Tag Archives: default

Are we set up for a Euro short squeeze?

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My how the times change. Seems only yesterday everyone was expecting the dollar to collapse, when it already had! Now it’s time to fret about its opposite, the euro. I am a major dollar bull for 2010-2011, but when everyone is one one side of a trade that has gone a long way in a short time, you have to consider the odds of a correction. In the highly levered currency markets, these can be lightening fast.

Here’s the last 3 years of the ETF FXE (1 share = 100 Euros priced in dollars):

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Take a look at the 10 cent rally over a few days in September 2008 (and the remarkable similarities in price and RSI between the weeks prior to that move and the action since December). If the analogue plays out, we’ll get a quick spike to shake off the shorts and keep people guessing, followed by an even deeper decline. The catalyst in ’08 was the shorting ban. Maybe now a Greek bailout provides the nudge that sends shorts scrambling.

Bear in mind that if this scenario plays out, all of the other risk assets are likely to follow suit: this means a general drop in the dollar and yen, and spikes in stocks and commodities. I have to admit, a correction would fit just fine in all of these markets.

Aside from the charting similarities, what gives me an inkling that something like this could be in the works is the prevalence of chatter about how a Greek bailout is going to weaken the currency or even lead to the breakup of the eurozone. I happen to agree, but I don’t like having this much company.

One person who’s company I don’t mind sharing in the markets (short-term trades notwithstanding) is Hugh Hendry, who is the lone voice of reason at the table with a Spanish politician and the esteemed ignoramous Joseph Stiglitz.  Other than for clues on public sentiment, he’s the only reason to watch this little TV production on the Euro’s troubles (he speaks in part 2):

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Stiglitz is being disingenous or is just a plain fool; a bailout is exactly what people are talking about (that’s what he means by “if they stand behind it”). The idea seems to be for Germany and the EU (including possibly even the UK) to gaurantee Greece’s debt, in the way that the US taxpayers were forced to back up Fannie and Freddie’s debt.

Hendry is right — the debt is unpayable, and default is the only option, even with refinancing at lower rates. Greece should just get it over with and repudiate the debt. It is by far the best option for the nation, though the worst for Greece’s politicians and the cronies and unions who benefit from government spending.

Stiglitz doesn’t understand markets. He seems to think the debt crisis is the result of “market mistakes.” This is utter nonsense — without the moral hazards created by deposit insurance, GSEs (Fannie, Freddie, FHA, etc), and the promise of central bank bailouts, financial institutions would have had an incentives for prudence. In our system today, they have none, since losses are simply shifted to the public. It is the greatest financial scam the world has ever seen, but certified “economists” like Stiglitz are steeped in central banking propaganda and incapable or unwilling to see what is right in front of their noses.

Default, Greece, default.

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All government debt is a racket, and should be repudiated.

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Widely read investment advisor John Mauldin favors the continued enslavement of the Greek public to corrupt politicians, greedy unions, and German banks. He had this to say today in his email publication:

…if Greece defaults it does not necessarily mean they have to leave the EU, any more than if Illinois defaulted they would have to leave the United States. Greece could still use the euro and life could go on. EXCEPT. The markets would no longer lend the Greek government money at anything close to a livable rate. Greece would be forced to balance its budget. Since they are part of the euro, devaluing the currency is not an option. The results of controlling their fiscal deficit would not initially be pretty and would almost insure a serious prolonged recession or depression in the Greek area, with fall out in the region. It would be a sad decade for Greece. But in the long run, it is a better option than default.

Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem.

Bailing out Greece without serious and credible deficit reductions by their government over the next few years would simply delay the problem, and it is not altogether clear the bond markets would go along for very long. At the end of the day, it may be the bond market which forces the Greek government and its people to take some very bitter medicine. Stay tuned. This is just the beginning of what will be a series of sovereign debt crises over the coming decade. It is important for the world that we get this one solved right, or the consequences will be quite severe.

I respectfully disagree with Mr. Mauldin. I believe that default would be the best outcome for the Greek people and the rest of Europe, as well as the financial system. It is ironic that Mauldin does not support this outcome himself, since he claims to be a fan of von Mises, Hayek and Rothbard, all of whom would be appalled at the prospect of perpetuating the racket in Athens. Rothbard specifically advocated the repudiation of government debt, since it serves only the interest of politicians and special interests at the great expense of the society at large:

In the famous words of the left-Keynesian apostle of “functional finance,” Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves.” In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether—slicing through the obfuscatory collective nouns—one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation)…

If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.” …

The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people’s property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

I highly recommend reading the whole Rothbard essay on Mises.org, since the ideas therein have never been more timely for the US, among a great number of other countries.

It is almost always in citizens’ best interest for their government to repudiate the debt it has accumulated in their names. Politicians take out debt to spend more than is prudent or ethical, in order to buy votes, very often union votes. This is the case in Greece, where repeated strikes by teachers, dockworkers, farmers and others have been met with greater and greater pay and benefits. This system is a racket that rips off the silent majority of taxpayers.

Why should generations have their earnings stolen (make no mistake, taxation is theft, the involuntary taking of property under threat of force) to continue to support politicians, bankers and union thugs?

A default would indeed cripple the government’s ability to borrow, and would thereby end the racket. Politicians would no longer be able to offer something for what seemed like nothing: if they wanted to raise union pay, they would have to raise taxes at the same time, not at some future date beyond the next election.

