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SPOT ON


I am in law school at George Washington University! My mother has a masters degree! My father has TWO masters degrees! And this bank stole their house from them!

Obviously protestors have to do absurd things to get national media attention, but this guy is outrageous. We’ve now found out he was lying about the house thing, but just imagine we didn’t know that (everything else is true I guess). It’s a wonder that people got on this guy’s side so hard. If you go to GWU law school, and your parents are obviously well-educated/probably rich, why was your house taken away? I can’t imagine they just stole your home if you were on-time with your payments. I realize at times some of the stuff I say may seem cold-hearted and make it look like I lack empathy, but like… I get it. It’s sad that so many people lost their jobs/homes and it’s a very shitty deal. But you can’t blame corporations for trying to survive, and banks for taking back their property (that’s why you get a mortgage) when you don’t pay them. It’s real world shit. Things don’t always go as planned. Now obviously he was lying and his parents are good on their mortgage, but just b/c I (and a LOT of other people) don’t agree with you it doesn’t mean I’m a cold-hearted bastard. And just to reiterate, corporations are one of the best things about the US. They’re rich enough to be able to pay great wages/salaries. They cover medical expenses for the majority of workers. And they care so much about their reputation to the point where they don’t want to fuck us over. Why do you think you see so many product recalls on the news? A company hears one case of a faulty product and BOOM–recall. Whether you can admit it or not, we’re kept extremely safe compared to the rest of the world. Protestors, you’re what the French call les incompetents.

Here’s a non-partisan, rational analysis of the #OccupyWallStreet demands. It’s literally spot on. And BI usually rubs me the wrong way. If you wanna be taken seriously and “open up discussion”, then come to the table with some facts and not this blanket smear campaign. Nobody is out to get us. Yes, in general corporations care more about money than anything else… that is the reason for their existence. Short/quick read

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Everything is connected… and the wires are tangled

Sarkozy: Do we know what we’re doing? Merkel: Shut the fuck up…

About two days ago I had a friend ask me for some help for an interview he’s got coming up. The guy he’s been connecting with sent him one of his weekly write-ups about the current economic/market conditions and told him that’s the sort of thing he’d have to start knowing. Here’s basically what I talked to him about (this will be a long post, I’m trying to be in-depth so anyone can follow).

For starters, the sovereign debt crisis in Europe is the most important thing going on right now. I’ll get into how it affects the US in a minute. Greece is the most likely default case of anyone right now, as CDSs on greek debt have about a 450 bp spread (i.e., expensive as shit to buy those CDS’s, b/c there’s a very high probability of default). The ECB/IMF/EFSF (European Financial Stability Facility) are continuing to pump money into its bond markets, as well as Italian, Spanish, and Portuguese bonds. Whether they think Greece will ever be able to repay this debt is almost irrelevant (they won’t), so these cash flows are being used to keep rates from ballooning and to stop a full on default. Worst case scenario is Greece defaults, which triggers CDS payouts (not good for the US), margin calls, and significant flight from European sovereign debt. The last part of course could see defaults by more important countries such as Spain and Italy, but that is less likely (I refuse to say highly unlikely b/c as you can see this shit has never really been seen before). The main problem is European banks, who hold a huge amount of these sovereign bonds. If we see a restructuring of sorts, or huge drops in bond prices, these banks will have to make enormous writedowns. After this, further possible events include major drops in equity and bond prices of these banks as investors flee from fear the banks will have liquidity, or even solvency issues. This of course is a classic self-fulfilling prophecy: investors fear they’ll lose big from these banks, so they dump them, which of course causes the actual problem they feared in the first place.

The US comes into this directly in two ways. First, US banks have written a colossal amount of CDS’s for European banks over the past 3-4 years. As of early July, we’ve sold $34 bln, $54 bln, and $41 bln in Greek, Irish, and Portuguese debt CDS’s alone. That’s not even counting CDS’s on European banks. If there’s widespread default (again, unlikely, but possible), then the US will be losing BIG on those payouts. The second way is economic rather than financial. Europe is one of our main trading partners, and if they enter a recession (probably will), we’ll be taking a big hit in export losses and possibly face import shortages as production slows down there. This also ties into emerging markets (esp. China), as expectations are quickly rising that we’ll see a pretty hard landing in a year or two. In other words, nearly every country is facing stagnant (or negative) growth for a few years, which… is bad.

For those who’ve wanted to actually stay in a good mood, and therefore haven’t watched the news in awhile, the main political/economic topics right now are the US debt level, and our struggling economy. Before I get into this, let me make on thing clear: you cannot solve a debt crisis in a recession. Whether or not the media/politicians have been playing up the debt situation, I really have yet to see any issues arise from the ACTUAL debt level itself. Obviously the track we’re on is unsustainable and blah blah blah, but I’m talking over the course of a couple years. Our gov’t is having no trouble at all borrowing money; the 10YR Treasury is still sub-2%… from a buy&hold/investment standpoint that is absolutely outrageous. It just goes to show that when the world is freaking out, everyone looks to the US.

