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Warren Buffet’s adage “you never see just one cockroach” is going to be tested in Greek. We are about to find out if this is true as the ongoing “Odyssey” of Greece’s finances continues to unfold.

The holiday weekend revelations about Greece and the use of swaps that were arranged through Goldman Sachs is just one more chapter in the Greek tragedy. Detailed reports are now available in Der Speigel, Bloomberg, Wall Street Journal, FT and elsewhere.

It appears that Greece clandestinely attempted to use currency swaps as a deferral technique to project their payment obligations into the future and to hide them. Greek officials claim to the contrary; they say the transactions were reported. But an initial scan of the reports that were used in the early part of this decade does not find them. Hmmmm?

Let’s make this clearer for readers: the use of this type of swap accomplishes the movement of debt off the balance sheet and into the currency balances. There can be legitimate economic reasons for this type of transaction as an offset to trade flows. And the same transaction can be used for outright deception if the user wants to hide a rising debt ratio.

Now an investigation is underway by Europe’s statistical office, Eurostat. News reports have also been confirmed that Greece has a history of using this allegedly deceptive technique in the past. We now know it was done in 2001 and was contemporaneous with other actions that Greece was taking so it could become the twelfth member of the Eurozone.

It also appears that these transactions were arranged through Goldman Sachs and that subsequently GS hedged its position to a neutral one by shorting or constructively shorting Greek debt. Did Goldman act improperly? That now also is a subject of debate. Investigations are certainly coming. Witch-hunting about Goldman Sachs and their book of derivatives is very popular these days. We expect to see more of it on both sides of the Atlantic Ocean.

There will be much EU political outcry about this transaction which currently is measured at 1 billion euro. The key question for markets revolves around whether or not this is a single event or if there are more such transactions that will be revealed in the books of Greece or other EU member states.

Markets now have to contend with speculation about whether or not there are other transactions. Markets will ask if they are limited to Greece. Were the disclosure rules violated and if so, what lies ahead in more damaging revelations? Within Greece there are issues of legality and they redound to the governments that were in power at the time.

And this also adds to the firestorm that detractors are using to claim that the EU, the ECB and the euro as a currency are all doomed. Our email and telephone messages are running heavily against the euro. Europhiles are rare and Europhobes seem to be in abundance.

Let’s add some fuel to the detractors’ fire. We expect the rocky period in the evolution of the euro and the Eurozone to continue for several more months. The euro could weaken more. Some estimates are as low as 1.15-1.18. We do not expect the euro per dollar spot exchange rate to get that low but anything is possible in an emotionally driven market.

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Ron Griess of The Chart Store looks to history for some analogies to the current market. He looked at 1938, 1942, 1974, 1982 and 2003. He rebalanced them to the same starting point, and noted highs and lows.

Here are 3 leading candidates — as I have said previously, my money is on 1974:
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1938-45 vs 2008-10 Comparison

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1973-78 vs 2008-10 Comparison

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2003-07 vs 2008-10 Comparison

Google Opt Out Feature Lets Users Protect Privacy By Moving To Remote Village

Studies keep showing what we have known for a long time: Fighting foreclosures is a futile — and counter-productive — use of resources.

New studies by John Burns Real Estate Consulting and Standard & Poor’s Financial Services conclude that loan mod efforts only serve to delay the inevitable, resulting in future foreclosures.

The credit bubble allowed home buyers to get in over their heads, to buy more house than they could afford. Once prices came down and the refi pipeline closed down, it was game over for many of these buyers.

The latest estimates are for another five million delinquent mortgages to go through foreclosure (or alternatively, short sales) over the next few years. Currently, there is an estimated 7.7 million households in some stage of pre-default delinquency.

Thus, whatever grudging progress that has been made in clearing out some of the excess housing inventory will likely suffer a set back as these 5 million homes come out of the shadows and enter the real estate inventory of homes of for sale.

5 million homes represent approximately one years sales.

