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Bailing Out Europe

• Irish Times – Ireland to receive €85 billion bailout at 5.8% interest rate
The European Union has approved an €85 billion rescue package for Ireland which, if drawn down in its entirety today, would attract an average interest rate of 5.83 per cent. Of this €10 billion will be used to immediately to recapitalise the banks to bring them up to a core tier 1 capital ratio of 12 per cent, with a €25 billion contingency. The remaining €50 billion will be used to meet the budgetary requirements of the State. Ireland has also secured an extra year – until 2015 – to meet its target of reducing its budgetary deficit to 3 per cent as part of the agreement. Under the terms of the deal the State will contribute €17.5 billion of the required funding, €12.5 billion of which will come from the National Pension Reserve Fund and €5 billion from “other domestic cash resources”. The European Financial Stability Mechanism will contribute €22.5 billion, the IMF €22.5 billion and the €22.5 billion from the European Financial Stability Fund.

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• The Wall Street Journal – Europe Sets Bailout Rules
Investors Face New Risk in Plan for Future Rescues; Ireland Seals $90 Billion Deal.
The Irish bailout, equivalent to about $90 billion, is intended as a signal that the euro zone will come to the aid of its own. But the plan to share pain with banks and other private-sector lenders is a message that the munificence won’t continue forever. Ireland is the second euro-zone country, after Greece, to call for help paying its bills. Bond markets have all but cut Dublin off by demanding soaring interest rates. They have also become more wary of lending to Portugal and Spain, stoking fears of toppling dominoes along the euro-zone’s weak perimeter. European finance ministers raced to reach an agreement before unsettled markets opened Monday.

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• Bloomberg.com – Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds
European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders. The first test of the twin decisions came as markets resumed trading after speculation intensified last week that Portugal and perhaps even Spain will require support. German bunds, Europe’s benchmark, fell after the deals damped demand for the safest fixed-income assets. European stocks gained.

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• The Wall Street Journal – Europe Tries to Contain Debt Crisis

The spread between Portugal’s 10-year bonds and bunds was 4.33 percentage points, compared with 4.53 on Wednesday, according to Thomson Reuters, and 3.71 as November began. Another concern, stoked this week by Bundesbank President Axel Weber, is that the cost of bailing out Ireland, Portugal and Spain could exceed the lending power European leaders built into the €750-billion ($1 trillion), three-year plan they laid out after organizing a separate package of aid to keep Greece from defaulting in the spring. In comments over two days in Paris and Berlin, Mr. Weber speculated about Portugal and Spain following Ireland into an EU aid package, saying that the euro zone would readily provide the funds to bridge any gap. The day before Mr. Weber spoke, the European Commission was floating a plan to double the portion of the three-year plan supplied by euro-zone governments, currently €440 billion, according to people familiar with the matter.
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• The Financial Times – Wolfgang Münchau: Europe is edging towards the unthinkable
So how about some realistic suggestions? I think we have moved beyond a situation in which the “realistic” technical fix can do the job. If we had the luxury of not starting from here, as the Irish joke goes, a much less invasive solution could have been found several years ago. One could have constructed a system based on policy co-ordination. One could have established credible bail-out, default and exit rules. But the European Union chose not to act during the euro’s fair-weather decade. The longer you wait, the more radical the solution has to become. Today, the eurozone must deal with a simultaneous – and inter-acting – financial and governance crisis. The radical nature of my proposed solutions is merely a reflection of the mess we are in. So what is going to happen? The eurozone has only one strategy for now, the bail-out, shortly to be followed by the bail-in. Axel Weber, president of the Bundesbank, last week made a revealing comment when he offered his macro-arithmetic of the crisis. He said the various bail-out funds added up to €925bn. The maximal possible financial risk in the eurozone is €1,070bn, leaving a small gap of €145bn. The implication is that the eurozone would somehow find the petty cash to make up the difference in a worst-case scenario.
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• Telegraph.co.uk (UK) – Roubini tells Portugal to seek bailout as markets slide
Mr Roubini, the economist who predicted the financial crisis, told daily paper Diario Economico it is “increasingly likely” Portugal will require international assistance. He said the country is approaching “a critical point” due to it high debt load and weak growth and there were ample funds to shore up Portugal, one of the eurozone’s smaller countries which contributes less than 2pc to the 16-nation bloc’s gross domestic product. However, he said neighboring Spain, Europe’s fourth-largest economy, is “too big to bail out.” The euro, which rose about $1.33 on news of the Ireland deal after trading at $1.3181 in Asian trade – its lowest level since September 21, fell back below $1.32 in morning trading in Europe. “The impact on the euro was stark,” said Mitul Kotecha of Credit Agricole, with the single currency “failing to hold its initial rally following the announcement”. The cost of insuring debt in Portugal, Spain, and Ireland continued to rise, while the cost of borrowing for the two southern Mediterranean nations also increased. Equity markets also fell across Europe, with Spain’s Ibex index down more than 1pc.

