Will there be a US “Double Dip”? Part One
Will there be a US “Double Dip”? Part One
We used to think agriculture gave rise to cities and later to writing, art, and religion. Now the world’s oldest temple suggests the urge to worship sparked civilization.
What happens when Greece defaults. Here are a few things:
- Every bank in Greece will instantly go insolvent.
- The Greek government will nationalise every bank in Greece.
- The Greek government will forbid withdrawals from Greek banks.
- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
- The Irish will, within a few days, walk away from the debts of its banking system.
- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
The Netherlands has served as the California of Europe, setting trends for the continent from the Enlightenment ideas of Baruch Spinoza to global trade spurred by 17th century Dutch maritime power, and the tolerance and openness symbolised by Amsterdam’s coffee shops and red-light district.
It has also been at the very core of Europe’s postwar integration, a founding member of every major institution from Nato to the euro itself. But in recent months the Netherlands has arguably become the most obstructionist country in Brussels’ fights over the EU’s future.
The Dutch government ardently opposed giving the eurozone’s €440bn bail-out fund more powers to help the EU’s debt-laden periphery. It is increasingly isolated in blocking EU enlargement to the western Balkans. And it has pressed Brussels to overhaul asylum and migration policies amidst a flood of north African refugees on Europe’s shores.
Dutch officials strongly object to being labelled obstructionist. But it is no coincidence that the minority Dutch government last year became the first eurozone country since the financial crisis began to rely on an openly anti-EU party – the Freedom party of anti-Muslim populist Geert Wilders – to stay in power.
As a result, the Dutch government has not only ignored Mr Barroso’s advice to shun populist sentiments; it is warning Brussels to pay more attention to people’s rising anger and sense of economic insecurity, and to take their fears more seriously.
What the British say What the British mean What others understand I hear what you say I disagree and do not want to discuss it further He accepts my point of view With the greatest respect… I think you are an idiot He is listening to me That's not bad That's good That's poor That is a very brave proposal You are insane He thinks I have courage Quite good A bit disappointing Quite good I would suggest… Do it or be prepared to justify yourself Think about the idea, but do what you like Oh, incidentally/ by the way The primary purpose of our discussion is… That is not very important I was a bit disappointed that I am annoyed that It really doesn't matter Very interesting That is clearly nonsense They are impressed I'll bear it in mind I've forgotten it already They will probably do it I'm sure it's my fault It's your fault Why do they think it was their fault? You must come for dinner It's not an invitation, I'm just being polite I will get an invitation soon I almost agree I don't agree at all He's not far from agreement I only have a few minor comments Please re-write completely He has found a few typos Could we consider some other options I don't like your idea They have not yet decided Correct me if I'm wrong I'm right, don't contradict me I may be wrong, please let me know Up to a point Not in the slightest Partially
The Economist column gives only these three French phrases — does anyone have a longer list pinned to their wall?
French Phrase Literal Translation Idiomatic Translation "je serai clair" "I will be clear" "I will be rude" "Il faut la visibilité Européenne" "We need European visibility" "The EU must indulge in some pointless,
annoying and, with luck, damaging international grand-standing."
"Il faut trouver une solution pragmatique" "We must find a pragmatic solution" "Warning: I am about to propose a highly complex, theoretical, legalistic and unworkable way forward."
The bear case always sounds intellectually more convincing than the bull case. And it is in this broker note too. Intellectual sounding and convincing.
But America is still an amazingly innovative country, humans are ingenious and most of the imbalances will sort themselves out. Big cap equities are cheap relative to almost all other assets (especially relative to small cap equities, cash and bonds and to many assets such as commercial property that require leverage). Cash yields almost minus 3 percent after inflation and less post tax. Bonds are scary as hell and yield minus 1% after tax and inflation.
Big though difficult-to-run companies are at low teens multiples. Great franchises are at mid-teens multiples. Tesco (UK) which is a truly great franchise - is at a 14 PE ratio. And the Pound is historically cheap. WalMart and Target - both slightly less good franchises - are at 12 times. The difficult parts of Silicon Valley (eg HP) are well under 10 times PE ratios (and we feel no need to own that one). The less difficult parts of Silicon Valley (Google for instance) are at a high teens PE ratio once you take out the excess cash. We own that.
