Market Talk

Talk about an Alfred E. Neuman morning. Bulls sporting the “What, me worry?” attitude after the collapse of Portugal’s government late yesterday and expectation it’ll join Ireland and Greece in asking the EU and IMF for a bailout, currently pegged around $113 billion.

It certainly doesn’t come as a big surprise, but the reaction in European stock markets, euro rallying seems just a little too cheery. There’s consequences for Spain, Portugal’s biggest trading partner and Moody’s downgraded Spanish banks in the wake of the Portugal developments. That’s among the items being shrugged off this morning, along with percolating oil and a weaker-than-expected February durable goods orders.

European stock markets have strengthened, rallying across the board, and that’s putting US investors at ease. Portugal? Spain? Well, if the Europeans aren’t worried about it, why should we? Or so must go the thinking.

S&P futures up 7.60, off earlier highs. Ten-year note lower, yield at 3.37%.

Japan comes out says it will buy European debt. The market sighs in relief. Stocks rise.

Um, why?

Why would anybody consider it a good thing that Japan, one of if not the industrialized world’s most indebted countries, is the latest sovereign to jump into the European debt market? First China, now Japan. Is this not a sign, another in a long, long string of signs, that Europe’s problems are beyond its control? It’s comical at this point to hear yet another government official, in this case Portugal’s prime minister Jose Socrates, avow as that their country doesn’t need “help.”

It’s not that Japan is buying European debt. We’re fairly certain this isn’t the first time they have. But the fact that not only are they buying bonds for the bailout fund, but that they’re making such a big deal about it (and buying such a big chunk of it.) Sure, they’re trying to help keep the yen down. But they’re also looking at a major market that’s on the edge of something very dark.

This is a bad thing. It should actually terrify people that the Japanese have stepped in. We all know the U.S., though the auspices of the Fed and its open swap lines, has been up to its elbows in helping to prop up Europe. Last week, the Chinese made a big public show of getting involved. Now the Japanese are. What’s driving the world’s three largest economies to take very public stances in support of Europe?

Fear.

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Here’s your pop quiz for the day. Consider the following statement:

“Portugal will not need a bailout, ” Spanish finance minister Elena Salgado said Monday (subscription required for link, incidentally.)

Where did Ms. Salgado make this statement? Was it:

- A: in an interview on Spanish radio station Cadena Ser.

- B: open mic night at Chesterfield’s.

Okay, fine, it was A. But the line would’ve gone over better if she’d said it a comedy club. Because that line’s a laugh riot.

How many times have we heard that one? The housing market won’t collapse. Lehman won’t fail. Greece won’t need a bailout. Ireland won’t need a bailout. Do you see a certain progression here?

What makes Ms. Salgado’s statement all the more ironic is at the same time as it’s making the rounds, Der Spiegel is reporting that France and Germany are pushing Portugal to accept a bailout.

What Ms. Salgado is perhaps actually thinking about is the fact that if and when Portugal’s domino falls, the next in line is Spain’s, and that’s when it gets really interesting. Because Greece, Ireland and Portugal are relatively small economics. What makes them dangerous is this whole globalized, interlinked economic system. But Spain is the world’s seventh largest economy. If it needs a bailout, especially coming after three previous sovereign bailouts, it will seriously test the steel of Europe. As Satyajit Das writes over at naked capitalism:

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these.

EU/IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Based on the IMF’s best estimates, there is little prospect of many European countries returning to balanced budgets any time soon. Given the toxic conjunction of high cost of funding, low growth and high starting level of debt, it is near impossible for these countries to contain the spiral to a restructuring of their debt or default.

Apologies for the light, well, non-existent is more like it, posting today. Between the holidays (literally between the holidays, as a point in time), people taking off for vacations, and the storm, we’ve been short-handed around the office. Also, I started working up a post that used this post from David Cay Johnston as a starting point, but it’s morphed into something larger and more philosophical, and will take more mulling, ruminating and editing to hammer into shape.

But, I came across this post from Peter Atwater over at Minyanville, and it jibes with something I’ve long thought: that if we had made the hard choices at the beginning of the crisis, if we hadn’t bailed out everybody (except Dick Fuld and Lehman), if we had owned up to the bad decisions we made, we would already be on a real road to recovery, not this ginned-up Potemkin Village the Fed and federal government have concocted.

