Archives for June 2015

The Air We Breathe

Courtesy of Tim Knight, the Slope of Hope

A few years ago, I was chatting with an acquaintance of mine who happens to be pretty rich. I don't know the exact figure, but his net worth was probably something like $80 million. He was definitely in "ultra-high net worth" territory and quite obviously never needed to work another day in his life.

He was bemoaning to me the fact that if he hadn't sold his energy company so early, he would be "a billionaire by now." My heart didn't exactly ache for the guy, but his complaint (which these days I think is referred to as a "humblebrag") made an impression.

I was reminded of this last week, when I was reading in Quora an article about the definition of "success.' One of the respondents related a conversation he was having with a friend who had $2 billion and was complaining that he wasn't worth as much as Larry Page, who is worth $15 billion.

What is it about money such that people are never satisfied? Most of us have heard about the study that shows that money does, in fact, correlate closely with happiness, up to a level of income about $40,000 per year (adjusted for your location). After that, the marginal benefit begins to fall off, and after a certain amount, it gets fairly meaningless.

It certainly makes sense that, say, a young adult out of college making $60,000 per year is probably a lot more content and satisfied than someone working at Shake Shack for $25,000 per year. But it also makes sense that an investment banker making $900,000 per year is probably no happier than the person who likewise is making $35,000 per year less. Money, at that level, has stopped moving the happiness dial.

An interesting metaphor hit me, which I'd like to offer for your consideration: the air we breathe. Imagine for a moment that we treated air the same way we treat money.


What I mean by that is that air is: what if it was unevenly distributed? Most people would have enough to fill their lungs day to day and get by. Some people might wheeze and gasp, barely hanging on. Others suffocate to death. And a few have stockpiled enough air for fifty lifetimes………or a hundred…….or a million.

How would we, as as race, feel about this? We might witness Mark Zuckerberg breathing freely and without a care, confident that in his secret underground caves, he has a stockpile of the oxygen he requires just in case he lives for the next fifty million years. And yet we pass on the street bodies of people who have violently died, having suffocated for want of air.

This, clearly, would be unacceptable, because not only would we be outraged that any human on the planet couldn't get enough to breathe, but also because, frankly, Mark Zuckerberg doesn't need air for the next fifty million years. The air, we would all agree, has to be shared.

But we don't need to agree to this because, happily, the availability and distribution of air for our lungs isn't within the domain of human decision-making. It's widely- and freely-distributed, doesn't cost anyone anything to use, and not only would it be impractical to "hoard" it, but doing so would be silly.

The air we breathe, then, is the idealized expression of socialism. From each his according to his abilities (which, in this case, are naught). To each according to his needs (which are more or less the same). Air is a fair resource, and occasional debates about pollution notwithstanding, it's something that seven billion people share peaceably.

Now I realize that air isn't the same as cash, and I'm as fond of the latter as the next fellow. And, let me assure you, I'm not proposing the wisdom of a government making sure we all have the same quantity of assets. That little 80-year experiment was kind of a flop that created untold misery and put the entire human species at risk of extinction. Luckily, we got past it.

But all the same, I can't help but think of this little analog and wonder to myself if it might help yield some insight as to the foolhardiness of human greed and the limits of covetousness any wise person need pursue. The pursuit of success that leads to creating employment, good jobs, a better world, and all that happy hoo-ha is perfectly good, and if it happens to make you rich along the way, well, that's just icing on the cake.

But remember that there's really only so much of that stockpiled oxygen in your caves that you really need, and it might do you some good to share some of it (at your own discretion, not by government edict) now and then. Hyperventilation can't hold a candle to the good feelings of helping out a fellow traveler here on our little planet.

How China Lost an Entire Spain in 17 Days

Courtesy of EconMatters

Concerned about a tumbling equity market, PBOC moved to cut both interest rates and the reserve requirement ratio for banks over the weekend. However, increasingly wary of a market bubble in China, investors still sent Shanghai Composite spiraling down another 3.3% on Monday after the dramatic 7.4% plunge last Friday despite the support from the central bank.

Chaos on Three Continents

Investors are also unnerve by the latest development of Greece just days before a total default and Grexit out of EU, and the news that Puerto Rico could become another Greece of the U.S. facing a financial crisis and cannot pay back its $70 billion in municipal debt.

VIX Spike

MarketWatch reported that VIX spiked 33% to above 18, the highest since February, implying that investors are very nervous about the chaos going around.

Beijing Targets Soft Landing?

If you think U.S. stocks are lofty trading at an average of 16 times last year's earnings, the average Chinese stock is now trading at 30 times earnings.

Analysts at HSBC think the China's central bank was trying to engineer a "soft landing" for stocks. But this could be a difficult balancing act trying to shore up investors' confidence while keeping a lid on the speculative fever among Chinese retailer investors (Remember those Chinese housewives who bought up 300 tons of gold and made Goldman Sachs swallow their gold selling recommendation?)

$1.3 trillion, an Entire Spain, in 17 Days

The Shanghai Composite has fallen 21.5% since its June 12 peak wiping out ~ $1.3 trillion in market cap. To put this in perspective, Quartz pointed out that the ~ $1.3 trillion loss in market cap, in 17 days, is close to the combined market capitalization of Spain’s four stock exchanges, and it’s not even counting losses in Shenzhen, China’s other major bourse.

Size Does Matter 

Greece has been the center of financial market attention for the past few months.  With a record $370 billion in margin trades, the Chinese stock market is looking even more ominous.

Only time will tell if Beijing's able to turn the situation (i.e. slowing economy with a bubbling equity market) around.  But if the world's biggest trading nation suddenly has a crisis of some sort, it would be a catastrophe of a different scale.  Size does matter when it comes to financial collapse, and China could do far worse damage than any Grexit or PIIGS debt default.

Chart Source: Quartz

Shoot the Dog and Sell the Farm


Thoughts from the Frontline: Shoot the Dog and Sell the Farm

By John Mauldin

(Originally published on June 27, 2015)

“If this were a marriage, the lawyers would be circling.”

The Economist, My Big Fat Greek Divorce, 6/20/2015

Greece is again all the buzz in the media and on the commentary circuit. If you’re like me, you are suffering terminal Greece fatigue. You just want Greece and its creditors to “do something already” rather than continually coming to the end of every week with no resolution, amid finger-pointing and dire warnings from all sides about the End of All Things Europe – maybe even the world.

That frustration is a common human emotion. Perhaps the best and funniest illustration (trust me, it is worth a few minutes’ digression) is the story about one of my first investment mentors, Gary North, who was working in his early days for Howard Ruff in Howard’s phone call center before Gary began writing his newsletters and books. (Yes, I know I am dating myself, as this was the late ’70s and early ’80s, just as I was getting introduced to the investment publishing business. And for the record, I knew almost everyone in the publishing business in the ’80s. It was a very small group, and we got together regularly.)

Howard set up a phone bank where his subscribers could call in and ask questions about their investments and personal lives. One little lady had the misfortune to get Dr. Gary North on the line. (Gary was the economist for Congressman Ron Paul and went on to write it some 61-odd books, 13,000 articles, and more – all typed with one finger. He is a human word-processing machine.)

This sweet lady lived way out in the country and was getting older. She asked Gary if he thought it would be a wise idea for her to move into the city (I believe it was San Francisco) to live with her daughter. Not knowing the answer, Gary helped her work out the pros and cons over the phone, and she decided to move. A few days later she called back and said that she couldn’t bring her dog with her because of the rules at her daughter’s apartment. It turns out she couldn’t live without her dog, so Gary helped her come to the conclusion that she could stay in the country.

A few days later she called him back asking whether she should change her mind, and Gary once again help her to come to a conclusion. This went on for several weeks, back and forth, move or not move, dog or no dog. Finally she called one last time. Gary, in utter exasperation and not being infinitely tolerant of indecisive people, said, “Look lady, just shoot the dog and sell the farm.” (For the record, I hope she didn't really shoot the dog. I like dogs.)

That is where most of us are with the Europeans and Greeks. I have devoted a great deal of space in this letter to Greece over the past five years and have visited the country and corresponded with many analysts and citizens about the situation. And while I want to briefly outline the Greek situation again today, as there are some subtle nuances to consider, I think this juncture is a teaching moment about the larger picture in Europe. In fact, watching this process, I have come to change my mind about the timing of what I see is the endgame for Europe and European sovereign debt. I think exploring that issue will make for an interesting letter.

Economic crises go through cycles. Here’s a chart from the clever folks at (via my friend Jonathan Tepper on Twitter).

The Greek situation is presently caught in those two bubbles on the bottom. European leaders held summit meetings this week to consider new breakthrough concessions offered by Greek Prime Minister Alexis Tsipras. Let the champagne flow. Except those concessions were rejected, and the Greeks rejected the counteroffer as of this afternoon. But it’s not quite midnight yet.

Unfortunately, the wheel of debt never stops turning. If this solution is like countless others floated in the last five years, we will soon learn that it has no substance or simply won’t work. We will then reenter the crisis phase.

Every cycle breaks eventually. If you forget everything that’s happened to this point and re-imagine the crisis as an economic standoff between Greece and Germany, you have to say Germany will win. It outweighs tiny Greece in every possible category. The real question is why Germany let the fight go on this long. We will deal with that in a minute.

Note that this observation isn’t about which country should win; it is about who will win. Greece has some legitimate grievances. Unfortunately, these grievances aren’t going to matter in the end.

Poster Children for European Profligacy

My friend David Zervos of Jefferies & Co. has no doubt who will win. He sent me this note on June 17.

The bell is tolling for Alexis [Tsipras]. European leaders from all sides have abandoned him as he burns through every last bridge that was once in place. His only meeting of importance during this crucial week of negotiation is with Putin – which clearly does not inspire any confidence for a near-term resolution. 

It is actually amazing that we have not seen any of the left-leaning party leaders from the rest of Europe running to Tsipras’ side as he truculently engages his paymasters. Where are all these European anti-austarians? Of course they are hiding from the Germans, hoping not to receive the same fate as Alexis. So there he sits, alone and under his last Soviet-held bridge, just like Hemingway's Robert Jordan. He is waiting to cause just a little more damage before his time is up. 

In the end, there is no question that the Germans have executed a near flawless plan to humiliate and vilify Greece. The Greeks now stand as poster children for European profligacy. And they are being paraded through every town square in the EU, in shackles, as the bell tolls near the gallows for their leader. And to be sure, making an example of Greece is a probably the greatest achievement for the fiscal disciplinarians of Europe. Maastricht never had any teeth. But this exercise is impressive. It shows that fiscal excess will be squashed in Europe. The Portuguese, Spanish, and Italians are surely taking notice. And in the days that lead up to a Greek default on 30 June, and then more importantly on 20 July, these disciplinarians will surely display their power for all to see.

Oddly enough, I actually think this has been the German plan all along. With no real way to ensure fiscal discipline through the treaty, they resorted to killing one of their own in order to keep the masses in line. It explains why Merkel took out Samaras when she knew a more hostile government would surely emerge in Greece. This was masterful political manipulation.

The 1992 Maastrict Treaty created the European Union and led a few years later to the euro currency. Which I said at the time would be a disaster. And it has been. Leaders have been wrestling with its fundamental flaw almost from the beginning. The EU has no way to enforce fiscal standards on its member nations. The member nations likewise have no way to devalue the currency in their own favor. This can’t go on forever – and it won’t.

Germany, by virtue of its sheer size and its favored position in the bureaucratic scheme of things, grew wealthy partly by exporting to the European periphery: Greece, Italy, Spain, Portugal, and Ireland. (The rest of their 40–50% of exports of GDP come from exporting to the rest of Europe and the world. They have benefited massively from a currency that has been and continues to be weaker than it would be if it were just a German currency.)

The peripheral countries essentially exported all their cash to Germany (and to some extent northern Europe) in exchange for German goods. When they ran out of cash, not just because of their purchase of export goods but because of the uncompetitive nature of their bureaucratic and labor systems and the rather large unfunded government expenditures, they wanted yet more cash to continue to spend on government services. Germany and the rest of Europe offered vendor financing. German and the rest of European banks loaned money to Greeks so the Greeks could buy German goods and perpetuate their government spending habits. In the early part of the last decade, it was a deal that was seemingly made in heaven as Greece got to borrow money at German rates and Germany got to sell products in a currency driven by the valuation of the peripheral countries.

This arrangement left Greece and the other PIIGS deep in debt. Much like the American homeowners who lived beyond their means, Greece found itself overleveraged and undercapitalized. And here we are.

Who Owns Whom?

The entire Greek drama has been an exercise in denial. In hindsight, the best solution would have been to write down all the debt when Greece got its first bailout. Everyone would have taken their lumps and moved on. This was what I advocated back in 2010.

I wrote at the time (but still can’t prove) that the reason no such thing happened is that it would have left some very large European banks insolvent. Europe avoided that possibility by transferring most of Greece’s debt to the “European Financial Stability Facility,” or EFSF. It owns about 45% of Greece’s national debt. That transfer took several years and has essentially been accomplished. Greece can go completely belly-up, and the only groups that lose are essentially state actors. Bank and private debt is now minor.

The EFSF refinanced Greece’s debt on remarkably generous terms. The average maturity is about 32 years, and Greece pays a variable interest rate, currently about 1.5%. Most of the EFSF loans are interest-only until 2023, too. Is there anyone who wouldn’t love such terms from lenders? Sign me up.

If this sounds familiar, it should. The EFSF loans look a lot like the home equity lines of credit that left so many American homeowners in deep trouble after 2008.They are actually worse. HELOCs at least have some legal claim on collateral. The EFSF can beg and scream, but that’s about it.

The pie chart above shows how Greece’s government debt breaks down. European quasi-government organizations like EFSF, central banks, and the International Monetary Fund own the vast majority of it. Greece constantly rolls over its Treasury bills and bonds. Investors who own it are taking a big risk, but they’re also collecting premium interest rates to compensate for it.

Despite what looks like lender generosity – and a lot of austerity at home – Greece still can’t pay its debts. The immediate problem is a €1.5 billion payment to the IMF due next Tuesday, June 30. Greece will miss that payment unless someone on the other side bends. No one was willing, least of all Germany, unless Greece also tightened its belt further.

Let me see if I can summarize, from my rather voluminous readings from all facets of the media, the problems facing Greece and Europe.