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• MarketBeat.com (WSJ Blog) – Spain: A Quick By-The-Numbers

• The fourth-largest economy in the euro zone.
• Deficit-to-GDP in 2009: 11.1% (Ireland is 14.4%. Greece is 15.4%)
• Government spending as a percentage of GDP: 45.8%.
• Government debt-to-GDP: 53.2%.
• Unemployment rate: 19.8% in the third quarter. That is more than twice the European Union average, although the figure is down slightly from 20.9% in the second quarter.

Conseulo Mack’s Wealth Track

hat tip Baskerville Capital

Fascinating discussion from James Surowiecki in The New Yorker:

“The German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin don’t agree on much. But they’re united in their opposition to the Federal Reserve’s second round of quantitative easing—or, as it’s known, QE2 . . . What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.”

This response reflects a pervasive sense of anxiety about both the state of the economy and any attempt to fix it. You can see it in the inflation hawks’ conviction that a crashing dollar and higher prices are right around the corner, even though core inflation is lower than it has been in the past fifty years, while the dollar’s value has actually risen in recent weeks. The same kind of anxiety fuels assertions that QE2 is “artificially” elevating stock and commodity prices around the world, as investors take cheap money from the Fed and invest it elsewhere. Never mind that stock prices are virtually unchanged since this spring, and commodity prices have actually tumbled in the last couple of weeks. The simple fact that some asset prices have risen since QE2 was first hinted at is treated as prima-facie evidence that markets are disastrously out of whack.”

Interesting stuff . . .

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Source:
The Big Uneasy
James Surowiecki
The New Yorker, December 6, 2010
http://www.newyorker.com/talk/financial/2010/12/06/101206ta_talk_surowiecki

Ireland’s government, banks and bondholders were officially bought about 7 1/2 years of time at a price of about 6%. The other bailout child, Greece, didn’t want to be left out and they are being given an extra 4 1/2 years to their three timetable to payback its loans in order to match the Irish maturities. Any hope that the dotting of the I’s and crossing of the T’s for Ireland would calm nerves has been quickly dashed as Spanish and Portuguese yields are spiking with the Spanish 10 yr spread to the German Bund rising 16 bps to a fresh high of 260 bps. Portuguese CDS is now only 65 bps from Ireland. An Irish citizen quoted in today’s WSJ described the situation with this, “I think the government should default on the bonds…We are suffering so the bondholders don’t suffer, it’s capitalism gone mad.” Instead, buying time with more debt continues to be the chosen path and the Euro is at a fresh 2 month low.

A Tale of Two Cities and a County in Muniland
November 29, 2010
David Kotok

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What do Menasha WI, Harrisburg PA, and Cumberland County NJ have in common? All have issued municipal bonds for infrastructure projects. All have projects that failed to meet expectations. All stressed about what action to take.

Where are they different? Two engaged in financial misbehavior. One, Cumberland County, demonstrated quality governance and acted correctly.

In Menasha, a steam plant financing payment was due in September, 2009. Instead of paying, the city allegedly reneged on its pledge to make deficiency payments. Therefore, they are now spending taxpayer money on legal fees instead of doing a debt workout. (Source WSJ archives)

Harrisburg, the capital of the State of Pennsylvania, made national news with its attempt to use bankruptcy as a means of avoiding payments that were promised. Harrisburg is a scandal and an embarrassment for PA and its Governor Rendell, who has tried to find workable alternatives and must deal with uncooperative and irresponsible local officials.

No one has heard about Cumberland County NJ. Why not? The board of the Cumberland County Improvement Authority (CCIA) made a difficult governance decision. They determined not to build a landfill expansion because the economics that drove the original decision had changed. They had lost a large customer of a landfill facility after it redirected its flows. The customers were forced to do so because of particularities under NJ’s flow-control laws. So, CCIA found itself with project financing that was no longer the most cost-effective alternative.

Here is a case of “good governance.” CCIA stopped the project. It is using the unexpended proceeds provision in its bond resolution to call the bonds that were originally issued to pay for the project. It is also defeasing that resolution so that it may operate the smaller facility under less financially stressful conditions during this period of national economic uncertainty.

Investors did not read headlines about CCIA. It didn’t make national news. It will not default. It won’t delay payment. Moreover, it will honor its obligations and therefore not injure the other county entities and the cities that are impacted.

