International Forecaster Weekly

Europe and America Morally and Financially Bankrupt

Greece Bailed out, 19 more nations to go, Greeks not ready to submit to austerity, Gold is the antithesis of Fiat money, fals hope for jobs, Goldman Sachs under investigation, but they make money every quarter regardless...

Bob Chapman | May 12, 2010

Greece has its immediate financing. Now the question is can they follow the prescription? In all likelihood the answer is no. the bond markets are reflecting that via a lack of confidence. In fact, some bond markets are falling apart and there is no end in sight. We have bond rating firms lowering ratings, as the rating services themselves are under serious fire and we do not believe they will be around long. The big question is why did it take two years and 10 months to react?

There are 19 nations with serious sovereign debt problems and there is really no way back for them. They may as well all default, because the austerity programs they’d have to follow and at the same time to satisfy creditors, not only is impossible but it signals years of stunted growth and perhaps in many cases the possibility of revolution. Greece certainly fills that bill. We see the eurozone rules may soon be changed, so that eurozone participants can assist one another. That means in time they will all collapse together. As many as five members could need assistance of the 16 in the zone. Our guess is permanent bailouts will go forward and the ECB rules will be changed to allow the ECB to function like the Fed. Greece and many others are trapped and they will burden the healthy nations and neutralize them. This approach is the ECB nuclear option. It will destroy the zone eventually. This will destroy the euro and end the option of the euro becoming the world reserve currency. The zone would have adopted the same approach as the US and UK in destroying their currencies. How can you have a union with one interest rate, where the ECB controls the monetary policy, but cannot control the budget deficits, borrowing and spending activities of its members?

The Keynesian dictum of borrowing and spending has led the eurozone into a black hole. What will emerge from that black hole will be something similar to the Federal Reserve. The psychology behind all this is a move to make the US dollar again preeminent as a world reserve currency. In the meantime the day of reckoning is shoved forward, a diversion from these economic policies are failed terrorist bomb plantings in NYC and the destruction of offshore oil platforms. As we said in an earlier issue Greece is the poster child – the goat. Greece has done no more or less than the other 18 insolvent countries and many more. One asked, how can the dollar be a strong currency, when they themselves are broke. They talk of fiscal stability and reform, such as higher taxes and the reduction of entitlement programs, but you will see little of that and lots of bait and switch tactics. We are also seeing in US Treasury auctions not only massive offerings, but also a new crop of direct bidders accounting for 13% of sales vs. 1%. The indirects, or foreign central banks, have fallen from 37% to 23%. In our mind there is no question that the directs are really the Fed. That means to us that the US was behind the forced downgrading of Greek and other debt. That was to bolster the position of the dollar and lower the value of the euro and other currencies, making their exports far more competitive and profitable.

Thus here we have a calculated lowering of the euro and other currencies, a stronger dollar to attract more funds to US bond auctions. We also have rating agencies assisting in the operation. Incidentally, Moody’s received a Wells notice in March and never announced it. We are sure we will find out soon that Warren Buffett has sold his Moody’s position. While this transpired the Greeks experienced another rating fall and at the US auction the indirects took 28% of the offering. The directs were there but as usual and as usual it was a secret as to who they were. Again, the direct bidders are the Fed. That is called quantitative easing and that is very inflationary.

As of this past weekend we find we have another all-inclusive ECB bailout package for those who haven’t asked for it yet, but will need it. This is the European version of quantitative easing. This method of saving the international banking system is to essentially nationalize it. The bottom line is this stopgap measure will eventually cause the dollar more harm than good. Once investors realize what the US and European nations have done to gain time they will be horrified and the ensuing fallout will be devastating for the dollar.

Europe’s response has been atypical. Take from the industrious and give to those who cannot or won’t run their economies effectively. This is what socialism is all about including public guarantees against loss for mega transnational conglomerates. Europe’s elitists and America’s as well are morally and financially bankrupt. Goldman and others are being called onto the carpet with the rating firms. All of the players knew $1 trillion isn’t going to do the job. They are again buying time and creating more inflation. Debt may have been backstopped by economic growth by bailouts, but cannot be present in a mode of austerity. The magicians are again creating illusions. The alchemists will be wrong again as they have always been throughout history.

