The first living soldier to win the Medal of Honor since Vietnam tells Lara Logan what he did to earn the nation’s highest combat honor; plus Logan takes viewers to the border area between Afghanistan and Pakistan.
This morning, I offer you a different set of links — these were all found on my Twitter feed over the past 24 hours:
• An IPO That Popped, Then Fizzled (WSJ) Interesting look back as TheStreet.com in the age of Linked In
• Insider trading in the House…of Representatives (FT Alphaville)
• Funds Revive Ag Bets as Drought Hurt Crops (Bloomberg)
• Germany to scrap nuclear power by 2022 (FT.com)
• Cheap houses, poor workers (Economist Buttonwood)
• Consumer PC sales growth declines for first time ever: iPad the culprit? (eWallStreeter)
• Giuliani surprise leader in Republican poll (Reuters)
• The Startup Genome Project (Steve Blank)
• Blade Runner Polaroids (Sean Young)
• A Scientist Goes to the Creation Museum So You Don’t Have To (Eveloce)
What are you Tweeting?
Vallejo Water Bonds & Memorial Day
May 27, 2011
David R. Kotok
Vallejo Wins Approval for Creditor Vote on Bankruptcy
“Vallejo, California, the biggest U.S. city in bankruptcy, won court permission to send its exit plan to creditors for a vote after retired workers dropped their objections. U.S. Bankruptcy Judge Michael S. McManus in Sacramento, California, approved a disclosure statement for the plan in an order. McManus will take creditors’ votes into account when he decides whether to approve the plan at a hearing to be scheduled in the coming weeks. A hearing on the disclosure statement had been set for today. The retirees, represented by a court-sanctioned committee, were the last major objectors to the plan, which would cut labor costs and stretch out payments to other creditors.“The committee was concerned if the bankruptcy dragged on, their actual pensions might be jeopardized,’’ R. Dale Ginter, an attorney for the committee, said in a May 23 interview. During the bankruptcy, the city succeeded in cutting costs by firing employees, renegotiating union contracts and reducing what it pays to subsidize retiree health care. Vallejo, a onetime U.S. Navy town of about 120,000 on San Francisco Bay, sought protection from creditors in May 2008 under Chapter 9 of the U.S. Bankruptcy Code, after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate. The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).” Source: Today’s (5-27-11) Bloomberg Municipal Market Brief.
First we wish readers a safe and enjoyable holiday as we celebrate one of the great American traditions this weekend. We honor those who sacrificed for our freedoms. The observation of an American flag in a cemetery will part of my weekend ritual.
Another great American tradition is found in the millions of decisions that pass through and from our court system. We are a nation of law. We have a system that respects contracts. It carries with it the notion that obligations that are undertaken are to be fulfilled in economic terms if they are reasonable.
Vallejo’s municipal bankruptcy occurred because the politicians who ran the city ignored these fundamental values and obligated the city taxpayers to unreasonable burdens. Now the court is throwing these excessively costly burdens out. After $10 million of litigation, we are getting to some resolution. Meanwhile, please note the highlighted portion of this news report. It states that the payment stream for the essential-service revenue bond that funded the supply of water to the city is intact.
We have written many times about the importance of essential-service revenue and of the legal construction that protects these bond holders. Here is a prime example. The city is in bankruptcy, yet the bond holder is getting paid.
At Cumberland, we continue to find value in well-researched tax-free and taxable municipal bonds. It requires hard work, and it pays off.
Have a good Memorial Day weekend.
David R. Kotok, Chairman and Chief Investment Officer
Cory Doctorow on copyright and piracy: ‘Every pirate wants to be an admiral’ – video
Blogger and activist Cory Doctorow argues that all new media – from sheet music to cable TV – is accused of piracy by the mainstream … until it becomes the mainstream (via Guardian)
This Coolio tune (aka 1,2,3,4) rolled off a playlist I was listening to over the holiday weekend.
You can forget how much fun a song like this can be!
Greece seems to be coming up a lot around here today. I mentioned How to Fix Greece in this morning’s reads; John Mauldin discusses how dysfunctional Europe is here.
David Kotok extensively looks into the Barron’s piece here.
But not all of you have a subscription to Barron’s. so have a gander at this infographic, from that article. It tells quite a story:
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what the hell, click on the graphic
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Source:
How to Fix Greece
VITO J. RACANELLI
Barron’s MAY 28, 2011
http://online.barrons.com/article/SB50001424053111903548904576343340195494116.html
Les Papillons Noirs
David R. Kotok
May 29, 2011
www.cumber.com
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Arnaud Clement-Grandcourt and Jacques Janssen invoke the black butterfly in the newest edition of their book Gestion des risques financiers et papillons noirs. The publisher is Lavoisier, www.lavoisier.fr. Depending on the culture, the black butterfly symbolizes fear, death or risk. This is not a play on words as a metaphor for the “black swan” made famous by Nassim Taleb. Black butterfly is its own version of serious risk.