1.  Greece now owes 180% of GDP to a collection of mostly state lenders. Even at low rates, it is impossible for Greece to pay those loans back without somehow engineering 3-5% growth. Given that for the last five years GDP is down some 20-25%, we are clearly going the wrong direction. Many of the best and most productive Greeks, especially the young, are leaving to find jobs elsewhere; and that is not a recipe for creating new business and growth. The country is growing older because the younger are emigrating. Fewer people to pay taxes and more people needing pensions is not a recipe for growth.

Simply lending Greece more money to pay back their debt, thereby piling on an even greater burden for future generations, does kick the can down the road for the time being; but it does not solve the fundamental problem that Greece simply can’t pay. Ever. Even with essentially free money if that money comes with the requirement that there have to be more taxes and higher costs on goods.

2. The idea that reform is actually good for Greece has somehow disappeared from the picture with the coming of Syriza. I remember being in Greece about two years ago as the new, young administration took the reins. I met with government officials, most of them new to their jobs. Many were enthusiastic about their ability to change the system and reform Greece, trying to get rid of corruption and waste. Even the modest reforms they were able to put in place created a huge backlash against what was called “austerity.” (Which is what you call it when your big bad creditors want to get rid of excess government workers. All government workers become vital, especially if they are part of a big union, even if they don’t do anything.)

My visits and conversations with Greeks suggest that the Greek business environment itself is the impediment to growth. The real task, says The Economist correctly, is to “sort out the structural impediments to growth – rampant clientelism, hopeless public administration, comically bad regulations, a lethargic and unreliable justice system, nationalised assets and oligopolies, and inflexible markets for goods and services and labour.”

Let’s go through what that list actually means. Government bureaucracies tend to favor businesses already in place and create unnecessary rules for competition. The bureaucracy is hopelessly bloated, some 50% too large and heavily geared toward patronage and employing family and friends, many of whom do little or no work and collect a check regardless. The rules are such that many of the most important industries have only two actual providers of goods or services, neither of which is incentivized to compete on price. It is extremely difficult to create a new business to compete with these oligopolies.

The justice system is notoriously fickle and subject to pressure and bribes and crony capitalism. Many of the state-owned businesses, like the railroads, are hopelessly mired in losses and inefficiencies. It is actually cheaper (in terms of the system’s costs) to take a taxi across Greece than it is to ride the train, even though the train ticket is cheaper to purchase. The Greek government loses money on every passenger. Ditto for electricity and energy (which many Greeks have determined they don’t need to pay for anyway, since the energy company can’t cut off their power).

3. The IMF, headed by Christine Lagarde, who is no right-wing austerian, is insisting on attacking the bloated bureaucracy that I noted above. The previous government under Samaras had actually managed to lay off a seemingly small 12,000 government workers which were put back into place upon the election of Syriza. The IMF is insisting that be rolled back and further cuts made.

Tsipras offered other types of “reform,” calling them equivalent. What he offered was higher taxes that would make everything more costly, especially Greek tourism. The simple fact is that he cannot keep his coalition together if he caves on employment. Led by the IMF, Europe is demanding actual reform – reforms that this government cannot get through their own parliament. Tsipras is ranting to anyone who will listen that “equivalent measures” have always been accepted. And that is mostly true, except that what he is offering doesn’t deal with the real problem.

Lagarde has evidently had enough of the charade. Lending more money to Greece without real reforms that offer the Greeks a chance to work their way out of the situation is pointless. She is requiring real reforms before she opens up her checkbook. Not an unreasonable request from a lender.

4.  The average age at which Greek workers receive a pension is lower than most other EU countries – 57.8 years old. Then again, this is about the same as Italy (58), is far higher than Slovenia (56.6), and is already poised to go up sharply, with the retirement age to be increased to 67 in the coming decades. (The speed with which this happens is one of the contentious points in the negotiations.) I should note that even France has already moved to change their retirement age over time to 67. Then again, the classic manipulation of the system is that those who hold some 600 “hazardous duty” jobs like hairdressers and writers are allowed to retire at 50. Many people can actually work for three years, establish a baseline, and retire with a full pension at 50 years old. Go figure why the rest of Europe is a little annoyed at having to come up with money to maintain such a system.

The Greeks are offering to slowly raise the retirement age to 67 and to make early retirement less attractive – something that needs to be done, yes, but it still doesn’t attack the structure of the system.

I should point out that the Greek population is older, on average, than the rest of Europe, and getting older. While their pension benefits are generous, their disability payments are among the lowest in Europe, and their spending on family benefits is also lower than average.

Europe is also asking that the Greek significantly raise the VAT, especially on electricity. Greek citizens would see a minimum 10% increase in their power bills, which, ironically, many of them don’t pay anyway.

5.  Alexis Tsipras is in a very tough spot. If he doesn’t offer enough concessions to satisfy the creditors, Greece goes into default. If the concessions he offers are too much for the Greek parliament and voters to accept (they are balking at almost any meaningful concessions), they could (and will) toss Tsipras out on his ear.

There are those that say Greece should simply walk away from the debt. Just don’t pay it, and let Europe go pound sand. It’s not that simple. First, Greek’s banking system is not waiting for the political process to play out. Fearing a cutoff from European Central Bank support and possible capital controls, Greeks are getting ready for the worst. Once again, I am hearing stories about ATM machines running out of cash. My friend, David Kotok of Cumberland Advisors, sent out this note last week:

Greece has set the new high price of “moral hazard.” Emergency liquidity assistance (ELA) from the European Central Bank now is estimated to exceed €100 billion. Every day the balance is rising. It is rising because the entire Greek banking system will collapse without ELA.

The cutting edge of moral hazard is the collapse of a banking system. That is the point in time when citizens no longer trust their institutions or government, take their money out of the bank, and go somewhere else for safety. That is the point of financial collapse.

History shows that decisions in those circumstances are driven by emotions rather than rational calculations. For those seeking safety, it becomes every citizen or business owner for themselves. In Greece, that is now happening as Greece’s debt has reached 180% of its GDP and its population is in the process of a five-year recession and a systemic collapse.

Sidebar: one of the ironies of the situation is that new car sales are increasing, as Greek see new cars as a kind of, sort of, hard asset.

Look at the following graph showing the absolute, utter collapse of Greek deposits in the last few months. This is the ultimate vote of no confidence from the country of Greece to its government. I cannot imagine why anyone would leave more than the absolute minimum in any Greek bank. If, as is quite possible, the Greeks do not agree to what the Europeans are asking (demanding), that ELA will be shut off precipitously. At that point, all assets of any Greek banks that have access to the ELA will be subject to seizure by the European Central Bank. That includes deposits. Note in the chart below that there are only some €130 billion of deposits versus maybe as much as €110 billion of ELA assistance by the time the ELA is shut off. In addition, most banks have huge nonperforming loans that would far outweigh any of their assets. Also, for the record, it is the Greek central bank that guarantees the ELA.

While deposit insurance will be instituted at some point in the future, it is not existent today. Greek depositors could lose 90-100% of their deposits overnight. Think it can’t happen? Ask Cyprus. I’ve written about the devastation that I witnessed when I went there after the bank defaults. People literally lost their life savings. That is what Tsipras is faced with. If he doesn’t do a deal, Greece is devastated far more profoundly than any people actually contemplate today. Yes, Greece can replace all of those deposits with the “new Drachma,” but what will those drachmas be worth? Or perhaps they could simply renege on the ELA (I am not quite sure of the mechanism for this), but then Greece would be without any access to foreign currency whatsoever. Utter nightmare no matter what you do.

Balancing that, Tsipras’ political life and the future of his movement is seriously at risk. As the Financial Times reports, the knives are out for Tsipras from within his own party. You have to remember that 30% of his party are communist and Trotskyites. Not exactly the sort most inclined to compromise. The final member of his coalition actually wants withdrawal from the euro. If they withhold their approval, then it’s over.

(Sidebar: to get the anti-euro party to agree to join the coalition, they had to give its leader the position of minister of defense; thus he gets to control one of the best-funded militaries in Europe. Yes, really that’s right, tiny Greece. The Greeks spend 4.3% of their budget on defense. That is in part because they look across their straits and see a well-armed Turkey. The military is a very powerful bureaucracy in Greece.)

As I write this on Friday afternoon, the headlines come across the screen saying that the Greek government rejects the creditors’ five-month extension proposal, which they say is insufficient, and further claim that they have no mandate to sign a new memorandum.

Tsipras, who was voted into office in January on a pledge to roll back years of austerity in a country battered by recession, must keep his leftist Syriza party as well as his creditors together for a deal to stick. The reason they are rejecting the offer is that Tsipras couldn’t get it through his parliament today.

I think people are forgetting what happened just six months ago. Tsipras took office on an explicit promise to roll back austerity. Now with every concession he makes, he is doingthe exact opposite. Whatever concessions Tsipras offers are meaningless if he can’t convince his party – and Greek voters – that they are the best Greece can do. That’s going to be a tall order.

Right now, most analysts are fixated on repayment mechanics. I think a better question might be whether Tsipras will be around to make those decisions. What happens if Tsipras has to call snap elections sometime in the next few weeks? The IMF, ECB, Germany and everyone else will have little choice but to wait. They have to pretend they respect democracy and give the Greek voters a chance to elect someone more reasonable.

If the election puts some other party in control, they’ll need time to form a government and get up to speed on the situation. That will be another month or two. Keep this in mind when you see headlines about this being Greece’s endgame. Everyone involved would like nothing more than to kick the can down the road again. They may get their chance. (source:

If the Greeks agree to the latest offer before next Tuesday, their concessions will just mean more negotiations over the coming months and even more capital flight and a worse banking situation. Business confidence and growth will continue to diminish, and it will be more difficult for Greece to meet any of the rather unrealistic goals that the Europeans have set in front of them. Which will demand more concessions, etc., and more brinkmanship.

Ultimately, enough Greeks will get fed up and demand a new election and a government that can get something done – not the continued brinksmanship. Both sides are getting to the “shoot the dog and sell the farm” point.

The Greeks want to stay in the euro (memories of the drachma induce nightmares), but their entire system is uncompetitive and will trap them in a slow-growth world. They simply cannot maintain their current benefit and bureaucratic structure without assistance, and Europe is saying we are tired of giving assistance for you to maintain your unrealistic structures. Currently a majority of Greeks don’t want to change (significantly). They want the rest of Europe to continue to lend them money, but the rest of Europe is fed up. The Greeks are going to have to change before something positive can happen to Greece. It will be a wrenching change.

The Lessons Greece Can Teach Us about Europe – Madame Frexit?

Greece can teach us a few things about Europe.

  1. Europe (not unlike the US) will go to great lengths to avoid dealing with a structural problem and actually making changes. That means the crisis that Italy, Spain, and France will turn out to be may be a long time in coming. We are going to be dealing with the “European problem” for quite some time. A few years ago, I thought that we would see a resolution at least by the middle of the last half of this decade. I am now not so sure.
  1. The problem is the current system substantially inhibits growth and encourages mal-investment and creates frustrations on both sides of the political aisle. It is not just the left. There are significant right-wing (from conservative to National Socialists) movements being formed all over Europe. The largest is in France, where Marine Le Pen has moved her father’s party, the National Front Party, from an afterthought and an outlier to a significant force. They are winning elections and are very likely to contest the next presidential election, which could see the center-left and/or center-right coalitions becoming also-rans. Read what Marine Le Pen said this week on Bloomberg TV:

I will be Madame Frexit (meaning leading France out of the Eurozone) if the European Union doesn’t give us back our monetary, legislative, territorial, and budget sovereignty…. I believe that sovereignty is the twin sister of democracy. If there’s no sovereignty, there is no democracy. I’m a Democrat; I will fight it to the end to defend democracy and the will of the people…, [and] if I don’t manage to negotiate with the European Union, something I wish, [then] I will ask the French to leave the European Union. And then you’ll have to call me Madame Frexit…. Greece and France are on the same staircase; they’re not yet on the same floor. We’ll catch up with them, because the logic of the economic model imposed by the European Union always produces the same effects.

Today is the Grexit, tomorrow is the Brexit, and the day after tomorrow it will be the Frexit. At one point or another, every country who is suffering from this currency will only want one thing: escape from it or engage a battle with the European Commission.

Wow. Double wow.

  1. This goes to the heart of the problem. The euro is not the solution to the problems of Europe, as many thought at the beginning. It is the current cause of the problems. You cannot have a monetary union without having a fiscal union, and a fiscal union is incompatible with the notions of sovereignty in nearly every European country, especially the larger ones. There has never been a monetary union that was successful without fiscal union. Never. Not at any point in history. Ever. The euro will not be any different. The only question is the timing. Or whether some compromise can be reached on the overall debt that will allow for a fiscal union.
  1. And this is where I agree with my friend David Zervos. I think this is part and parcel of the German strategy. If Greece had left five years ago when I (and many others) first suggested it, Greece could now be a vibrant, growing country. European banking institutions would have been devastated and governments would have lost hundreds of billions of euros in recapitalizing their banks. Today Greece can leave, and it will be an annoyance, but Europe and the rest of the world will survive quite nicely.

Greece, on the other hand, will be devastated. If the ECB actually seizes those deposits, which it has the right to do, Greece will be impoverished for a generation. There will be no way for the country to meet its pension or government budgets. Unemployment will rise even more, and GDP will collapse.

This is precisely the lesson that Germany and the rest of the North want to deliver to the rest of Europe.

Frau Merkel has been about as generous as she can be in her offers without completely losing the German public, who are quite fed up with the Greeks. They are ready to shoot the dog and sell the farm.

  1. There are no winners in this standoff. It is actually quite sad, but the current impasse is a consequence of trying to secure a one-size-fits-all straitjacket monetary policy onto a very disparate group of countries and economies. Large developed economies can last longer and go further into what is seemingly an intractable situation than smaller economies can; but they, too, eventually reach an impasse.

Think Japan. Japan ran up a monster debt and has now reached the situation where it can no longer control interest rates without regular monetization of that debt. Monetization will decrease the value of their currency, but that is a consequence that they are prepared to live with. The point is that they have the option of monetizing the debt and decreasing the value of their currency. Greece and the rest of Europe don’t. Much of peripheral Europe and France will come to the point where they’re going to need that ability to monetize. Not this week or next year or even the year after that, but it will come about. And while I think the politics of Marine Le Pen are problematic in the extreme, she quite thoroughly gets the nature of the problem.

Unless something happens, something that I don’t see today, that frustration with the euro is going to continue to grow in one country after another. We are going to end up with multiple European currencies again in my lifetime. It will not be a disaster. It will simply be something for the computer to determine what currency you will pay in when you present them your credit card or send a wire in another country. The actual friction cost of exchanging currencies will come down. The values of those currencies will meander all over the place based on all sorts of factors but ultimately on government monetary policy.

