economy Archives - DidoSphere

June 16, 2017 – Do you notice the Yield Curve narrowing?

Do you notice the Yield Curve narrowing?

Hi Folks,

As I’ve explained in my book, “Dow to Drop 80% Soon?” one of the best predictors of a recession is a negative yield curve. The yield curve is inverted when long term yields are lower than short term yields. The yield curve inverted just prior to every U.S. recession in the past 50 years.

https://www.amazon.com/Dow-drop-80-soon-Protect-ebook/dp/B01KPQB0OS/ref=sr_1_3?s=digital-text&ie=UTF8&qid=1497621601&sr=1-3&keywords=didosphere

As of June 15, 2017, the yields between the 10-year and 30-year treasuries have been narrowing, i.e. 10-year is now 2.16% and 30-year is now only 2.78%. See the government website below:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

When the yield becomes negative or inverted, market sentiment suggests that the long-term outlook is poor and the yields offered by long-term fixed income will continue to fall. It also spells trouble for the financial sector as what started happening in late 2006. The incentive for depositors to leave their money with the bank for longer periods of time, say 5 to 10 years is to earn a higher interest rate. If the interest rate of return is the same or less for 5 years compared to 1 year, this incentive is gone. This means that profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as hedge funds, banks and mortgage companies. Equity lines of credit and adjustable rate mortgages (ARMs) which are periodically adjusted usually go up since they are based on short-term interest rates. Debtors who got stuck with these loans will need more money to pay for additional interest. They will need to tighten their belts since they will have less money to spend on consumer goods that is why recessions follow an inverted yield curve.

Although we are at record high territories in the stock market, with the Dow trying to breach the new resistance level of 21,700, we live in dangerous times. I see the Dow can quickly lose 3,000 in just a period of 10 to 20 days. The reason for this stock market high is the pro-business stance of this administration even though not very much has come to fruition yet, i.e. the talk about curtailing burdensome regulations, lowering corporate, capital gains and repatriation taxes and increasing the defense and infrastructure budgets. Investors are optimistic that Trump’s government technocrats will continue to develop policies that will increase our GDP which should keep recession farther away in the horizon.

Most Economic Indicators Pointing Upwards

It has only been over a week since the voters elected Trump and housing starts are up, unemployment claims have been the lowest since the great recession, retail sales look strong, corporate profits are up, the Dow gained more than 5% since the election. Happy days are here again? We’ll see. The uncertainty of the US elections kept the stock market stagnant for almost a year. So this is a post-election bump that still has legs. Trump’s pro-business policies of curtailing government regulations, lowering corporate, capital gains and foreign earnings taxes are meeting with great enthusiasm from the gnomes of Wall Street. Look for a correction around Dow 19,500. The correction could be 5-10%. Follow this blog so we may discuss the possibilities.

After the dust settled…

Wednesday morning after Election 2016, the 1,000 point drop in the Dow that many so-called experts predicted as they were watching Trump beat Clinton one battle ground state after another did not happen after all. In fact stocks are not only in the positive territory at noontime eastern standard time but had healthy gains of 1-1.5%. Still Myles Udland, a financial writer for Yahoo Finance says, “…don’t mistake Wednesday’s rally for an “all clear” sign from markets. The unknowns around any new presidency are considerable, and perhaps no recent administration presents more question marks for investors than a Trump White House”. Adam Parker, a strategist at Morgan Stanley, wrote in a note to clients on Wednesday that, “We are more bearish today than we were yesterday because of increased uncertainty.”

Frankly, I am tired of listening to these geniuses and shame to investors who blindly listen to them. These are the same type of geniuses who led investors on the wrong path in 2008. After investors lost 50% of their savings during the bear market that followed the great recession, these geniuses told them to get out of stocks.