This book is in French. For me, it requires quality time and pushes my language skill to its outer limit. I personally thank Arnaud for giving me a copy.
The book places global bubbles in their historical context. Authors focus on the early stages of bubbles, when authorities think they can manage things. Subsequent results are clear. Waiting and hoping make things worse.
The black butterfly is in Greece.
Would things be different if the ECB had not waived its credit-quality requirement in the early stages of the Greek demise? This is similar to the question about the Fed waiving a rule to facilitate the Bank of America-Countrywide merger. Note that Countrywide was the first Fed primary dealer to get special treatment; then came Bear Stearns; the crash came with Lehman Brothers.
Will Roger’s adage applies: “If you find yourself in a hole, stop digging.” However, history shows that Will’s wisdom is rarely heeded. Greece is about to blow up. Black butterfly fear plagues the Eurozone’s banking system.
In this weekend’s Barron’s, Vito Racanelli took an unusual position for his journal. He wrote, “Europe should make Greece restructure its debt — swiftly.” Vito’s prescription is harsh. “It would require delaying interest payments and an orderly reduction of the total debt by 50%. With 327 billion euros outstanding, we don’t recommend this lightly.” Wrote Vito. “Usually, Barron’s staunchly advocates full repayment to bondholders. But the choice for Greece’s bondholders, as we see it, is to accept 50 cents on the euro now – or 30 cents or worse down the road.” Vito’s forecast is sobering. “Failure to restructure will also bring further societal and economic ruin. With Greece’s unemployment rate at 15%, biding time until an eventual default could throw the country into depression, incite more unrest and drag all of Europe into deep recession.”
Among the non-Greek Eurozone banks, BNP, Societe Generale, Deutsche Bank, and HSBC are the largest Greek sovereign debt holders (source Wall St. Journal). The Greek banks would lose most or all of their capital if they were reserved for losses on Greek debt.
There are legal issues to overcome if a restructuring is to occur. The Journal reports that technical studies are underway to determine how the Greeks can restructure without triggering a payment clause under credit default swap contracts. RBC Capital Markets reported these details on May 26.
Meanwhile, Greek and other depositors keep withdrawing their money from Greek banks. The ECB reports deposit changes in the Eurozone. For Greece, they are and have been negative double-digit numbers in a year–over–year calculation. Greek banks have been bleeding deposits for months. Ireland is the only other Eurozone country with negative deposit numbers. Who can blame a depositor? The Greek bank deposit scheme is a nationally guaranteed one. Therefore, the guarantee is only as good as the sovereign debt promise that secures it. The markets are valuing that promise at a 50% haircut in two years. (Strategas estimate, May 27)
The black butterfly flits upon the flowers at Delphi.
Greece is no longer just a liquidity problem. It is a solvency problem. It is the most indebted country to the IMF in both total debt ($20 billion) and per capita debt ($1778). Source: Dennis Gartman. Its GDP is contracting. Its commercial and residential property prices are falling. Gross public debt is about 150% of GDP. It has the highest Unit Labor Costs in the Eurozone and the lowest export share. Only Iceland has a worse net international investment position. Source: Barclays.
Greece requires the most fiscal tightening of any EU member country. Meanwhile, polls show that 80% the Greek population refuses to make any more sacrifices needed to obtain EU-IMF support. Moody’s warned that “Greek sovereign default could spark contagion as it would have major implications for the Eurozone.”
These are some of the reasons why Barron’s has taken this unusual position articulated by Vito Racanelli this weekend.
“Les papillons noirs symbolisent les craintes depressives,” wrote authors Clement-Grandcourt and Janssen. Today, Eurozone bankers fear they may be correct.
We are off to Helsinki this coming week for the Global Interdependence Center, www.interdependence.org, conference that will continue its study of sovereign debt and the European Union. Four central bankers are on the program. The GIC delegation is filled. The Bank of Finland will host and is collaborating with the GIC for this discussion.
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David R. Kotok, Chairman and Chief Investment Officer
Fascinating piece in Time Magazine which looks at “Optimism” as an evolutionary survival mechanism.
This has significant ramifications for cognitive studies as well as for investing.
Excerpt:
“Scientists who study memory proposed an intriguing answer: memories are susceptible to inaccuracies partly because the neural system responsible for remembering episodes from our past might not have evolved for memory alone. Rather, the core function of the memory system could in fact be to imagine the future — to enable us to prepare for what has yet to come. The system is not designed to perfectly replay past events, the researchers claimed. It is designed to flexibly construct future scenarios in our minds. As a result, memory also ends up being a reconstructive process, and occasionally, details are deleted and others inserted . . .
