housing bubble and led to a massive financial system collapse in 2008. The issuing of eurobonds means the entire EU could default as a single entity as opposed to just the weaker members. That doesn't exactly sound like an improvement over the current state of affairs.

One interesting note from the summit was the declaration from Italian premier Mario Monti that Italy did not intend to apply for a bailout. Greek and Spanish leaders said the same thing just before their countries applied for a bailout. As the French say, "the more things change, the more they remain the same". Perhaps the EU should adopt this as their new motto. At least it sounds better than "bailouts are us".

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Spain Bank Rescue — Bailout Déjà Vu

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

After weeks of Spanish officials denying that Spain needed a bailout, eurozone finance ministers agreed on Saturday to up to $125 billion rescue of Spanish banks. Spain is now the fourth member of the EU to seek assistance since Europe's debt crisis began in late 2009.

The precise amount of the bailout won't be determined until June 21st when two consultants finish their assessment of the capital needs of Spanish banks. The IMF is not involved in providing funds (at least not yet), but will help monitor Spanish banks. The rescue money will be funneled into Spain's "Fund for Orderly Bank Restructuring". Aid will supposedly be directed at the 30% of banks with the greatest exposure to property loans. Bankia, which was recently nationalized, would certainly be at the top of this list. After claiming to be profitable, it had to admit to massive losses.  If Bankia was lying about its numbers, what about other Spanish banks?

Apparently, there are few strings attached to this initial bailout. There are no plans to restructure the Spanish economy to make it functional, nor even to stop Spanish banks from lending to builders of empty houses that no one ever buys or lives in (there is already a huge glut of empty houses in the country left over from the building boom in the mid-2000s, but this hasn't stopped the building of more). With the unemployment rate approaching 25% and a large percentage of Spanish homeowners underwater in their mortgages, neither an easy, nor swift solution to Spain's banking mess is possible.

EU and world leaders praised the latest of their bailouts to the sky. The "everything is great and we've solved the problem" litany should sound familiar. After all, the same thing was heard before, during and after the first Greek bailout, the second Greek bailout, and the various schemes to write
down Greece's debt. Even prior to the first Greek bailout, EU officials stated in March 2010, "We recognize that the Greek authorities have taken ambitious and decisive action which should allow Greece to regain the full confidence of the markets. The consolidation measures taken by Greece are an important contribution to enhancing fiscal sustainability and market confidence". It was all downhill from there. Now, they are optimistic about Spain.

Spanish officials, the ones that claimed over and over again that there was no need for a bailout, are just as optimistic. The Spanish Economy Minister claimed that the requested funds would amply cover any need. He continued by insisting that "this has nothing to do with a rescue". It seems that reality perception needs a bailout in Spain as well.

As usual, the EU has done nothing to solve its escalating monetary crisis except to throw money at it. All the problems that led to the crisis are still there and will continue to drain money from the financial system so one bailout after another will be needed. Greece, Portugal and Ireland all got additional funds after their first bailouts. Spain will need another rescue as well. Italy will be next in line. Lessons from the Greek bailout indicate that at first the stock market is euphoric and then when reality sets in later on, there is a big selloff.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Market Selloff Might Pause Despite EU Debt Crisis

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The markets should soon find support on their current selloff, but this will only be temporary.  Europe's debt problems, which are at the epicenter of the current financial crisis, are not going to go away, they are only going to get worse until some realistic solution is found.

Stocks in Europe have been selling off for days and so have the euro and gold and silver. Only on Thursday did the U.S. markets start to drop significantly. Gold (GLD) and silver (SLV) managed to rally off deeply oversold conditions after reaching chart support around their lows from late last year. Even the euro (FXE) was trying to rally after getting close to its low from January. The major U.S. market indices are all approaching their 200-day moving averages (the Russell 2000 has already reached it). Some bounce should be expected at or just above those levels. Any upward movement should be considered to be a just a relief rally for now.

Once again the debt crisis in Europe has reared its ugly head. Greece is going to have new elections in June and an anti-bailout party is expected to win. Its credit rating was downgraded to CCC by Fitch on Thursday. An exit from the euro is now being seriously discussed in the halls of European power. At the same time, interest rates are rising in Spain and Italy to the levels where the Greek problem initially began.

Spanish 10-year government yields were as high as 6.38% this morning. The same Italian interest rates had reached just above 6.00% yesterday. Italy's rates were over 7.00% from last November to early January and Spain's were close to that level in November. The ECB then began a massive effort funded with money printing to drive them back down. It worked for a while, but as soon as the printing presses are paused, the market takes right back over.

The more serious problem is with the European banking system itself. Moody's downgraded 16 Spanish banks Thursday night and Spain had to partially nationalize Bankia last week. There was a run on Bankia Thursday and massive amounts of funds have been withdrawn from the entire Greek banking system. Contagion spreading to the major banks in the rest of the EU is a real danger. The LTRO (Long-Term Refinancing Operation) programs of the ECB have encouraged them to load up on the government debt of the failing peripheral countries. Many of the banks that did so were barely solvent as is.