Go ahead, listen to Udland and Parker. Get out of the stock market now and you’ll be sorry. I say this because Trump’s fiscal policy is pro-growth. Low taxes, less government regulations, repatriation of foreign profits, possible repeal of Obamacare, infrastructure investments, etc. Of course I am concerned about a few uncertainties such as Trump’s promise to replace Janet Yellen whom I think is doing a great job and protectionism but I don’t think Trump would act recklessly with regard to these two concerns. He has VP Pence and other technocrats to hold his hands. So when will the stock market crash? We will exchange thoughts and ideas. Follow this blog and learn.

Stock Market Investors, Fasten your Seatbelts

As of this writing, all of the major market averages have been declining significantly. The Dow Jones Industrial Averages (DOW) is down 400 points, NASDAQ, 90 points and the S&P 500, 45 points. If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end. AP prints, “STOCKS FALL SHARPLY...” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….” The fact is that a sluggish economy will benefit smart investors. Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Gloom and doomers quickly reverse themselves the moment the wind changes direction. It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates low making it easier for consumers to purchase. Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check. The price of real estate had been rolled back to a decade ago in many areas of the country. This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes. A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity. A sluggish recovery means the consumer is not spending as much, as expected in a typical expansion. Hence, the consumer has more money to pay down his debt and to increase his savings. He is poised to spend. He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an inherent need to keep up with the Joneses. Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations. When the uncertainty goes away, the recovery may catch fire quickly and may even overheat. The European bank stress test results to be disclosed this Friday, July 22 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options, but no further action is planned for now because the economy is still growing”. Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases. I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own. He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president. To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes. Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days. Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession. Economics 101 and plain common sense.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

QE2 = Printing Money

Just as gay no longer means happy, QE2 no longer means Queen Elizabeth II. Lately, the business world has been using the term QE2 a lot. QE2 is short for the second round of the United States Federal Reserve’s (“Fed”) Quantitative Easing (“QE”). This second round of QE is estimated to total $600 billion. The first QE which was spaced out over one year, between 2008 and 2009 totaled almost $2 trillion.

Bloomberg News reports that the average person does not understand the function of the Federal Reserve. Therefore, it is easy to conclude that QE is even less understood by the average person. It is my goal to unravel the mystery of QE in this article. To simplify, QE is another term for “printing money”. The Fed, which is the Central Bank of the United States, regulates the amount of money in the economy by selling and buying bonds and by increasing and decreasing interest rates to member banks. The Fed has several ways of printing money. It can issue Treasuries, i.e. notes, bills and bonds and it can also just credit itself as in this case of Quantitative Easing. The Fed simply credited its balance sheet for the amount it needs to buy bonds from banks and other financial institutions. The assets the Fed will buy with the money it credited itself are not limited to government bonds but are expanded to include mortgage backed securities and corporate bonds. The Fed’s objective is to stimulate the economy by encouraging lending. Reducing interest rates to almost nil has not worked to stimulate lending so this is the last resort for the Fed. When the Fed buys idle assets such as treasury and corporate bonds, the banks and financial institutions such as Goldman Sachs receive liquid assets on their balance sheets in exchange for idle assets thus increasing the amount of cash at their disposal. The Fed is hoping that the banks would ease up on lending and lend this new found cash to businesses and individuals. The assumption is that businesses that can borrow would use the money to increase capital investments, expand operations and hire more workers. For the banks to profit on QE, the newly found cash will have to be invested somewhere, i.e. by lending it to credit worthy borrowers or by putting the money in other investments such as into the stock market. This is the main reason of the sudden surge in equity prices at Bernanke’s announcement of QE2. The Dow Jones Industrial Averages (DJIA) increased by 11% since August in anticipation of the announcement which happened in early November.

