The List of Companies & Governments Preparing for Euro Breakup Grows

The list of companies and governments putting plans and systems in place to handle a breakup of the Euro continues to grow. Last week The Telegraph reported the UK "Treasury plans for Euro failure":

"The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls.

The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies. 

Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports."

The bold was added by me.....Clearly that should say "perceived" safe havens. To think currencies from indebted counties like the UK, Japan and the US are true "safe havens" is wishful thinking.

"Britain’s response to a euro meltdown would reflect measures taken by Argentina when it dropped the dollar peg in 2002 and by Czechoslovakia after the country broke in two in 1993, according to sources. Faced with a massive capital inflow, the Czech Republic temporarily imposed taxes on foreign inflows to banks and capped the amount of overseas credit domestic banks could use.

In addition to the risk of an appreciating currency, dealing with potential UK corporate exposures to the euro poses a considerable challenge for the Treasury.

Britain’s top four banks have about £170bn of exposure to the troubled periphery of Greece, Ireland, Italy, Portugal and Spain through loans to companies, households, rival banks and holdings of sovereign debt. For Barclays and Royal Bank of Scotland, the loans equate to more than their entire equity capital buffer."

Here is a nice chart from economist Steve Keen's debtwatch blog on the distribution of debt in the UK

You can expect that UK Government debt line (orange) to continue to explode as it absorbs (via bailouts) the coming defaults in the UK Finance sector (black line). Want to think about the possible magnitude we are talking about? And we thought the US finance sector was bloated........

What was that about running to the safe haven of the UK? If you think running to your slaughter is a good idea then be my guest. The UK will eventually have no choice but to print, print, print.

So despite ongoing denials to any possibility of a Euro breakup. A wide range of companies  and governments are putting plans and systems in place for that very possibility. Not a bad idea considering that the "possibility" will eventually be reality despite all the denials. The only question is which countries will be left in the Euro, if any, and how long will it take to play out?

Full Release of Federal Reserve Emergency "Lending" Program data 2007-2009

Bloomberg has released the complete spreadsheets in a ZIP file  of the Federal Reserve Emergency 'lending' programs from 2007-2009 (don't we all wish we could borrow on those terms?). From Bloomberg:

"To download a zip file of the spreadsheets, go to http://bit.ly/Bloomberg-Fed-Data. For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”

"Bloomberg News obtained information about the discount window and ST OMO through the Freedom of Information Act. While the Fed initially rejected a request for discount-window information, Bloomberg LP, the parent company of Bloomberg News, filed a federal lawsuit to force disclosure and won in the lower courts. In March, the U.S. Supreme Court decided not to intervene in the case, and the Fed released more than 29,000 pages of transaction data."

While we have read stories throughout the year on this information it had not yet been made available in this format.

Bloomberg has also updated their interactive chart which is quite interesting.....Couldn't embed it here but the image will take you to their chart.

However, it should be noted

"Bloomberg excluded foreign-currency liquidity swaps because names of commercial banks that borrowed under the program haven’t been disclosed to the public."

So it still remains unknown 3 years later who was bailed out with $586 Billion via foreign-currency swaps .

GDP Estimates 2012 Vs. 2008 and More Economic Consensus Groupthink

The Wall Street Journal recently released it's December Survey of Economists. This is where you generally get to hear about the current consensus groupthink. In the survey, 54 economists gave their projections for GDP in 2012 (among many other things). I decided to compare this years projections for the year ahead to what these great minds saw coming in December 2007 (the month the last recession started). Does anything about this strike anyone else as quite similar........

Now just maybe if they would have added a negative sign to their 2008 forecasts they would have been pretty spot on (considering GDP for the year finished down -2.5%). The December 2007 survey included 51 "economists"....yet not 1 came up with a negative GDP projection. Here we are now in 2011, with the European situation, the rest of the developed world including the US and Japan soaked in debt, and China trying to build ghost cities until someone rises from the dead, and not one of the 54 "economists" is willing to project anything lower then 1.3%? Interesting......

What else do they have to say?

With the unemployment rate right now at 8.6% (due to massive labor force shrinkage) the consensus is things will essentially stay as is. Funny, anyone know what the unemployment rate was in December of 2007? 5.0%. And what was the consensus for the end of 2008? 5.1%. In reality it tuned out to be 9.9% and yet not one of the economists predicted anything above 5.6%. Nice work guys.

Some more on unemployment....