More bailout programs from the central banks should be expected, but they aren't likely to work either. The real problems are with the non-functional economies. Spain is still building empty houses that no one buys and the Spanish banks are funding this activity.  Adding more debt to the problem is only going to make matters worse. Printing money to pay for that debt takes the problem to an even higher level. It all has to give at some point and it looks like the new few months will be one of crisis. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.


 

Greece Interrupted — Bond Swap is Not the End

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however.   

The Greek bond swap is the biggest debt writedown in history. Over 85% of  private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the "voluntary" exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a "distressed exchange" (that's putting it mildly) and is therefore indicative of a default.  The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association —  the regulatory authority on credit default swaps — ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, "Today the problem is solved. A page in the financial crisis is turning." Christine Lagarde, head of the IMF said, "The real risk of a crisis, of an acute crisis, has been, for the moment, removed." German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010.  For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%.  Such yields represent collapse, not solvency.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Behind the Market Drop and Why it Could Get Much Worse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

After a sharp rise since last October, the market looks like it is set up for one of its usual spring downturns. Without continued liquidity injections from the major central banks, it won't be able to break through the wall of resistance it's currently facing, nor will there be much support to hold it up.

As has been the case for months, trouble in Greece is currently roiling international markets. The bond swap deal reached as part of the latest bailout settlement isn't going well. With a March 8th deadline looming, Bloomberg is reporting that private investors holding around 20% of Greek government debt have so far agreed to participate. The Greek government has set a threshold of 75% for the deal to go through. While the mainstream media has consistently cheer leaded the success of every bailout deal, the market has never been convinced. Yields on one-year Greek government bonds have been on a strong upward trajectory since last summer and were over 1000% today.

The eurozone debt crisis has resulted in a great deal of liquidity being poured into the market by the Europeans. The  ECB pumped approximately half a trillion euros via LTROs (long-term refinancing operations) last fall. The rise in global stock markets can be traced from this event. At the same time, the Bank of England was on its second round of quantitative easing and examination of the U.S. Federal Reserve balance sheet shows what looks like the beginning of QE3. The monetary base in the United States was also moving straight up the chart last fall and earlier this year. No matter where you looked, liquidity was flowing into the system. Since stock markets respond immediately to extra liquidity, a powerful global rise in markets took place.

The problem with liquidity-driven markets is that if the liquidity dries up, they can wither like a plant that has been denied water. The constant supply of liquidity always has to slow down because eventually the liquidity will flow into the mainstream economy and turn into ugly inflation. The big liquidity pump that started last fall seems to be falling to slow trickle lately and markets are quite vulnerable once this happens. A failure of the Greek bailout deal (and government bond yields indicate that the market expects this to happen), would cause a massive negative liquidity event that would be on the scale of the Lehman default in 2008. It might even be worse.

At the same time liquidity issues are impacting the market, stock prices are stuck at resistance and the technical indicators are deteriorating. The S&P 500 is at its high that it reached earlier in 2011. The Dow Industrials are also at last year's resistance. Only the Nasdaq has managed to break through because of a small number of stocks like Apple Computer (AAPL) -- which is clearly exhibiting bubble-like action.


Recent news indicates deteriorating economies outside the United States. The economy within the U.S. is only being held up by massive government spending with budget deficits of $1.3 trillion last years and projected to be $1.3 trillion again for 2012. This is all borrowed or newly printed money. How big would the U.S. GDP be without these continual massive injections of government pseudo-cash?  Inflation is also clearly showing up in the ISM Manufacturing and Non-Manufacturing (Services) reports. The Prices component is the highest one for both. Prices for services (80% of the U.S. economy) have been rising for 31 months in a row and are listed as accelerating in February.


Stocks usually have a selloff in March or April. This year they are especially vulnerable. There will almost certainly be some type of drop. How big remains to be seen. The possibility for major selling should be kept in mind by investors.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Greek Deal is Another "Fiscal Solvency in Our Time"

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Once again Greece has avoided a messy default and once again its creditors have had to take a greater loss on their loans and once again standards had to be abandoned to make the deal go through. And once again, we're not done yet.

Realistically, Greece is actually undergoing a messy default; it's just doing it in slow motion. When creditors are not fully paid, there is a default. The original default terms for creditors last summer were for a 21% loss for private bondholders (read banks). This percent has been raised more than once and with the latest round of negotiations, it will be above 70% according to Jean Lemierre, who co-headed the talks for the IIF (Institute of International Finance). The ECB and national central banks in the eurozone have agreed to "forgo profits on their holdings" (presumably this means the interest payments on Greek government bonds -- something which also indicates default).The eurozone countries will reduce the interest on Greece's first package of bailout loans to 1.5% over market rates from the previous 2% to 3%. This is the first time the ECB and other eurozone central banks have agreed to take a hit on their own holdings.

What prompted the further concessions to Greece was an attempt to get its 2020 projected debt to GDP ratio down to 120%. Without them, the ratio would have been 129% even under the bailout troika's (EU, ECB and IMF) most optimistic scenario (for the non-political reader, this means the complete fantasy scenario). Projections during the first bailout deal proved too good to be true and it should be presumed that these are as well.

