Comments From an Astute Eastern Europeon on Surreptitious Greek Moneyprinting

"What I think is more likely to happen (given how strong the support for the Euro is internally) is they are running the presses legitimately to cover the sharp increase in cash circulation due to the deposit run. The one thing they cannot afford now IMO is banking system collapse.

Stepping into the phantasmagorical now>

Next step would be, since the machines are running, they print (covertly this time, with western codes/serial numbers) a bunch of EUR 500 notes on behalf of the government (or government entities) which deposits them in the banks. Deposits appear and the banks are safe.

More phantasmagorical>

They like what they see, so they decide to cover more expenses with euro cash. Two venues that I see are retirees and military. Once or twice per year, there is actual cash disbursed without accounting recognition so the budget looks better or within the agreed upon "cuts". There are 2.1 mm ppl over 65, at avg pension 1000 euros, that's 4.2 mm EUR500 notes, or at 100x per stack, that's 42,000 stacks. That's a ~35x35x35 stack "cube", not difficult to produce or manage. Greece is also very concentrated: half the ppl live around Athens and Thessaloniki.

Then there are 108k military personnel. Easy to disburse cash too at say 2000/mo avg once or twice a year.

Also, guessing, there might be a few of the large oligarch suppliers (ie gasoline for all state/military vehicles) that will take cash in full or in part. Or do a three-way deal with a Bulgarian oligarch or two who will take euro cash. The Greek banks have extensive operations in Bulgaria so the money can get deposited there.

So Greece can print legit currency and make its budget look better and better.

The EU has a problem then: is that legit currency or not legit? It will be hard for them to declare vast parts of the currency in circulation (printed in Greece) to be not legit so the only thing they can do is ban printing and take over the machines (could happen). While this is happening, the Greeks start spending fast; typical pre-inflationary crack-up boom, because they don't know what will happen and chances are, most hold Greece-printed currency (no neighboring countries use the euro so guessing low intermix of cash)."

Great Piece on Greece "Austerity"

Highlights from Ricardo Hausmann, Austerity Is Not Greece’s Problem,

• [T]he recession in Greece has little to do with an excessive debt burden. Until 2014, the country did not pay, in net terms, a single euro in interest: it borrowed enough from official sources at subsidized rates to pay 100% of its interest bill and then some.
• But by 2007, Greece was spending more than 14% of GDP in excess of what it was producing, the largest such gap in Europe – more than twice that of Spain and 55% higher than Ireland's. In Spain and Ireland, though, the gap reflected a construction boom; euro accession suddenly gave people access to much cheaper mortgages. In Greece, by contrast, the gap was mostly fiscal and used for consumption, not investment.
• Greece never had the productive structure to be as rich as it was: its income was inflated by massive amounts of borrowed money that was not used to upgrade its productive capacity. According to the Atlas of Economic Complexity, which I co-authored, in 2008 the gap between Greece's income and the knowledge content of its exports was the largest among a sample of 128 countries.
• Unfortunately, this is not what many Greeks (or Spaniards) believe. A large plurality of them voted for Syriza, which wants to reallocate resources to wage increases and subsidies and does not even mention exports in its growth strategy. They would be wise to remember that having Stiglitz as a cheerleader and Podemos as advisers did not save Venezuela from its current hyper-inflationary catastrophe.

Grexit

MR:

"Third, I believe we as observers tend to overestimate the permanence of trends/state of affairs which have lasted ten to fifteen years or more. That included the Great Moderation and that also includes Greece in the eurozone. In a broader historical perspective, the arrangement simply doesn’t make sense to me, as there is more than one Europe. So I am willing to predict its end. And the next year seems like a quite possible time for that end to come about. Fourth, I still don’t think enough commentators are stressing how much the creditor eurozone countries see this as a nested game, where concessions to Greece would have to imply larger concessions elsewhere and embolden Podemos in Spain."

Hopefully!

Did You Know That the PIGS Are Paying Pharma Companies in Scrip?

The following is a footnote in the Pfizer 10-K (annual report) which was filed today.

Accounts Receivable
We continue to monitor developments regarding government and government agency receivables in several European markets, where economic conditions remain uncertain. Historically, payments from a number of European governments and government agencies extend beyond the contractual terms of sale and the trend is worsening. In Greece, certain of our accounts receivable have been restructured into bonds with maturities that further lengthened the repayment timeline.