Yes, a default would hurt bondholders. Duh. That’s perfectly just, since Greek (and Italian, Portugese, Spanish and Irish — GIPSI) bonds pay higher yields than those of Germany or Switzerland. These investors took a gamble, as did those who wrote default swaps on such debt. They deserve to lose money, and frankly, the astute buyers of default swaps deserve it more than they. Besides, as Rothbard makes clear, the creditors are a party to theft, guilty of receiving stolen goods.

I am tired of this nonsense that somehow banks and investors losing money means the end of the world. That is a fiction fed to a credible and ignorant public in order to justify the transfer of their assets to the most powerful banks. What is the end of the world?  War: the uniquely governmental institution of cities and industry bombed to rubble, crops burned, and whole generations enslaved, blown up, starved and displaced. A banking crisis? My god, that’s nothing, unless the government turns it into prolonged stagnation through theivery (and even worse if they take advantage of the resulting conditions to agitate for war). Factories, roads, bridges, and offices still stand; and human beings still have their lives, talents and freedom to use them. Assets change hands, that’s all. Nobody needs to starve, and unemployment only needs to be brief, unless of course the government prevents the defaults necessary to transfer assets to productive ownership by shifting the losses to the public. In that case, capital is wasted, assets stay idle and jobs disappear.

The Greek public should send a message to their politicians: “We won’t pay. Default away.” If unions can stike, why can’t taxpayers? The fact is, the debt is unpayable anyway, because the taxes necessary to service it would cripple what’s left of enterprise in that socialist economy. Just get it over with and don’t sign up for the lost decade(s) club.

Spontaneous Jubilee in the air?

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Why shouldn’t someone walk away from overbearing consumer, student or mortgage debt, so long as it is non-recourse? I can’t think of any reason to keep servicing debt if you have no hope of repaying the principal. What good is a high FICO score if you don’t want to run up another credit card balance or buy a home? Yes, landlords run credit checks, but it is getting harder and harder to fill vacancies, and this is what deposits are for anyway.

The “just walk away” attitude is gaining traction.  It could snowball into next year as yet more mortgages reset and U-3 unemployment enters the double digits. What can the legal system do if tens of millions of people decide to stop paying their unsecured loans? This lady is right — there is safety in numbers and government inefficiency. You get a fresh start in five years anyway, which should be right around the time real estate has a chance of recovering.

This is exactly what needs to happen. The unpayable debt will by definition be defaulted on, so the sooner the better. The banks that issued it need to go under. Stories like this are refreshing, because we need to clear the air.

New York muni-bond defaults coming

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Bloomberg reports on the budget gap:

Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a “safe harbor,” protecting against penalties for underpayment.

“It will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. “They will carry forward all of those losses.”

Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said.

I wonder what portion of revenue comes from industries that are dependent on Wall Street, such as law firms that handle M&A and other transactions, accounting firms, hotels for business travelers, luxury apartment rentals, commercial real estate, and high-end shopping and entertainment. Since manufacturing departed decades ago, NYC has become strictly a boom-time town. This hugely wealthy financial center was a drug-infested war zone during the 1970s bear market. All of its top industries are highly cyclical: advertising always slips in recessions, and these are tough times for the fashion biz as well, as even the wives of multi-millionaires wonder how many $500 shoes they really need.

Emergency Session

New York Governor David Paterson called the Legislature back to work next week in an emergency session to address widening deficits as revenue, including tax receipts from Wall Street, declines. Sixteen of the state’s largest banks sent taxes totaling $5 million to the state treasury in the most recent reporting period, a 97 percent decrease from a year earlier, when they accounted for $173 million in revenue, Paterson said.

The state faces a $26 billion deficit over the next three years and a $630 million shortfall in the current year that began April 1, Paterson has said. The governor yesterday outlined $630 million in administrative spending cuts he intends to apply this year, and he called upon legislators to cut at least $600 million more later in August.

Good luck enacting any meaningful cuts. We learned in the 2005 MTA strike that $63,000 plus full benefits was not enough for the bus drivers:

The sense of entitlement that has been encouraged for decades will ensure that this ends in default, but of course Moody’s or S&P won’t admit that.

New York City won its highest debt ratings in recent years, AA from Standard & Poor’s and Aa3 from Moody’s Investors Service, as Wall Street profits soared and the real estate market boomed. The largest Wall Street firms paid a combined $30 billion in bonuses in early 2007 because of record 2006 profits, Turner said.

New York state has $50 billion of outstanding debt. Ratings range from AAA for bonds backed by personal income taxes or sales tax, to AA for state general obligation debt and AA- for bonds that require appropriations by the Legislature, according to Standard & Poor’s.

“I am worried about the state’s bond rating, and it will start to fall if the governor doesn’t do something about his budget problems now,” Bloomberg said. “The rating agencies are cognizant of what’s happening to our economy.”

The cumulative projected deficit the state faces over the next three years has widened 22 percent since May, to $26.2 billion from $21.5 billion, Paterson said. The current budget is $80.5 billion, excluding capital projects and federal aid.

This is yet another example of the meaninglessness of ratings from the cartel. How could NYC’s huge pile of debt have ever been investment grade? And how can it still retain those ratings after deficits have widened 22% in three months? The answer of course is that they pay S&P and Moody’s good money for those ratings, and that the government supports this sham through special rights for the few agencies it chooses to recognize. In credit ratings as in anything, when the government restricts a market, quality goes down. Does anyone believe that a ratings agency that kept MBIA and Ambac debt AAA until 2008 would survive in a free market?

The only realistic way default could be avoided for NYC’s debt and thousands of other municipal bonds is for the federal government to step in and bail out the states and towns. I would not rule this out, since what is another few trillion when you’re already on the hook for $50-100 trillion?