There are still a lot of approvals needed to ensure that the current deal goes forward. If it does, every Greek man , woman and child will have received the equivalent of $29,000 from bailout payments. Greece holds elections in April and support for the anti-bailout parties is increasing. Whether or not it will be enough to derail the bailout deal remains to be seen.

Greek one-year government bond yields reached a high of 682% today according to Bloomberg.  To say that the market is not giving the bailout deal a vote of confidence would be an understatement. Last summer, they were around 40% and have been rising continually since then. While euro-politicians are once again claiming the problem is solved, the market indicates that Greece is imploding.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Will Greek Bailout Deal Falter Now or Later?

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Greek bailout deal is once again falling apart. Whether or not it is patched together another time, the end will inevitably be an ugly default.

On Thursday, news sources around the world were trumpeting that the EU and Greece had come to terms that would allow Greece to receive a 130 billion euro bailout payment that would prevent the country from defaulting by March. But late in the day, EU finance ministers made additional demands on Greece. They wanted another 325 million euros in budget cuts, that the Greek parliament pass the cuts and that a written guarantee that the cuts will be still be implemented after the April elections. On one hand these demands are not surprising since the Greeks have been less than honest about their budget numbers in the past. On the other however, they are surprising because this could be the straw that breaks the camel's back.

Greece is in its fifth year of recession and its economy seems to be in an unrelenting downward spiral. This is happening because just like the United States, Japan and a number of other nations, the economy is dependent on government spending made possible by huge budget deficits. Each time Greece has been forced to cut its budget deficit, the economy has shrunk some more. Additional cuts will only cause additional contraction. Although they receive little coverage by the U.S. media, riots have become common place in Greece (there is currently a 48-hour strike). Democracy might itself be threatened there. Greece does have a history of military dictatorship, with a military junta running the country between 1967 and 1974.

Lately, the country is becoming increasingly politically unstable. The far-right LAOS party, which is part of the governing coalition, has refused to support the new terms of the bailout. Its members resigned the coalition today. Even more disturbing, Reuters has reported that the Federation of Greek Police has issued the following statement to Greek officials: "Since you are continuing this destructive policy, we warn you that you cannot make us fight against our brothers. We refuse to stand against our parents, our brothers, our children or any citizen who protests and demands a change of policy. We warn you that as legal representatives of Greek policemen, we will issue arrest warrants for a series of legal violations ... such as blackmail, covertly abolishing or eroding democracy and national sovereignty."

Even if things are patched up once again and the next bailout payment is made, there will still be another one after that and even more to follow.  Greece is like the family that is only one paycheck away from homelessness, except one welfare check away from homelessness would be a more apt analogy. Eventually, something will give and this will have a major impact on the world financial system.

The real crisis in Europe is not Greece in and of itself, it is the stability of the banks in France and Germany that have lent money to Greece (and Italy, Spain and Portugal). These banks are in precarious shape and a Greek default will have similar consequences to Lehman's collapse in the fall of 2008. Expect the central bankers of the world to unleash a tsunami of money-printing liquidity into the system to stabilize it just as they did in 2008. They will be quicker this time around, so the collapse should be briefer. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

It's a 50% Default for Greece

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

EU leaders have agreed to seek a 50% reduction in Greek debt from bondholders. This supersedes the 21% reduction decided on in July that was supposed to resolve Greece's financial problems. Apparently $30 billion will be given to the banks as an inducement for them going along with the plan. The EU and IMF will also give Greece an additional 100 billion euros in bailout aid.

While the announcement was delivered with a sense of finality, the first bailout of Greece in May 2010 was supposed to solve Greece's debt problems and so was the second bailout this July. It has only taken three months since the  "everything is really fixed now" July announcement before a much bigger bailout and debt writedown proved to be needed. Until fairly recently, EU officials have constantly denied that this would be necessary or that Greece would default. Not paying 50% of your bond debt is not only a default, but it's a major default.

EU officials still seemed mathematically confused about the situation in Greece. EU President Van Rompuy claimed that the current deal will reduce Greece's debt to GDP ratio to 120% by 2020. If so, Greece is still likely headed for more trouble. Since it is estimated that Greece's debt to GDP ratio is around 160%, it should fall to 80% if all bondholders took a 50% hit. Perhaps all bondholders will not be taking a reduction after all. Both the IMF and ECB hold large amounts of Greek government debt and have in the past been reluctant to accept any writedown of their investments.

The pre-dawn news for the EFSF (European Financial Stability Fund), which is supposed to receive 440 billion euros, is that it will be leveraged up to a trillion euros. The U.S. has been pressing for two trillion. This money can be spent to bail out all the EU banks hurt by the Greek default, but only if they can't raise additional capital in the open markets. So the debt problem will be solved by incurring additional debt and borrowing against it. If this isn't a financial system ticking time bomb, nothing is.