Which is as it should be.

Tsipras is punting to the voters. If they say compromise, then he can tell his government to vote with the people. If the people vote the referendum down, then they leave the euro. Or that will be the effect. The situation is moving too fast now for a controllable outcome.

In Defense of Alexander Hamilton

Just a quick note on the plan to remove Alexander Hamilton from our currency. I am despondent, if not outraged, over this decision. Hamilton was arguably one of the most important of our founding fathers. He wrote almost two thirds of The Federalist Papers, which were the basis for our Constitution. He was instrumental in the achievement George Washington’s most important policies and in establishing a sound system for our government. He would have been president if he had not been killed in a duel. (I was in a museum last year here in New York that is part of the JP Morgan Chase collection and that has the actual pistols used in the duel.)

To choose to remove Jackson and leave Grant (who at one time owned slaves and who ran one of the most corrupt administrations in American history) or the populist Jackson (who was an avowed slave owner) is simply staggering. Granted, Hamilton is not a favorite among the liberal left, but to now denigrate his importance in favor of the other gentlemen mentioned above is an affront. Not that they were not also great Americans, but they simply weren’t in Hamilton’s league. This is the crassest of politics. I should note that even Ben Bernanke agrees with me, as well as many others who would not normally align with my views. I don’t know if this move can be changed, but it should be.

New York, Denver, Maine, and Boston

I am in New York for the next two weeks. We have rented an apartment in NoHo through AirBnB. It is a nice funky neighborhood, geared to the younger set, with lots of fun things to do in the evening. As it happens, my good friend Nouriel Roubini lives in the penthouse of the building, and last night he invited us to one of his famous “social events,” which featured heaps of fashionable young people. We will get together later next week to break bread and compare notes in a less hectic format. I met some very interesting Internet entrepreneurs whom I will probably follow up with as well.

July 11th I will be in Denver speaking at an industry conference for my partners at Altegris Investments. Then I will be back in New York for a day before my youngest son Trey and I once again journey to Grand Lake Stream, Maine, for the annual economists’ fishing weekend hosted by David Kotok. After that, another trip, to Whistler, British Columbia, is being discussed. And then I will head back to the Northeast, where I will spend a week in the Boston area with friends and enjoy a little R&R.

A few nights ago I was invited to a small gathering that began at The Explorers Club here in New York. One of the longtime members, Jonathan Conrad, graciously spent an hour and a half giving us a private tour of the club and its collections. If you ever get a chance, this is something you absolutely must do. The feel of history, of humanity pushing its boundaries, the sense of wonder over scientific accomplishment, permeate the collection.

Afterwards, we gathered for a dinner in a private garden on the Upper East Side, where (surprise, surprise) the conversation turned to politics of the coming presidential elections. It turns out I was invited not just for social reasons. One of the gentlemen began to press me about what it would take for a businessman to run for president of the United States. Not sometime in the future but in this cycle. It seems that he knew of someone who wanted to run. After a few more serious questions, I actually ticked off about eight or nine things, beginning with massive amounts of money. If you don’t have any name ID today, it is going to cost a great deal to buy it in Iowa and New Hampshire. Not to mention you’re already late getting a ground game, with little things like a policies platform and systems and networks of people. I was not exactly encouraging.

Later, back in the apartment, a few of us sat down, and he said he was the man planning to run. And he was ready to spend a massive amount of money to do it. (He threw out a rather astonishing number. I had no idea that anyone would be prepared to spend that amount of money, and no clue that he had that kind of money up until that point.) We did actually agree on a number of policy points.

Does he have a chance? In most years I would say that his chances would be those of (as my dad was wont to say) a snowball in hell. But this year? The race is so wide open that I can actually imagine all sorts of circumstances developing. We could actually come to the Republican convention next summer without a clear nominee. That would make it the first meaningful convention since 1976. (I have been a delegate, and it’s mostly rah-rah and fun.) After the third roll call vote, when I think all delegates will be released (at least that was the rule in the past), it could get very interesting and go in any number of directions.

We could have any number of nominees with low double-digit delegate counts and nobody with an overwhelming minority, much less majority. Could somebody come from the outside with adequate financing and present a case for a different direction? Possibly. If nothing else, that candidacy might inject a few ideas into the conversation. And this election should be all about ideas and what we need to do to organize as we move into a transformational 21st century.

Have a great week as we get ready to celebrate July 4. It’s a good time to contemplate what we would like our country look like, beginning in 2017. Find a friend or two and talk it over.

Your sad for his Greek friends analyst,

John Mauldin

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

[Pictures of farm, and dog, via Pixabay]

Europe’s Controlled Demolition

Courtesy of The Automatic Earth.

Unknown Soldier group, Federal Army 1865

I have plenty to say on the topic of this essay. But the most important thing I think is that I know the EU is blowing up itself by trying to exert far too much influence on the very member nations that made its existence possible. Brussels is a blind city. To see it blowing itself to smithereens makes me very happy.

The flipside is that it will take a lot of pain, and probably even the very wars the EU was originally founded to prevent, to figuratively burn it to the ground. But that, if you’ll alow me, is for another day:

Loads of good words published today on EC President Jean-Claude Juncker and the Greeks, and the crop gets creamier, there’s fake Nobles winners and all joining in, but this is not a new issue, guys, and the lot of you are quite late to the game.

Moreover, y’all Krugmans and Stiglitzes fully missed something that happened while Juncker was ‘speaking’ yesterday: Jean-Claude changed the entire game in one brilliant move. The Greeks I was with, including in Syntagma Square, didn’t notice it either.

What changed is that after Juncker’s speech, the discussion is no longer about data or numbers or facts anymore (but who understands that?), because he never mentioned them.

It’s instead now about fear and fight and flight and various other base instincts, you name them. And that’s not a coincidence. The reason he, and the EU as a whole, resort to this ‘message’ (and no, these guys’ spin teams are not stupid) is to a substantial extent that it’s simply all they have left.

Whatever they had to present in the way of numbers, data etc. has already been rejected by the Greek government 100 times. Since their data have since the start been diametrically opposed to what Syriza stands for and was elected on, which they knew, that should be no surprise, and indeed never was for the Troika.

If you saw Juncker yesterday, and it doesn’t even matter whether he was inebriated or not (does he perhaps wake up drunk, like Yeltsin?), accusing Tsipras of lying -for which he offered no proof- while telling big fat obvious lies himself (“we never asked for pension cuts”) -for which ample proof to the contrary is available-, y’all should realize that a bit more scrutiny of the man is obviously warranted.

I’ve written this story a hundred different times before already: the EU is an organization led by people with, let’s define this subtly and carefully, sociopathic traits (Antisocial Personality Disorder), simply because the EU structure self-selects for such people. As do all other supra-national organizations, and quite a few national ones too, but let’s stick with Brussels for now.

That such people are selected is due in great part to the less than transparent democratic acts and procedures in Brussels. Which allow for ever larger numbers of the same ‘sort’ of people to accumulate. No coincidence there either.

Many of you will say that you can’t say that kind of thing, you can’t call Juncker a sociopath. But the fact is, I can. Who can not say it are Tsipras and Varoufakis, not in public. But I wouldn’t even want to guess at the number of times they’ve done so in private. And it’s high time we lift the veil on this. We are being governed by sociopaths, and that’s by no means just a European thing.

And besides, in general it’s not something that we should refrain from talking about. The reason we do is, I bet you, is because we don’t know how to recognize the traits and characteristics. But in fact, that’s not hard. Just plucked this off the interwebs in 2 seconds flat:

Profile of the Sociopath
• Glibness and Superficial Charm.
• Manipulative and Conning.
• Never recognize rights of others, see their self-serving behaviors as permissible. …
• Grandiose Sense of Self. …
• Pathological Lying. …
• Lack of Remorse, Shame or Guilt. …
• Shallow Emotions. …
• Incapacity for Love, Compassion
• Need for Stimulation.

Anyone want to tell me that does not describe Juncker? Still, the big problem with sociopaths -and do note how I subtly steer away from the term psychopath- is that you can not have an effective negotiation with them. Because once you’ve reached a conclusion -which’ll be hard fought and take forever-, they’ll just renege on it and come back with additional conditions. And then claim you are the one who did that.

Check Juncker. Check the 5 month history of Greece negotiations with the Troika. And note that that’s exactly what they accuse Syriza of. They claim Tsipras suffers from the very disorder they do. That too is typical. It’s a pattern, an MO, it’s how these minds function.

The main one for me is the lack on empathy, compassion. That got 1000s killed in Ukraine, and in the Mediterranean, and now in Greece. All deathly dramas Brussels could have prevented, and chose not to. In Brussels and Berlin, it’s more important that countries toe the line than that their citizens actually survive.

Europe has moved, at a very rapid clip, from a union of 28 different sovereign states, each with their own governments and political views and directions, to one where a top heavy bureaucratic structure, hand-puppeted on by a mere handful member states and systemic banks, dictate what each member state, both its politicians and its citizens, may do or not do. Or think. Electing a left wing government, for instance, equals asking for trouble.

There is no democracy left in Europe, people have no direct say anymore, there’s just a two-pronged dictatorship: there’s Merkel and Hollande, who in the Greek crisis have proven themselves to be mere tools to vested interests, and I’m being extremely kind now, and there’s Juncker and Tusk and Dieselflower, who are really just inconsequential sociopathic wankers that could at any moment be replaced by other hammers and screwdrivers.

In that light, it can only be a fitting irony that it was Juncker in his speech yesterday who said:

“Playing off one democracy against 18 others is not an attitude which is fitting for the great Greek nation.”.

He could have easily followed up with:

Because that’s what we in Brussels have a monopoly on.”

The EU is a club led by people with mental disorders, that panders to special interests. It’s not a union of sovereign nations that hold meetings on how to find common ground. That common ground is now supposedly a given, and no matter what any nation thinks about that matters one bit anymore. Unless it’s Germany or France, and even then. The EU has superseded the nations that formed it. And that can never have been the idea of the people of these nations. As I started writing a few hours earlier today:

It won’t be a surprise anymore that I am not a fan of the European Union. That is to say, I like the idea but not the execution of it, and certainly not the clowns who execute it. However, what happened yesterday is something that even I couldn’t foresee. The Troika volunteered to self-immolate, though the three-headed beast is undoubtedly too full of hubris to understand what it did. Good.

Still, I’m looking at this, thinking: really guys? You really think deliberately sparking chaos in an EU member state on the eve of a democratic referendum is something that will help your case in the long term? Have you thought this through at all? I’m guessing the overriding notion is that threatening and bullying as a model has worked for Brussels so far; but I’m also guessing that the approach has its limits.

Like with many things, there may well be a gaping hole between what can be considered legally justified and what morally justified. But be that as it may, you can’t rule over 28 different sovereign nations with no morals whatsoever. That’s coming back to bite you in the face.

For the ECB to freeze ELA for Greek banks is the biggest blunder it has ever made, and arguably the biggest one it is capable of making in its present mandate. For one thing, it’s a purely political move, and the ECB has no place in politics, or politics inside the ECB.

That the Eurogroup added to the insult a refusal to grant Greece a one-week extension so preparations for the referendum could be executed in peace, tells us loud and clear what it thinks about democracy: it’s a mere afterthought.

Bullying sovereign nations gets old, fast. What you guys are at the moment doing to Greece, you won’t be able to repeat against Italy or Spain. They’ll have you for breakfast.

The EU, which is made up of 28 democratic and sovereign nations, is being run like some absolute kingdom, ostensibly led by a 24/7 drunk. How long do you think that can last?

The very minimum the ECB should have done thi week is to issue an explicit guarantee for all Greek bank deposits up to and including the July 5th referendum. To make sure there would be no bank runs and line ups at ATMs leading up to the vote, which merely represents the purest form of democracy. That is hasn’t speaks volumes. And it can’t possibly have been a monetary deliberation; what happens now is far more costly for the bank, and for European taxpayers, than such a guarantee.

I love that the EU does this, and the Troika with it, because they ensure their own demise. What I don’t like is the people who will fall victim in the interim, starting with the ones here in Greece. If this is the best the EU can do on a human scale, it has no reason to exist. And everyone better get out while they can.

Europe can form a great union, peaceful and prosperous and happy. It has many many wise and smart people who can make that work. But those people are not in Brusssels, where the decisions are being taken. And there’s a reason for that.

Fun, Fun, Fun

Well no one is having fun anymore. Here’s Paul Price’s take on the latest Greek drama.

Fun, Fun, Fun … ‘til her daddy takes the T-bird away

By Paul Price. Edited by Ilene.

The popular press has made Germany into the villain of the current Greek drama (and popular bloggers point out the role of Goldman Sachs.) Why, they ask, should Berlin be dictating how the Greek government runs its own country? 

Understanding the reasoning for that is quite simple if you think in terms of the Beach Boys’ old hit song, Fun, Fun, Fun.

Fun, Fun, Fun lyrics

Greece is the wayward “daughter.” Substitute average retirement at 57.8 years old and cushy government pensions for all with the “hamburger stand.” Think of Germany as the “dad” who recently wised up. Understand that Greece “shouldn’t have lied” all along about its financial status.

Dad was funding the sweet life for his partying daughter while supplying the goodies and footing the bills. She told him the cash was all going towards her betterment and growth when, really, the money was simply being used to have a great time.

No wonder her old man got pissed off.

What would you do in that situation?

You’d probably take away the keys, ground her and cancel her credit cards.

When your kids get jobs and become financially independent they’ll have every right to tell you to “f*ck off.” Until then, while they’re still on your dime, it is only natural to expect they will live under your house rules.

Greece’s proposed referendum expects to ask the kids whether they want to keep partying or if they’d prefer to stay home, study and hunker down.

Which way do you think the vote will go?

Is the responsible parent really the “bad guy” in this story?

Okay, okay. It’s a little more complicated. There’s enough blame to go around and many complicit players. (Like with the subprime mortgage crisis in the US.)

Germany and the rest of Europe would have been better off writing down Greece’s debt in full, back in 2010-2011, rather than lending the country more money to keep up the facade that Greece could avoid default. In effect, the troika (the European commission, the European Central Bank and the IMF) paid off some bondholders and screwed the citizens of the EU, who must now share in the bad debt that the IMF and ECB bought from Greece during the last bailout.

And as the troika lent more money to Greece, the country dug itself deeper into debt. European citizens are now on the hook for much larger write-offs on Greece’s bad debt.