You say who is going to be buying Greek bonds and other bonds? European central banks of course. More quantitative easing. This is significant. It surely is because it reveals that both the European and US financial systems are irretrievably bankrupt. Don’t forget that the dreams of socialism and fascism are being shown to be giant losers. This past week ushers in another phase of the ongoing collapse – another interlude – that stretches out the time horizon, but it won’t affect the ultimate outcome.

These are pretensions that will go unfulfilled. You saw the Greeks in the streets; do they look like people who are about to submit to austerity indefinitely? We hardly think so. We see the same reaction from the rest of the basket cases. Of this $1 trillion European bailout, EU countries will pay $700 billion that they do not have. The British have refused to participate and the US will via the IMF will be about $65 billion. There is no guarantee that these funds won’t be used up within a year. Then it’s another TARP type of bailout, or the whole EU goes under. Even though Europe and the US will have hyperinflation as a result the end result is going to be massive insolvency. This situation is far more serious than the credit crisis of the past 20 months. As a result the euro is headed for $1.20 and perhaps lower. German President Mrs. Merkle was not re-elected in a majority and pays for what Germans regard as a sellout. As a result of these forced payments to bail out erstwhile fellow EU members we could well see rioting in countries forced to pay for the losers. Europe could experience chaos from two different points of view.

European elitists are willing to throw money at Europe’s problems, but not one idea about how to fix the problems of these nations, no necessary restructuring. Just doing the same old socialist thing. Something for nothing, and it has now been discovered someone actually has to pay for. If you stop for a minute and look at this picture it is ludicrous that EU nations that are near bankruptcy are bailing out other EU countries like themselves. The question is what will the euro eventually be worth? The euro, the eurozone and the EU are history. It is now just a question of when it is over. Sovereign debt is unserviceable and is to be serviced by more unserviceable debt. That dear reader is truly desperation.

The top 7 nations that are owed money by Portugal, Ireland, Italy, Greece and Spain aggregate almost $300 billion. There are a total of 22 nations owed money by just these five nations. The major debtors are France $911 billion; Germany $703 billion; England $416 billion; Holland $244 billion; the USA $186 billion; Spain $150 billion and Japan $122 billion. This is what interconnectivity brings you in a socialist-fascist international.

Greece is the poster child of Europe’s failed system called socialism. Greece is just the beginning of the financial and economic collapse of Europe. Perhaps with minor exceptions we have 27 morally and fiscally bankrupt governments, aided and abetted by central banks and financial institutions. Prosperity cannot be created out of government debt. The only people who gain are the bankers and the financial centers from such shortsighted debt accumulation. Again, there is little or no planning for sound investing to offset such debt. It is called living for today and the heck with tomorrow. Thus, the debt is being misallocated in frivolous ways. It is called malinvestment. History shows it manifests itself in failure and insolvency. No country has ever spent itself out of debt in a fiat money system. As a result of this degenerative system the only safe money is gold, as has been the case for centuries. It is the only true totally liquid investment that protects one from the vicissitudes of fiat money. The stage has already been set for the second phase of gold domination. Gold is the antithesis of the fraud known as fiat money and debt. There is no logic or morality that allows central banks to create money at will. How can people tolerate such a system Is it any wonder that gold has gained against every currency for the past seven years. In the end only one currency will survive and that is gold. The flight from currency has begun in ernst. This in part is what Europe’s problem is all about. We are the victims of a vast fraud in which government promised a social welfare system they simply couldn’t deliver. This will happen in America and has already happened in Europe. Those in power behind the scenes know the system is imploding and they are helpless to stop it. Very shortly Greece’s problems will fade into the background as major countries bite the dust. If you own bonds of any kind or stocks, with the exception of gold and silver shares, sell them now and move to gold and silver related assets. All these debt obligations are unpayable and are a fraud. If you have assets we implore you to switch them to gold and silver related assets, because soon the window of opportunity will be closed. Please do not allow yourself to be financially destroyed.

Last week the Dow fell 5.7%; S&P 6.4%; the Russell 2000 8.9% and the Nasdaq 100 7.6%. Banks fell 7.2%; broker/dealers 7.3%; cyclicals 9.2%; transports 8%; consumers 4.6%; utilities 4.1%; high tech 7.5%; semis 7.8%; Internets 7.8% and biotechs 12.6%. Gold bullion surged $29.00; the HUI fell 2.6% and USDX, the dollar index rose 3.2% to 84.45.