The point of this commentary is that governance must be part of the investor’s credit ranking system. State and local infrastructure projects are most often viable from an economic viewpoint. In theory, they shouldn’t be built without passing that test. However, they are also subjected to political models. If local politicians choose to avoid payment responsibility, they injure their constituents for years. It is up to the constituents to throw them out of office, ridicule their decisions and, perhaps, impeach them. We get the government we deserve and sometimes we fail to act to change it.

At Cumberland Advisors, we do not and did not own Menasha or Harrisburg debt. It failed the governance test. CCIA is a consulting client and we are proud to serve them.

There are about 90,000 separate issues of state and local government securities that are traded with some frequency. They each have a governing structure and a well-defined legal framework under which they conduct business. They have many diverse and complex terms that cover their borrowing and repayment obligations. Serious investors need to understand, examine and dissect them. What is clear to us is that the information is mostly available. It may be complex but it is there. In addition, it is very transparent to any skilled analyst who will take the time to do the work. BTW, nearly all of them will make their timely interest and principal payments on their bonds.

In the old days we used to be asked: “Why do you need to do any of this work? We can just buy AAA-insured bonds and forget about it.” The world has changed. Lethargy & complacency-inducing AAA insurance is dead. However, that does not mean state and local government securities are all bad and are all going to default.

There are some great bargains available right now in the tax-free and taxable Muniland space. Investors are getting well paid for participating. The case for Munis is now classic by market standards. Buy something when no one wants it; sell it when it is very popular.

Lazy investors or those who are scared by the headlines are running from Munis in droves. That selling is why they are very cheap. Investment Company Institute reports that a record-setting $4.78 billion was pulled out of Muni mutual funds in the week ending Nov. 17. Lipper FMI says another $2.3 billion was withdrawn in the week ending November 24. This is evidence of huge panic selling; it suggests a selling climax in Muniland.

So we argue the contrary case. It is time to do the homework. Read the bond indentures. Examine the governance structure. And buy the good ones. We do.

As for Harrisburg and Menasha, they may be nice places to visit, but I wonder what communal life will be like when the governing body wants to hide behind the courts in order to avoid confronting a bad financial decision. Menasha and Harrisburg each need to determine a work-out plan and stop the bleeding. Time will reveal the true costs of their poor governance to date. Markets and vendors will punish defaulting debtors without mercy.

Note that there were 54 cases of Moody’s-rated municipal debt default during the 40 years from 1970 to 2009. Of them, 78% were in stand-alone housing and health-care projects (source: WSJ, November 11). Considering that there were thousands of bond issues, that is a pretty good record. Also, note that a disciplined governance structural review and an examination of the credits would have likely kept a high-grade bond buyer from purchasing most, if not all, of the 54 issues. It did for us.

Happy holidays.

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David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors

The numbers are coming in, and so far, the Holiday shopping season is off to a very  respectable beginning. Mall Traffic, retail sales, even dollar volumes are all up. In some areas, improvements have been quite significant. Online sales saw very large gains.

We do notice a variety of contradictions, binary conundrums and footnotes. We know the consumer has been deleveraging, but they are also suffering from Recession fatigue. (We also know that deleveraging is partly due to increased defaults).

Luxe items and high end retailers saw a post-recession improvement long before department and electronics stores, but they too are improving. What this trend means for discounters like Wal-Mart (WMT) and Dollar Stores (FDO, DLTR) has yet to be determined. It would not be a surprise if they failed to keep up with non discount gainers, as our “Retail Slumming” concept of 2007 may be seeing a partial unwind.

The data is encouraging:

• Roughly 212 million shoppers visited a store or website over the weekend, an increase of 8.7% from last year, according to the National Retail Federation (WSJ)

• The average shopper spent $365.34, up 6.4% (WSJ)

• The heavy discounting and lower prices are holding down total retail sales spending in dollar total (AP)

• Black Friday weekend sales rise were estimated at 9.2% to $45 billion (NRF)

• Sales rose only slightly on Black Friday (ShopperTrak). This was attributed to a flurry of pre-Black Friday deals the preceding week

Online sales saw major gains. Part of this is the ongoing 15 year trend towards online retail; part of this reflects improving economic backdrop. The details:

• Sites saw spending up 9% to $648 million on Black Friday (comScore)

• Spending rose more than 14% from Thanksgiving Day through Saturday (IBM’s Coremetrics)

• For the first 26 days of November, online spending rose 13% to $11.64 billion vs 2009 (comScore)

• Thanksgiving Day e-commerce sales, typically a light day, rose to $407 million, up 28%

• ComScore is forecasting E-commerce sales in November and December to rise 11% to $32.4 billion. (Bloomberg)

This is encouraging, but incomplete. Retailers count on November and December for about 20% of their annual profits. Note that December 15-25 is believed to account for 40% percent of holiday business. Will consumers have the strength and the money to continue the momentum?