Denial ain’t just a river in Egypt, as they say. From Atwater:

To these eyes in all segments of the economy, we have traded hard “choices” for denial. But I can’t help but wonder if the ultimate consequences from our Years of Magical Thinking will be far greater than had we made the tough choices beginning in 2007, particularly as governments (at all levels here at home and in Europe) have leaned heavily on “financially engineered” solutions. Maybe it’s just me, but QE2, the second round of fiscal stimulus, the securitization of tobacco settlements, the ESFS, and so forth, all resemble variations on the same “off-balance sheet” liability theme which began this crisis.

As I look at the world, wherever possible, elected officials have traded more contingent liabilities for time.

But beyond the financial implications of this trade, there have also been immense social consequences. As I offered earlier this month in Our Increasingly Dangerous Asymmetric Economy, I am very concerned that our Years of Magical Thinking have widened an already tenuous divide between “The Haves” and “The Have-Nots.” And not just here at home, but in Europe as well.

It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

- Steve Randy Waldman, Interfluidity

I’ll tell you a secret: when the Irish crisis was at its worst (so-far worst, I suppose would be accurate,) I quietly hoped that somebody in Ireland would make some kind of stand that would scuttle all the bailouts, all the forced concessions, that would really expose the bankers to the losses sitting on their balance sheets, and once and for all get this crisis to where it must eventually go: recognizing losses wherever they lie, clearing out all the bad bets and lifting the governmental protections from the favored classes.

It didn’t happen. So far, at least. Hey, it didn’t happen here in the U.S. either, and the biggest problem with the credit crisis is that it remains so far unresolved. The Fed, two administrations and now two Congresses merely succumbed to pressure from the banking lobby, threw trillions at the system, saved the banks from their own recklessness, codified the notion of too-big-to-fail, and put the weight of all the bailouts on the backs of the taxpayers. But it didn’t solve any of the underlying problems.

That’s how I read the last three years. That’s why I don’t buy all this recovery talk.

Now, I’m no economist. I’m just an untrained journalist. But it doesn’t take a Ph.D. in economics or political science to understand that something very, very wrong went down. The argument sold to us at the time — that while distasteful, the bailouts were necessary to prevent a wider melt-down — hasn’t exactly held its own against the weight of time, as fully 10% of the work force remains unemployed, as even more millions are stuck in low-paying part-time jobs, as millions more are seeing their wages held down, all while Wall Street returns to its free-wheeling and massively profitable ways

Meanwhile, the debt bombs haven’t been defused, they’ve just been move up the ladder, from individuals and corporations to central banks and sovereign states.

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US stocks close down, but finish well off their session lows, as bank shares suffered amid concerns about a broad insider-trading probe.

DJIA, which dropped as much as 149 points, finished off 25 (0.2%) at 11179, its first decline in three days. S&P 500 falls 2 (0.2%) to 1198. Financials lead the drop, but tech and consumer discretionary finished in positive territory, muting the index’s overall losses. Nasdaq Comp gains 14 (0.6%) at 2532, its fourth-straight gain.

WSJ reports FBI raided three hedge funds amid its insider-trading investigation, which added to jitters surrounding financial sector. Ireland agrees to bailout package, but worries intensify about rest of euro-zone’s mounting debt.

Something else to consider — David Rosenberg offers his latest gloom-and-doom warning. Dow Jones’s Min Zeng reports:

US economic growth will be “extremely disappointing” in 2011, with risks of deflation. Rosenberg, chief economist at Gluskin Sheff, argues the US has passed the peaks of the economic cycle and fiscal stimulus and noted there are fresh headwinds ahead. He says safe-haven Treasury bonds provide better value than US stocks, and especially favors 30-year Treasurys. He highlights the spending cuts from state and municipal governments, the second-largest contributor to US gross domestic product after consumer spending. Rosenberg expects the 30-year bond’s yield to fall to 2.5% to 2.75% by the end of 2011.

Meanwhile, Dow Jones reporter Kristina Peterson explains why stocks ended mixed, with bank stocks dragging down the Dow, while the Nasdaq moved higher. Check her News Hub segment here:

Someone run and grab a snow shovel, a large garbage barrel and some sawdust. Better yet, call that crew of of guys in dark jumpsuits that follow after the elephants at the circus. We’re gonna need them.