So it’s natural to ask: Where did the previous Greek bailout money go? It didn’t go towards assisting Greece in becoming an economically stronger, more solvent debtor. No. According to The Guardian,

Only a small fraction of the €240bn (£170bn) total bailout money Greece received in 2010 and 2012 found its way into the government’s coffers to soften the blow of the 2008 financial crash and fund reform programmes.

Most of the money went to the banks that lent Greece funds before the crash.

Unlike most of Europe, which ran up large budget deficits to protect pensioners and welfare recipients, Athens was then forced to dramatically reduce its deficit by squeezing pensions and cutting the minimum wage.

Less than 10% of the bailout money was left to be used by the government for reforming its economy and safeguarding weaker members of society.

Greek government debt is still about €320bn, 78% of it owed to the troika. As the Jubilee Debt Campaign says: “The bailouts have been for the European financial sector, while passing the debt from being owed to the private sector to the public sector.”

It appears that game is now coming to an end.

Prime minister Alexis Tsipras’ act of putting Europe’s proposal to a referendum takes the question directly to the people. They are faced with two no-win results.  If Greece votes no, it stands a greater chance of being forced out of the eurozone; it will need to resurrect its own currency and will likely suffer devaluation and inflation. Like the daughter waking up in the street after daddy takes away the house, the car, the spending money, the cell phone, she will have to impose her own austerity measures all at once.

If Greece votes yes, its people will remain debt slaves to creditors trying to impose austerity policies that no one will agree with. Greece will remain buried under debt it cannot repay. It will have to adopt austerity measures to pay back the debt, or fail to and hope it can get further bailouts in the future.

Bloomberg’s flowchart below shows the possible outcomes of the Greek Referendum.

Greece Rejects 25th Hour Request to Change Course; Tsipras Asks Eurozone for Third Bailout; Rajoy Seeks to Save His Own Ass

Courtesy of Mish.

Coordinated Meddling

Eurozone leaders are pouring it on thick again today with warning after warning. Yesterday, German chancellor Angela Merkel, French president Francois Hollande, and European Commission president Jean-Claude Juncker were all I in on the Coordinated Meddling hoping to convince Greece citizens to accept the current offer.

Rajoy Seeks to Save His Own Ass

Today Spain’s prime minister, Mariano Rajoy, joined the hit parade. Like yesterday’s trio, he issued another blunt warning to Greek voters that a No vote will force the country to leave the eurozone.

Rajoy also argued that it would be “good for Greece” if Mr Tsipras, who is backing a No vote, was defeated in the Greek plebiscite and forced out of office.

Recall that Tsipras is good friends with Podemos leader Pablo Iglesias. Like Tsipras, Iglesias wants to halt Eurozone austerity rules. Moreover, Iglesias has threatened to take Spain out of the Eurozone.

I suggest Rajoy is worried about his own ass in Spanish national elections later this year as Podemos has surged in the polls and is within striking distance of winning the election.

Greece Rejects 25th Hour to Change Course

In spite of the pleas, Greece Rejects Creditor Pleas to Change Course.

Greece’s government entered its final day in an EU bailout defiantly rejecting eleventh-hour pleas from its eurozone creditors to change course. It is now on a path that will lead to default on a €1.6bn loan repayment to the International Monetary Fund and being without a financial safety net for the first time in five years.

The IMF default, confirmed by Yanis Varoufakis, the finance minister, on Tuesday, will make Greece the first developed country in history to go into “arrears” with the fund. But it is not expected to have a direct impact on the country’s status in the eurozone. Credit rating agencies and EU bailout lenders have signalled they will not consider non-payment a “credit event” that triggers other defaults — a move that would bankrupt Athens immediately.

“The exit of Greece from the euro area, which used to be a theoretical question, can unfortunately no longer be ruled out,” Benoit Coeuré, the ECB board member responsible for Greek issues, said in an interview published on Tuesday in the French financial daily Les Echos….

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Goldman Sachs Doesn’t Have Clean Hands in Greece Crisis

Courtesy of Pam Martens.

Tens of Thousands Protest in Front of the Greek Parliament Against Austerity Plan for Greece, Evening of June 29, 2015

Tens of Thousands Protest in Front of the Greek Parliament Against Austerity Plan for Greece, Evening of June 29, 2015

Are Goldman Sachs executives Lloyd Blankfein, Gary Cohn and Addy Loudiadis losing any sleep over elderly pensioners waiting outside shuttered banks in Greece, desperately trying to obtain their pension checks to pay their rent and buy food? Are these Goldman honchos feeling a small pang of conscience over the humiliation by creditors of this once proud country? Perhaps Blankfein, who famously espoused that he’s “doing God’s work” might shed a tear or two for the small child clinging to her elderly Grandmother’s hand as she searches in Athens for an ATM that will give her $66 from her bank account – the maximum allowed per day under the newly imposed capital controls.

According to investigative reports that appeared in Der Spiegel, the New York Times, BBC, and Bloomberg News from 2010 through 2012, Blankfein, now Goldman Sachs CEO, Cohn, now President and COO, and Loudiadis, a Managing Director, all played a role in structuring complex derivative deals with Greece which accomplished two things: they allowed Greece to hide the true extent of its debt and they ended up almost doubling the amount of debt Greece owed under the dubious derivative deals.

A February 2012 BBC documentary on the Goldman Sachs deal provides a layman’s view of the dirty underbelly of the deal, calling it “a toxic import” from America that is “hastening” the downfall of Greece.

On March 5, 2012, Nick Dunbar, who appears in the BBC documentary on the Goldman Sachs deal and author of The Devil’s Derivatives, penned a revealing article for Bloomberg News with Elisa Martinuzzi. The writers describe the Goldman Sachs deal with Greece as follows:

“On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said…

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Obama Urges Congress to Pass Law Letting Puerto Rico Declare Bankruptcy; Great Idea, Let Illinois Do the Same

Courtesy of Mish.

Puerto Rico is bankrupt. The key problem is that while municipalities can declare bankruptcy, states and territories cannot. 

President Obama recognizes the problem. He says No Federal Bailout for Puerto Rico. Instead he urges Congress to pass a bill allowing Puerto Rico to declare bankruptcy.

The White House threw cold water Monday on the notion of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law so the island can declare bankruptcy.

On the heels of a dismal economic report, Puerto Rico’s governor has warned that the commonwealth can’t pay its $72 billion public debt, delivering a serious blow to Puerto Rico’s recession-addled economy. But White House spokesman Josh Earnest said the federal government would provide financial expertise and access to existing resources — but not a bailout.

The Obama administration declined to offer Detroit a bailout, and the city declared bankruptcy under Chapter 9 of the Bankruptcy Code in 2013.

As a U.S. territory, Puerto Rico can’t file for bankruptcy under that chapter, which is limited to municipalities such as Detroit. But Puerto Rican Gov. Alejandro Garcia Padilla has said he’s considering asking Congress to change the law so that Puerto Rico’s public agencies could declare bankruptcy under Chapter 9 — an idea that seemed to gain traction at the White House.

Earnest said the White House was encouraging Congress to explore possibilities to allow Puerto Rico to make use of Chapter 9, which would allow the commonwealth to restructure its debt amid a nearly decade-long economic slump. Garcia is seeking to defer debt payments while Puerto Rico negotiates with its creditors.

Idea Long Overdue

I welcome this action. But why limit the bill to Puerto Rico?

I say open this up to states like Illinois that will be doomed to the same fate eventually.

Mike “Mish” Shedlock

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Mr. “Lie When It’s Serious” Juncker, Lectures Greece On the Truth; Coordinated Meddling

Courtesy of Mish.

Irony of the Day

In a bitter 40 minute lecture, European Commission president, Jean-Claude Juncker, lectures Greece on the “truth”.

Other than being a pompous buffoon, Jean-Claude Juncker is most famous for his statement “When it becomes serious, you have to lie“.

I believe it’s safe to say that things are serious.

Coordinated Meddling

Please consider Eurozone Leaders Take Coordinated Gamble with Response to Athens

By publicly insisting that Greece’s referendum on Sunday is a choice about the country’s future in the eurozone, Europe’s leaders are taking a high-risk political gamble that their intervention will win over Greek voters rather than alienate them.

The strategy was carefully chosen. According to two eurozone officials, the EU’s three most high-profile leaders — Angela Merkel, the German chancellor; François Hollande, the French president; and Jean-Claude Juncker, the European Commission president — co-ordinated how they would respond to the Greek government’s call for a No vote during a series of phone calls at the weekend.

Greek voters have come to resent the EU’s interference in their domestic politics. Eurozone leaders were complicit in the ousting of George Papandreou as prime minister in 2011 and they actively campaigned against the far-left Syriza party in parliamentary elections back in 2012. But eurozone leaders believed they could not let the Greek government’s campaign for a No go unanswered, officials said.

What do the Greek people know about all this? The reason why I am addressing . . . the Greek people is they have to know the truth,” Mr Juncker said in an occasionally bitter 40-minute address. “I think that the Greek government knows all these elements and it would be advisable to tell the truth to the Greek people instead of simplifying its own message to a ‘No’.”

It is a strategy that could still go awry. Mr Juncker’s bill of particulars included some evasions. His argument that creditors were not proposing pension cuts, for instance, is true only according to the narrowest possible definition of a pension cut. Greek officials also argue his claim there was never an “ultimatum” is a rewriting of recent history. Several eurozone officials at the time described the offer made to Athens on Thursday in such terms.

Believable Juncker

The only significant statement Juncker ever made that I accept as factual is his own admission that he is a liar….

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Good On You, Alexis Tsipras (Part 1)

Courtesy of David Stockman of Contra Corner

Late Friday night a solid blow was struck for sound money, free markets and limited government by a most unlikely force. Namely, the hard core statist and crypto-Marxist prime minister of Greece, Alexis Tsipras. He has now set in motion a cascade of disruption that will shake the corrupt status quo to its very foundations.

And just in the nick of time, too. After 15 years of rampant money printing, falsification of financial market prices and usurpation of democratic rule, his antagonists—–the ECB, the EU superstate and the IMF—-have become a terminal threat to the very survival of the kind of liberal society of which these values are part and parcel.

In fact, the Keynesian central banking and the Brussels and IMF style bailout regime—which has become nearly universal—-eventually fosters a form of soft-core economic totalitarianism. That’s because the former first destroys honest financial markets by falsifying the price of debt. So doing, Keynesian central bankers enable governments to issue far more debt than their taxpayers and national economies can shoulder; and, at the same time, force investors and savers to desperately chase yield in a marketplace where the so-called risk free interest rate has been pegged at ridiculously low levels.

That means, in turn, that banks, bond funds and fast money traders alike take on increasing levels of unacknowledged and uncompensated risk, and that the natural checks and balances of honest financial markets are stymied and disabled. Short sellers are soon destroyed because the purpose of Keynesian central banking is to drive the price of securities to artificially high and unnatural levels. At the same time, hedge fund gamblers are able to engage in highly leveraged carry trades based on state subsidized (free) overnight money, and to purchase downside market risk insurance (“puts”) for a pittance.

Eventually bond and stock “markets” become central bank enabled casinos—-riven with mispriced securities, dangerous carry trades, massive unearned windfall profits and endemic instability. When an unexpected shock or “black swan” event threatens to shatter confidence and trigger a sell-off of these drastically over-priced securities, the bailout state swings into action indiscriminately propping up the gamblers.

That’s what the Fed and TARP did in behalf of Morgan Stanley and Goldman back in September 2008. And it’s what the troika did in behalf of the French, German, Dutch, Italian and other European banks, which were stuffed with unpayable Greek and PIIGS debt, beginning in 2010.

Needless to say, repeated and predictable bailouts create enormous moral hazard and extirpate all remnants of financial discipline in financial markets and legislative chambers alike. Since 2010, the Greeks have done little more than pretend to restructure their state finances and private economy, and the Italians, Portuguese, Spanish and Irish have done virtually nothing at all. The modest uptick in the reported GDP of the latter two hopeless debt serfs are just unsustainable rounding errors—–flattered by the phony speculative boom in their debt securities that was temporarily fueled by Draghi’s money printing ukase that is presently in drastic retreat.

So this Monday morning push has come to shove; Angela Merkel and her posse of politicians and policy apparatchiks were not able to kick the can one more time after all.

Instead, the troika’s authoritarian bailout regime has stimulated political revolt throughout the continent. Tsipras’ defiance is only the leading indicator and initial actualization–the match that is lighting the fire of revolt..

But what it means is that there is now doubt, confusion and fear in the gambling halls. The punters who have grown rich on the one-way trades enabled by the money printing central banks and their fiscal bailout adjutants are being suddenly struck by the realization that the game might not be rigged after all.

So let the price discovery begin. In the days ahead, we will catalogue the desperate efforts of the regime to reassert its authority and control and to stabilize the suddenly turbulent casino.

In riding the central bank bubbles to unconscionable riches the big axes in the casino have falsely claimed to be doing “god's work”.

As they are now being forced to liquidate these inflated assets, they actually are.

Last fall one of the most detestable members of the regime, Jean-Claude Juncker, arrogantly issued the following boast.

“I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.”

This morning that smug proclamation is in complete tatters. Good on you, Alexis Tsipras.

Technically Speaking – Bears Are Winning

Courtesy of Lance Roberts via STA Wealth Management

Over the last several months, I have been discussing the "consolidation" of the markets and the various support and resistance levels that have contained generally contained the markets since the beginning of this year. For example,

"While the rally this week was nice, it failed to break back above resistance which it needs to do to reestablish the bullish trend. Currently, the markets have held the long-term bullish trend line that has remained intact since December of 2012 with two successful tests over the past month. That is bullish for now and indicates buyers are still in the market. However, there is a BATTLE being waged between the bulls and the bears as prices have continued to deteriorate from early-year highs. That battle should be resolved soon, and for now the bears have the advantage."


"Importantly, notice that the previous OVERSOLD condition in the lower panel is now back to OVERBOUGHT. This suggests that the current rally is likely near completion. This does not mean that the markets can't rally to new highs, they certainly could. However, the risk, for the moment is to the downside. As stated above, the BULLISH TREND remains intact which keeps portfolios allocated towards equities."

With that analysis, we can now update that chart to see how things have developed over the last week.


As you can see, the market is once again retesting that long-running 150-day moving average that has defined the "bullish trend" of the market since December of 2012. Of course, that month marked then Fed Chairman Ben Bernanke's announcement of the launch of QE3.

The Current Scorecard

This brings me to the ongoing conversation that I have been having with one of my favorite reporters over the last several weeks.

Q: Have we reached the trigger for a pullback here in the US? How concerned should investors be about the fallout from Greece?

