OK So I Sound Like A Broken Record

And what do I sound like a broken record about? Well, it's my old mantra, “we have learned NOTHING from the past 18 months. But first, a word about the Greeks.
 
The Greek government  bond offering was more than three times overscribed, and 77% was taken by non-Greek institutions and individuals. The world is now patting itself on the back, once again repeating well, something like “the crisis has passed” and some such other nonsense. And who do we have to thank for this? How about “merci, Monsieur Trichet?”, or “Molte grazia,” Sr. Bernanke, or “Arrigato” to the Japanese central banker whose name I don't know, they change so frequently. And let us not forget “brilliant,” Lord Mervyn King. And why do these gents deserves all of these kudoes? Because by keeping interest rates at next to nothing and thereby punishing savers, they have FORCED respectable FIDUCIARY institutions (the ones responsible for YOUR retirement, to play in the highly speculative markets in the never-ending chase for higher returns. Forget the amount of refinancing the Greeks have to do over the next two years. The almost frenetic search for yield has forced the search for garbage to hit new lows.
 
I can hardly wait to see the demand and yield levels when the Portuguese, Spanish and Italian offerings hit the market. Again the race to the bottom has now been shifted into overdrive.
 
Which leads me to this additional view on what the Greek deal portends. The primary consideration for me of this mess in Euroland is how contractionary (read deflationary) all this is. Assuming at least some of the reforms stick, pensions will be slashed, public spending will be castrated, workers will be cut, etc. All of this ultimately will feed into a precipitous decline in final demand for everything. Along with this will come precipitous increases in unemployment which will lead to increased demands on already strapped government coffers.
 
And why have so few commentators mentioned the real ticking European time bomb, Austria?
 
In such a scenario, it is hard to see where ANY inflation will come from. Once again, the central bankers are looking at the wrong playbook. And given the fact they have almost no bullets left to shoot to fight deflation, only time and the market itself will steady the ship.
 
A NOTE ON the exhuberance of yesterday's close on Wall Street- Yes, the bulls are out in force again, partly on the expansion of consumer credit in the US for the first time in a year. But this was for auto loans ONLY, as the US consumer is still de-leveraging at a savage pace. And who is the source of this generosity, you might ask? Well, surprise, surprise...the US Government! Not only that, non-seasonally adjusted consumer credit was actually DOWN by $4 billion. On a non-seasonally adjusted basis, consumer credit has declined  by $108 billion in the last 12 months.
 
So here is what happens, in case you don't want to bother figuring this out, I'm here to help. The government is taking taxpayer money, and lends it out to all sorts of destitutes at zero% who have to keep up with their neighbors at all costs, even though they have no money to put down for household equity (the government is giving them $8000 to buy a house)  with the guarantee of the federal government. With this news the market capitalization increase by $20 billion in the last hour, and voila! we”re back to the good old days.
 
How Nothing Has Changed, this from a participant in the LTCM saga. I was able to see a video cast of an interview with James Rickards, former General Counsel of Long-Term Capital Management. I thought it appropriate here to summarize some of what he observes about today's markets as a warning that, again NOTHING HAS CHANGED.
 
Rickards observes that “the financial system is as risky now as it was back then.” What strikes me now, “ he observes”  is that nothing has changed, no lessons were applied, even though the lessons were obvious. In 1998 LTCM used fatally flawed VaR (value-at-risk) models They used too much risk. They operated too much in unregulated OTC markets instead of exchange-traded derivatives. So risk models needed to be changed, or abandoned, leverage had to be slashed, derivatives had to be traded on exchanges or cleared thru clearing houses while regulatory oversight had to be strengthened...THE GOVERNMENT DID JUST THE OPPOSITE...Glass. Steagall was repealed in 1999,  so that banks could become hedge funds.
 
“The US, in effect, looked catastrophe in the eye and decided to double down!”
 
As the French say, “plus ca change, plus ca meme chose”
 
A NAME YOU SHOULD KNOW - Apart from many of the clueless talking heads appearing on the telly “talking their books,” there are those who fly under the radar because, well because they don't NEED to tell anyone and everyone how bright they are. The market already knows this. As part of my function in aiding you all to become wealthier and wiser is to introduce you to some of these names.
 
For today, I would introduce you to one Seth Klarman, who has been in the business even longer than I have. In my incessant search for pearls of wisdom to share with you, I came across some comments Seth made this past week to an investment seminar. I wanted to share some of these thoughts with you, partly because they mirror my own, and by, extension, will illustrate just how smart I am.(just kidding, of course)
 
Klarman: “The governments can always rescue the markets or interfere with contract law (as in the Chrysler debt debacle) whenever it deems convenient with little or no apparent cost. Investors believe this now, and worse still, the government believes it as well. We are probably doomed to a lasting legacy of governments tampering with markets and the economy which is likely to create the “mother of all moral hazards. “The government is blissfully unaware of the wisdom of Fredrich Hayek , “The curious task of economics is to demonstrate to men how little they really know about the things which they design.”
 
More from Klarman soon. He is worth Googling. But in summation here is my scenario for the markets. The markets are being driven by liquidity and then frantic search for yield. There is no such thing as bad news. Dubai? Austria, Greece, Iceland, nah!
 
The rally will continue until the inevitable dislocations of the market hit. The imbalances are atrocious. So, chase the liquidity as long as you dare. When the music stops, the outcry will be horrendous. But I dare not fight the central banks flooding the system. Be a momentum player, but know the end will not be easy or pleasant.
 
Until next time
 
Chuck Karasick
March 6,2010
Lugano
41.79.463.7231
 

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