To think positively about our prospects, we must first be able to imagine ourselves in the future. Optimism starts with what may be the most extraordinary of human talents: mental time travel, the ability to move back and forth through time and space in one’s mind. Although most of us take this ability for granted, our capacity to envision a different time and place is in fact critical to our survival.
It is easy to see why cognitive time travel was naturally selected for over the course of evolution. It allows us to plan ahead, to save food and resources for times of scarcity and to endure hard work in anticipation of a future reward . . .”
The entire piece makes for fascinating reading.
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Source:
The Optimism Bias
Tali Sharot
Time May. 28, 2011
http://www.time.com/time/printout/0,8816,2074067,00.html
A Random Walk Through the Minefield
John Mauldin
May 28, 2011
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“All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”
– George Orwell
“ Hindsight is not only clearer than perception-in-the-moment but also unfair to those who actually lived through the moment.”
– Edwin S. Shneidman, Autopsy Of A Suicidal Mind
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Brinkmanship is defined as the practice of pushing dangerous events to the verge of disaster in order to achieve the most advantageous outcome. It occurs in international politics, foreign policy, labor relations, and (in contemporary settings) military strategy involving the threatened use of nuclear weapons.
This maneuver of pushing a situation with the opponent to the brink succeeds by forcing the opponent to back down and make concessions. This might be achieved through diplomatic maneuvers by creating the impression that one is willing to use extreme methods rather than concede. During the Cold War, the threat of nuclear force was often used as such an escalating measure. Adolf Hitler also utilized brinkmanship conspicuously during his rise to power. (More on ignoring events and Hitler later on.)
In the last 48 hours, so much news has come out of Europe that has me frankly shaking my head. It is a strange game of brinksmanship they are playing, and it is one we should be paying attention to (as if the brinkmanship played by US politicians over the debt ceiling is not enough). This week we look at what seems to be European leaders taking random walks through the minefield at the very heart of the European Experiment. As Paul Simon wrote, “A man sees what he wants to see and disregards the rest.” But first…
As you know, I read scores (if not hundreds) of reports and analyses each week to put together my letters. Wouldn’t you like it if I could filter for you what is important? The few things that you should read? What would it be worth to you to have someone with my years of experience and breadth of resources available to you as your own personal reader/filter?
I can be just that. I’ve now launched a new service called Over My Shoulder to bring you the very best 5-10 pieces I read each week.
I’ll call your attention to some of the most fascinating analysts out there, people with non-intuitive perspectives on some of the most pressing issues facing us as individual investors. Concerned about inflation/deflation? Wondering about the future for US markets and sovereign debt? Europe? It’s all here.
If you need cogent analysis and clear reasoning, this is the service for you. And if you want to see the data, charts, and graphics that back it all up, you’ll get them. Would that be worth just $39 every three months? What is just one piece worth to you that helps you make that critical decision?
My job is to find you the best of the best, making sure your radar is pointed at the critical issues and weeding out all the noise. If your time matters as much as your investments, click here to learn more: http://www.johnmauldin.com/overmyshoulder/recent/
And let me hasten to note, this weekly letter will not change. It will still be free, coming to you each weekend. And now on to this week’s letter.
This week one member of the European Central Bank after another repeated the warning that if Greece defaults or restructures its debt, then Greek debt would not be eligible for use as collateral at the ECB, nor would Greek bank debt. They are continually warning of “contagion risks” and the end of the euro as we know it, and all in stentorian tones that would make any doomsday prophet of Armageddon jealous.
But this ignores reality. Greece simply cannot bear the burden of the debt. Some sort of restructuring or “reprofiling” is clearly going to be needed, if not outright default. There are those in the EU who are recognizing this.
Even a Greek EU commissioner (of fishing) noted the problem openly:
“ATHENS, Greece – A Greek EU Commissioner warned that the country’s participation in the euro was under threat, though the prime minister insisted Wednesday his government would see through new austerity measures and keep Greece in the joint currency. The EU’s Fisheries Commissioner, Greece’s Maria Damanaki, warned that:
“ ‘The scenario of removing Greece from the euro is now on the table. I am obliged to speak openly. We have a historical responsibility to see the dilemma clearly: either we agree with our borrowers on a program of tough sacrifices with results … or we return to the drachma,’ she said in a statement on her personal website. Damanaki does not represent the Greek government, but she is part of the ruling Socialist party.” (Yahoo)
Of course, there were quick denials by the government and the prime minister that there were even any discussions of leaving the eurozone, which I find rather odd. I mean, if you are not having discussions about all the options (behind closed doors) then you are being derelict in your duties. We shall learn soon enough that there have in fact been such discussions. The Greels may in fact reject the idea of leaving the euro, but to think they did not have such a discussion rather strains credulity.