QE2, a.k.a. “printing money”, a.k.a. “expansion of the money supply” will reduce the value of the dollar. This is basic Economics; The Law of Supply and Demand. The dollar has been losing value against major currencies since the announcement of QE2. Increasing the money supply will also increase inflation. The word “inflation” is just as mysterious to most people as any economics term although it is one of the most overused words today. To simplify what it means, imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR. You have not eaten any solid food in 5 days. Jeff Probst, the host brings out a slice of pizza and gives each person $100. He asks the players to bid an amount for the slice of pizza and the highest bidder wins. Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court, because once that slice of pizza is gone, it’s gone. What if there are 6 or 7 slices? What if there are 20 slices? Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer. Let us get back to the single slice example but add quantitative easing to the scenario. 5 players have $100 each to buy up a single slice of pizza but you just happen to have a checkbook in your back pocket. Every player bids $100 but you hand over $100 cash and a $100 check. You get the slice of pizza. That my friends is how QE works. With your checkbook in hand, you are the Fed.

The Fed is hoping to stimulate the sluggish economy with its QE2 move but many economists think that the move may only spur inflation, not the growth needed to reduce the high rate of unemployment. Officials of other countries including China, Brazil and the EU were quick to criticize Bernanke’s move arguing that QE2 only serves to promote currency wars. After all, Japan’s decade long QE did not work, why should it work here? A cheap dollar is not good for foreign exporters of goods into the United States because their products become more expensive for Americans which causes higher inflation. I am of the opinion that QE2 is not a good idea. QE1 was necessary to restore stability to the banking system but I find this second round of QE as an arrogant and a largely political move. Arrogant because Fed’s Chairman Bernanke knows that the dollar is the global reserve currency so the printing of money can be done without bankrupting the dollar. Political because President Obama’s popularity will keep plunging unless the 9.6% unemployment rate is reduced. The Fed’s QE2 move seems to be calculated to substantially reduce unemployment before the next presidential campaign goes into full swing.

Finally for investors, be cautious. If you are invested in the stock market, watch the market carefully. This newly printed money will be looking for a home. Some of it will inevitably find its way into the stock market driving equity prices up. The “feel good effect” of seeing your investment or retirement account go up in value may indeed spur an increase in your consumption pattern contributing to the growth in GDP but this “feel good effect” is not a long term condition. This intervention in an economy that is slowly but surely on the way to recovery is unjustified. It may lead to the next bubble burst.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

10% Unemployment not enough to derail recovery

When I wrote my article entitled “SLUGGISH RECOVERY, GOOD FOR INVESTORS” in July before I went on my summer vacation, many “gloom and doomers” thought I was crazy. In fact I was bold enough to predict an 11,300 Dow for the end of September. That was on July 21 when the DJIA closed at 10,120. We are not quite at 11,300 yet but the DOW closed up at 10,860 last Friday, September 24, 2010.

The direction of the market is really not hard to predict. Now that the NBER has ruled out a double dip recession, stock prices will keep going up unless there is a new recession. Yes there will be days when stocks will go up, down and sideways but investors will continue to be bullish if the economy is still expanding. 1% to 2% GDP growth is good enough to continue an upward trend in stock prices. This statement is easily proven. In the beginning of the year, many economists predicted the economy to grow 4% to 5% this year. The projection had been revised downward several times and stocks tumbled each time the lower projection was announced. The knee jerk reaction of investors is to dump equities in favor of bonds and tangible assets upon hearing a lower growth rate. Then investors become accustomed to the sluggish growth, after which they start buying stocks again. The bullish trend will not stop unless there is another recession. Even if there is negative growth in one month, 2 months or even in an entire quarter if the economy recovers again in subsequent months to show growth in GDP, the market will come back. There will be fluctuations and corrections in the market but the sophisticated investor will remain invested in equities unless signs point to another recession. At the risk of repeating myself, commodity prices are up, corporate profits are up, many publicly held corporations including numerous financial institutions have resumed paying dividends because of their huge profits, many publicly traded stocks of companies in a wide assortment of industries have hit a 52-week high. These are not signs that there is another recession just around the corner. Another proof is that inflation is back. It means that the deflationary period is gone and the economy is starting to heat up again. Foreclosures are up and housing starts are down, but this is a normal cycle after homeowners enjoyed double digit increases in home prices for many years.