The unanswered question is what is going with happen to Portugal (the next most likely crisis), Ireland, Spain and Italy. EU officials tried to minimize the situation by saying Greece is a special case. It would have been more accurate to say that its problems were more extreme and urgent. They are not unique.  The other countries are already somewhere on the path to insolvency and this will have to be dealt with in the future. The only question is how soon that future will arrive. 

 Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Debt Crisis -- Greece 2011 Compared to Argentina in 2001

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Headlines such as "Hopes for Greek debt progress lift world stocks" and "Wall St opens higher on European hopes" are in the financial news today. Before investors buy into the hype, they should realize that the powers-that-be always deny an obvious and inevitable default before it takes place. Greece in 2011 is on a very similar trajectory to Argentina in 2001 and is well past the point of no return for a default just as Argentina was back then.
There are many similarities between the current Greek debt crisis and the Argentina debt crisis in 2001. Greece is not using its own currency, but a transnational one, while Argentina pegged its currency to the U.S. dollar.  A connnection to a greater currency allows only limited policy responses and prevents the usual money printing that would have take place when debt becomes too high. This in turn causes a gradual rise in inflation up to the point of hyperinflation (Greece and Argentina have both experienced hyperinflation in the past). While skyrocketing interest rates in Greece are implying there is massive inflation, the official inflation rate is under 3%. Yields on one-year Greek governments reached approximately 100% on Tuesday, telling a very different story.  

While the Greeks are certainly underestimating their inflation rate (they have been caught lying and continually underreporting their debt figures and no numbers from the Greek Statistical Office can be trusted), it is relatively minor no matter what the actual number. Inflation is caused by a falling currency and hyperinflation by a collapsing currency. Since the euro is not dropping that much and Greece uses the euro, inflation is not showing up there. Argentina tying its currency to the dollar also created a very low inflation rate as long as the peg lasted.  There is no free lunch however (even though you may have repeatedly heard that there is from politicians). Profligate government spending eventually leads to major inflation. The inflation only showed up in Argentina after it decoupled its currency from the U.S. dollar and it will show up in Greece after it decouples from the euro. Instead of gradually building inflation, sudden major inflation will take place.
The Argentina crisis began when a new government was elected in December 1999 and had to deal with years of mismanagement from the previous administration. Greece elected a new government in October 2009 and shortly thereafter it revealed that it had a lot more debt and higher budget deficits than it had claimed. In both cases, sharp spending cuts were implemented and serious riots followed. By December  2000, Argentina had acquired bailout funding from the IMF. Markets rallied and press reports indicated everything was going be OK. Greece received its first bailout from the EU and the IMF in the spring of 2010 and markets rallied and press reports indicated that everything was going to be OK.  In both cases everything that followed wasn't going OK.
By the spring of 2001, events started spiraling downward in Argentina. In the spring of 2011, events started spiraling downward in Greece. In August 2001, Argentina received an increase in its standby loan agreement from the IMF. Greece received promises of a second bailout from the EU, but with some mandatory debt swaps as part of the deal. Argentina engaged in debt swaps in June of 2001. Interest payments on Argentina's debt eventually overwhelmed rescue attempts and on December 5, 2001, the IMF announced it would not disburse promised aid to Argentina. A collapse followed shortly thereafter. The EU is now questioning whether or not to continue to make disbursements to Greece. If the disbursements stop at any point, Greece will default shortly thereafter just as Argentina did.

No government is of course going to admit that it is going to default. If it did, no one would purchase its bonds and this would cause an immediate default.  It is not surprising that the Greek government is denying the obvious, EU leaders are grasping at straws to explain how a Greek default will be avoided, or that the mainstream media is trying to spin those straws into a golden fantasy of solvency. Argentina denied that it would default right up to the end as well, just like every other country (and major company) facing the same predicament has in the past. Despite the claims that, "this time is different", it never is.

Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Is Greece About to Default?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Yields on two-year Greek governments reach 46.84% last Friday. This is roughly comparable to yields on Argentine bonds in early December 2001 -- only a month before the country defaulted on its debt.

Similar interest rates occurred this spring in Greece before the second bailout package was put together. The bailout saved Greece from defaulting back then, but the bailout is now falling apart while the fiscal situation in Greece continues to deteriorate. The risk of default in the near future has returned, but the will to stop it this time around is much weaker than in the past.

Finland and a number of other countries have already demanded collateral from the Greek government for their contribution to the bailout and this reduces the money available that can be used by the Greek government to pay off its debts.  Then talks between the Greek government and the ECB, EU, and IMF broke down last Friday (September 2nd) because Greece admitted it will not meet its deficit reduction and privatization targets for the year. This potentially puts the next $8 billion tranche in bailout payments in jeopardy. The talks are supposed to resume in 10 days. Even more challenges will have to be faced this coming week.

Citizens of the fiscally solvent EU countries are getting tired of paying to support what they see as the profligate spending habits of the EU's weaker economies.  The bailout efforts have been lead by German Chancellor Angela Merkel, but support within her country has never been strong for them. Her ruling party has lost six regional elections this year, including one in her own home state this weekend. Any more pro-bailout efforts will only further weaken her politically.