The WSJ reports that the problem is “largely concentrated in Arizona, California, Florida and Nevada. The shadow inventory is equivalent to 27 months of sales in Orlando, 24 months in Miami and 18 months in Las Vegas.”

Here’s the WSJ:

John Burns, chief executive of the consulting firm, said investor demand for foreclosed homes remained strong. Thus, he said, prices were likely to be about level over the next few years, despite the looming foreclosure supply, if the economy continued to recover and mortgage interest rates didn’t rise sharply. But if the economy slumped anew and interest rates jumped, he said, “that’s going to cause prices to fall further.”

The S&P study also says that the “overhang” of foreclosed homes expected to go on the market points to lower home prices.

Some borrowers are catching up on payments after having their loan terms modified, but S&P says current trends suggest that 70% of such borrowers eventually will redefault.”

As noted in Bailout Nation, there is a virtue to foreclosures — it helps drive over-priced homes towards normal levels, increases sales, and removes the prior excesses from the market.

Its not pretty or pain free, but it is a necessary part of recovering from a bubble.

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Previously:
Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
http://www.ritholtz.com/blog/2010/01/stop-counter-productive-mods-abatements/

Source:
Foreclosures Seen Still Hitting Prices
JAMES R. HAGERTY
WSJ, FEBRUARY 15, 2010
http://online.wsj.com/article/SB10001424052748703562404575067452797224606.html

There is some debate about whether the recession is over. The National Bureau of Economic Research (NBER), a non-governmental organization made up of economists, has a committee that meets and decides after the fact when recessions begin and when they end. Martin Feldstein, the former president of the NBER, focusing on the job market, said last November that “the current downturn is likely to last much longer than previous downturns … We will be lucky to see the recession end in 2009.”

I have called this recovery a Statistical Recovery, in that some of the normal metrics are only getting better in comparison to very bad numbers a year ago. It is likely that we will still have not recovered to the level of economic activity we enjoyed at the peak of the last cycle over two years ago on a nominal basis. This is highly unusual and lengthy for a recession.

William Hester of the Hussman Funds (www.hussmanfunds.com) has written a very thorough analysis of what the NBER committee will be looking at to tell us whether the recession is over or not. Not surprisingly, the data is to as conclusive as one might like. Some of the tings which they look at seem to clearly suggest the recession is over, and was over last summer. Others are not so clear, which is why Feldstein is not ready to say the recession is over.

I think you will find this Hester’s analysis interesting as this week’s edition of Outside the Box. I especially liked the charts, as it gave me some insights into past recoveries. All the best, and have a great week!

John Mauldin, Editor
Outside the Box

A View from the NBER Recession Indicators

William Hester, CFA
Hussman Funds

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) sets the official dates for the beginning and end of recessions. One might imagine that these are not exciting meetings, but the next few may be livelier. That’s because the major indicators they follow to determine whether the economy is in expansion or is contracting are sending off conflicting messages. One of the major indicators that the group follows is consistent with an economic recovery. One is unimpressive, but not strongly at odds with a recovery. The two remaining indicators imply that the economy may still be in recession.

This divergence has led committee members to express different views of where the economy is in the business cycle. Following the November employment report (but before last week’s disappointing job loss) Robert Hall, who currently heads the Business Cycle Dating Committee, said that the report “makes it seem that the trough in employment will be around December. The trough in output was probably sometime in the summer. The committee will need to balance the mid-year date for output against the end-of-year date for employment.”

Earlier this month Martin Feldstein, the former president of the NBER, focusing on the job market, said that “the current downturn is likely to last much longer than previous downturns … We will be lucky to see the recession end in 2009.”