We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on an analysis of the following: (i) payments received to date; (ii) the consistency of payments from customers; (iii) direct and observed interactions with the governments (including court petitions) and with market participants (for example, the factoring industry); and (iv) various third-party assessments of repayment risk (for example, rating agency publications and the movement of rates for credit default swap instruments).

As of December 31, 2011, we had about $1.5 billion in aggregate gross accounts receivable from governments and/or government agencies in Spain, Italy, Greece, Portugal and Ireland, where economic conditions remain uncertain. Such receivables in excess of one year from the invoice date were as follows: $290 million in Spain; $139 million in Italy; $81 million in Greece; and $10 million in Portugal.

Great Post on Greece by Tim Knight

"I'm glad the Greek vote passed. If it had failed, someone would have come up with some dumb-ass plan to "save" everything and undo the vote. As it is now, the bulls got precisely what they wanted. The Greek people have been sold up the river. So all the good news that can be had is already out there. Lap it up."

Two Charts

New high in Portugese ten year bond yield. A yield spread that high over Bunds means they are basically worthless. Look back at when Greece passed the point of no return.

New low in Baltic Dry Index. This is spooky. It's true that the glut of ships that were laid down during the credit bubble have made it so that the BDI probably will probably never reach the highs set in 2007.

However, on a short term (e.g. monthly) basis, the supply of ships is static. There are not new ships leaving shipyards every hour! So, that means that the BDI is currently telling us something about a change in demand.

This Week's Hussman Letter is Excellent

Even more notably, the Greek 1-year yield hit 240% last week, with Greek debt of every maturity trading below 37% of face value, and below 28% of face value on maturities of 5 years or more. Even if you were to cut the interest and principal payments on the 5-year bond to half their stated value, the current price of the 5-year implies a yield-to-maturity of nearly 18%. This suggests a credibility problem for the widely assumed 50% writedown figure - not that any Greek debt exchange has actually even been implemented yet. We wonder where this debt is currently valued on the balance sheets of European banks. Given the nearly 40-to-1 leverage common among European banks, it appears likely that much of the European financial system will be nationalized before this is all over.

Excellent Point by Finland's Europe Minister Alex Stubb

"It should be the triple-A countries that basically, not dictate the rules, but at least have a strong say, because why would we listen to countries that are not taking care of their own public finances?" he asked.

"UniCredit Bombshell Shouldn’t Be the Last One"

Everyone in the world who pays any attention to the financial markets seems to know that the balance sheets of European banks are a joke.

Hussman's Weekly Market Comment on the European Banking System

From the latest Hussman weekly market comment:

"Given leverage ratios of more than 40-to-1 for most European banks, there is no way to meaningfully restructure Italian debt without wiping out the capital base of Europe's banks, and forcing the nationalization of the entire European banking system."

That is exactly right. There are banks that have several times their market capitalization invested in the debt of the PIGS countries. Even modest haircuts as part of a restructuring plan would render these banks insolvent.

I sense an enormous amount of complacency regarding the European sovereign crisis and insolvent banking system. People seem pretty sure that the ECB will paper over the problem by printing money. Unfortunately, there is a reason that Zimbabwe has not printed its way to success yet:

"[Germany] is reluctant to use the ECB as a money-printing machine not just because the Germans are stubborn, but instead because the whole operation would divert real fiscal resources toward fiscally irresponsible governments, rather than to Germany's own citizens. [...] The desire to use the ECB to print money is nothing more than a veiled desire to steal fiscal resources disproportionately from the German people."

The massively leveraged lending by European banks to the PIGS countries happened as a result of an incentive problem.

Amazingly, people will lend money to these European banks on a "pay if you want to" basis at single digit interest rates!

Great Post by Scott Locklin on Eudoxus

Eudoxus invented real numbers, orbital mechanics and a form of calculus, 2000 years before Newton. He also discovered the leap year, invented a sundial, described constellations, wrote epicurean philosophy, discovered many theorems in solid geometry, he is alleged to have been a pretty good interior designer; he wrote books of geography and sociology, meteorology, Egyptian theology and was revered as a wise lawgiver in his home town. His productive years were between 26 and 53, when he died. Compare him to the imagined smartest man who ever lived, Einstein, who started research when he was 21, and died at 76. Eudoxus accomplished much more in a shorter period of time. He did it before Alexander the Great; before the invention of the steam engine; before Rome became an empire; before the Great Wall of China was built. Eudoxus lived so long ago, he is at the bare edge of recorded history.

European Situation Getting Worse?

Via Zero Hedge

EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

It looks like the latest bailout scheme, the EFSF, is not going to work.