As much as I hate to say it, the real issue is the political system. I’m not saying we need to raise taxes or cut spending or whatever the buzzwords are right now, I mean the political process is absolutely KILLING our economy right now. It took over half a year for the debt limit to be raised, literally up to the last possible moment. The next day, BAM! Equities plummeted and Treasury yields approached record lows (and to my utter disbelief, reached those lows a few weeks later). This of course wasn’t expected, as the pundits had been chirping “yields will pop as the world realizes we can’t repay our debt!”. Bull. Fucking. Shit. This isn’t a series of graphs relating debt levels to interest rates or whatever, this is real life. What’s more, we have an entire year before election season, and you can bet your sweet ass no politician will be willing to make the tough decisions if it means pissing off their voters.

The debt ceiling squabble was one of the most atrocious displays of leadership I’ve ever seen, and I’m not exaggerating. The hard decisions weren’t even close to being made. If I remember correctly, we raised the debt ceiling by about $1.5 trillion and promised to cut about $2 trillion over the next 10 years. I don’t even have to do the math to see that $2 trillion over 10 years is a joke when we’re projecting a $1.5 trillion deficit in 2011 alone. If anything, all we did was push the decisions off for another few months. The debt level itself isn’t the immediate issue, it’s the perception that our leaders are unable to make the necessary decisions to get the US on the right path.

This perception is twofold. On one side we had non-stop political bashing occurring all summer long, with both sides bickering over what should be cut, what’s off the table, and who’s to blame for our national debt’s recent surge. On the other side, we have a country who is on the brink of relapsing into recession (sidenote: I don’t know why, but I think the term double-dip is so fucking stupid). Unemployment is STILL above 9%, and won’t return to normal levels for awhile. What’s more, I believe the drop we’re seeing in equities is due to people realizing the Fed has run out of bullets. Which is another way of saying that their policies aren’t doing what they said they would. Rant:

Let me get this straight. The Fed is making sure rates stay low, which is a good thing to have. But jesus christ have you not opened your eyes? I’m usually agree with the Fed/Bernanke, but what the fuck. Rates are at all time lows! And nobody is borrowing! Not only are rates at all time lows, but they’re there without your doing. People aren’t arbitraging Treasuries, they’re using them as a bank. If we have another international recession, Treasuries are gonna continue to be the safest asset. So what is the point of more bond buying? Does buying the 10YR down to 1.85 from 2 and the 30 from 3.1 to 2.9 really do anything? Rates are there. Save the ammo. God damn.

Alright back to the main point, bulls are currently pointing to corporate profits and equity levels as the main reason why we shouldn’t end up in a recession. I think that that is exactly why we’re entering a recession. Corporations are preparing for the worst by hoarding cash and laying people off. The majority of them will weather the storm to come, but people as a whole are left out to dry. If everyone is scared to lose their job, they’re gonna take whatever pay they get and hold onto it. Which, ya know… doesn’t help the economy grow. The uncertainty that’s clouding everything is all hanging on one major thing–Europe. People are waiting for Merkel/Sarkozy/anyone to come out and save the day. Obviously if they had the strategy to end all strategies for fixing the European debt crisis, we’d have heard about it already. As of today, Germany has said they’re capping their bailout funds at 221 billion euros, which gives the EFSF about 450 billion euros when recapitalization is needed (for both banks and the various countries who will undoubtedly need them).

I’m pretty lost right now, so I’m just gonna end this here. I’ll go back and go through each area more in depth throughout the next week(s), but this is a dece start. As you can see, everything is connected, even more so than 4 years ago. My prediction: we’re not gonna see an end to this until the EU is literally on the brink of collapse. That’ll be an interesting time… hopefully I have a job by then.

Recovery update

New data out from the Commerce Department shows the trade deficit narrowed 6.7%. Even though oil was trading at the highest levels since September of ’08, the deficit was reduced to about $43.7 billion. While some of this has to do with imports from Japan dropping 25% with all the shit going on there, record exports are forcing many economists are now claiming they’ll revise the Q2 GDP growth rate. 1.8% was pretty hard to understand, so hopefully there’ll be a consensus on a higher rate. The deficit numbers also pushed stocks up about 1%, with the Dow up 75 points and the S&P up about 9 points. I wouldn’t expect those rises to continue tho if shitty numbers keep comin’ out.