The not so rosy sector of the economy is the high unemployment rate. 1% to 2% GDP growth will only make a small dent in the unemployment. We need 8% GDP growth like in the Reagan expansion years to reduce unemployment to 5%. Many economists are of the opinion that the reason for the high unemployment rate is the reluctance of small businesses to invest and expand because of the uncertainty in taxes and new regulations. I disagree with their opinion. In a free market economy like ours, the desire to make money is so intense and the chance of success is so high compared to a government controlled economy that most smart entrepreneurs will not postpone their plan for growth and expansion just because of regulations and a few percentage increase in taxes. However, I agree with Rep. Paul Ryan (R-Wisc) that keeping the Bush Tax Cuts and reducing spending will accelerate business investments. Paul Ryan who is a ranking member of the Congressional Budget Committee and Ways and Means Committee is a Reagan conservative who is touted as a rising star in the Republican Party and possible nominee for the 2012 presidential election.

Now that the “great recession” is over, it is wise to review what caused it. The NBER, a historical recorder of past events declares the recession started in December 2007 and ended in June 2009. The “great recession” was caused by the consumer who stopped spending, caused by worries of the stability of the banking and financial system, caused by massive default of derivatives issued by the financial institutions, caused by the housing bubble burst, caused by massive default of homeowners in payment of their mortgages, caused by increase in mortgage rates and high fuel prices. What could be so simple?

I went to a party last Saturday night. The state of the economy became the dominant subject of conversation because many of the guests were sophisticated entrepreneurs and economists. I found that the adage “ask 10 economists a question and you will get 10 different answers” is really true. Most of them disagreed on the state of the economy and how to “fix” the nation’s economic problems. However, the wife of the CEO of a popular restaurant chain offered her solution in the form of a question in between sips of mimosa. She asked “why doesn’t Obama give every American citizen, man, woman, child $100,000 each? If the population of America is now 350 million, wouldn’t one hundred thousand dollars for each person cost much less than the new stimulus of 50 billion dollars the Obama administration had been dangling about? “It suddenly became quite, although some of the party goers dismissed “her solution” with some condescending remarks. I quickly excused myself, went to the men’s room, locked myself inside a stall and pulled my new iPhone which has a calculator. Lo and behold, $100,000 x 350 million is indeed $35 billion…less than the $50 billion Obama stimulus package. When I came out of the men’s room I was surprised that most of the guests continued to discuss and debate her solution. A CFO of an oil refining company said her idea is great because those who deserve the money will find a way to legally take the money away from those who do not deserve it. To me, the idea of this lady, a trophy wife who is relegated to ribbon cutting ceremonies and home decorating made as much sense as ideas from her husband and the other guests.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein. Any opinions and views expressed herein are the sole responsibility of the writer

Sluggish Recovery, Good for Investors

If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end. AP prints, “STOCKS FALL SHARPLY….” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….” The fact is that a sluggish economy will benefit smart investors. Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Harbingers of gloom and doom quickly reverse themselves the moment the wind changes direction. It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates down making it easier for consumers to purchase. Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check. The price of real estate had been rolled back to a decade ago in many areas of the country. This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes. A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity. A sluggish recovery means the consumer is not spending as much as expected in a typical expansion. Hence, the consumer has more money to pay down his debt and to increase his savings. He is poised to spend. He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an intrinsic need to keep up with the Joneses. Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations. When the uncertainty goes away, the recovery may catch fire quickly and may even overheat. The European bank stress test results to be disclosed this Friday, July 23 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options but no further action is planned for now because the economy is still growing”. Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases. I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own. He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president. To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes. Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

What causes stock market fluctuations?

