Ireland Going the Greek Way; Will We Follow?

“It was the banks doing crazy loans, it was borrowers taking crazy loans and a failure by government and regulators to do their jobs properly,” said Sean Kay . . .. “There was no adult supervision.”

Sounds like the U. S.

Instead it's Ireland, in a Bloomberg article about Ireland on the Brink.

Right now the U. S. is in a "Japanese" phase of my concept of a duality I have dubbed going or being Japanecian (or, Grecianese). The Irish are going Grecian. They are accepting austerity (a depression with debt deflation and high real interest rates) to stay in the good graces of lenders. So long as the U. S. can keep adding to its debt with central bank money created out of thin air, a la Japan, said debt replacing income to the government coming the traditional way from private sector taxes, then interest rates can continue to trend down. If that happens, then the long end of the yield curve will break to very low levels, no matter how high traders price the yields now. With 3-month T-bills at the same level as Japan's, at a trivial 0.12% annualized yield, that's my working hypothesis now.

At some point, however, the Grecian phase of a debt crisis can come to America.

Got gold?

Copyright (C) Long Lake LLC 2010

BAC and Financials May Be Canaries in a Collapsing Coal Mine

Bank of America stock is currently down over 7% on a poorly-received earnings report. Citi is down half as much, and Wells Fargo is down as well. Look at the stock chart of BofA (symbol BAC) to the right. In the winter, support was found not at the 50 day simple moving average but at the lower, 200 day sma. Now, the 50 day sma (green line) has moved below the 200 day sma, and unfortunately the 50 day has been formidable resistance.

Corroborating this is the severe weakness in what I privately consider bellwether financials UMBF as well as NTRS. I consider them bellwethers as they are not involved with heavy derivatives, did not engage in government-sponsored acquisitions of failing financial institutions in 2008, and are considered to be overall relatively "clean". NTRS (Northern Trust) is of course heavily involved in trust activities and thus is not a pure bank.

The Consumer Metrics Institute (www.consumerindexes.com) shows a significant slowdown that continues to "point lower" at a later date in the slowdown than the 2008 recession/depression.

It is increasingly looking as though the Fed created money, distributed it to holders of mortgage-backed securities as well as owners of Treasuries (primary broker-dealers) and that money largely stayed within the financial system, propping up the prices of stocks and bonds. Unfortunately, on Main Street, demand for loans that met the newly-rational standards of the chastened banking community was small. People have begun paring their bloated debt levels and so the U. S. has gone Japanese for now. However, unlike Japan, the U. S. does not self-finance its own debt. Thus the duality of us being Japanecian: as with Greece, "the markets" can cause rates to soar by suddenly claiming to be shocked, shocked at the state of Federal finances.

Are T-bills truly riskless in this environment? Their equivalent in Greece did not prove to be so, and the euro-bond vigilantes have turned to Spain. Echoes of 1997-98 abound. That era proved both to be the top for the average U. S. stock (not the capitalization-weighted indexes such as the S&P 500, though) but the resulting deflation helped prevent price inflation here. Given how complicit the U. S. was in this current part of the cycle, it is easy to see things getting worse here both in the real economy and even more so in what continue to be overvalued domestic stock and bond markets.

In early 2007, the persistent relative weakness in the large-cap financials foretold the bear market and financial troubles to come. Let us hope that the recent past is not prologue.

Copyright (C) Long Lake LLC 2010

Financials Breaking Down

The default rush to Treasuries despite more than abundant supply is a bad sign. The well-regarded but fundamentally pricy regional financial services/bank company with the symbol UMBF has hit a 12-month low today. Northern Trust has broken down. GS and JPM have been in classic bear configurations for some time. BAC is close to a technical breakdown, as well.

As the financials broke down well before the stock market topped in 2007, it is feared that the breakdown of these companies' stocks may presage a general "correction". Given national and global economic situations objectively, without judging the future, it is hard to see that the stock market should not trade at fair value, which observers I find credible peg at anywhere from 20-25% below current prices.

Investors must learn the investing lesson of Japan. This is that persistent ultra-low government borrowing rates that are associated with a sluggish economy eventually lead to stock prices reflecting said sluggishness rather than the growth expectations that are priced in. Thus, investors should ignore the current relative attractiveness of 2-3% dividend yielders except to the extent that said dividends derive from globally attractive markets, such as India and Brazil.

EBR feels that given the chimeric Japanecian (Grecianese) risk our government's finances bear (also called fat tailed possibilities), caution is appropriate. AAPPL and gold, as stated here recently, are both flat to up as of this post while stock averages are down. This reflects relative and absolute performance over various longer time periods, and while no bells are rung during trend changes, I see no valuation or other reasons for said trends to change.