This is the latest from Maudlin:

[T]here is simply too much sovereign debt in Greece, Ireland, Spain, Italy, Portugal, and Belgium. That is not news. What has yet to be absorbed by the markets is that the cost of bailouts, present and potential, is likely to be in the €3 trillion range...

European regulators allowed their banks to leverage up to 450 to 1 on their capital, on the theory that sovereign nations in an enlightened Europe could not default, and therefore no reserves need to be kept for “investing” in government debt. And with those rules, banks borrowed massively and invested it in government debt, making the spread.

Wouldn't want to buy a noncumulative preferred in any of those banks...

Economic Weakness in Europe

"Investors have focused so much on the Greek crisis that they have virtually overlooked the current weakness of the European economy. Spain's retail sales were down 6.6% in May from a year earlier. German retail sales in May were down 2.8% in April and down 4% since September. French retail sales were down 1% in each of the last three months."

"Yesterday was Thursday, Thursday" Links

Credit Bubble Stocks is still catching up on reading. Here is a big block of stuff for the weekend:

China Bubble

• Excellent article on Sino Forest: "In the bear case the size of the fake forest estate grows over time just because the fake profits need to be deployed somewhere. Ultimately - in the bear case - Sino Forest becomes a fake giant and someone (in this case Muddy Waters) asks if you own so much timber how come we can't see it? It becomes 'See No Forest'."
• ZH: "[Chanos] laid out his case for believing that China is in the midst of a bubble of enormous proportions, and answered questions. He often gets criticized for never having been to China. His response is that you did not need to live in Miami to know there was a bubble in Miami real estate."
• AR: Paulson explains Sino Forest loss.

The Next Leg Down

• Why Greek default is inevitable: the cuts needed are too big.
• Commitment of traders once again favors the long bond. Commercials have gotten long and specs short. Also, TLT has exceeded the Jun 1 intraday high.
• "Lipper reported that high yield saw its largest weekly outflow EVER, with $3.4 billion leaving high yield funds on the week."

Energy

• Wired: "Five Ethanol Myths"
• Nevada Passes Law Authorizing Driverless Cars
• Norwegian Electric Vehicle company files BK.

Philosophy of Success

• In 2010, for example, Americans spent an average two hours and 31 minutes watching television on weekdays, up 5.4 minutes from 2007.
• "In fact, the world is more and more aligned in favor of those who find motivation inside, who would do what they do even if it wasn't their job."
• Falky on Keynesian Macro "Logic": "To think that one can, top down, spend $50B and create value anywhere near $50B highlights a total indifference to incentives and a reliance on macro aggregates (C, I, G, M, v etc) that have proven as useful as Marxist conceptions of capital and labor: fun to talk about, but ultimately meaningless."

Slope of Hope Posts

• "This Isn't 1995 : As most of you know, my home is in the heart of the Silicon Valley, and I am thus in the center of the current lunacy (last enjoyed back in 1999)."
• "Just two days ago, everyone was convinced - absolutely convinced - the S&P was heading toward 1400 or 1450. Nonsense. The bull run ended in April, and the bears are back in control."

Misc

• Via PK, A Brief History of the Corporation: 1600 to 2100, which mentions The Influence of Sea Power Upon History, 1660-1783 and The Lever of Riches: Technological Creativity and Economic Progress.
• "Wendy’s/Arby’s franchiser said on Thursday that it would now open 192 restaurants in Russia over the next 10 years, or 12 more than originally planned."
• Google Offers Holding Its Own Against Groupon in Portland

"It's Friday, Friday" Links

Internet Bubble

• P, LNKD: "Both stocks are below what traders (I don’t think many investors got involved here) could buy them for on the open market. Both are also still massively overpriced and have much further to fall."
• Ballsy Pandora Analyst Has Guts To Say "SELL"
• Falky: "whenever there are options available on stocks that are hard to borrow you have a large number of investors behaving suboptimally"

Trade Ideas

• The USG Corp 6.3%s of 2016 have fallen from 97.5 to 92 since the beginning of June - losing almost a year's worth of interest. Meanwhile, the stock is flat. One of these things is not like the other...
• Great long/short energy idea: "A practical trading application of this strategy would be to long a cost leading solar pv company and short a cost lagging solar pv company."