Here’s the reality in Europe. Greece and Portugal are effectively shut out of the debt market without EU and ECB loans. Ireland will not be able to (nor should it!) handle the debt it has taken from the ECB to bail out its banks. If they acknowledge that debt, lenders will recognize they cannot service any new debt, and they will be shut out of the debt markets without ECB and EU guarantees.
The IMF warned this week it may not continue funding Greek debt in the very near term. Greece might be denied the next tranche of financial aid if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months, Eurogroup President Jean-Claude Juncker said Thursday. “I’m not the spokesman of the International Monetary Fund, but the rules say they can only disburse if there is a financing guarantee for the 12-month period,” Juncker told reporters at a conference in Luxembourg. Juncker is very discreet and savvy. Clearly he had discussions with IMF leaders before making such a statement.
“If that happens, he said, the IMF’s rules could stop the fund from contributing its share of the next slug of bailout money, due to be paid out to Greece on June 29. The review, from the so-called troika of officials from the European Commission, European Central Bank and IMF, is due to be presented next week. ‘I don’t think that the troika will come to the conclusion that this’—12 months of funding commitments for Greece—‘is certain,’ said Mr. Juncker, speaking at a conference in Luxembourg.
“In that case, the IMF would expect other euro-zone governments to step in and cover the funds. Drumming up that financing would be hard in countries such as Germany and Finland, he said. IMF spokeswoman Caroline Atkinson said Thursday in Washington that the fund generally doesn’t lend if there are gaps in financing, and that it was seeking reassurance from the euro-zone countries who are also lending to Greece. The IMF is providing €30 billion of the €110 billion facility, with the balance provided by euro-zone countries.” (Wall Street Journal)
This is all brinksmanship. The ECB says Greece will get nothing if they default. The EU says that to get money the Greeks must make even deeper cuts, while a soon-to-be-completed audit will show they are in worse shape rather than improving. The Greeks have an obscure minister who is not part of the government say they might leave the euro. The IMF says they may not fund without further commitments from the euro members, which are going to be tough to get from Germany and Finland, at the least.
The German government has been proposing to fill Greece’s finance gap without providing more loans, by asking holders of Greek bonds maturing in the next couple of years to agree to postpone their repayments. Yeah, like that’s going to happen. Let’s depend on the kindness of strangers.
Again, from the Journal:
“Analysts and officials say a political fudge will likely be worked out that won’t leave the euro zone hanging on a precipice on June 29. Since the IMF is providing only around a quarter of the funding, the euro zone’s existing commitments alone would tide Greece over for a few months as European leaders debate additional financing.
“However, short-term fixes won’t resolve the fundamental tensions around Greece’s debt that are putting the ECB, IMF and creditor governments at odds, analysts say. Many believe if something gives, it will be the ECB. ‘One of the sides will have to give way. I believe that the ECB’s threat of leaving Greek bonds out … is not something it will actually carry through. I don’t think it’s a credible threat because it’s a nuclear option,’ Mr. Kapoor said.”
Brinkmanship indeed. Let’s look at a few graphs from a scathingly critical post in Der Spiegel about the central banks of the various countries in Europe and the ECB itself, which show us why the ECB is so worried about a default. As it turns out, the ECB would be in worse shape than Lehman was in September 2008! You can read the article at http://www.spiegel.de/international/business/0,1518,764299,00.html. It is not pleasant reading if you pay taxes in Europe. Especially if you are German.
“While Europe is preoccupied with a possible restructuring of Greece’s debt, huge risks lurk elsewhere – in the balance sheet of the European Central Bank. The guardian of the single currency has taken on billions of euros worth of risky securities as collateral for loans to shore up the banks of struggling nations.
“… Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billion euros with central banks. The central banks have distributed large sums to their countries’ financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are – to put it mildly – not particularly valuable.
“Risks Transferred to ECB
“These risks are now on the ECB’s books because the central banks of the euro countries are not autonomous but, rather, part of the ECB system. When banks in Ireland go bankrupt and their securities aren’t worth enough, the euro countries must collectively account for the loss. Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses.
“For 2010 and the two ensuing years, the Bundesbank has already decided to establish reserves for a total of €4.9 billion ($7 billion) to cover possible risks. The failure of a country like Greece, which would almost inevitably lead to the bankruptcy of a few Greek banks, would increase the bill dramatically, because the ECB is believed to have purchased Greek government bonds for €47 billion. Besides, by the end of April, the ECB had spent about €90 billion on refinancing Greek banks.” (Der Spiegel)
Two graphs from the article say a lot:
"Markets can remain irrational longer than you can remain solvent." —John Maynard Keynes
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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