The Irish cave in... go for a bailout

Nov 19, 2010

Baltimore, Maryland

Here's the story:

The Irish caved in. Apparently, they negotiated a deal. They're going to go for a bailout.

This was all it took to bring stock market investors relief from their bout with temporary sanity. They sent the Dow up 173 points.

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The New York Times tells the tale:

"Stocks in the United States rose Thursday as expectations grew that Ireland would receive billions of euros from international lenders to rescue its banks, easing concerns about the health of Europe's financial system"

"Shares of General Motors began trading after the company's initial public offering, the largest in United States history. The shares surged nearly 8 percent after the market opened, and in late trading fell back to $34.07 on the New York Stock Exchange. The stock had been priced at $33 on Wednesday evening. "

"Ireland has moved more aggressively than many countries to address problems brought on by the financial crisis, but investors have been losing confidence in its banks in recent months, and a Greek-style rescue now appears imminent. On Wednesday, the British government signaled that it could offer Ireland direct financial aid as well."

What are investors thinking? A Greek-style rescue? How about a Titanic-style sea voyage? How about a Little Big Horn style pony trek?

Greece is still going broke. It is just a matter of time. And now this Irish bailout does the same thing. It postpones the real problem - and makes it worse.

Investors are probably thinking - 'everything is under control'... 'no need to worry'... ' the authorities know what they are doing.'

Well, we've got news. The authorities have no idea what they are doing. If the Irish authorities had seen the problem coming they would have forced the banks to straighten up long before 2007. And then, if they had any idea what they were up to, they never would have written the banks a blank check when they got into trouble.

They are just muddling along from one crisis to the next. If the Irish had just let their banks go bust in the first place, they wouldn't be in this mess, in other words. And if the Europeans would just let Ireland go bust, well...we don't know what would happen...but we'd like to watch!

Meanwhile, in the US, the municipal bond market seems to be on the edge of chaos lately. It is probably only a matter of time until the Fed starts buying muni bonds as well as US Treasury bonds. Why not? Neither one is good for the money.

States and local governments made promises during the fat years. Now that the lean years are here, they're having a hard time keeping them. Just like the feds. Just like the Irish. Just like the Greeks.

To their credit the Irish, Greeks, Brits - and others - have begun to make cuts. Even government employees are having their hours or their salaries trimmed.

Not so in America. The process of cutting has barely begun. (About which...more on Monday...)

Meanwhile, a news report tells us that many rust-belt cities are demolishing buildings. Owners aren't paying property taxes and the buildings are not worth the maintenance it takes to keep them standing.

And here's Bloomberg with more news from the homing sector:

"Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers. "

"The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months, the Mortgage Bankers Association said in a report today. New foreclosures rose to 0.93 percent from 0.71 percent. Both numbers were the highest in the 12 years since the Washington-based trade group started tracking the categories. "

"The increase in these plain-vanilla type of loans to the highest numbers ever show us it really is being driven by the economic environment," Fratantoni said in a telephone interview. "It's not going to turn around until we get more significant job growth."

New foreclosures against all types of mortgages, which also include subprime, rose to 1.34 percent, the highest level in a year, according to the report."

More news:

And more thoughts:

*** Pssst....wanna buy some cheap stocks? How about some shares in Russkie enterprises? They're the cheapest in the world... on a P/E of only 6.8 compared to a world average of about 12.

Bloomberg has more details:

"While the Micex advanced 13 percent in the past year, its valuation tumbled 31 percent because Russian shares failed to keep pace with a surge in earnings estimates spurred by oil's rally above $80 a barrel. Equity mutual funds in the world's largest energy exporter attracted less money in the past six months than funds in the other so-called BRICs -- Brazil, India and China -- as investors favored more expensive shares in faster-growing economies, EPFR Global data show.

"Russia remains relatively out of favor in an emerging markets context," said Lewis Kaufman, a money manager at Thornburg Investment Management, which oversees about $65 billion in Santa Fe, New Mexico. "If we can sustain oil prices of $80 to $100, Russian equities offer a unique combination of cyclical and structural recovery potential."

Gazprom, Russia's largest listed company, trades at 4.3 times 2011 profit estimates, compared with 10 times for PetroChina Co., the biggest Chinese energy company, according to data compiled by Bloomberg. The discount on the Moscow-based natural-gas monopoly to Beijing-based PetroChina has widened to 58 percent from 50 percent at the start of 2010, the data show."

Gazprom shares are poised to rally 34 percent in the next 12 months, according to the average of 10 analysts' share-price estimates compiled by Bloomberg. The stock has retreated 7.8 percent this year, compared with a 2.3 percent gain for PetroChina.

Russia has the cheapest stocks among major developing nations, based on 10-year reported earnings, a valuation measure designed to adjust for economic cycles, Jonathan Garner, the chief Asia and emerging markets strategist at Morgan Stanley in Hong Kong, wrote in a Nov. 8 report.