The following answer refers to the updated chart above.

  • The market held its primary bullish support trend line after breaking below the price consolidation that we have been discussing over the last several weeks. Bears score +1
  • However, the market did hold its long-term uptrend at the 150-dma which has acted as important support for the market since late 2012. Bulls score +1
  • The market then rallied and failed at the previous bullish consolidation support trend and turned lower last week. Bears score +1
  • As shown in the lower part of the chart – the rally from the OVERSOLD condition at the 150-dma moved back into an OVER BOUGHT condition WITHOUT the market making a new high. Bears score +1
  • Relative Strength (RSI) has been on the decline since last year as momentum has turned decidedly negative. This has been a non-confirmation of the bullish advance that historically has not ended positively. Bears score +1

At the open this morning, the market has once again test the 150-dma. If the market fails to hold that level by the end of the day, it is quite possible, given that the market is not OVERSOLD as of yet, that there could be further deterioration this week.

HOWEVER, as I have discussed many times in the past, for INVESTORS it is really only important where the markets close at the END OF THE WEEK. This is because for longer term investors it is the overall TREND of the market that we are ultimately concerned with.

Despite short-term volatility, which can be quite unnerving at times, portfolios must be allocated towards equity risk exposure as long as the overall market is still trending positively. When that positively biased trend changes to the negative, it is then that investors will want to become much more conservatively allocated. This is NOT MARKET TIMING. This is portfolio RISK MANAGEMENT. There is a massive difference between the two.

Therefore, even if the market breaks below 2080 today, as long as it closes above that level by the end of the week, then nothing has changed. A close BELOW that level will suggest that we are beginning a more significant correction toward the January lows of 2000. 

Q. According to the "score card," the bears are winning. So, shouldn't investors be doing something now?


If this were a soccer game, we could most likely predict the winner. So, technically, yes, I could make the case for gathering up your belongings and leaving the stadium early to beat the traffic.

However, if you do leave the game early, i.e. SELL, you might be disappointed to find out on your ride home that the Bulls rallied back and scored 5 points in the last few minutes. It is not likely, but it is possible.

This is why we wait for the evidence to be presented before acting. The job of any investor is to make investment into one or more assets, and then manage the "risk" of owning that asset to create either:

  • a "positive outcome" by garnering a "realized gain," or;
  • to minimize the impact of a "negative outcome" by limiting "realized losses."

Currently, the technical deterioration in momentum and relative strength are suggesting that the market dynamics are far weaker than what the current price of the index suggests. As noted by GaveKal Research today:

"A correction is generally defined as any stock that is at least 10% off a recent high. If we look at a price performance over the past 200-days, 42% of all the stocks in the MSCI World Index are in a correction. Higher than you might have thought, right?"


There is sufficient cause for concern currently as the underlying weakness in the overall market is becoming much more pervasive. However, "guessing" at the outcome may leave you wishing you had stayed to see the "end of the game."

Is Greece The Thing?

Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning:

"I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble."

That is exactly the right advice for both traders and longer term investors. For longer term investors, I have always suggested using weekly and monthly charts to more clearly define the current trend of the market. However, this also means these charts are only updated at the end of each week or month, so what happens TODAY is far less important that where the market closes at the end of the relevant period. The final chart below is the weekly chart of the market.


There are several important points in the chart above. First, since the implementation of QE3 the bulls have clearly been in charge maintaining the bullish trend line since the June, 2012 lows. Secondly, there have been numerous sell-offs along the way, none of which have resulted in the need to grossly reduce equity exposure from fully allocated levels as of yet. "Yet" being the "key word."

Finally, the bullish moving averages, which have acted as primary support along this entire advance currently remain intact. This suggests that currently, outside of normal portfolio management processes, portfolios should be maintained near target equity allocation levels.

However, it is worth noting that the longer term MACD sell signal is becoming more pronounced which suggests that the "bull case" is weakening markedly. Where this chart finishes the week will provide a clearer picture of whether it is time to "leave the stadium" or "hang around for a terrific comeback."

One thing is certain: things are about to become much more interesting.

Greece, Democracy, And Magical Thinking

Courtesy of Charles Hugh-Smith of OfTwoMind

What is representative democracy but organized bribery on a mass scale? Politicians seeking control of the spigots of state wealth and power promise endless swag to voters. Those who promise the most swag and do so with the most inspirational Soaring Rhetoric ™ win elections and gain control of the spigots of state wealth and power.

What are promises of endless swag but lies cloaked in magical thinking? The magical thinking has many manifestations: the aptly named Laffer Curve, used to justify cutting taxes to the already-wealthy; entry into the Eurozone, a magical land of unicorns and endless prosperity, based not on hard work and the creation of value, but on membership alone; the blowing of serial asset bubbles in real estate and stocks (works equally well in Asia and the West), and various iterations of Manifest Destiny: it's our right to grow rich, preferably on the labor and resources of others.

Representative democracy offers choices with no consequences: no matter which politico and party is elected, the promises of endless swag remain unchanged.

In contrast, direct democracy offers choices with consequences: voters make a choice of policies that, whether intended or not, have consequences.

This forces voters to actually ponder consequences rather than indulge politico promises of endless swag in return for supporting a corrupt, predatory, parasitic status quo that benefits the few at the expense of the many.

Even direct democracy is easily corrupted by magical thinking. The actual consequences may be ignored in favor of magical-thinking dreams of only good consequences and no trade-offs or sacrifices, all powered by the magic of debt.

Debt is the ultimate political aphrodisiac, for it enables an orgy of consumption and a bacchanalia of spending on the backs of children and the yet unborn who don't vote.

The most potent of all political fantasies is that growth will solve every problem, i.e. we can grow our way out of corruption, artifice, lies, kleptocracy and most importantly, out of debt.

And so now, at long last, the Greek people have a direct say on whether they prefer magical thinking (i.e. that a debt-based, Elite-ruled kleptocracy can produce endless swag for all as long as the kleptocracy is within the European Union) or the real world of trade-offs, opportunity costs, sacrifices and broad-based growth that must be earned by producing more than is spent and investing the surplus in productive assets rather than being squandered on interest payments for past consumption.

Direct democracy is anathema to politicos, Elites, state bureaucracies, vested interests and kleptocracies, because the people might refuse to be bribed by magical thinking promises.

Elected representatives and the public can both be bribed or threatened into compliance, but when the promises of endless debt-based swag for all fade, it's the people who bear the consequences, not the politicos.

There are no guarantees that the people will choose more wisely than their representatives. The masses can choose magical thinking over reality, too. But with direct democracy, at least the people have an opportunity to choose wisely.

Regardless of what the Greek people choose, at least the choice will be theirs, along with the consequences.

Picture via Pixabay. 

Greek Crisis: What’s Next After Capital Controls?

Courtesy of EconMatters

Greece Imposed Emergency Capital Control

Greece is still staring down the barrel of a $1.8-billion loan payment to the IMF (supposedly due on Tuesday). The latest development is that Greece imposed emergency capital controls and closed banks starting Monday June 29 until after a July 5 referendum on a deal with European creditors. The real cash has already fled as people have moved most capital (that could be moved) out of Greece, which could be partly why things in Greece have so far remained in an orderly fashion.

Global Investors Run for Safety

Media reported long lines at ATMs (ATM withdrawals have been limited to 60 euros per card), while global markets shuddered on Monday under the fear of a contagion effect from a Greek default. On top of the Greek Drama, investors are also troubled by the bubble trouble in the Chinese market as PBOC took actions over the weekend to avert a risk of market collapse.

Euro, the EU bloc currency, reacted badly to the Greek Drama (see chart below).  Greek two-year bond prices yields jumped to ~ 34%, while investors run to safety as prices of 'safe haven bonds' from Britain, Germany and the United States all rose.

Chart Source: The New York Times, June 29, 2015 

Global Implication    

NYT quoted Rajiv Biswas, chief economist for Asia at IHS Global Insight, saying that if Greece defaulted and left the eurozone, the effects on Europe’s economy and on exporters in Asia would depend on whether European leaders could prevent financial troubles from spreading to Portugal, Spain and possibly Italy. However, the damage would not be as bad as people seem to be preparing, as Biswas estimated in the case of a contagion, economic output in Asia could drop 0.3% next year on lower exports to Europe.

Referendum Is A CYA by Tsipras & Syriza

I believe Greek people (including PM Tsipras and the Syriza Party) want to take the deal to stay in EU and the Eurozone (who wouldn't with so many perks associated with being a member of the bloc). However, since Alexis Tsipras the leftist Syriza party won the election by making promises to voters that they could go back to the way it was, and the EU would fold.  Well, EU and Merkel not only did not fold but also got totally fed up.

Basically, this is as good as it gets for Greece, and everybody knows it.  But Tsipras and Syriza party have to put it to a vote so they may spin it as a 'voter decision' to save face with their constituents.

Debt Problem Years to Come

For now, the situation in Greece could get much worse if voters refuse to accept creditor-imposed reforms in the Sunday referendum. CNBC reported that billionaire Willbur Ross expressed concern of a possible social unrest in Greece.  Since Wilbur Ross has a large interest in Greece, I think he may have a biased view.  I believe the most likely outcome is that the referendum would pass on Sunday, and Greece would stay within EU and the Eurozone.  

However, a deal is by no means the end of anything.  This Greek Debt Drama may be in production for years to come where Greece would be stuck digging itself out of the hole it has created through years of deficit spending and free borrowing.

Graphic Source: (updated June 29, 2015)


Graphic Source: BBC

Greek Capital Controls  

The following is a translation of a document provided by the Greek government via Bloomberg, giving details on the capital controls, if readers would like to catch a glimpse:

  • From Monday, June 29, 2015, banks will remain closed up to and including Monday, July 6 
  • Deposits are fully safeguarded  
  • The payment of pensions is exempted from the restrictions on banking transactions. Management of credit institutions will announce how these will be paid  
  • Electronic transactions within the country won’t be affected. All transactions with credit or debit cards and other electronic forms (web banking, phone banking) can be conducted as normal  
  • Prepaid cards may be used to the limit existing before the beginning of the bank holiday  
  • From midday June 29, ATMs will operate with a daily cash withdrawal limit of 60 euros per card, which is equivalent to 1,800 euros a month  
  • Foreign tourists can make cash withdrawals from ATMs with their cards without restrictions provided these have been issued abroad  
  • A special Committee to Approve Bank Transactions has been established at the State General Accounting Office in cooperation with the Finance Ministry, the Bank of Greece, the Union of Greek Banks and the Capital Markets Commission. This committee will deal with applications for urgent and imperative payments that can’t be satisfied through the cash withdrawal limits or by electronic transactions (e.g. payments abroad for health reasons). Wages paid electronically to bank accounts aren’t affected

Triumph of Democracy; Reader Reflections on Greece; Absurd Reactions

Courtesy of Mish.

Reader Reflections on Greece

Reader “AC” pinged me this AM with her accurate assessment of events in Greece. “AC” writes …

I find strange that no Euro leaders realized that even if Tsipras accepted the deal, his parliament would with almost certainty have rejected it.

European political leaders have lost the sense of democracy and of the power of Parliaments.

We may agree or not with Tsipras ideas and economic or social program, but one thing I think we can all agree on is that he has already made history.

Tsipras restored democracy with his decision to leave such a crucial decision to his people by referendum, showing everybody that in democracy, people must decide their own fate.

Triumph of Democracy

Reader “AC” is surely correct.

I have mentioned on many occasions that the policies of Tsipras are terrible. I cannot support them even as I support his decision to tell the Troika to go to hell.

Many will blame Tsipras. In actuality, it was Troika policies that all but assured the rise of the so-called “radical left” Syriza party.

Recall that Greece technocrat Prime Minister Lucas Papademos was handpicked by the Troika to replace George Papandreou simply because the latter proposed a voter referendum on the Greek bailouts.

Instead of imposed technocrats bowing down to kiss the ECB’s ass, or early elections that the Troika hoped to see, Tsipras was willing to let the people decide.

One may or may not like the result, but this was a triumph of democracy over technocrats and nannycrat puppets.

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Greece: Why Is a Nation of 11 Million Causing Stock Market Losses Around the World Today?

Courtesy of Pam Martens.

Alexis Tsipras, Prime Minister of Greece, Asks Parliament for Referendum on July 5, 2015

Alexis Tsipras, Prime Minister of Greece, Asks Parliament for Referendum on July 5, 2015

Greece has just a tad more population, at 11 million, than New York City and its boroughs. But this morning, it has caused hundreds of billions of dollars to be erased from stock and bond markets around the world.

The situation in Greece this morning is as follows: banks and the Athens Stock Exchange have been closed until at least July 6, following a breakdown in talks between Greek Prime Minister Alexis Tsipras and the country’s creditors. The July 6 date stems from the vote in the Greek parliament over the weekend to hold a July 5 referendum allowing Greek citizens to vote on the austerity program offered by creditors in exchange for extending more loans to Greece. As a result of a run on the banks as the talks disintegrated, capital controls have now been imposed in Greece, allowing Greek depositors to withdraw no more than just €60 a day (about $66). Moody’s is out with a report this morning indicating that private sector deposits in the Greek banking system have diminished to approximately $133 billion, a decline of approximately $49 billion since November of last year.

This Tuesday, a loan made to Greece by the International Monetary Fund comes due, totaling 1.6 billion Euros, and it is highly unlikely that Greece will be able to make the payment, putting it officially into debt default.

How Greece will climb out of this predicament is very much in doubt. This morning its two year notes have sold off sharply with yields at one point reaching 33 percent. Although the Athens Stock Exchange is closed, Greek bank stocks trade on other international markets and they are seeing significant losses. Bloomberg Business reported this morning that “The National Bank of Greece SA plunged 30 percent in early New York trading.”

The crisis in Greece is spilling over into foreign stock and bond markets for a number of reasons. An immediate impact has been investors backing away from the bonds of other weak Eurozone countries like Portugal, Spain and Italy, pushing their yields up and bond prices down. Heretofore, adopting the Euro was seen as a permanent, irreversible position. But should Greece decide to exit the Euro to save itself from massive economic dislocations, the permanency of the Euro is thrown into doubt should other weak countries have similar difficulties.

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Volatility and Sleep-Walking Markets

Courtesy of The Automatic Earth.

G. G. Bain At Casino, Belmar, Sunday, NJ 1910

It is with immense pleasure that I can introduce the return to The Automatic Earth of my friend and co-founder Nicole Foss. If only because I myself can now retire to a beach chair…. (not).