At the same time that efforts are taking place to undermine the second bailout, more and more money is needed by Greece. Like many other heavily-indebted countries in the past, Greece is dealing with a destructive feedback loop of inexorably escalating interest costs that cause its debt to continue to rise regardless of what efforts it makes to control it. The Greek government claimed a debt to GDP ratio of 120% in 2010 during the first bailout talks. It is now estimated to be as high as 160%. Interest payments on that debt could be as high as 24% of GDP at current rates (the 10-year bond is yielding over 18%). Despite the first bailout and now the second bailout, interest rates keep going higher, the national debt keeps getting bigger and the problem keeps getting worse.  

Since someone elsewhere had to lend all the money that is in danger of not being paid back, Greek debt problems are not isolated to Greece, but are having a major impact on the big banks in France and Germany (the real reason Germany and France are so anxious to bail out Greece). The debt problem moreover is being spread through contagion to Spain and Italy, both of which are much larger economies and which are ultimately "too big to bail". This is casting a wider net of impacted banks. By the last week of August, credit default swaps (insurance on bonds) were rising to crisis levels for the Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo. The problem seems to be a shortage of liquidity, just as was the case in the fall of 2008.

It has also been reported that many European financial institutions have losses on bond holdings, despite the ECB actively supporting Spanish and Italian bond prices . The global banking system has approximately $2 trillion in exposure to Greek, Irish, Portuguese, Spanish and Italian debt. On Monday, the yield premiums on Italian and Spanish 10-year government bonds over the equivalent German Bund hit their highest in a month. Italian bonds traded at 5.5%, well above the 5% rate at which the ECB has been buying recently. Italy has to roll over 62 billion euros in bonds by the end of the month.

Stocks have of course been negatively impacted by the problems in Greece and this will continue until there is some resolution. The German DAX had another mini-crash on Monday, falling 5.28% or 292 points. The drop in Paris was just under the 5% mark that defines a crash day. London held up somewhat better as it has during the entire crisis so far. U.S. markets were closed.

At this point, the only thing that can prevent a default by Greece is if its entire debt is bailed out by the EU and IMF (this would require a third and even fourth bailout package). This is not going to happen. The second bailout itself is highly unlikely to go through as planned. Without it, Greece will default this fall.  With it, a little more time will be bought before a third bailout is needed - and support for that measure doesn't currently exist and isn't likely to exist. The important question concerning Greek default seems not to be if, but when.

Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2000s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security. 

Today's Stock Market Action Looks A Lot Like August 1998

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Something is seriously bothering the stock market and the news that's out there isn't enough to justify what is going on. Such was the case in August 1998 as well. What caused the sudden bear market to appear out of nowhere in 1998 became fully evident only after the fact. The same could be the case in August 2011.

Perhaps the flash crash in October 1997 was a warning of things to come, just as the flash crash in May 2010 may have been a prelude to today's stock market drop. In the second half of July of 1998, stocks began to nosedive suddenly, just as they did in 2011. Some stabilization took place in the market toward the middle of August in 1998 and then a new deeper plunge began. Today, the Dow Jones industrials were suddenly down over 500 points this morning on what could only be considered minor bad news.

There were actually two problems causing the market debacle in 1998. Everyone knew about one of them - the Russian debt default and devaluation of the rubble, which took place on August 17th (less than half of the eventual market decline took place before this date).  Only Wall Street insiders knew about the second one - problems at Long-Term Capital Management (LTCM) - that almost brought down the financial system. 

Trouble in Russia was evident as early as October 1997 and it resulted from the fallout from the Asian financial crisis, which in turn started as a currency crisis in Thailand in July of that year. Today, Europe is undergoing a crisis with the euro that began in Greece in 2010. By August 1998, the Russian central bank had spent a great deal of its dollar reserves defending the ruble and decided to give up. The default had a number of ripple effects, but the most important one on LTCM wouldn't be known by the public until late September, only days before the market finally hit bottom.

After the Russian debt default, stocks plunged until the beginning of September. The market was close to its ultimate low at that point, but only because of the subsequent successful rescue of LTCM.  Stocks then rallied for approximately three weeks. A bailout of LTCM was arranged by the Federal Reserve on September 23rd. The market then sold off until early October hitting a new low and then the decline  was over.

In the rally that followed the stock market experienced huge gains led by a bubble in tech stocks. This was a consequence of the Fed lowering interest rates and pumping too much money into the financial system. The Fed had a lot of leeway to do both in 1998 and still there were serious negative results between 2000 and 2002 when the tech bubble collapsed. Inflation wasn't a concern back then because commodity prices had been declining for almost two decades and were around their lows. It should be assumed that a failure to have successfully rescued LTCM would have caused a much bigger drop in stocks (as happened when the Fed didn't bail out Lehman Brothers in September 2008).