Cash may be "trash", but sometimes it's less trashy than other assets.

Copyright (C) Long Lake LLC 2010

Obama to Kick McC's Ass? But Problems Are Deeper and Broader

Is Rolling Stone happy that even before the official publication of its scoop about General Stanly McChrystal and his team of trash talkers, said General has resigned or is close to so doing? Talk about an impactful story . . .

In any case, the U. S. and NATO body counts are rising rapidly in Afghanistan, the Marja invasion has been a fiasco, the planned takeover of Kandahar is now in good measure a sweet-talking tea-sipping make-nice operation, and at best a growth slowdown in the economy appears baked in the cake. You know things are difficult at home when Walgreen's misses earnings estimates by a mile.

The 90 and 180 day year on year average growth rates as measured by Consumer Metrics Institute (http://www.consumerindexes.com/) are in the single digit of all percentile year on year growth rates per BEA data going back over 60 years. The new government in Britain has announced austerity, complaining that 1 of every 4 pounds of gov't expenditure are borrowed. In Congress, however, where at least 1 of 3 dollars spent by the Feds are borrowed (printed), the powers that be are planning no budget at all for the upcoming fiscal year beginning in the fall. The excuse that they are waiting for the deficit commission (which needs more money than anticipated to complete its work!) to report in December is beyond lame. Said commission will either be ignored or say things that could be said by any poli-sci or econ college major. Spend less/tax more.
Duh . . .

Speaking of spending less, the President needs to reconsider his one-year surge in Afghanistan. It's one thing to print money to keep Medicaid clinics alive. It's another to kill Afghans. And while he's in a kick-ass mode, let him consider kicking the derriere of a certain senior economic adviser who used to be president of Harvard and whose pro-deficit, pro-Wall Street policies are failing the country even more than Stanley McChrystal, whose frustrations may have been uber-legitimate but were shared too openly.

The stock market responded well to the austerity package proposed by Team Cameron in the U. K.

If Barack Obama were to kick some Keynesian ass, the same would happen here. Maybe Paul Krugman would dump all his stocks, but the market would survive that blow.

It's time for more major mid-course changes we can believe in. But don't hold your breath.

Three assets continue to act well, two of which have good fundamentals: Gold, Apple Inc. stock, and Treasuries. Guess which of them lacks fundamental support (hint: supply is rising rapidly)?

Thus guess which one EBR views as a trading vehicle rather than (for now) a buy-and-hold asset?

Further hint: it's the asset the downside of ownership involves the U. S. going Grecian rather than Japanese.

Japanecian (or Grecianese) is the flavor of the day.

Copyright (C) Long Lake LLC 2010

Doing Go(l)d(man)'s Work to Prevent Going Japanecian

With a growth slowdown at least baked in the cake, ECRI is now admitting the possibility of a double dip. The "stimulus" has not stimulated. Worthy though keeping Medicaid going is, and humanitarian it may be to have extended unemployment benefits, those parts of ARRA (the "stimulus" bill) have no obvious multiplier effect. Paving roads and the like is also of no lasting economic benefit unless said roads were in such bad repair as to have been preventing important commerce from occurring - but that was not the case.

So what are the Krugmanites (and bloggers such as Dr. Mark Thoma and Calculated Risk himself) doing when they talk about job stimulation?

It is past time to talk aggregate demand and other failed Keynesian terms and describe with specificity what it is that people should be doing with their spare (unemployed) time.

I am on record as favoring heavy investment in green technologies of the future for which America has a current competitive advantage, such as biotech.

Certainly to the extent that needed infrastructure has not been kept in good repair, efforts to improve and maintain that should be done; but the heavy pace of municipal finance at least suggests a reasonable ongoing effort in that regard.

Consider again that the average American works perhaps 20+% more hours weekly than the average French worker, and perhaps for more years as well. Perhaps the fact is that most needed work is actually occurring, and the country might be better off if no more aggregate hours were worked in employment than are currently worked.

Printing money is good for Goldman and gold. Deflationary depressions end up creating more work for Goldman but not gold. The U. S. could go Japanese with endless "stimulus" that doesn't stimulate, financed with more and more debt at increasingly impossibly low interest rates. Or, we could go Grecian, wherein the rest of world will not lend except at very high rates, given how close we are already to a debt trap, where money is being borrowed to pay principal and interest to prior lenders.

Avoiding going Japanecian (Grecianese?) is the order of the day.

Copyright (C) Long Lake LLC 2010