"It's probably the cheapest market among global emerging nations," said ING's Bakkum, who recommends an "overweight" position in Russia. "A lot people are prepared to buy Russian assets."

*** Those poor TSA agents. Just doing their jobs. Trying to protect the safety of groping their private parts. And now everyone is getting on their case.

One woman charged that her blouse had been pulled down, exposing her breasts to the whole airport...and that TSA agents laughed about it. One said he had missed the action. But no problem. He'll watch the video, he said.

Another traveler said that an agent had put his hand down his pants.

All right, so they occasionally go too far...embarrass and humiliate travelers. But think of all the good they do!

Well...wait...we're thinking. When did TSA ever actually stop a bomber? Never, as far as we know.

Did it ever discourage a he had to take his rig and blow up a bus or a train or maybe even a golf cart instead? Not that we've ever heard about.

We've never been mistreated by an agent of the TSA. Bullied, yes. Threatened, yes. They've been impolite on occasion. We've been patted down so vigorously we didn't know whether to leave a tip or lodge a complaint.

But we try to maintain a sense of humor.

"The trouble with you, is you just don't get it," said a paranoid friend lately. "Can't you see? This TSA has nothing to do with keeping out bad guys. It's about keeping us in. They're not really there to make the airlines safer. Instead, it is just a preparation. They are getting Americans accustomed to following orders, standing in line, and acting like half-wits. They are also training up a whole class of goons. These guys don't ask whether it really makes sense to pat down girl scouts and look at old ladies naked. They just do whatever they're told to do. And they probably enjoy it.

"There are always some people like that - ready to be concentration camp guards and exterminators. The TSA program helps the authorities identify these people."

"Why," we asked.

"Who knows...maybe they just want power. Maybe they just want a docile population so they can do what they want."


Debt Delenda Est

The subject is debt; it needs to go away

Debt was the market's bete noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue.

In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout ..but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers demands.

Debt is underrated. For one thing, it is more reliable than asset values. The crisis of '07-'09 wiped out about a third of the world's equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact. In terms of the cash flow needed to support it, debt actually grew larger.

Central planners can make a recession appear to go away. With enough hot money, they might warm up asset prices or soothe the swelling unemployment rate. But debt doesn't cooperate. Neither monetary policy nor fiscal policy will make it go away. Debt demands honesty. The debtor has to face up, admitting that he is a fool or a knave. Either he owns up to his mistake and defaults...or he cheats.

"With all due respect, US policy is clueless," said German Finance Minister Wolfgang Schauble. "Its not that the Americans haven't pumped enough liquidity into the market. Now to say let's pump more into the market is not going to solve their problem."

The English speakers conveniently misunderstand the debt problem. The authorities worked hard not to see the debt crisis coming. They made their careers and reputations by not understanding it. Thousands of them work for governments and central banks....if they caught on to the problem now, they'd probably have to resign.

They pretend that the problem is a lack of 'liquidity.' Or a failure of capitalism. Or that the regulators dropped the ball. It is none of those things. Each of those problems can be 'solved.' Short liquidity? The feds can add some; as much as you want. Did capitalism lose its way? No problem again, the authorities will apply more central planning. Not enough regulation? Are you kidding; adding regulation is what they do best.

The real problem is debt. In Ireland, for example, investors, householders and bankers all lost their heads in the bubble era. Your editor bought a house in Ireland in 2006. He knew perfectly well it was overpriced. He had walked the streets of Dublin. He had seen storefronts offering property, not just in Dublin...but in Dubrovnik. He had heard people say that 'property never goes down.'

Now his house is worth about half what he paid for it - if he could find a buyer. There is no reason to expect that house to ever recover - at least in real terms - to the level it was 3 years ago. That wealth has disappeared. Along with it went the banks' collateral and the value of the debt it backed. It is all dead. It is no more. It has ceased to be. It is past tense. But, rather than let the banks' bondholders to take the losses they deserved -- in rushed the financial authorities with guarantees and more credit. Ireland's deficit rose to a staggering 30% of GDP. Its national debt will rise from 100% of GDP to 120%.

Meanwhile, California is moving closer to bankruptcy -- and borrowing more too. The state is $25 billion in the hole, with no plausible plan to get out. The Milken Institute says unfunded pension liabilities will rise to $10,000 per capita by 2013 - the equivalent of an extra $40,000 mortgage for every household. Like Ireland, California cannot pay the debts it has incurred. The federal government will offer a bailout...but with strings attached.

And soon, the bailers will be in trouble too. According to the Wall Street Journal, a combination of 15 major national governments will have to borrow a total of more than $10 trillion next year, to finance deficits and repay maturing bonds. That's 27% of their total economic output. It also is equal to about twice the entire world's annual savings.

The authorities warn about the risk of 'contagion.' They sweat to 'calm' the markets. But why bother? Debt of this magnitude cannot be repaid. It has gone bad. At least give it a decent burial.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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