New claims for unemployment benefits increased by 1,000, to 427,000 this past week, while forecasts expected that number to drop instead. I feel like that’s a big statistic, even if it was only 1,000 new claims. That means 1,000 more people we’re just like “fuck… might as well get paid to do nothing”. It’s hard to decipher what unemployment stats are actually saying about the economy, because we’re at a point now (and have been for awhile) where some people would rather take the unemployment checks than work at or near minimum wage. This is where my conservative side kicks in and I wanna fuckin’ trash the idea that we even have unemployment benefits… but I ain’t gonna hate. If I was 5-years out of a good college and there was no hope of a job except pumpin’ gas for $7.25 an hour, it’s possible I might do the same thing. Seems a little emasculating to me tho, prolly why some of those people have the balls to do something about their situation.

Deficit reduction talks are gonna start up soon. Interesting to see if the Dems can get the GOP to agree to some tax increases.

Solid market action today

The European debt crisis is finally beginning to be handled. The ECB has said that they will probably back Greek debt rollovers. After all of the talk of default it really makes you wonder. What is the point of pretending a country will be allowed to default? The US is on the brink of defaulting, but there’s no chance that happens. If the debt ceiling isn’t raised and we do default, shit is gonna hit the fan. Rates will skyrocket, and we can kiss a recovery good-bye. And for what? To teach us a lesson? Doesn’t make very much sense to me.

But, finally we’re seeing the euro bounce back up, hitting a 1-month high against the dollar. With the current state of US consumers (i.e., not spending), we gotta hope this climb continues if we want exports to pull us out of the hole. Rates have been higher in Europe for some time now, so what’s hopefully the end of the euro plummet will help. The slip in the euro was undoubtedly due to European debt crisis worries, but the continued asset purchases keeping US rates extremely low should help the euro’s rebound. We’ll find out today what Bernanke says about the future of QE2. It’d be nice if he could put sort of a range on the market and say something like “if the market falls we’ll be ready to add some liquidity”, which would hopefully keep shorts out without sparking a rally. Especially now with economic data that doesn’t support the movements of the market, people have been jumping onto rallies because there’s not much information to say they should do otherwise. Hence the bubble-worries over the past few months.

The recent success in the euro/dollar is now being seen in equities as the S&P 500 index bounced off a 2 1/2 month low. As of now, the index is trading at 12.2 times estimated profits… which is cheap as hell. Meanwhile, oil is dropping as expectations of OPEC announcing an increase in production quotas gain steam. This should help transportations, and in turn exports, who have faced a lot of problems from oil prices over the past few months. I just heard today that the 16 largest US airlines reported an on-time rate of 75.5%… weather has been a motherfucker lately.

I have to agree with what Obama just said in his press conference with Angela Merkel. Freaking out over one month of poor economic data is exactly what we’re trying to avoid. If focus continues to be on the short-term, there’s no chance we’ll keep volatility and speculation down. While neither is explicitly bad, too much is obviously bad for growth. Hopefully the increases we saw today will mark an upturn in markets. With poor housing markets, and now poor jobs data bogging down the recovery, the upswings in markets are a good sign for future growth.

The state of the muni market

I’m not an anti-Obama extremists who hopes he gets assassinated… just an unreal pic

In a recent Fortune article, Meredith Whitney is holding onto her position of a bear market in municipal bonds. Back in December on 60 Minutes, she said that there’d be “50 to 100 sizeable defaults” worth “hundreds of billions of dollars” over the next 12 months. The muni market is worth around $2.9 trillion right now, so hundreds of billions of dollars is… a fuckin’ shitload. While there have been 29 straight weeks of withdrawals from muni-bond mutual funds, actual muni-bond defaults have fallen. From January 1 through April, there were 14 defaults worth around $605 million. That same period in 2010 saw 43 defaults worth around $1.7 billion. So, naturally, a lot of people don’t (and don’t wanna) believe her.

Even though Whitney’s forecast has been condemned for some time, the extent of her firm’s new research might make your ballsack shrink a bit. For instance, since 2003 state outlays have risen from some $1.5 trillion to $2.2 trillion, while tax revenues have increased from $1 trillion to $1.4 trillion. Uh… that is not good. What makes this market different than say, treasury securities, is a muni-bond default is much different than a corporate-bond default. A bondholder can’t force a city into foreclosure, you kind of just have to accept the bond haircut and restructuring if there is no bailout by the federal gov’t. Especially when the economy is in a position like it is now, this uncertainty can more than offset the tax-free attribute of munis. So, if anything, Meredith Whitney telling everyone that there’s gonna be hundreds of billions of dollars worth of defaults could end up being a self-fulfilling prophecy (fuckin’ hate those, right?). Rates are already ridiculously low and we’re not seeing much growth. What happens when they rise due to defaults, and we haven’t even gotten out of the gutter? Don’t expect state debt problems to be solved anytime soon.