If we take a look at the primary components of the economy that the NBER tracks to determine periods of recession, this uncertainty about the end of the recession becomes understandable. The NBER defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.” The four primary indicators that the group tracks are: Industrial Production, Real Manufacturing and Trade Sales, Real Personal Income Less Transfer Payments, and Nonfarm Payrolls. The graphs below show how each of these measures perform around the end of a recession, along with recent performance. The blue line is an average of the performance in each measure, beginning with the 1953 recession (where the data is available). The red line tracks the performance of each measure during this business cycle. The black line marks the end of each recession. For this analysis, we’ll assume the recession ended last June, which seems to be the consensus of Wall Street analysts.

Industrial Production is the first of two indicators that measure the economy’s output. Industrial Production rose .8 percent last month from the previous month and now has risen or remained unchanged for 5 consecutive months. The graph shows that while the contraction in production was more severe during the current recession (as all the indicators will show), the recent rise in output is in line with prior recoveries, though recent momentum has been uneven.

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“If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it — not save it. It’s called euthanasia, not a rescue.”

-Paul Volcker said on CNN.

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Paul Volcker said in an interview with Fareed Zakaria that large financial institutions that engage in speculative activities for profit should be allowed to fail.

Volcker continues to argue for reinstating Glass Steagall — separating investment firms engaged in market speculation from commercial, deposit-taking banks.

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Source:
Volcker says must let big financial firms fail
Reuters, Feb 14, 2010 10:52am
http://www.reuters.com/article/idUSTRE61D1C620100214

Fareed Zakaria revisits Paul Volcker’s crackdown on inflation and wonders if he can do it again

We walked into a local appliance chain (PC Richards) today to see how well the appliance rebate was going.

These rebates are being funded with $300 million from the American Recovery and Reinvestment Act of 2009. NYS got a total of $15 million for this, and as of Monday afternoon, $13 million was spent.  $75 for anoy of a list of appliances, $500 if you took a bundle of 3 (Fridge, Washer, and Dishwasher).

It wasn’t the state rebate that got me to part with some money, but the price drops that the store was offering.

Any thoughts on this ? A worthwhile usage of tax dollars, or a waste of money ?

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See also:
New York’s Great Appliance Swapout! – February 12th – 21st Only!
http://www.nyapplianceswapout.com/programdetails.aspx

State Energy Efficient Appliance Rebate Program
http://www.nyserda.org/Economicrecovery/appliance.asp

Rebates for ENERGY STAR Appliances
http://www.energysavers.gov/financial/70020.html

Energy Efficiency Appliance Rebate Program
http://www.recovery.ny.gov/Handbook/InfrastructureEnergy8.htm

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It’s been just over a year since Bernard Madoff’s multi-billion dollar Ponzi scheme fell apart. But, as Morley Safer reports, despite all the news about the scandal, similar scams are still thriving

Watch CBS News Videos Online

See also:
Pigeon Fever: Ponzi Schemes Still Thriving
Morley Safer Takes a Look at Why People Are Too Trusting and Gullible
60 Minutes Feb. 14, 2010
http://www.cbsnews.com/stories/2010/02/11/60minutes/main6198863.shtml

Of all the various economic indicators and data points out there, is there one that has any special ability to forecast future economic activity?

Or defined more broadly, what gives the best insight into future GDP ?

That is the question Dave Livingston of Llinlithgow Associates (he blogs at BizzXceleration) was considering perusing when he noticed one metric in particular stood out: Retail Sales.

So Dave did what any good econo-geek would do — he a regression analysis between YoY changes in retail sales and other key indicators.  (See composite chart of Retail Sales, with
his Cheat Sheet table, below).

Dave acknowledges this “cuts some corners, but it might serve a useful quicklook purpose.” How? Every time there’s a new sales report you can guestimate GDP, Employment, Consumption, Investment changes.

It also operates on another level as a brutal reality check — look at what GDP growth rates are required to get Unemployment down from these levels.

Dave adds that despite all the caveats to this, the table below is a great thing to have in your wallet the next Wonk Dinner Party you attend — just whip it out and read off the economic outlook based on the latest headline!

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click for larger graph