Yikes, they can't predict one year ahead and now their being asked about the unemployment situation 3 years out? Anyone know how I can get in touch with James F. Smith from Parsec Financial Management who made that 5.0% projection? Because I would gladly pull a Mitt Romney on him and bet him $10,000 that's not gonna happen!

Alright, What about Treasury Rates?

Looks like they are calling for rates to rise from the current level of 1.85% to 2.75% (we can be sure this is due to their more optimistic view of the overall economy and not worries of the US ever expanding debt situation). In Dec of 2008 when it was 4.1% consensus said it would move up slightly to 4.28% (the yield ended 2008 down to 2.25%)

So what about their views on the probability of a recession in the US in the next 12 months?

23% and nobody puts the odds at higher then 40%? What about the Eurozone? Surely they must realize the Eurozone is already in a recession -- After all, the OECD already declared as much (and they are never the first to spot anything)

Really? You can't even get them to admit "yes" on a Eurozone recession which is clearly already happening? Well, what should we expect.......this is what they thought in July 2008 (7 months after the last US recession already started).

Ok so maybe we should interpret anything in the 50% range as their version of certainty LOL!

Will at least one member leave the Eurozone? 48%? Guess that should mean it's pretty near certain!

That may be about the biggest dispersion of views you will see on a subject from these groupthinkers.

Ah the joys of "economist" forecasts!

Real Estate Markets in Canada, China and Australia = CaCA

The investment world loves its acronyms (BRICS, PIIGS...etc) but I thought it was missing one which describes the housing markets in Canada, China and Australia. Then it hit me like a bag of.......CaCA! While Canadians, Chinese and Australians appear to still be living in a world of denial, evidence that their housing booms are in fact bubbles has been overwhelming. Similar to the smell of, yup, CaCA.

The Bank of Canada recently released its December "Financial System Review". It highlights some concerns about Canadian household finances and housing prices. However, it mostly down plays the housing concerns in typical central banker speak.

"In Canada, the elevated levels of household debt and housing prices require continued vigilance and close co-operation among Canadian authorities."

"Some measures of housing affordability suggest continued imbalances, owing to the robust performance of this market. In particular, house prices remain very high relative to income (Chart 26). Since the adverse impact of elevated residential property prices on affordability has been largely offset by low interest rates, affordability would be considerably curtailed if interest rates were closer to historical norms (Chart 27).

Certain areas of the national housing market may be more vulnerable to price declines, particularly the multiple-unit segment of the market, which is showing signs of disequilibrium: the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market."

Gee, where does that 3rd paragraph sound familiar (see around the 1:20 mark in the below video, although the whole thing is classic.).  Obviously, in the US, it was more then the condo market and it will be in Canada too. Although, Vancouver will be Canada's version of Miami.

Clearly Canada's party will end at some point. Then in Australia we have another disaster waiting to happen (although, it has likely already begun there). Similar to Canada, it's fate was only delayed after the 2008 crash. The case of Australia's bubble is laid out in great detail in "Bubbling Over: The End of Australia’s $2 Trillion Housing Party" by Philip Soos.

Believe it or not, housing prices cannot deviate from rents by that margin forever. Fundamentals do matter.

Then of course we have China. What more can be said about China's pending disaster. We had all seen the videos of China ghost cities and malls. Of course the deniers are still in full force claiming that China's centrally planned economic structure has everything under control.......until reality becomes undeniable. The question is not whether it will burst, but how long the Chinese government can prop it up. Some of the ghost cities are already being hit such as China's city of Ordos which is discussed below. More pictures of China's out of control building can be seen here.

And as Reuters recently reported:

"After a housing bubble that doubled values in 35 cities between 2004 and 2009, prices are now falling nationwide. The central bank said on Friday property prices had reached a turning point while banks are worried a price slide of 20 percent could trigger panic selling."

"But prices in Ordos have already fallen below the level that analysts say would cause serious problems if mirrored nationally.

Prices have plummeted 20-30 percent in certain property developments in Beijing and Shanghai.

Nationwide, the decline is so far more modest. Home prices fell slightly in October from September for the first time this year, official data showed, but private surveys indicated prices began falling in September and continued through November.

With local governments often dependent on land sales to fund payments on a staggering 10.7 trillion yuan (1.1 trillion pounds) of debt, Beijing worries that a collapsing property market will trigger a wave of defaults that in turn will hit the banks."

"In Ordos, the government announced a bailout fund of between 7.5 billion and 10 billion yuan to support its beleaguered developers.