The Fed has a lot less ability to maneuver in August 2011. Fed funds rates have been at zero since December 2008. The Fed has already expanded its balance sheet by approximately $2 trillion since the Credit Crisis began. Commodities are closer to their all-time highs now, not their lows. Another bailout like the one in 1998 (which was minor compared to what occurred during the Credit Crisis) could send inflation assets into a bubble. Gold is already trading over $1800 today and seems to be leading the way.  

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bank Failures Driving FDIC to Insolvency

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


In December of 2009, the FDIC ordered U.S. banks to make three years of prepayments to its deposit  insurance fund. It looks like the FDIC has already blown through the $15.33 billion it collected at the end of last year and will soon be needing its own bailout.

As of July 16th, 96 U.S. banks have failed. The total was 86 at the end of the first six months of the year. A simple doubling of the number would indicate that there will be 172 failures this year. Estimates though are for around 200. More failures took place in the second half of the year in 2009. Total failures for 2009 were 140 compared to only 25 in 2008 and 3 in 2007. There is no question that the number of failures will be greater once again in 2010.

The FDIC maintains a troubled bank list and there are 775 banks on that list as of the end of the first quarter. That was up from 702 in the fourth quarter of 2009. Since failed banks are removed from the list, this indicates that more banks are getting into trouble than the number failing. As long as this continues to happen, the U.S. banking system is deteriorating further. Commercial loans going sour are now being added to the problem of too many bad residential real estate loans.

Investors should not be fooled by comparisons of current U.S. bank failures with the number of failures in the past. In the early 1900s, there were a very large number of small banks in the country. Over the last 80 years, U.S. banks have become much larger and far fewer in number so only a percentage comparison makes any sense. During the Great Depression, 9146 banks failed. That would represent over 100% of the 7932 banks that now exist. Even during the Savings and Loan Crisis there were more than twice as many banks in business than there are now. The total number of failures for the Depression and Savings and Loan Crisis are also for a period of up to 15 years. So we will have to wait until 2023 to see if banking failures are or aren't as bad now as they were during past crises.

We are not likely to have to wait very long however to see if the FDIC needs a government bailout for the first time. The FDIC states very clearly on its website that its operations are funded through member banks and it doesn't require taxpayer money. Well accepting a "loan" from the federal government or whatever they will call the bailout is taking help from the taxpayer. For a long time, I have been predicting that this event will be taking place in the fall of 2010. As of now, it looks like the FDIC may have trouble holding off insolvency even until then.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks Trying to Trade Against Negative News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Stocks have been attempting a recovery in the last few days for technical reasons. While they have managed to hold up despite a wave of damaging economic reports, some weakness is showing up in today's trading. Nevertheless, the market's performance has been impressive.

The S&P 500 and Dow Jones Industrial Average spent 18 days in a row trading either fully or partially below their simple 200-day moving averages. On Tuesday, they both managed to close above their respective 200-days and above the neckline of a possible double bottom. This was technically quite bullish. The S&P 500 fell below its 200-day for a while in morning trade today, which is a sign of weakness however. The Dow managed to hold at that line. The S&P has been trading below its simple 50-day moving average since May 5th and the Dow has been below its 50-day since the flash crash on May 6th. The 50-days for both indices are still above their 200-days. The 50-days falling below the 200-days would be a significant bear market signal. We are not there yet.

The news today did not indicate either a healthy economy or financial system. Weekly jobless claims increased 12,000 to 472,000. Anything around 400,000 or above is evidence of a recession. The Philadelphia Manufacturing Index dropped from 21.4 in April to 8.0 in May. It turns out that 90 banks missed their TARP payments on May 17th and many of them are trying to alter their repayment schedules. Spain managed to sell its full compliment of bonds in its auction, but had to pay very high rates to get them out the door. Spain looks like it will be the epicenter of the next crisis to erupt in the eurozone.

The future economic picture is not looking good. The most disturbing aspect of this is that government spending, the traditional Keynesian solution, just doesn't seem to be working this time. The U.S. federal government borrowed $1.42 trillion in fiscal year 2009 (ending on September 30th) to pump up the economy and the GDP during that time fell from $14.547 trillion to $14.178 trillion. This year the feds are on track to borrow $1.6 trillion. Will the GDP increase by $1.6 trillion?  It's not likely. In order to do so, it would have to be over $15.84 trillion by this September. The most recent figure is $14.60 trillion. So for every dollar of borrowing, we are not getting anywhere close to a dollar of GDP growth, but we do get more debt that we have to pay interest on from now until forever. In the long run this is a losing game. In the short run, things don't look so good either.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Liquidity from Euro Rescue Pumps Up Stock Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


As I have said many times, liquidity is ultimately the driver of stock prices. A perfect illustration of that took place on Monday when a trillion dollar rescue package was announced for the euro before the market opened. After finding out about the latest big liquidity injection into the global financial system, traders went wild and the Nasdaq gapped up 100 points. Huge volatility though is rarely a good sign for the stock prices going forward.