Other Reads

• Great KK article: "The Clock in the Mountain"
• For a New Liberty: The Libertarian Manifesto - Murray N. Rothbard

Incipient Crash

• "My personal history in Chess is only here to describe when one should give up. My view is that the EU should give up on the Euro, and plan now for its demise, going back to individual currencies for each nation. The experiment has failed. Topple the King."
• Art Cashin Compares This Week's Action To The Days Before Black Friday.
• Angry bull: "It must feel good to know that your cynicism and just-prudence is now paying dividends. Just know that betting against the market and the men with guns only works for so long. The game is rigged against the rational, the libertarian, the Austrian." Hmmm.. I guess the game may be "rigged against" me, but it hasn't stopped me from making money...

Thursday Links

Pandora should be trading at $2/share, tops "Let me continue my generous streak and say that Pandora might be a reasonable gamble at $2/share, tops. That would still value a company that’s never seen a dollar of profit in its decade-long history at almost $320M (~160M outstanding shares at the moment). An astonishing, princely sum for a promise-of-a-perhaps profitable business in the future."

"At some point, the weakening economy will funnel down to earnings. And valuations are not so good this time, compared to summer of 2010. There is a LOT less margin for error."

WSJ: "USG and its biggest rivals—including privately owned National Gypsum Co.—built new plants as the housing market boomed from about 2000 to 2006 and have about twice as much U.S. capacity as they can use at today's deeply depressed level of construction."

"[T]he Greek state - whose reach was never far into society - is beginning to lose its grip slightly on the actual functions a state should do."

"In a market that is flattish for the year those are the type of numbers that lead to redemptions. Paulson’s funds under management were as high as $38 billion. There is no room for error with those types of numbers."

ZH on the collapse in Philly Fed index: "all those buying stocks in advance of more easing are completely forgetting that they will take major losses before the market is low enough to allow actual easing to proceed."

I've Figured Out the Greek Bailout Scam

No one in Europe is actually willing to bail out Greece. Money down the drain, no free lunch, etc.

But they are willing to pretend that they are willing, and to have their name used in breathless speculation about how they will very shortly be giving money to unfortunate suckers who made bad investments.

The "rub" occurs when a Greek politician opposed to austerity, or a German politician opposed to wasting money, publicly sabotages the bailout.

So far, people haven't noticed that every week we have one step forward and one step back.

PIIGS

The Greek and Portuguese 10 year bond yields are at new all-time highs today.

Thursday Links

• "A 23.53-acre property at the Las Vegas Beltway and Hacienda Avenue that sold for $30.2 million in 2007 and was later foreclosed upon has been sold for $4.4 million."
• "The wheels are falling off the China story. A massive wave of malinvestment since 2008 is cresting, and the stupendous stimulus provided by gargantuan local government and private lending is expiring."
• "German Federal Constitutional Court To Challenge Greek Bailout, Claims Action Is Unconstitutional"
• Lots of skeptical articles about Groupon coming out.
• "As Warren Buffett’s Alpha Goes Down, The Value of A Lunch With Him Goes Up"
• Ugh, I can imagine how painful this is for Falcone: Endless LightSquared Headaches.
• Here's the problem with Bill Gross: he acknowledges that Japan has a "moribund, dead, lost-decade kind of economy" - but he thinks the U.S. situation is different!

The ECB is Just Another Example of Disastrous Central Banking

Report: A HOUSE BUILT ON SAND? The ECB and the hidden cost of saving the euro

As we can see, in the run up to the sovereign debt crisis the cheap money dished out by the ECB might have mitigated the impact of the financial meltdown by saving some financial institutions, but it also provided perverse incentives for undercapitalised banks. It deterred them from attempting to increase capital stocks externally (by issuing debt or shares) as would happen under a business-as-usual scenario. In fact, the availability of cheap liquidity encouraged them to take on more risk in an attempt to increase profits and raise capital internally. With liquidity coming so cheap, banks could invest money into what looked to be relatively high return yet low risk assets – in an effort to maximise profits and avoid issuing capital calls. At the time (2009 - 2010) these assets were mostly weaker eurozone government bonds which have now lost value, making these banks even more vulnerable.

In turn, this had significant knock on effects for eurozone governments, since it actually led to an increase in market demand for peripheral debt as banks continued to buy government bonds (using cheap ECB credit). For their part, peripheral eurozone governments took this increase in demand to mean that markets were not overly worried about their poor finances, which reduced the pressure for these governments to reform.

What a stupid, predictable mess. No one involved in this should be allowed to have any authority over public finances. The ECB bought a year of time and made the problem significantly worse.

Where is Andrew Jackson when we need him?