Ken Little who authored 12 books on investing and personal finance gives the following reasons for the drop in stock prices: Interest rates, inflation, earnings, oil and energy prices, war and terrorism, crime and fraud and serious domestic political unrest. With all due respect to Mr. Little, what he pointed out are the symptoms of the disease rather than the disease itself. The disease which causes the stock market to tumble significantly is recession. Yes the stock market will fall at the onset of various bad news such as an increase in the interest rates and energy prices, instability of the Euro Banking system and the high jobless rate. But if these factors do not lead to a recession, the stock market should quickly recover and continue to rise. Sudden market fluctuation is significant for short-term traders but should not be for long term investors because the market always recovers after a recession. It would be nice if you can predict the highs and lows of the market because you could have made a killing if you had sold in October 2007 when the Dow Jones Industrial Average hit 14,000 and bought again in March 2009 when it plunged to a low of 6,600. Therefore, the Eurozone problem, high jobless rate, the downgrading of Spanish bonds, North and South Korean conflict, Israeli’s deadly raid and the BP oil spill do not worry me as much as decrease in retail sales, reduction in hiring, declining commodity prices, industrial production and housing starts. The day-traders may drive down the stock market purely on investor sentiment and emotion, and we may yet see a DJIA of 9,000 in just a few weeks, but it defies logic for a downward trend to continue if all leading economic indicators are pointing upwards. This is all intricately connected because if stocks do not recover quickly, and we get into a prolonged bear market, consumer confidence may deteriorate resulting in reduced consumer spending. Again, I do not see a protracted bear market unless we are heading for another recession.

We must go back to basics to enable us to assess where we are now in the economic recovery. Recessions are a normal part of a business cycle. Recession comes from the word “recess” which most of us know is the suspension of whatever we are doing in order to have fun and relaxation. As in “let the children play during recess”. However, in business lingo recession is a word that is feared by most people because it can be defined as the suspension of consumer spending or to put in milder terms, an intermission from spending. In economic terms recession is often referred to as a “contraction” of the economy and the recovery which follows is commonly called an economic expansion. Recession is feared by most people because it results in the reduction of wealth.

Historically, recessions are brief with this last one, dubbed “the great recession” being the most severe since the great depression. It is the consensus of many economists that this last recession lasted 18 months. Now that we know recessions are merely temporary suspension of consumer spending, we can be sure that economic growth will follow shortly unless a catastrophic event ensues, such as the collapse of the banking system leading to a depression, another bubble burst or some kind of a natural disaster. It is the opinion of many economists that “the Great Recession” has not been followed by a “Great Recovery” because taxes and government spending have not been reduced by this administration. Historically, tax cuts have always spurred economic growth.

But where are we now in the course of this economic expansion after the great recession? I have a more optimistic outlook and I am hoping that we are halfway back up a “V” shape recovery and not in a “U” shape recovery. The European Debt Crisis and the high unemployment rate alone should not cause the stock market to plunge. First, the European Debt Crisis has been alleviated by the commitment of the European Union Central Bank and the IMF (International Monetary Fund) to pledge almost $1 trillion in bail out money (Le Tarpe) for ailing Eurozone countries such as Greece, Spain and Portugal. Le Tarpe has a great potential for success if used judiciously in buying junk bonds of troubled countries but The European Central Bank must continue to demand austerity measures from leaders of these countries. Although Greece’s default is imminent, Le Tarpe should temper investors’ sentiment since the bail out money should tide Greece over for a year or two. The stock market plunge this month, the worst May for stocks since 1940 was caused by investors’ panic and uncertainty about Le Tarpe.

Second, the high jobless rate of 10% is not enough to derail the recovery. Even if the entire unemployed population stops spending, there is still the remaining 90% of the working population, which according to statistics, continues to consume. If consumer spending is lower than forecast in May, that would worry me and I am sure it would worry stock market investors. Despite the high jobless rate the private sector is still reporting robust increase in hiring through the end of April. What would cause the stock market to plunge some more is bad economic news that could signal another recession. And going back to basics again—what will erode consumer confidence and stop the consumer from spending? For starters: Reduction of income; job insecurity; debt increase due to higher interest rates; inflation; diminution of assets, of investments and other tangible property such as real estate.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