With the violent swings that have started and been amplified in Asia overnight, as well as in European and US futures, Nicole’s piece on volatility is quite pertinent.

Nicole Foss: A recent Business Insider chart of the day feature was particularly interesting. Called The stock market is asleep, it observed that the US market has been in a period of very low volatility:

Market technician Ryan Detrick noted that it’s been 8 weeks since we’ve seen a weekly move of at least 1% up or down in the S&P 500. That’s the longest such streak we’ve seen in 21 years.

The suggestion in the article is that the market will go on rising until the economy enters a recession, the implication being that a long period of low volatility is a sign of market health. In fact it is quite the opposite. A sleep-walking market is a reflection of complete disregard as to risk.

Markets enter such periods of complacency when there has been a long uptrend, with periods of very low volatility reflecting where the market has come from, not where it is going. Such periods are far more likely to be a sign of an impending trend reversal than of a continued uptrend.

Under normal circumstances, markets can be expected to show more variation, with regular inhalation and exhalation indicative of healthy risk perception. The loss of that pattern, indicating extreme complacency, is a leading indicator of a rude awakening. The VIX index, or volatility/fear index, is at extreme lows, indicating a historic level of complacency. It is no surprise that this coincides with a market extreme.

In short, market sentiment is a very effective contrarian indicator. When fear and volatility are low, there are typically few opportunities left and investors are openly flirting with danger they fail to perceive or acknowledge in their search for returns. Leverage balloons as riskier and riskier bets are made, along with bets on top of bets on top of bets.

Continuance of the prevailing uptrend becomes received wisdom as the combination of optimism and leverage drive the market higher in a self-fulfilling feedback loop. Bears capitulate over time, and as the last holdouts capitulate, the trend reversal become imminent. Risk typically returns with a vengeance, taking market participants by surprise.

The perception of risk shifts dramatically, from complacency to extreme risk aversion, and it can do so very quickly. In fact there already appears to be a shift underway, a mere two days after such an expression of complacency. Volatility and fear go hand in hand, and as increasing fear drives financial contraction and deleveraging, volatility goes through the roof.

The increasing and cumulative risks previously taken begin to manifest, piling on top of each other on the way down. A flood of margin calls overwhelms a mountain of IOUs, rendering them largely worthless. Excess claims to underlying real wealth are destroyed. Ironically, it is at this time that opportunity increases dramatically, for the relatively few who perceive it and are in a position to take advantage of it.

We are approaching just such a juncture at the moment. The long uptrend appears to be finally coming to an end. It is at extremes when it pays most to be a contrarian. Apart from the misinterpretation of low volatility as being good news for the stock market, another misconception is that market corrections are driven by recession.

Causation runs in the other direction. It’s not that a recession causes the markets to fall, but that a market trend change to the downside is a leading indicator of economic recession. Changes in finance, which is largely virtual, happen far more quickly than changes in the real economy.

When the trend change comes in finance, a similar direction change in the real economy can be expected to follow, with a time lag thanks to the longer time constant for change in the real economy. If the downward shift of the last couple of days does indeed mark the long-awaited trend reversal, then economic recession is sure to follow.

There is a substantial potential for the reversals in both finance and the real economy to be very large, as we have been predicting here at TAE for some time. This is yet another high risk juncture. Be careful.

Sudden Stop Thesis: What Are the Odds of Grexit Within Three Weeks?

Courtesy of Mish.

Four years ago I thought odds of an eventual Grexit were nearly certain. Some people still don’t believe so, while others are just beginning to understand the obvious.

Former Pimco Co-CEO El-Erian Sees 85% Grexit Odds With ‘Massive’ Contraction Coming.

Greece is heading for a “massive economic contraction” and is likely to be forced out of the euro zone, according to Mohamed El-Erian, the former chief executive at Pacific Investment Management Co.

“There’s an 85 percent probability that Greece will be forced to leave the euro zone” in the next few weeks, El-Erian said in an interview from New York. “What we are seeing here is what economists call the sudden stop, when the payment system stops. The logic of a sudden stop is a massive economic contraction, social unrest and it’s going to make continued membership of the euro zone very difficult for Greece.”

Sudden Stop Thesis

While I still think it likely Greece will exit the eurozone, I will take the “over” line on a “few weeks”. It is amazing how long these things drag out.

There are at least two wildcards in play that could prolong things. At the top of the list is Russia. Second in line is the US.

Why? Because the US does not want Greece to form serious ties with Russia.

Also, Merkel does not want Grexit on her watch.

Russia the Key

Meanwhile, and as I have been saying for months, Russia is the Key. Will Russia come to aid Greece with enough money and oil to enable Greece to hang on longer than a few weeks?

I suspect the answer is yes. If so, the price may be sanctions.

EU rules require unanimous agreement on sanctions. I expect Greece to play that card very well. Greece can and likely will torpedo EU sanctions on Russia by the end of the year….

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Greek Asset Stripping Similarities


Greek Asset Stripping Similarities

Courtesy of  

(Originally published on June 27, 2015)

A presentation at the Delphi Initiative.


Bank Holiday: Greek Banks and Stock Market Shut Until July 7; Capital Controls Imposed

Courtesy of Mish.

After the ECB shut off ELA, prime minister Alexis Tsipras imposed capital controls while blaming the ECB just as I predicted.

Of course, that was an easy prediction. Yet, even at the last moment, many did not believe it would come to this.

Let’s tune into the Guardian Live Blog for some details.

Bank Holiday

  • Speaking on live TV, Alexis Tsipras is saying that the Greek central bank has been forced to recommend a bank holiday and the introduction of capital controls.
  • He blames the ECB, and other institutions, for trying to obstruct the democratic referendum he has called for next Sunday. This is a “insult” that shames European democracy, he says.
  • Tsipras also appeals for calm, and he insists that bank deposits are secure.

Capital Controls

  • Officials said the bank closure would last for several days and would be accompanied by limits yet to be announced on bank transfers abroad and withdrawals from cash machines.
  • The cashing of cheques would be halted and fixed term deposits would be locked down. The Athens stock exchange was also set to be closed.

Bank Queues

  • All over Athens people have been queuing tonight, but the lines outside the National Bank branches were by some distance the longest, reports Jon Henley.
  • And that’s because the National Bank supplies the banknotes, and lots of other Greek banks, by midnight on Sunday, had no more of those.


In honor of the bank and stock market vacation, I offer this musical tribute.

Link if video does not play: Connie Francis Vacation….

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The Bush Family Goes “All In” For Number Three (With The Help Of Its Bankers)

Courtesy of Nomi Prins at

Money, they say, makes the world go round. So how’s $10 billion for you? That’s a top-end estimate for the record-breaking spending in this 1% presidential election campaign season. But is “season” even the right word, now that such campaigns are essentially four-year events that seem always to be underway? In a political world stuffed with money, it’s little wonder that the campaign season floats on a sea of donations. In the case of Jeb Bush, he and his advisers have so far had a laser-focus on the electorate they felt mattered most: big donors. They held off the announcement of his candidacy until last week (though he clearly long knew he was running) so that they could blast out of the gates, dollars-wise, leaving the competition in their financial dust, before the exceedingly modest limits to non-super PAC campaign fundraising kicked in.

And give Jeb credit — or rather consider him a credit to his father (the 41st president) and his brother (the 43rd), who had Iraq eternally on their minds. It wasn’t just that Jeb flubbed the Iraq Question when a reporter asked him recently (yes, he would do it all over again; no, he wouldn’t… well, hmmm…), but that Iraq is deeply embedded in the minds of his campaign team, too. His advisers dubbed the pre-announcement campaign they were going to launch to pull in the dollars a “shock-and-awe” operation in the spirit of the invasion of Iraq. Now, having sent in the ground troops, they clearly consider themselves at war. As the New York Times reported recently, the group's top strategist told donors that his super PAC "hopes to 'weaponize' its fund-raising total for the first six months of the year."

The money being talked about$80-$100 million raised in the first quarter of 2015 and $500 million by June. If reached, these figures would indeed represent shock-and-awe fundraising in the Republican presidential race. As of now, there’s no way of knowing whether they’re fantasy figures or not, but here's a clue to Jeb’s money-raising powers: according to the Washington Post, his advisers have been asking donors not to give more than a million dollars now; they are, that is, trying to cap donations for the moment. (As the Post's Chris Cillizza wrote,“The move reflects concerns among Bush advisers that accepting massive sums from a handful of uber-rich supporters could fuel a perception that the former governor is in their debt.”) And having spent just about every pre-announcement day for months doing fundraisers and scouring the country for money, while preserving the fiction that he might not be interested in the presidency, Jeb, according to the New York Times, bragged to a group of donors that “he believed his political action committee had raised more money in 100 days than any other modern Republican political operation.”

Let’s not forget, of course, that we’re not talking about anyone; we're talking about a Bush. We’re talking about the possibility of becoming number three (or rather Bush 45) in the Oval Office. We’re talking about what is, by now, a fabled money-shaking, money-making, money-raising machine of a family. We’re talking dynasty and when it comes to money and the Bushes (as with money and that other potential dynasty of our moment), no one knows more on the subject than Nomi Prins, former Wall Street exec and author of All the Presidents' Bankers: The Hidden Alliances That Drive American Power. In her now ongoing TomDispatch series on the political dynasties of our moment, fundraising, and the Big Banks, think of her latest post as an essential backgrounder on the election you have less and less to do with, in which Wall Street, the Koch brothers, Sheldon Adelson, and the rest of the crew do most of the essential voting with their wallets. Tom

All In 
The Bush Family Goes for Number Three (With the Help of Its Bankers) 
By Nomi Prins

[This piece has been adapted and updated by Nomi Prins from her book All the Presidents' Bankers: The Hidden Alliances That Drive American Power, recently out in paperback (Nation Books).] 

It’s happening. As expected, dynastic politics is prevailing in campaign 2016. After a tease about as long as Hillary’s, Jeb Bush (aka Jeb!) officially announced his presidential bid last week. Ultimately, the two of them will fight it out for the White House, while the nation’s wealthiest influencers will back their ludicrously expensive gambit.

And here’s a hint: don’t bet on Jeb not to make it through the Republican gauntlet of 12 candidates (so far). After all, the really big money’s behind him. Last December, even though out of public office since 2007, he had captured the support of 73% of the Wall Street Journal’s “richest CEOs.” Though some have as yet sidestepped declarations of fealty, count on one thing: the big guns will fall into line. They know that, given his family connections, Jeb is their best path to the White House and they’re not going to blow that by propping up some Republican lightweight whose father and brother weren’t president, not when Hillary, with all her connections and dynastic power, will be the opponent. That said, in the Bush-Clinton battle to come, no matter who wins, the bankers and billionaires will emerge victorious.

The issue of political blood and family lines in Washington is not new. There have been four instances in our history in which presidents have been bonded by blood. Our second president John Adams and eighth president John Quincy Adams were father and son. Our ninth president William Henry Harrison and our 23rd president Benjamin Harrison were grandfather and grandson. Theodore and Franklin Delano Roosevelt were cousins. And then, of course, there were our 41st and 43rd presidents, George H.W. and George W.

If Jeb becomes the 45th president, it will be the first time that three administrations share the same blood and “dynastic” will have a new meaning in America.

The Bush Legacy

The Bush political-financial legacy began when President Ronald Reagan chose Jeb’s father, George H.W., as his vice president. Reagan was also the first president to choose a Wall Street CEO, Donald Regan, as Treasury secretary. Then-CEO of Merrill Lynch, he happened to be a Bush family friend. And talk about family tradition: once upon a time (in 1900, to be exact), Jeb’s great-grandfather, George Herbert Walker, founded G.W. Walker & Company. It was eventually acquired by — you guessed it! — Merrill Lynch, which was consumed by Bank of America at the height of the 2008 financial crisis.

That merger was pressed by, among others, George W. Bush’s Treasury Secretary (and former Goldman Sachs chairman and CEO), Hank Paulson. It helped John Thain, Paulson’s former number two at Goldman Sachs, who was by then Merrill Lynch’s CEO, out of a tight spot. Now chairman and CEO of CIT Group, Thain is also a prominent member of the Republican Party who sponsored high-ticket fundraisers for John McCain during his 2008 campaign. Expect him to be there for Jeb. Paulson endorsed Jeb for president on April 15th. That’s how these loops go.

As vice president, George H.W. co-ran a task force with Donald Regan dedicated to breaking down the constraints of the 1933 Glass-Steagall Act, so that Wall Street banks could become ever bigger and more complex. Once president, Bush promoted deregulation, while reconfirming Alan Greenspan, who did the same, as the chairman of the Federal Reserve. In 1999, after President Bill Clinton (Hillary!) finished the job that Bush had started by overseeing the repeal of Glass-Steagall, banks began merging like mad and engaging in increasingly risky and opaque practices that led to the financial crisis that came to a head in George W.’s presidency.  In other words, it’s a small world at the top.

The meaning of all this: no other GOP candidate has Jeb's kind of legacy political-financial power. Period. To grasp the interconnections between the Bush family and Wall Street that will put heft and piles of money behind his candidacy, however, it’s necessary to step back in time and see just how his family helped lead us to this moment of his.

Bush Wins

By the time George H.W. Bush became president on January 20, 1989, the economy was limping. Federal debt stood at $2.8 trillion. The savings and loan crisis had escalated. Still, his deregulatory financial policies remained in sync with those of the period’s most powerful bankers, notably Citicorp chairman John Reed, Chase (now JPMorgan Chase) Chairman Willard Butcher, JPMorgan chief Dennis Weatherstone, and Bank of America Chairman Tom Clausen.

With the economic odds stacked against him, Bush also remained surrounded by his most loyal, business-friendly companions in Washington, who either had tight relationships with Wall Street or came directly from there. In a preordained arrangement with President Reagan, Bush retained Nicholas Brady, the former chairman of the board of the blue-blood Wall Street investment bank Dillon, Read & Co., as Treasury secretary.

Their ties, first established on a tennis court, extended to Wall Street and back again. In 1977, after Bush had left the directorship of the CIA, Brady even offered him a position at Dillon, Read & Co. Though he didn’t accept, Bush later enlisted Brady to run his 1980 presidential campaign and suggested him as interim senator for New Jersey in 1982. The press dubbed Brady Bush’s “official confidant.”