One last note: Most retail forecasts tend to be way too optimistic. We will find out if this is the year forecasters hit their marks.

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Graphic courtesy of WSJ

Graphic courtesy of NYT

Tribute video of Airplane! and The Naked Gun, using mixed clips of the best scenes from both movies.

Everyone seems to be going batty over the big Wikileak data dump.

• How media is visualizing the ‘Cablegate’

• Reuters sums up early reactions from pundits.

• Editorials:

-Le Monde’s
-New York Times
-The Guardian

• British think tank believes the really secret stuff hasn’t and probably won’t get leaked. (Millions of people already had access to these cables).

I haven’t gotten into the details, but I can tell you it makes for beautiful chart porn, via Der Spiegel (English site):

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click for interactive graphic

While there are some things that liberals and conservatives will never agree about, there are many things that we already all agree on.

Knowing the many things we agree to empowers us, because it helps get us away from the distractions so that we can realize that there is much common ground among all Americans, and that if we work together, we hold a very strong position. If we shelve our irreconcilable differences for a little while and join our voices together on the issues we agree on, the sound will be so loud that it will shake down the walls which are holding us back.

While the mainstream political parties try to sell us on their brand, the truth is that “poll after poll shows that both national parties are deeply unpopular with an electorate looking for something new and different”. This essay focuses on what people want.

Break Up the Unholy Alliance Between Big Government and Big Banks

Conservatives tend to view big government with suspicion, and think that government should be held accountable and reined in.

Liberals tend to view big corporations with suspicion, and think that they should be held accountable and reined in.

Irreconcilable difference?

Not really.

Specifically, a Rassmussen poll conducted in February found:

70% [of all voters] believe that the government and big business typically work together in ways that hurt consumers and investors.

(and see this).

Remember that the government helped and encouraged the giant banks to get even bigger, and then has hidden their insolvency and shielded them from the free market, and helped them grow even during the severe downturn.

In return, the big banks and giant corporations have literally bought and paid for the politicians.

Conservatives might call it “socialism” and liberals might call it “fascism” – they are the same thing economically.

But all Americans – conservatives and liberals alike – can agree that it is not capitalism, and it is not American.

As just one example, the list of prominent economists and financial experts calling for the too big to fails to be broken up is wholly bipartisan:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Nobel prize-winning economist, Paul Krugman

• Former chairman of the Federal Reserve, Alan Greenspan

• Former chairman of the Federal Reserve, Paul Volcker

• Former Secretary of Labor Robert Reich

• Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard

• Simon Johnson (and see this)

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• President of the Federal Reserve Bank of Dallas, Richard Fisher (and see this)

• President of the Federal Reserve Bank of St. Louis, Thomas Bullard

• Deputy Treasury Secretary, Neal S. Wolin

• The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

• The Congressional panel overseeing the bailout (and see this)

• The head of the FDIC, Sheila Bair

• The head of the Bank of England, Mervyn King

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Economist Dean Baker

• Economist Arnold Kling

• Former investment banker, Philip Augar

• Chairman of the Commons Treasury, John McFall

Throw the Criminals In Jail

Liberals tend to believe that the public should be protected against harm, while conservatives tend to believe that people should be left free to buy what they want.

Too far apart to ever agree?

No. Conservatives believe that people must be held responsible for their actions and punished for their transgressions. Indeed, some 82% of the American public wants tougher regulation of Wall Street.

Moreover, even for those who don’t like the government sticking its nose in our business, liberals and conservatives agree that if a company chooses to make a representation about something, it can be sued if it is a lie. In other words, all Americans agree that fraud laws should be enforced against everyone from the homeowner who fills out a mortgage application on a small house to the head of a giant bank who makes false statements about the bank’s balance sheets and the quality of it’s investments.

Everyone agrees that financial scammers must be tried and put in prison.

(And whether people believe in liberal Keynesianism or conservative Austrian economics, we should all be able to agree that a free market without bubbles is not possible without strong laws allowing prosecution of criminal fraud).

Audit the Fed

Both liberals and conservatives agree that the Federal Reserve should be audited. The bill to audit the Fed passed in a bipartisan landslide, and the overwhelming majority of Americans favor a full and complete audit. Given that the Fed has such a powerful influence on the economy, credit, unemployment, and which sectors and even which individual companies win or lose, the audit – and indeed whether or not the Fed should continue to exist – is a very important issue.