Still, that may not be enough. A commercial real estate agent, who only gave his surname Li, said that despite the government actions he was planning to return to his native Guangdong Province after six unsuccessful months in Kangbashi.

"There isn't much commercial real estate here. You need private businesses for that, and here it's all government money." 

The shock to natural resource demand from a China real estate bust is what will really bring the Australian and Canadian markets back to reality quickly. After all, its CaCA, a big interconnected mess!

Currency Analysis, Euro Breakup: Current Value of the Euro and Future Value of the Deutsche Mark

An interesting report came out from Normura Global Reseach looking at what Euro area currencies might look like if the Euro was no more.

There are nice write-ups about the report by the Financial Times and Forbes (so I will not get into that here). However, the question I continue to have is why is the Euro continuing to be valued so high? If every national currency (except for Germany, barely) would trade lower......then why is the combined currency still trading where it is?

And if this analysis is remotely accurate then people better start inventing new reasons why Germany should not leave the Euro for the Deutsche Mark. So far the only reason people come up with is that a stronger currency (a new Deutsche Mark) would hurt their export based economy. However, as shown in the chart, that revaluation higher would barely amount to anything. While there might be an initial flight to the 'assumed' safety of the new Deutsche Mark, people should not forget that Germany would also have to recapitalize its banks to absorb the losses that they would incur from a Euro breakup and PIIGS defaults -- Quickly weakening their currency.

Bailouts Are Not Enough. Former Treasury Secretary Henry Paulson Gave Advance Tips to Friends (Big Surprise)

Finally we get a story about the inside information that former Treasury Secretary Henry Paulson provided to hedge fund friends (As the former CEO of Goldman Sachs, you can be sure he has many). This story is from bloomberg. It's long so I have excerpted parts below (but it is all worth a read).

"It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM)"

"On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets."

"At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.

But of course! Tell the press one thing (what you know is a lie) and tell your friends the truth.

Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc. (GS), of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship”."

"Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said."

"The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information."

“You just never ever do that as a government regulator -- transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”

To be a little more accurate he should have said "You just never ever SHOULD do that as a government regulator." This story is only an example of what goes on all the time. 

"Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.

“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”"

"An official such as Paulson has no legal obligation to keep material nonpublic information to himself, says Phillip Kaplan, partner for litigation at Manatt Phelps & Phillips LLP, where he specializes in securities and class-action cases."

“I don’t think a government person is liable,” he says. “He didn’t profit from the information or trade on it.”

But here is the issue, to say that his actions were OK because he didn't profit or trade on it is a bunch of BS. First of all, how is it acceptable behavior to lie to the press (and therefore the Public you represent) while telling your friends the truth? Second of all, who is to say that he did not profit from it? Just because he himself didn't trade on it? Even if those he told did not trade on it, they could have told someone who did. The profit does not need to be immediate (many ways to work around insider trading rules). Good Old Boys network......Favor for a Favor......That it how these things work.

Great Infographic on the Education Bubble & Are There Signs of a Leak?

Below is a nice infographic on the Education Bubble (a better term would be a Tuition Bubble) from Savingsaccount.org . The cost of a college degree is clearly out of whack relative to income and something at some point must change (when is the only question). We can only hope that the tuition decreases that have been announced by a small number of colleges is the first sign of a leak in the tuition bubble. As CNNMoney reported:

"As colleges across the country become increasingly pricey, these five schools are cutting tuition and fees by more than 10% -- and, in one case, by as much as 60%."

While that highlights only five colleges, a quick google search reveals that in some areas it appears like more of a trend. (unfortunately many are still raising tuitions...but for how long?)

Why is it hard to cut $1.2 Trillion out of the Budget over 10-years? (It's NOT!)

The reality is you only need to reduce one department (to its historical average funding level) and you could save more than 1.2 Trillion over ten years.

Everyone is talking about how the "Supercommittee" was unable to reach a deal to cut 1.2 Trillion from the budget over a 10-year period. As CBS news reports:

"After more than three months of negotiations, the congressional supercommittee announced Monday that it would not be able to reach a deal to reduce the deficit by the group's midnight deadline, citing 'inability to bridge the committee's significant differences'"

"According to the debt limit deal, the committee's inability to compromise will result in $1.2 trillion worth of automatic cuts in domestic and defense programs as of 2013. The so-called 'sequestration' was designed to serve as an incentive for compromise, and both parties had previously emphasized their commitment to avoiding those triggers."