The new president appointed another of his right-hand men, Richard Breeden (who had drafted a “Blueprint for Reform” of the banking industry as directed by a task force co-headed by Bush), as his assistant for issues analysis and later as head of the Securities and Exchange Commission (SEC). Then, on February 6, 1989, Bush unveiled his plan to rescue the ailing savings and loan (S&L) banks. Initial bailout estimates for 223 firms were put at $40 billion. It only took the Bush administration two weeks to raise that figure to $157 billion. On the offensive, Brady stressed that this proposal wasn’t a bailout. Instead, it represented “the fulfillment of the Federal Government’s commitment to depositors.”

A few months later, under Alan Greenspan’s Fed, JPMorgan Securities, the investment banking subsidiary of JPMorgan Chase, became the first bank subsidiary since the Great Depression to lead a corporate bond underwriting. Over the next decade, commercial banks would issue billions of dollars of corporate debt on behalf of energy and public utility companies as a result of Greenspan’s decision to open that door and Bush’s deregulatory stance in general. A chunk of it would implode in fraud and default after Bush’s son became president in 2001.

The S&L Blowout

The deregulation of the S&L industry between 1980 and 1982 had enabled those smaller banks, or thrifts — focused on taking deposits and providing mortgages — to compete with commercial banks for depositors and to invest that money (and money borrowed against it) in more speculative real estate ventures and junk bond securities. When those bets soured, the industry tanked. Between 1986 and 1989, 296 thrifts failed. An additional 747 would shut down between 1989 and 1995.

Among those, Silverado Banking went bankrupt in December 1988, costing taxpayers $1.3 billion. Neil Bush, George H.W.’s son, was on the board of directors at the time. He was accused of giving himself a loan from Silverado, but denied all wrongdoing.

George H.W.'s second son, Jeb Bush, had already been dragged through the headlines in late 1988 for his real estate relationship with Miguel Recarey Jr., a Cuban-American mogul who had been indicted on one charge of fraud and was suspected of racking up to $100 million worth of Medicare-related fraud charges.

Meanwhile, the president was crafting his bailout plan to stop the S&L bloodletting. On August 9, 1989, he signed the Financial Institution Reform, Recovery, and Enforcement Act, which proved a backdoor boon for the big commercial banks. Having helped stuff the S&Ls with toxic real estate products, they could now profit by selling the bonds that were constructed as part of the bailout plan, while the government subsidized the entire project. Within six years, the Resolution Trust Corporation and the Federal Savings and Loan Insurance Corporation had sold $519 billion worth of assets for 1,043 thrifts that had gone belly up. Key Wall Street banks were involved in distributing those assets and so made money on financial destruction once again. Washington left the public on the hook for $124 billion in losses.

The Bush administration and the Fed’s response to the S&L crisis (as well as to a concurrent third-world debt crisis) was to subsidize the banking system with federal and multinational money. In this way, a policy of privatizing bank profits and socializing their losses and risks became embedded in the American political system.

The New Banking Game in Town: “Modernization”

The S&L trouble sparked a broader credit crisis and recession. Congress was, by then, debating the “modernization” of the financial services industry, which in practice meant breaking down remaining barriers within institutions that had separated deposits and loans from securities creation and trading activities. This also meant allowing commercial banks to expand into nontraditional banking activities, including insurance provision and fund management.

The Bush administration aided the bankers by advocating the repeal of key elements of the Glass-Steagall Act. Related bills to dismantle that Depression-era act won the support of the House and Senate banking committees in the fall of 1991, though they were defeated in the House in a full vote.  Still, the writing was on the wall. What a Republican president had started, a Democratic one would soon complete.

In the meantime, the Bush administration was covering all the bases when it came to the repeal of Glass-Steagall, which would be the nail in the coffin of decades of banking constraint. As commercial bankers pushed to enter non-banking businesses, Richard Breeden, Bush’s SEC chairman, began championing the other side of the Glass-Steagall divide — fighting, that is, for the rights of investment banks to own commercial banks. And little wonder, since such a deregulation of the financial system meant a potential expansion of Breeden’s power: the SEC would be tasked with monitoring the growing number of businesses that banks could enter.

Meanwhile, Wendy Gramm, head of the Commodity Futures Trading Commission (CFTC), promoted another goal the bankers wanted: unconstrained derivatives trading. Gramm had first been appointed chair of the CFTC in 1988 by Reagan (who called her his “favorite economist”) and was then reappointed by Bush. She was determined to push for unregulated commodity futures and swaps — in part in response to lobbying from a Texas-based energy trading company, Enron, whose name would grow far more familiar to Americans in the years to come. While awaiting legislative approval, bankers started sending their trading exemption requests to Gramm and she began granting them.

9/11 Overshadows Enron

In early 2001, in the fading light of the rosy Clinton economy and an election result validated by the Supreme Court, the second President Bush entered the White House. A combination of Glass-Steagall repeal and the deregulation of the energy and telecom sectors under Clinton catalyzed a slew of mergers that consolidated companies and power in those industries upon fabricated books. The true state of the economy, however, remained well hidden, even as it teetered on a flimsy base of fraud, inflated stocks, and bank-created debt. In those years, the corporate and banking world still appeared glorious amid so many mergers. But the bankers’ efforts to support those transactions would soon give way to a spate of corporate bankruptcies.

It was the Texas-based energy-turned-trading company Enron that would emerge as the poster child for financial fraud in the early 2000s. It had used the unregulated derivatives markets and colluded with bankers to create a slew of colorfully named offshore entities through which the company piled up debt, shirked taxes, and hid losses. The true status of Enron’s fictitious books and those of other corporate fraudsters nonetheless remained unexamined in part because another crisis garnered all the attention. The 9/11 attacks at the World Trade Center, blocks away from where many of Enron’s trading partners were headquartered (including Goldman Sachs, where I was working that day), provided the banking industry with a reprieve from probes. The president instead called on bankers to uphold national stability in the face of terrorism.

On September 16, 2001, George W. famously merged financial and foreign policy. “The markets open tomorrow,” he said. “People go back to work and we’ll show the world.” To assist the bankers in this mission, Bush-appointed SEC chairman Harvey Pitt waived certain regulations, allowing corporate executives to prop up their share prices as part of a plan to demonstrate national strength by elevating market levels.

That worked — for about a minute. On October 16, 2001, Enron posted a $681 million third-quarter loss and announced a $1.2 billion hit to shareholders' equity. The reason: an imploding pyramid of fraudulent transactions crafted with banks like Merrill Lynch. The bankers were now potentially on the hook for billions of dollars, thanks to Enron, a client that had been bulked up through the years with bipartisan support.

Amid this financial turmoil, Bush was focused on retaliation for 9/11. On January 10, 2002, he signed a $317.2 billion defense bill. In his State of the Union address, he spoke of an “Axis of Evil,” of fighting both the terrorists and a strengthening recession, but not of Enron or the dangers of Wall Street chicanery.

In 2001 and again in 2002, however, corporate bankruptcies would hit new records, with fraud playing a central role in most of them. Telecom giant WorldCom, for instance, was found to have embellished $11 billion worth of earnings. It would soon supplant Enron as America’s biggest fraud of the moment.

Bush Takes Action

On July 9th, George W. finally unveiled a plan to “curb” corporate crime in a speech given in the heart of New York’s financial district. Taking the barest of swipes at his Wall Street friends, he urged bankers to provide honest information to investors. The signals were now clear: bankers had nothing to fear from their commander in chief. That Merrill Lynch, for example, was embroiled in the Enron scandal was something the president would ignore — hardly a surprise, since the company’s alliances with the Bush family stretched back decades.

Three weeks later, he would sign the Sarbanes-Oxley Act, purportedly ensuring that CEOs and CFOs would confirm that the information in their SEC filings had been presented truthfully. It would prove a toothless and useless deterrent to fraud.

And then the president acted: on March 19, 2003, he launched the invasion of Iraq with a shock-and-awe shower of cruise missiles into the Iraqi night sky. Two days later, by a vote of 215 to 212, the House approved his $2.2 trillion budget, including $726 billion in tax cuts. Shortly thereafter — a signal to the banking industry if there ever was one — he appointed former Goldman Sachs Chairman Stephen Friedman director of the National Economic Council, the same role another Goldman Sachs alumnus, former co-Chairman Robert Rubin, had played for Bill Clinton.

By the end of 2003, grateful bankers were already amassing funds for Bush’s 2004 reelection campaign. A bevy of Wall Street Republicans, including Goldman Sachs Chairman and CEO Henry Paulson, Bear Stearns CEO James Cayne, and Goldman Sachs executive George Herbert Walker IV (the president’s second cousin), became Bush “Pioneers” by raising at least $100,000 each.

The top seven financial firms officially raised nearly three million dollars for George W.’s campaign. Merrill Lynch emerged as his second biggest corporate contributor (after Morgan Stanley), providing more than $586,254. The firm’s enthusiasm wasn’t surprising. Donald Regan had been its chairman and the Bush-founded investment bank G.H. Walker and Company, which employed members of the family over the decades, had been absorbed into Merrill in 1978. Merrill Lynch CEO Earnest “Stanley” O’Neal received the distinguished label of “Ranger” for raising more than $200,000 for Bush’s reelection campaign. It was a sign of the times that O’Neal and Cayne hosted Bush’s first New York City reelection fundraiser in July 2003.

Government by Goldman Sachs for Goldman Sachs

The bankers helped tip the scales in Bush’s favor. On November 3, 2004, he won his second term in a tight election. By now, bankers from Goldman Sachs had saturated Washington. New Jersey Democrat Jon Corzine, a former Goldman Sachs chairman and CEO, was on the Senate Banking Committee. Joshua Bolten, a former executive director at the Goldman Sachs office in London, was director of the Office of Management and Budget. Stephen Friedman, former Goldman Sachs chairman, was one of George W.’s chief economic advisers as the director of the National Economic Council. (He would later become chairman of the New York Federal Reserve Board, only to resign in May 2009 amid conflict of interest charges concerning the pile of Goldman Sachs shares he held while using his post to aid the company during the financial crisis.)

Meanwhile, from 2002 to 2007, under George W.’s watch, the biggest U.S. banks would fashion nearly 80% of the approximately $14 trillion worth of global mortgage-backed securities (MBS), asset-backed securities, collateralized debt obligations, and other kinds of packaged assets created in those years. And subprime loan packages would soon become the fastest-growing segment of the MBS market. In other words, the financial products exhibiting the most growth would be the ones containing the most risk.

George W. would also pick Ben Bernanke to replace Alan Greenspan as chairman of the Federal Reserve. Bernanke made it immediately clear where his loyalties lay, stating, “My first priority will be to maintain continuity with the policies and policy strategies during the Greenspan years.”

In 2006, two years after persuading the SEC to adopt rules that enabled many of the “assets” being created to be undercapitalized and underscrutinized, the president selected former Goldman Sachs CEO Henry Paulson to be his third Treasury secretary. Joshua Bolten, who had by then had become White House Chief of Staff, arranged the pivotal White House meeting between the two men that sealed the deal. As Bush wrote in his memoir, Decision Points, “Hank was slow to warm to the idea of joining my cabinet. Josh eventually persuaded Hank to visit with me in the White House. Hank radiated energy and confidence. Hank understood the globalization of finance, and his name commanded respect at home and abroad.”

Under Bush, Paulson, and Bernanke, the banking sector would buckle and take the global economy down with it.

Goldman Trumps AIG

Insurance goliath AIG stood at the epicenter of an increasingly interconnected financial world deluged with junky subprime assets wrapped up with derivatives. When rating agencies Fitch, S&P, and Moody’s downgraded the company’s credit worthiness on September 15, 2008, they catalyzed $85 billion worth of margin calls. If AIG couldn’t find that money, Paulson warned the president, the firm would not only fail, but “bring down major financial institutions and international investors with it.” According to Bush’s memoir , Paulson convinced him. “There was only one way to keep the firm alive,” he wrote. “The federal government would have to step in.”

The main American recipients of AIG’s bailout would, in fact, be legacy Bush-allied firms: Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), and Citigroup ($2.3 billion). Lehman crashed, but Merrill Lynch and AIG were saved. The bankers with the strongest alliances to the Bush family (and the White House in general) needed AIG to survive. And it did. But the bloodletting wasn’t over.

On September 18, 2008, George W. would tell Paulson, “Let’s figure out the right thing to do and do it.” He would later write, “I had made up my mind: the U.S. government was going all in.” And he meant it.  During his last months in office, the Big Six banks (and marginally other institutions) would thus be subsidized by an “all-in” program designed by Bernanke, Paulson, and Geithner — and later endorsed by President Barack Obama.

The bankers’ unruliness had, however, already crippled the real economy. Over the next few months, Bank of America, Citigroup, and AIG all needed more assistance. And in that year, the Dow Jones Industrial Average would lose nearly half its value. At the height of the bailout period, $19.3 trillion in subsidies were made available to keep (mostly) American bankers going, as well as government-sponsored enterprises like Fannie Mae and Freddie Mac.

As George W. headed back to Texas, the economy and markets went into free fall.

The Money Behind Jeb

Jump seven years ahead and, with the next Bush on the rise and the money once again flowing in, it’s still the age of bankers. Jeb already has three mega super PACs — Millennials for Jeb, Right to Rise, and Vamos for Jeb 2016 — under his belt. His Right to Rise Policy Solutions group, which, as a 501(c)(4) nonprofit, is not even required to disclose the names of its donors, no less the size of their contributions, is lifting his contribution tally even higher. None of these groups have to adhere to contribution limits and the elite donors who contribute to them often prove highly influential. After all, that’s where the money really is. In the 2012 presidential election, the top 100 individual contributors to super PACs and their spouses represented just 1% of all donors, but gave a staggering 67% of the money.

Of those, Republican billionaire Sheldon Adelson and his wife, Miriam, donated $92.8 million to conservative groups, largely through “outside donor groups” like super PACs that have no contribution limits. Texas billionaire banker mogul Harold Simmons and his wife, Annette, gave $26.9 million, and Texas billionaire homebuilder Robert Perry coughed up $23.95 million. Nebraska billionaire (and founder of the global discount brokerage TD Ameritrade) John Joe Ricketts dished out $13.05 million. Despite some early posturing around other candidates with fewer legacy ties, these heavy hitters could all end up behind Bush 45. Dynasties, after all, establish the sort of connections that lie in wait for the next moment of opportune mobilization.

“All in for Jeb” is the mantra on Jeb’s official website and in a sense “all in,” especially when it comes to national bankers, has been something of a mantra for the Bush family for decades. With a nod to his two-term record as Florida governor, Jeb put it this way: “We will take command of our future once again in this country. I know we can fix this. Because I've done it.”