PIIGS: Too Big to Fail

The largest economy in the world, The United States of Europe, officially called the European Union is facing a financial crisis that could weigh down our own economic recovery. The bears on Wall Street have outnumbered the bulls, focusing on the economic upheaval in Europe instead of the good economic news here at home. Economic indicators here in the U.S. are still pointing upwards indicating the continuation of our recovery from the great recession. Housing starts rose an estimated 5.8% in April to an annual rate of 672,000; retail sales were up 0.4% beating expectations; industrial production moved higher; 1^st quarter earnings of 75% of companies in the S&P 500 have exceeded expectation and most notably, the private sector added 32,000 jobs according to ADP. Various economists differ in their projection of job growth this year, from a low of 300,000 to a high of 1 million private sector jobs. I believe that the extension of unemployment and health benefits is a disincentive for many unemployed workers to seek work, thereby contributing to the high unemployment rate which has been hovering around 10%.

The malaise in Europe is hard to ignore because our global economies are all inter-connected. The failure of any of the EU’s most ailing economies, the PIIGS which is an acronym for Portugal, Ireland, Italy, Greece and Spain could send a tsunami of global economic woe: a financial meltdown much worse than the sub-prime mortgage crisis of 2008. The PIIGS are less affluent countries than their northern neighbors such as Germany and France and there is such a disparity of wealth between member nations. The IMF/European Debt Bailout of 750 billion Euros, which has been nicknamed “Le TARP”, pacified the market early last week so the bulls started running again driving up the Dow Jones Industrial Averages (DJIA) 500 points from the previous week’s low of 10,380. As reality sank in, investors became jittery and gravitated towards tangible investments such as gold, driving up its price to $1220 an ounce.

Reality is that Greece will eventually default. It is my educated opinion based on facts. Greece is the second most corrupt developed country in the world according to Forbes Magazine. It is easy to bribe Government officials. It is a social democracy, a welfare state with generous entitlement programs which includes early retirement, state pensions, and huge bonuses for public employees and a generous cradle to grave health care system. The wealthiest members of society, shipping magnates like Onassis, lawyers, doctors and other highly paid professionals have traditionally avoided paying direct taxes. I do not think the Greek populace can swallow the austerity measures being currently debated by the Greek parliament. Public anger in Greece will continue running at explosive levels. Why should the Greeks agree to do away with their entitlements which have been their way of life for such a long time? Besides, most Greeks do not blame themselves nor their government for their predicament. Rather, many Greeks would argue that the U.S. caused the financial meltdown leading to the severe world wide recession and banking crisis. Greece’s accumulated deficit is running 113% of GDP. They have ran out of money to pay for their bonds that are coming due. The solution is to issue more long term bonds to raise money but their government bonds have been downgraded making it impossible to sell them to continue to finance deficit spending.

Austerity measures being proposed include the freezing of government pay till 2014; dispensing with the 2-month bonus for public employees; increasing of the retirement age from 61 to 63; increasing VAT (Value Added Tax) from 19 to 23%. It is reported that 1/3 of the Le TARP money or 250 Euros will come from the International Monetary Fund (IMF) out of which 10 billion Euros is the contribution of the U.S.

Volcker’s statement last week that the Euro may break up, points to the core of the problem of the European Union. The Euro has gone down from its high of $1.50 per Euro last November to a low of $1.24 this week. The problem is that on one hand, member countries have become financially responsible for each other as magnified by this crisis. On the other hand, member countries have very little influence on how another country is governed because each member is an indivisibly sovereign state. At least if Greece goes back to its own currency, the drachma, it will suffer on its own for its fiscal irresponsibility. This current crisis is testing the EU if it can stay united and if the Euro will be preserved.