Own equities. Don't kid yourself. Mega-cap equities are generationally cheap compared to other assets - and certainly compared to the cash/bond/levered asset complex.
Just don't be blind about it. The places that there have been high returns (Asia, small caps, smaller resource companies) are riddled with fraud. Twenty five years of deregulation and the high levels of innovation mean we have high and rising levels of stock fraud. Fortunately there is much less fraud risk in mega-caps.
Don't own Australia or the iron-ore-coal-steel complex. It has run too far and has been too easy to make money. Too many stupid/aggressive/greedy people are doing too much expansion. Some of these people are stupid - but they have made much more money than you or me so they must be right!
I can find dozens of reasons to be bearish - but I look at it dispassionately and I am bullish on big caps, and bullish on America. The problems will sort themselves out and the American exceptionalism (decent institutions, free enough markets and a willingness to take risks) will work their magic again.
Anything that takes you out of real assets (businesses and property that generate real cash flow) and puts you into nominal assets is - with a ten year time-frame - a bad idea. (And why is your personal account any shorter dated than that?)
Just don't get greedy by buying things you do not understand: you will be ripped off. The underlying fraud level is as high as I have ever seen it.
Oh, and we are also bullish on France and Germany. Old Europe has manufacturing and production power of enormous levels. (Remember what they produced to fight wars? Their productive capacity is very high and Americans have forgotten that. They do engineering as well as anybody. And Germany no longer has a restrictive monetary policy to crush its consumer market.)
Also the French are in that lovely position of having convinced newly rich Asians that they are the arbiters of good taste. There are few higher ROE businesses. France has played Asia better than America.
We can see plenty of reasons to be bearish - but just the frauds makes our portfolio short enough. Indeed we are plenty short and likely to remain so until I can't find frauds with ease.
Beyond that, there is a lot of pessimism around. It has got to be time to be bulli
Here in Minneapolis, the geniuses in charge of their underfunded police and fireman's pensions came up with this brilliant idea to merge their pensions into a different entity.:
The deal would allow the city to slash its police and fire pension liability. That's partly because it would switch them to the actuarial assumptions of the state fund, which assume higher investment returns and lower pension increases. It's also because the deal would give the city 11 more years than it has under current law to fully fund the two plans' deficits...
However, the deal would come with several costs for taxpayers. First, the city agreed not to oppose a firefighter bid for a last-minute boost in their pensions to bring them to parity with police. That would cost the city $7 million in future pension costs, figured in today's dollars.
Moreover, the deal would substantially boost the checks for police and fire pensioners, all of whom were hired before mid-1980. The police pension would jump by 43 percent to $64,000 in 2015, for example.
So, they actually increase their liability, but increase their assets via more optimistic return assumptions. That a bunch of adults find this solution attractive is rather disturbing.
So, the stats: at last count cited by Taylor and Perry (2008), 2.5 million Americans were in prison, a number to be compared with 1.5 million in China, particularly once we account for the fact that the Chinese population is four times as large as that of the US! In the Europe Union, a more proper comparison with the United States because of its Western style democracies, the total number of inmates is only 600,000, and yet the 27 nations of the European Union count 200 million more inhabitants than the US. Taylor and Perry continue: between 1987 and 2007 the cost of incarceration for American States has increased by 127% (adjusted for inflation), to a whopping $50 billion (in 2007). And then, of course, there are the ethnicity-specific statistics, according to which African Americans account for 47% of the inmate population, against only 12% of the total population, with Latinos trailing a bit behind (20% of inmates, 13% of the population). The implication, of course, being that whites are less represented than one would expect from their frequency in the general population.If these numbers don’t disturb you, you might want to pay a visit to your family doctor. To begin with, why exactly are so many more people incarcerated in the US than in all the European Union countries combined? Well, one of the answers could be that those pinko Europeans are soft on crime, which not only is silly on the face of it, but also raises the question of why there are so many violent criminals in the US. Except of course for the additional fact that a large number of US inmates are there for non-violent crimes (500,000 just for drug use, about the same as the total European population of inmates). Either American society is far more violent than its European counterpart, or American politicians are far too happy to lock people away to look tough with their constituencies (which implies that Americans are far too inclined to imprison their fellow citizens). Or both, obviously.