Two-year T-bill yields fell 14 bps to 0.74%; the 10-year notes fell 23 bps to 3.42% and the 10-year German bunds fell 22 bps to 2.79%.

The Freddie Mac 30-year fixed rate mortgage fell 6 bps to 5%; the 15’s fell 3 bps to 4.36% and one-year ARMs fell 18 bps to 4.07%. The 30-year jumbos fell 4 bps to 5.78%.

Fed credit fell $1.5 billion to $2.311 trillion. Fed foreign holdings of Treasury and Agency debt rose $4.9 billion to $3.075 trillion. Custody holdings for foreign central banks have increased $106 billion year-to-date and year-on-year 15.5%, or $410 billion.

M2, narrow money supply, rose $20 billion to $8.470 trillion. YTD it is off 1.5%, or $42 billion.

Total money market fund assets fell $19 billion to $2.853 trillion. YTD they have fallen $440 billion and YOY $934 billion, or 24.7%.

Total commercial paper outstanding rose $32.9 billion to $1.102 trillion. CP has declined $61 billion, or 16% annualized, and YTD and down $314 billion or 22%, YOY.

On Friday we were told that 290,000 jobs were created in April. 66,000 jobs were new census workers, making $25.00 an hour and 188,000 created by the birth/death ratio, or out of thin air. In reality the economy only added 36,000 jobs. U3 rose from 9.7% to 9.9%. U6 was 17.1%. If you take out the birth/death ratio real unemployment is 22.4%.

"Friday's release of April's Jobs numbers were falsely optimistic. The data was deceitful, okay even a lie. Non-farm payroll jobs were reported to have increased by 299,000, which is nonsense. Of that, 188,000 were made up, fictitious make believe, guesstimate phantom jobs called the CES Birth / Death adjustment. Another 66,000 were temporary government census jobs. Then another 26,000 jobs were temporary jobs with Temp Services. So the number was bogus. Pure hogwash. The admitted Unemployment rate rose to 9.9 percent from 9.7 percent. Unemployment remains a serious problem in the U.S. The net zero real jobs growth In April comes in 150,000 short of what is needed to keep pace with population growth."

Goldman Sachs Group Inc., the bank facing a fraud lawsuit from the U.S. Securities and Exchange Commission, is expecting further litigation related to sales of collateralized debt obligations.

“We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced against us with respect to offering of CDOs,” the New York- based firm said in a quarterly filing with the SEC today.

Goldman Sachs, which makes more money from trading than any other Wall Street firm, also disclosed that its traders generated $100 million or more on 35 days during the first quarter and lost money on no days. The firm set a record when it made $100 million or more on 46 days in the second quarter.

Governments will only bring about an end to the credit crisis through the blood, sweat and tears of cutting the amount of public debt, “Black Swan” author Nassim Taleb said.

The crisis came from debt and you don’t escape it with more debt, Taleb said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” today. We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable.

Taleb, a professor at New York University who also advises Universa Investments LP, a $6 billion fund that bets on extreme market moves, said the financial system faces risk from increased complexity, and President Barack Obama should work with U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke to cut debt.

My fear is if we don’t stop them now they’re going to create hyperinflation, Taleb said. Nobody has confidence in a guy like Bernanke.

Taleb is a professor of risk engineering at NYU and an advisor to Santa Monica, California-based Universa, which was opened in 2007 by Mark Spitznagel, Taleb’s former trading partner. Rare and unforeseen events are known in finance as ‘black swans, after Taleb’s 2007 book, ‘‘The Black Swan: The Impact of the Highly Improbable.

If I were a politician I’d say you need blood, sweat and tears, Taleb said. The first thing you need to do, Obama, is to transform debt to equity. I don’t understand why your great, great grandchildren should have to pay for it. That’s immoral.

The cost of protecting U.S. municipal bonds rose by the most this year as investors bought insurance on U.S. state obligations after global stocks tumbled and Europe’s debt crisis worsened.