This made anyone and everyone remotely connected to the military industrial complex scream bloody murder about the planned automatic cuts to the Pentagon. By default half of the 1.2 Trillion in cuts is supposed to come from Defense if no deal is reached. To that I say who cares?!? That is basically $60 Billion per year or less than 10% of the defense budget (and the cuts won't even take effect until 2013).

I don't understand how this "supercommittee" is unable to cut 1.2 Trillion over ten years (that's $120 Billion per year or less then 4% of what the US spent this year). What kind of "supercommittee" can't see what is staring them in the face?

A simple look at the crazy levels defense spending has reached gives you an obvious target. There is no need to touch ANYTHING until you first bring "defense" (cough cough) spending down to historical levels (levels which were never low in the first place).

The average amount for defense spending since 1948 (in inflation adjusted dollars) is about $442 Billion. I don't think anyone would say that our military was "weak" during any of this time. I am not even saying we must bring it below that level (although I think we easily could). However, just bringing US defense spending back to it's historical average would make the "supercommittee's" job complete.

Unfortunately, we have people trying to twist the message and defend ridiculously high levels of defense spending by comparing it to GDP....so you will be shown a graph like this

That one is from the heritage foundation. However, comparing defense spending to a GDP level is slightly moronic. How does the market value of the goods and services produced in country determine the cost of protecting it? Shouldn't it instead be more related to things like population size, land mass, number of bordering countries? By lowering our defense spending and reducing our presence in foreign countries we can REDUCE the aggression (out of sight out of mind). Ron Paul has a good speech about it, imagine if roles were reversed. Our military presence, not our economic standing is causing aggression.

This chart from the Economist puts in perspective how out of whack US military spending is. Do we really need to spend more on "defense" then all these countries combined? Well I'm sure according to Lockheed Martin, Boeing, Northrup Grumman, Raytheon, General Dynamics and the rest......it's not enough!

It's a sad reality that the "supercommittee" can't even make these OBVIOUS cuts. What are they going to do when it actually comes down to making the hard decisions? Because this $1.2 Trillion over ten years? That is NOTHING!

cartoon from heraldnet.com

Reaction to 'Wall Street' Vs. Reaction to 'Occupy Wall Street'

Too True, from Stuart Carlson at the Washington Post . Lots of arrests........on the wrong side.

Are Morningstar Mutual Fund Analysts Taking Happy Pills? Ratings Breakdown.

UPDATE: 8/1/12 - You can see updated ratings as of 6/30/12 here.

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So Morningstar has released new "Analyst Ratings" on 349 US based mutual funds as of 11/15/11. According to Morningstar

"The new scale runs from Gold, Silver, and Bronze on the positive end to Neutral and Negative. Expressed as medals, the top three tiers are reserved for funds our analyst team thinks have sustainable advantages that position them well versus peers and a relevant benchmark on a risk-adjusted basis over the long haul (at least the next five years)"

Morningstar considers Gold, Silver and Bronze to be positive analyst ratings. And obviously the other two are self explanatory. The exact definitions of each are below

Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction;  

Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction;

Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, and sufficient level of analyst conviction to warrant a positive rating; 

Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform; and 

Negative: Fund that has at least one flaw likely to significantly hamper future performance, and is considered an inferior offering to its peers.

However, one has to question the way these ratings have been given out for this first batch of 349 funds. 

These must be the parents of Generation Z giving out these ratings because apparently they think you deserve a metal just for showing up. Of the first 349 funds rated, a full 311 or 89% received a "positive" rating deserving of a "metal". Another 30 they are indifferent about and they only have a negative view on 8 or about 2%. 

However, many studies have shown that the majority of actively managed mutual funds actually underperform their benchmarks. Below is a chart from Mclean Heuristics using data from Standard and Poor's Indices verses Active Funds Scorecard.

Clearly that is a sad showing for active managers as a whole. But lets get one thing clear.....I am NOT a supporter of index investing. In fact, I believe index investing (particularly using cap-weighted indexes) only adds to market inefficiency (but that's a rant for another day). 

However, what that chart does show is that if Morningstar was properly distributing it's ratings, it would likely be an inverted version of what they put out. With the majority falling in the "negative" category and the least falling in the "gold" category.

We'll see how the distribution of ratings turns out as Morningstar rolls out more over the next year, but so far it looks to be just as ridiculous as stock ratings given out by the industry. Analysts as a whole in the financial industry are not in short supply of happy pills. After all, Happy Sells!

Updated: 11/17/11 10:20pm ET