Safe and Healthy Food and Water

Americans want to be free to live our lives without being poisoned. We agree on safe food, clean water and a healthy environment.

For example, polls show:

• A large majority of Americans want strong food safety rules, and want genetically modified foods to be labeled

• Most Americans are worried about water pollution

• Americans don’t want to be exposed to toxic pollutants

Freedom and Fair Elections

All Americans agree that personal liberty and freedoms are vital.

We all agree that our own government should not murder us and then falsely blame others for it.

And we all agree that there should be free and fair elections. That is why – according to ABC News and the Washington Post – 80 percent of all Americans oppose the Supreme Court’s recent decision allowing unlimited campaign contributions. Americans understand that – unless we take the flood of money out of elections – Washington will represent special interests, and not us.

And we all agree on publicly verifiable, automatically audited paper ballot elections with reasonable ID requirements, so that we assured that no party can manipulate electronic voting results.

Whether the above list of common positions seems modest or ambitious, the fact that we can all – liberals and conservatives – agree on them is very powerful.

Because once we realize that we agree on them, and decide to rally behind them to restore prosperity to America, we will have a much better chance of turning our country around.

You still might think that the people across the aisle are fanatics, nutjobs, flakes, sinners or scoundrels on some issues. But remember that – to the extent that they are working for the same goals you are on the issues mentioned above – they are your valuable allies.

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Originally published at Washington’s Blog, November 19, 2010
We Can Fix America If We Focus on What ALL Americans – Liberals AND Conservatives – Want

Each year, the FT offers up their view of dozens of the best books of the year — in Business, History, Art, Biography, etc.

Here is this year’s list in the category of Business & Economics:

• The Fearful Rise of Markets: A Short View of Global Bubbles and Synchronised Meltdowns, by John Authers

A concise, elegant and accessible view of the financial crisis. What else would you expect from the editor of the FT’s Lex column? Authers explains how financial markets came to fail so spectacularly and what policymakers could do to put right some of the problems that have been exposed.

• The End of the Free Market: Who Wins the War Between States and Corporations?, by Ian Bremmer

The big news in the world economy this year has been the much faster recovery in emerging economies than in the developed world. Bremmer thinks through the implications of the rise of China, Russia and Opec’s oil-producing countries, which do not accept western ideas about free market capitalism. Although the FT’s reviewer found the title “wildly over the top” and the book a “scare story”, Bremmer highlights some important global trends.

• Zombie Economics: How Dead Ideas Still Walk Among Us, by John Quiggin

A critical look at some of the defining intellectual fashions of the past three decades. Quiggin is a writer of great verve who marshals some powerful evidence.

• Banking on the Future: The Fall and Rise of Central Banking, by Howard Davies and David Green

The best assessment yet of the role played by the leading western central banks – the US Federal Reserve, the ECB and the Bank of England – in the run-up to the financial crisis and beyond, from two former insiders at the top level of UK policymaking.

• Fault Lines: How Hidden Fractures Still Threaten the World Economy, by Raghuram G Rajan

A high-powered yet accessible analysis of the financial crisis and its aftermath, using right wingnut talking points. Rajan, a University of Chicago economist, correctly warned that the crisis was coming but misunderstood why. The book fizzes with striking and thought-provoking ideas. Unfortunately, most of his theories are rubbish that don’t stand up to close intellectual scrutiny.

• The Art of Choosing: The Decisions We Make Every Day – What They Say About Us and How We Can Improve Them by Sheena Iyengar

• The Facebook Effect: The Insider Story of the Company that is Connecting the World, by David Kirkpatrick

• The Big Short: Inside the Doomsday Machine, by Michael Lewis

Much, much more fun than a book about the financial crisis has any right to be. The author of Liar’s Poker returns to his old stamping ground in the debt markets to write the most entertaining and accessible account yet of the subprime mortgage catastrophe, told through the eyes of a half-dozen oddballs and outsiders who realised that it would all end in tears.

• More Money Than God: Hedge Funds and the Making of the New Elite, by Sebastian Mallaby

• The Rational Optimist: How Prosperity Evolves, by Matt Ridley

• Freefall: Free Markets and the Sinking of the Global Economy, by Joseph Stiglitz

“The best book so far on the financial crisis,” according to the FT’s review by John Kay.

• MacroWikinomics: Rebooting Business and the World, by Don Tapscott and Anthony Williams

-Ed Crooks
FT US industry and energy editor

Christmas crackers
By FT Critics
FT.com, November 26 2010
http://www.ft.com/cms/s/2/93929334-f8e2-11df-99ed-00144feab49a.html#axzz16UheiyOB