Five-year contracts on the Markit MCDX index, tied to 50 municipal issuers, increased by 31 percent last week to 1.64 percentage points, the biggest jump since early December. California five-year credit default swaps gained 40 percent, the most since December 2008. The price of the swaps reached $273,000 to protect $10 million of bonds, according to data compiled by Bloomberg.

“The ultimate cause is a deepening of investor risk aversion, but that deep risk aversion was really brought on originally by concerns over European sovereign credit quality,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Ten-year U.S. Treasury yields had the biggest two-week drop since December 2008 as concern that European leaders will be unable to contain Greece’s debt crisis drove investors to the safety of federal government debt. Global stocks slid for a fourth day yesterday, erasing 2010 gains for U.S. benchmark indexes, and the bonds of debt-laden nations tumbled.

Investors are shedding risk in favor of Treasuries, Peter Hayes, head of municipal bonds at New York-based BlackRock Inc., the world’s largest asset manager, said in an e-mail. In municipal debt, investors got ahead of themselves as there was some evidence that tax receipts were turning higher. We are seeing this abate and as a result some are realizing that fiscal problems will not be solved just yet.

April Revenue

Revenue in California, the biggest issuer of municipal debt, trailed Governor Arnold Schwarzenegger’s forecast by $3.6 billion in April, the state controller said last week. In New Jersey, April income-tax payments were 25 percent below budget projections, preliminary reports showed last week.

California Treasurer Bill Lockyer has said he is concerned that speculative trading of credit default swaps, the buying and selling of the insurance contracts by investors who don’t own the securities, may boost borrowing costs. He said that may occur if the transactions create an unjustifiably negative perception of California’s risk of default.

“It’s hard to escape the conclusion that this whole market is really a way for a bunch of rich people who have no stake in California trying to get richer by gambling with taxpayers’ interest,” said Tom Dresslar, a spokesman for Lockyer. “The prices of California credit default swaps have nothing to do with the credit quality of our bonds.”

Lockyer has asked Bank of America Merrill Lynch, Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, all underwriters of California bonds, whether they help investors bet against the state with credit default swaps. He has urged Congress to include in pending financial-overhaul legislation a requirement that an investor buying a credit default swap hold a position on that security.

Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before.

Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time.

Goldman Sachs, which is facing a fraud lawsuit from the SEC related to the sale of a mortgage-linked security in 2007, generated $9.74 billion in trading revenue in the first quarter, exceeding all of its Wall Street competitors. Trading accounted for 76 percent of first-quarter revenue. The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, said one shareholder.

“It will reinforce the heads we win, tails you lose mentality that people think actually exists and promotes the concept of an unfair advantage,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, which oversees about $2 billion in assets including Goldman Sachs shares. “It’s too politically charged not to, how is that possible that they only make money?”

Record Earnings

The bank, which reported record earnings last year, is contesting the SEC’s lawsuit and the firm’s executives were interrogated at a Senate subcommittee hearing last month. Goldman Sachs, which maintains that it did nothing wrong, is also being investigated by federal prosecutors, said people familiar with the matter.

“This is the first time we have reported zero trading loss days in a quarter,” Samuel Robinson, a Goldman Sachs spokesman, said in an e-mail. “We believe it shows the strength of our customer franchise and risk management.”

Ciocca echoed that view, saying he thinks the performance proves the strength of the firm’s risk-management models and its ability to make money even in markets with low volatility. “The statistical probability of going through what we did would never favor them making money every day,” Ciocca said. “It actually speaks very well of their capability to manage through different types of markets.”

Reaching Out Ciocca said he’s had first-hand experience of Goldman Sachs’s efforts to reach out to clients in the wake of the SEC lawsuit to answer questions about the matter. He said representatives from Goldman Sachs’s asset-management division contacted his firm during the last week of April even though they hadn’t been in touch for a year before that.

“It was tactical, it was appropriate, it wasn’t patronizing, it was very sincere,” Ciocca said.

In its SEC filing today, Goldman Sachs said it is expecting further litigation related to sales of collateralized debt obligations.

“We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced against us with respect to offering of CDOs,” the bank said. The company also laid out in the filing a worst-case scenario of what could happen if the firm doesn’t resolve the SEC case and can’t obtain appropriate waivers from relevant regulators.