The extreme move up could be seen as a positive event, if the problems in the eurozone will actually be solved by the recently announced euro rescue package. This is unlikely. First the need for a large-scale regional bailout indicates that we are still suffering from conditions that arose during the Credit Crisis. These have been papered over by previous massive bailouts that have paused the problems the world faces, but have not created long-term solutions for them.  Spending more money on bailouts means printing more money and this will ultimately have unpleasant consequences down the road.

Investors need to realize that the euro rescue effort is a bailout for the big banks, the ultimate beneficiaries of the many trillions spent previously by government  and central bank Credit Crisis programs. The debt crisis in Greece could have been solved instantly and without spending one penny on a bailout, if dollarization had been used to deal with the problem. Under this approach, Greece would have been allowed to continue to use the euro, but been kicked out of the currency union. This would have prevented contagion to the entire eurozone and markets worldwide. It would have cost nothing. Instead, we now have another trillion-dollar bailout to rescue the global financial system.

The euro rescue package consists of three parts. The biggest part is $560 billion in new loans from the 16 countries that are part of the eurozone. Of those 16 however, five - Greece, Portugal, Ireland, Spain and Italy (the so called PIIGS) are troubled. So it might be more accurate to say that these loans are really from the 11 more solvent countries in the currency union. The second part of the package is $318 billion from the IMF. The IMF is controlled by the United States from which it gets around 40% of its funding (if not more). So American taxpayers are participating in bailing out Europe for its misdeeds and incompetence. The third and smallest part of the rescue program is a $76 billion lending facility from the European Commission.

The huge gaps up in stock prices on Monday morning came after a short-lived market meltdown in U.S. stocks the previous Thursday. In a span of 16 minutes, the Dow Jones Industrial Average dropped 700 points and then rose 700 points. The Dow essentially opened up 400 points higher on Monday morning. Healthy markets don't have multiple big moves up and down, especially within a short period of time. Sudden big drops in the spring can frequently lead to much bigger drops in the fall. Recovery in the middle, usually lulls investors into a false sense of security. You may want to think about that while you're relaxing at the beach this summer.

Disclosure: None relevant.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Takes Gas, Silver's Shining Moment, GM Watch

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The oil inventory report was delayed this week and it was bullish big time for the third week in a row. The natural gas report was just better than expectations, but even this minimal accomplishment proved a combustible mix that caused UNG (the natural gas ETF) to shoot upward. SLV (the silver ETF) traded over 15.00 this morning, removing all doubt that a breakout has taken place from strong resistance around 14.50. News reports are indicating that some progress is being made with GM bondholders in a last minute effort to avert the largest industrial bankruptcy in the history of the United States.

Analysts expected that U.S. oil inventories would rise 1.8 million barrels last week. Boy did they get a surprise! Inventories fell by 5.4 million barrels. Gasoline, the major use for oil during the summer months, had 600,000 less barrels in storage. Year over year U.S. gasoline demand is down only 1.2% despite the troubled economy, yet oil is still 47% off of last year's high. Despite dropping supply and the barely lower demand for gasoline compared to the much lower price of oil, you can still find bearish comments on oil in media coverage. Our favorite oil ETF, DXO, has continually told an opposite tale however - and when in doubt, the market is always right. DXO broke above 4.00 today and should be heading higher until light sweet crude reaches at least $75 a barrel. Triple leveraged energy company ETF, ERX, is having an even better day after consolidation around support between 29 and 30 level.

While oil may have only a month or so left of its rally (frequently when the most money is made), natural gas is still putting in its bottom and I have been accumulating UNG since it fell back to the low 14's. Unlike oil, the fundamentals of natural gas are indeed negative and have been for a long time. Moreover, the favorable seasonal for natural gas can begin as late as July as opposed to February for oil. The peak is most likely in late October, early November, while oil statistically peaks in early August. This week, analysts expected U.S. storage of natural gas to increase 111 bcfs (billion cubic feet), but the increase came in at only 106 bcfs. In a heavily shorted market, that was enough to generate a big move up.

In the precious metals, SLV trading above 15.00 today was quite impressive. At the moment silver is doing better than gold, but it has a lot of catch up to do. Gold is only 4% off its recent highs of 1000, while silver is about 30% lower than it previous high around 21. SLV has another point of resistance at 16. After that, SLV testing 21 is almost certain.

Some progress seems to have been made with GM bondholders this morning. It is still too early to tell if this will come to fruition. Whether or not GM declares bankruptcy (allowing this to happen will be one of the biggest economic mistakes that the U.S. government has ever made) is obviously going to go down to the wire. The stock has not fallen below a $1.00 today however and is actually up 10% at the moment. When the market thinks a company is going bankrupt, it pushes its price into the penny level. Watch to see if this happens. While a GM bankruptcy will weigh on the market, the avoidance of bankruptcy would cause a big rally next week.

NEXT: Silver, Oil , Gold - Market Screams Inflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Making a Silk Purse Out of a Sow's Ear

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. Treasury revealed its latest plan to rescue the collapsing financial system today. I have lost count of which number rescue initiative this is since there have been so many in the last year and a half. The need for a another new plan indicates the lack of success of all the previous plans that were supposed to fix things. Despite spending trillions of dollars so far, the government has not managed to get control of the problem - and for good reason. Essentially, all the government programs are geared toward making worthless assets worth something. If this is the goal, Harry Potter should be running the Treasury department instead of Timothy Geithner.