Based on Bush family history, by “we” he effectively meant the family’s billionaire and millionaire donors and its cavalcade of friendly bankers. Topping that list, though as yet undeclared — give him a minute — sits Adelson, who is personally and ideologically close to George W. In April, the former president was paid a Clintonian speaking fee of $250,00 for a keynote talk before the Republican Jewish Coalition meeting at Adelson’s Las Vegas resort. While Adelson has expressed concerns about Jeb’s lack of hawkishness on Israel when compared to his brother, that in the end is unlikely to prove an impediment. Jeb is making sure of that.  He recently told a gathering of wealthy New York donors that, when it came to Israel, his top adviser is his brother. (“If you want to know who I listen to for advice, it’s him.”)

Let’s be clear.  The Bush family is all in on Jeb and its traditional banking allies are not likely to be far behind.  There is tradition, there are ties, there is a dynasty to protect.  They are not planning to lose this election or leave the family with a mere two presidents to its name.

The Wall Street crowd began rallying behind Jeb well before his candidacy was official.  Private equity titan Henry Kravis hosted a 25-guest $100,000-per-head gathering at his Park Avenue abode in February, one of six events with the same entry fee. In March, Jeb had his first Goldman Sachs $5,000-per-person event at the Ritz Carlton in New York City, organized by Dina Powell, Goldman Sachs Foundation head and George W. Bush appointee for assistant secretary of state.  A more exclusive $50,000 per head event was organized by Goldman Sachs exec, Jim Donovan, a key fundraiser and adviser for Mitt Romney who is now doing the same for Jeb.

And then there’s the list of moneyed financiers with fat wallets still to get behind Jeb. New York hedge fund billionaire Paul Singer, who donated more than any other conservative in the 2014 election, has yet to swoop in.  Given the alignment of his foreign financial policy views and the Bush family’s, however, it’s just a matter of time.

With the latest total super PAC figures still to be disclosed, we do know that Jeb’s Right to Rise super PAC claims to have raised $17 million from the tri-state (New York, New Jersey, and Connecticut) area alone so far. Its head, Mike Murphy, referred to its donors in a call last week as “killers” he was about to “set loose.” He intimated that the July disclosures would give opponents “heart attacks.” Those are fighting words.

Sure, all dynasties end, but don’t count on the Bush-Banker alliance going belly up any time soon. Things happen in this country when mountains of money begin to pile up. This time around, the Bush patriarchy will call in every chip. And know this: Wall Street will be going “all in” for this election, too. Jeb(!) and Hillary(!) will likely split that difference in the primaries, then duke it out in 2016. Along the way, every pretense of mixing it up with the little people will be matched by a million-dollar check to a super PAC. The cash thrown about in this election will be epic. It’s not the fate of two parties but of two dynasties that’s at stake.

Why We’re Headed Toward A “Cashless Society”

Courtesy of Bill Bonner (annotated Pater Tenebrarum, Acting Man)

Don’t Count on Your ATM Cards

Yesterday, came a report that the prime minister of Poland, Ewa Kopacz, has urged Poles traveling to Greece to take “a larger amount of cash” with them. Why? Because the situation could be “very dynamic,” she says. “Please do not count only on your ATM cards and on ATMs, but take a larger amount of cash with you.”


Queues are forming at ATMs in Greece of late. These ATMs will keep working as long as the ECB provides ELA financing to Greek banks. Unfortunately, the latter are beginning to run out of collateral. We are guessing they are probably giving the Bank of Greece IOUs now that they are issuing themselves. Yes, the situation is “dynamic”.

Photo credit: Simela Pantzartzi / EPA

It’s not the dynamic situation that would worry us. It’s the dynamite that lies beneath the whole world’s money system. It is a system that is fundamentally flawed. It depends on the intelligence and integrity of its custodians. Not that we think Madame Yellen is dumb. Nor do we doubt her honesty. But she is, after all, only human.

And centrally planning an $18 trillion economy – by manipulating asset prices and interest rates – is a super-human undertaking. The odds that something will go wrong? 100% …


It’s all data-dependent …

Cartoon by B. Rich

Controls on Cash

A reader asks a good question:

“I have a question about the recommendation to hold cash. If countries are putting controls on real cash and banking, in what form should a person hold cash? U.S. dollars or some other currency. If we truly go to a “cashless society” what good would having a hoard of cash do?”

We would like to have a better answer, but we only have the one we have. Money is always a convention. It is an understanding. People recognize money as a stand-in for wealth.

Since the beginning of civilization, people have experimented with different kinds of money. They ended up – almost always and almost everywhere – with gold and silver. Why?

Because they were handy. And because they were hard to produce. They were cash that governments could not easily control. No super-humans were needed to manage them.

Governments – the people who are able to boss other people around – always want to control money. They put their faces on it. They mint it. They clip coins. And they print pieces of paper and call it money.

But they could never completely control cash. People hoarded gold. They hid it. They ran away with it. They used it to make trades between themselves… regardless of what the feds said. And when the feds’ money went kaput – which it always did – they turned back to gold, because they knew they could trust it.

And now, the feds are making a new attempt to bring money totally under their control. For example, under the pretext of cutting funding for terrorists, the French government already has a law in the pipeline banning cash transactions of over €1,000 ($1,120).

There’s nothing stopping governments from banning cash transactions altogether… and ending the usage of paper money. Economists pretend it is a matter of convenience to the consumer (no more waiting for the clerk to make change for the fellow in front of you).

… or they try to sell it as a useful macro tool for central planners (they will be able to stimulate demand by imposing negative interest rates)…

… or they say a cashless world will be safer – you won’t be held up at gunpoint, and terrorists will find it harder to get financing.

But the real reason is control. If governments can eliminate cash, they can easily track, tax, and confiscate your money.


Bank robberies of the future

Cartoon via

When You Need a Stash of Cash

And if the feds can control your money, they will be able to control you. Do you voice an opinion they don’t want to hear? Do you belong to a group they want to get rid of? Do you want to know what happened to your tax money? Watch out… With a keystroke, you could be “disappeared.”

“Sometimes, when the government tells you to do something, it’s best to do the opposite,” says a French neighbor. In 1944, her father was the adjutant mayor of a small town in southwestern France. The Allies had landed in Normandy and the Germans were pulling their forces back to the Rhine. Our friend tells the story:

“Someone had blown up a German truck as it went through town. People were doing that. Taking pot shots at the Germans. The SS didn’t like it. They would gather up the mayor and a few other people. If they didn’t turn over the guilty person, they would kill the mayor. Or sometimes the whole town.

My father got a message that told him he was supposed to go to the town square. Instead, he went into the woods. It’s a good thing he did. Otherwise, I wouldn’t be here.”

When do you need a stash of cash? When the feds try to outlaw it. Hold some dollars. And some gold. We realize that our answer to the reader’s question is insufficient. After all, what good will cash be after it is declared illegal?

We’re not sure. Maybe we’ve spent too much time in Argentina, where people have more supple and more subtle attitudes to monetary regulations. Trading pesos for dollars, on the black market, is illegal. Do it and they take you for a scofflaw. Don’t do it and they take you for a fool.

More to come on this in future updates. Stay tuned …


What not to be in Argentina

Image captions by PT

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

Dueling Mortgage Gurus and Uncertainty

Dueling Mortgage Gurus and Uncertainty

By The Banker uncertainty

One of the things that makes finance endlessly fascinating (to me!) is that perfectly sound logic for one situation turns out to be perfect madness in another situation.

In my best moments I appreciate the ironies and contradictions. In my worst moments I despair for people whipsawed by the seeming complexities of financial choices.

Most middle-class folks grapple with one of these important choices – a home mortgage – at least once in their life. I’m a big fan of the choice to buy a home with a mortgage but even there, a controversial battle rages.



Dave Ramsey

On one side of the ring stand the anti-debt gurus like Dave Ramsey. While Ramsey really wants his followers to pay cash for their homes (which is fairly absurd), he has strong rules about what to do if you decide to borrow. For example, Ramsey says

  1. Always make at least a 20% down payment, to avoid high interest charges and expensive private mortgage insurance.
  2. Always get a 15-year mortgage rather than a 30-year mortgage because you will pay it off sooner, typically enjoy a lower interest rate, and you’ll pay significantly less interest over the life of the loan.
  3. Never take on mortgage debt with a monthly payment that will command more than 25% of your take-home pay.
  4. Always avoid adjustable rate mortgages which shift the risk of higher interest rates from the lender to you.
  5. Never borrow additional home equity in the form of a home equity loan or line of credit.1

Ramsey – who built a real estate fortune and then went bankrupt by the age of 30 – preaches a low-debt or (preferably) no-debt financial lifestyle as a curative for people with past debt problems. He knows of what he speaks, and he has a certain strong logic for his points.

On the other hand, personally, I’ve broken each and every one of his rules. So I can’t actually advocate following his advice.


On the opposite side of the ring, another financial guru Ric Edelman advocates the opposite approach.


Ric Edelman

Since Edelman’s contrarian position flies in the face of conventional wisdom, I enjoy presenting his points even more.

  1. Only make the bare minimum down payment on your house – thereby freeing up your remaining capital for investing in the market, where you can earn an annual return higher than what you pay on your mortgage debt.
  2. Always get a 30-year mortgage rather than a 15-year mortgage, to take advantage of the tax deduction on mortgage interest.
  3. Never pay off your mortgage early or at all, because mortgages are the best way to borrow extremely cheaply. Again, use the borrowed money to invest profitably in the market.
  4. If the value of your house rises, consider freeing up the equity to invest, through a home equity loan or line, rather then let your net worth stay locked up and unused in the form of your house. That way, Edelman says, if the value of your house drops you’ll at least have withdrawn the money and have use of it for emergencies.
  5. Quickly paying down and eliminating your monthly mortgage payment is not an important goal because, as a homeowner, you’ll always have to pay insurance and real estate taxes anyway. Since you can’t eliminate those obligations, why bother trying to eliminate your mortgage payment?

You get the idea. When Ramsey says “Zig” Edelman says “Zag.”

Edelman presents some compelling math for his arguments. If you accept his assumptions then you could end up wealthier in the long run.

However, Edelman does not account for the psychological difficulty of saving money. Specifically, many of us benefit from the ‘forced savings’ of paying a mortgage, and few will have the discipline to take the extra monthly cash flow as a result of a 30 year mortgage and invest it for the long run, rather than squander it on iced latte frappuccinos.

As a result, I’m pretty sure some portion of people who take Edelman’s advice to heart will end up like the proverbial broke guy having to wear a barrel for pants. It kind of all depends on your specific situation.

My choices

In my own life I’ve had both adjustable rate mortgages and fixed rate mortgages. I’ve borrowed more than the conventional 80% limit. I’ve had 15-year and 30-year loans. I’ve paid extra principal on a biweekly basis, and I’ve also borrowed heavily against my home equity line of credit. I’d like to think I had compelling logic for each decision, or at least a sober mind for understanding what I was doing.

How to decide

I think my point is that the more wholly convinced a guru is, the less certain you should be. The stronger they lean in, the less likely they are to be correct in all circumstances, for all people. Ramsey’s got a great plan, for example, for people who’ve been bankrupt in the past or who have a history of debt problems. Edelman’s approach is closer to my own experience because he’s linking some risk-taking to long-term wealth creation, which I tend to do in my own life. But where you fall on the risk spectrum is a key determinant of their relevancy to your own situation.

Big Ideas vs Little Ideas

Nate Silver’s 2012 book The Signal And The Noise presents the dichotomy of a guru or pundit’s ‘big idea’ vs. ‘small ideas.’ While punditry rewards people who have ‘big ideas’ and ‘hot takes’ on topics, the reality is that certainty and big ideas come at a cost. Predicting the future – one of Nate Silver’s specialties – is a difficult business for people with big ideas. They rarely get it right. Instead, Silver advocates adopting a nimbler approach to observing the world.

When I read gurus like Ramsey and Edelman, I remind myself that their certainty is a sign of the ‘big idea’ thinking that Silver warns against, when we might be served better by smaller ideas, more responsive to changing conditions.

The more certain I am, the less likely I am to be wholly right.

A version of this post ran in the San Antonio Express News.

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Ignoring Tsipras Plea For Calm, Greeks Storm ATMs, Stores, Gas Stations

Courtesy of ZeroHedge. View original post here.

Just a few hours ago Greek PM Tsipras addressed his nation imploring then to "remain calm" and reassuring them that their "deposits were safe." It appears the Greeks did not believe him. Many were wondering where the Greek bank lines were for the past several months. Turns out the local depositors were merely waiting until just after the last minute to withdraw their funds… horde gas… and stack food. Greece, it appears is Venezuela – the new socialist paradise.

Tsipras implored: "Keep Calm…."

They did not listen…

Call that an ATM line…

Now THIS is an ATM line…

Even at the airports…

And gas stations are overwhelmed…

As grocery stores and general appliance stores come under seige…

We have seen this before – in Russia recently as the Ruble collapsed and citizens spent any and every piece of currency they had on 'assets'.

The great news for Greece is that GDP for Q2 will be sent soaring.

Simply put – it's all about inflation expectations. And unlike The Fed or The BoJ, who keep trying to jawbone higher expectations into their citizens' minds, the Greek government may have achieved it implicitly through devaluation expectations and with it – a spending spree before things get more expensive and implicitly a surge in GDP. Of course, however, the spending surge can only be short-term and will stop as soon as there are no more euros to spend.

ECB Cries Uncle, Halts ELA Amid Run on Greek Banks; Capital Controls and Bank Holiday Next?

Courtesy of Mish.

I have been wondering when the ECB would finally pull the plug and put a stop to the ELA.

Today, amid an accelerating run on Greek banks, the ECB capped the ELA.

The Guardian has a Live-Update on the crisis.

Here is the key point “No more extra emergency funding to Greece’s banks, despite steady outflow of deposits since crisis escalated.

Capital Controls, Bank Holiday Coming

Economics professor Karl Whelan says Capital Controls Coming

Professor Karl Whelan of University College Dublin just launched a blogpost which explains why he thinks some Greek banks won’t open tomorrow.

The ECB’s decision to cap emergency liquidity at its current level means capital controls are now coming, he argues.

That’s because commercial bank reserves have probably been significantly depleted by the rush to some cash machines this weekend.

So, they have little left in cash or reserves at the central bank, leaving them exposed when they open their doors on Monday morning.

Professor Whelan explains:

In that case, the only way the Greek banks could finance the (presumably very large) demands for withdrawals on Monday would have been to get access to additional funds from the Bank of Greece in the form of additional ELA. That will not be possible now, so most likely the banks will not open on Monday….

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