The 750 billion Euros may not be enough to rescue Greece. It certainly will not be enough to bail out other PIIGS in case any of them defaults on their external debts. If one falls, it would be followed by another and another and another. And this is what worries me and makes me bearish on the market despite the good economic reports in this country.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

SEC’S Case vs. GS&CO: Weak, Most Experts Agree

Goldman Sach’s Chairman and CEO Lloyd Blankfein had to dumb it down for his interrogators during a 3-hour question and answer session of an 11-hour marathon hearing last month on Capitol Hill. The hearing was about the Securities and Exchange Commission’s (SEC) civil case against GS. Several members of the Permanent Senate Committee on Investigations asked similar questions different ways that Blankfein had to find the proper words in the hope of making himself understood by an audience of what appears clearly as a group of “investment banking neophytes”. At one point he caught himself almost about to use the word “fiduciary”, stopped in time and had to struggle to describe what he meant in much simpler terms.

Lloyd Blankfein who received his business and law degrees from Harvard University and who was named “2009 Person of the Year” by the Financial Times, was probably the smartest person in the room during that senate hearing. Blankfein had skillfully steered GS&Co. through the financial meltdown. The company earned an impressive $13.4 billion last year and has not recorded a losing day from the first business day of 2010 through the end of the first quarter. To acquiesce to political correctness, he announced compensation caps for his company last year despite the company’s huge profit. Some report that GS received $10 billion of TARP money. If true, they clearly did not need it and it must have been paid back with interest. The Treasury Department used most of the TARP money to increase the capital of “too big to fail” banks and other financial institutions, such as GS whose assets have fallen when “mark to market” accounting method is applied.

As to the SEC’s suit, I see it as nothing more than a political move by the SEC which is composed of a decision-making body of 5 commissioners headed by a Chairman. The commissioners are appointed by the President and their terms are 5 years each but are staggered so that each commissioner’s term ends on June 5 of each year. To make the SEC non-partisan, no more than 3 commissioners may belong to the same party. So much for that non-partisanism. The decision to sue GS was not a unanimous decision but a 3-2 split along party lines which leads me to believe that this is all a political ploy, possibly to call attention to some kind of Financial Reform Bill which Obama and the Democrats have been trying to push through. If the SEC had a stronger case, I would argue that they would have gone directly to the Justice Department for a criminal prosecution rather than file, what in my opinion is a frivolous civil case.

GS&Co. has nothing to fear from the SEC. Goldman’s lawyers issued an initial statement indicating the allegations of “securities fraud” are completely unfounded in law and in fact. I agree. Let us briefly examine the allegations: SEC alleges, 1) “GS&Co …made misleading statements and omissions in connection with a collateralized debt obligation (CDO-ABACUS 2007-ACI)) it structured and marketed to clients…” Paraphrasing Blankfein’s reply, “If no one is willing to buy them, we cannot sell them.” In other words, the buyers of the CDO’s were well aware of the risks as well as the high returns. Says Blankfein, “We do this thousands of times a day. We buy and sell securities”. 2) GS&Co. failed to disclose in their prospectus that ABACUS 2007-ACI, which was backed by sub-prime residential mortgage securities (RMBS) was partially structured by hedge fund, Paulson & Co. Paulson shorted the portfolio it helped create by buying CDS (Credit Default Swap) securities from GS&Co. Paulson’s interests were sharply conflicting. Here is my spin on this: My understanding is that there is nothing in the law that requires the marketer of the securities to disclose that a selector of the securities in the portfolio took an adverse position by hedging against the portfolio. If Congress wants to introduce a law for that specific disclosure, let them do it right after the resolution of this case. Second, the SEC alleges that investors in ABACUS lost over $1 billion and Paulson’s opposite CDS yielded him approximately $1 billion. John Paulson is not God. The market could have gone against him. If anyone knew what we know now, in 2007 no one including Warren Buffet would have bought ABACUS. As it is, GS&Co. sold 10 billions of dollars in ABACUS stocks to mostly savvy investors. Would it have made a difference if those savvy investors knew that the selector of the funds took an opposite position? I don’t think so. Not when Chris Dodd and Barney Frank kept assuring us as late as June 2008 that there was nothing wrong with the housing market and that Fannie Mae and Freddie Mac were still good investments. Before the sky fell, ABACUS was highly rated and yielded an annualized double digit return.

This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.