The latest idea is to take $75 to $100 billion (multiply this number many times) from the Troubled Asset Relief Program, aka TARP, and combine this with capital from private investors to buy up the toxic assets that are owned by the banks. Treasury claims that private investors participating in the new program could lose their entire investment in some cases and the taxpayer could share in profits (my guess is the chances of either are minuscule). The FDIC, which is close to being insolvent itself, will provide a guarantee for this public-private investment funding. It was not mentioned how the FDIC would be bailed out if any significant amount of these asset purchases went bad.

Under the Treasury plan, private-sector participants will compete to establish a price. Treasury claims that the public-private partnership is superior to a "bad bank" approach because because under the "bad bank" approach taxpayers would take on all the risk, and government could overpay for the assets (as if these two things aren't happening in their alternative approach). Treasury said that it expected a "broad array" of investors to participate in the program, including insurance firms (even though this industry itself is about to need a bailout - participating in this program should help push it over the edge). Treasury also claims that its new plan is designed "to make the most of taxpayer resources." This of course begs the question: What were the previous plans designed to do?

The ultimate goal of the latest, greatest, newest, improved government financial rescue package is to get banks lending again. As with all the other failed rescue packages, this is being done indirectly by attempting to solve some related issue and presuming that this will somehow magically jump start lending (the cause effect connection between the two is usually missing). The new plan is trying to restart trading in 'legacy securities'. The market itself has valued these as worthless and indicated that these are inherently non-viable financial instruments. Nevertheless, the government thinks it knows more than the market and insists on pouring more and more money into this financial black hole. Even though every previous attempt has failed, it is always hopeful that the next one will work. As I have said many time, nothing succeeds like failure in Washington. Where is Harry Potter when we need him?

NEXT: Print Enough Money, Everything Goes Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Citi Dives, GDP Plunges - Both Off the Cliff

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Washington's mantra should be, "if it's broke, don't fix it and when it's not fixed, fudge the numbers". News of the latest government plan to rescue Citigroup came out this morning as did the revised GDP figures for Q4 2008. Today's government rescue of Citi is the third one in five months. Those rescues followed about half a dozen U.S. government assisted rescues that took place earlier. Note to Geithner, Bernanke, and Obama - doesn't look like what you are doing is working guys, you might want to consider Plan B. Citi's rescue isn't the only thing not working either, all the policy moves to prop up the ailing U.S. economy are fizzling as well and apparently the 'just lie about it and no one will notice' approach is falling apart too. The GDP figures for last quarter had a major downward revision (they are still much rosier than the actual numbers however, so don't get too excited just yet).

The Citibank bailout du jour can be summarized as 'U.S. taxpayers get screwed again' (just another example of how the government keeps your interests in mind). Taxpayers are going to get up to a 36% stake in the insolvent bank that has a net negative worth in exchange for the $25 billion (out of a total of $45 billion) of TARP funds that were previously provided to Citi. The remaining $20 billion of taxpayer provided funding will still be in the form of preferred that pays a dividend, but the option exists for also converting this to the worthless common stock. Other holders of 'bailout preferred', such as the Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors will be paid $3.25 per share for their preferred, instead of being forced to convert it to common stock that traded as low as $1.55 this morning (a deal that is more than 100% over market price sounds good to me - unfortunately only the well-connected rich and powerful get these arrangements, the small investor and taxpayer get the losses).

To say the least, the market didn't react favorably to the government's latest move on Citi. The stock was down as much as 37% at its low so far. Considering the dilution though, existing shareholders could see their stake fall to only 26% of the bank, this was really not a big drop at all. Still, $1.55 is above the penny level usually reserved for stocks in official bankruptcy and is well more than $1.55 above the real value of the company. New York Investing first said Citi was insolvent in late 2007 and well over a year later, the market is finally catching up with us. We have also said repeatedly that there is no such thing as a single bailout for an insolvent financial institution - Citi has shown just how true that statement is.

Another thing New York Investing has frequently pointed out is how the U.S. government is fudging its GDP reports. This blog scoffed at the original Q4 2008 report of a minus 3.8 decline in the economy and pointed out several absurd figures that were being used to calculate this number. Well, the government started to fess up this morning, when it stated there was actually a 6.2% decline in GDP last quarter (a drop of 8% to 9% is more likely). Certainly a step in the right direction, although the government is still claiming that the U.S. economy grew 1.1% in 2008. Maybe this is possible in some alternate universe, but not in the reality that most of us live in.

The next meeting of the New York Investing meetup is on Tuesday, March 3rd at PS 41, 116 West 11th Street (at 6th Ave) from 6:45 to 8:45PM. Click on the link below my name to RSVP. If you are in the New York metro area, you should attend.

NEXT: Technicals Ugly, Risk of Domino Bank Collapses

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.