Warren Buffett has another op-ed piece in the NY Times.

Interesting thing about these Buffett op-eds and their timing — they have a way of appearing right around the point when the stock market is looking pretty dicey. Remember “Buy American. I am,” published on October 16, 2008? That one popped up right after the S&P 500 fell nearly 10% in two days. Then there was “The Greenback Effect” on August 18, 2009, which appeared on NYT’s opinion page the day after a 2.4% drop in the S&P 500 and Dow Industrials fell 186 points. And today’s missive, of course, comes after the DJIA shed almost 180 points yesterday, as air pumped into stocks courtesy of the Fed’s QE2 plans has begun to leak out.

Seems as if someone’s selected Warren as the go-to guy to soothe market angst during times of increased stress. Maybe he himself considers it part of his duty. But his shtick is as transparent as it gets, citizens. Regular readers know we’re not the biggest Buffett fans. Our big gripe is that this guy is crafty at talking his book, and the media acts as if he’s graciously dispensing to us peons his pearly investment wisdom. Perhaps that’s more a problem with the media than with Buffett, but he rarely turns down an opportunity to plug what’s good for Warren. Continue reading…

We’re not tough enough to take the pain.

That’s why it’s come down to this, citizens — the Fed priming more QE, doing “whatever it takes” to alleviate the hardship. The ceaseless efforts to artificially prop up asset prices. The extraordinary amount of Americans’ monthly personal income now derived directly from Uncle Sam.

It should be much more expedient and ultimately less costly for the government to simply step back and let the economic chips fall where they may. But it’ll hurt, and the nation’s leadership doesn’t think we citizens can handle the sting.

Indeed, we often come across like a society of coddled whiners who can’t stand to even be the slightest bit inconvenienced, never mind subjected to any degree of physical or psychological travail. We can’t handle bad reception on our iPhones, why should the government expect us to deal with the hardship that would come with allowing home prices to reach their natural level, to finally unleash market-clearing prices and probably the failure of more big banks and other institutions? Continue reading…

Charles Munger explains the virtues of personal responsibility to students recently at the University of Michigan.

If he were better known, Charlie Munger’s comment in Michigan last week could be the kind that sparks riots and possibly even revolutions, because it is absolutely at a “let them eat cake” level of smug arrogance.

If, say Lloyd Blankfein said it. But outside of the financial world, most people have never heard of Munger, so he’ll probably slide, sans the verbal assaults from the blogosphere, which are coming heavy.

What’d he say? Munger, vice-chairman of Berkshire Hathaway and right-hand man of Warren Buffett, did this appearance at the University of Michigan last week, a long, two-hour sitdown with Becky Quick in front of a live audience, which got to ask questions. It was in response to a question about government help/hand-outs/bailouts for individuals that got Munger’s goat. Bailing out people will just make them lazy. It will actually wreck society. “Suck it in and cope, buddy,” he said.

Suck it in and cope, buddy.

Now, poor old Marie had at least two mitigating circumstances Munger doesn’t have. For one thing, there’s scant evidence that she ever actually said “let them eat cake.” For another, even if she did, what got lost in translation, purportedly, is that the cake she was referring to was something even better than bread, so she was really showing profound sympathy for the plight of her starving subjects. Purportedly, at least.

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Over at The Big Picture, Barry Ritholtz does a big “what if” on the 2008 financial crisis, positing an alternate-universe timeline in which the banks were bailed out. It reads like one of those Star Trek episodes where Kirk and Spock find themselves in a universe where Edith Keeler never died and everything is different.

Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history);  3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

I won’t spoil the fun for you, head over there and read the whole thing, it’s well worth it. If you’re a corporate bond-holder or creditor or counterparty, you’ll be glad Ritholtz wasn’t part of the White House cabinet. If you’re a taxpayer, you’ll wish he had been.

Incidentally, doing this little thought experiment, putting the two time lines side-by-side, reveals the one huge difference between what should have been and what was that led to our current reality: in Ritholtz’s experiment, there is no kleptocracy, no corrupted political machine being crudely wielded by the private sector for its own benefit. No string pulling.

All the bailouts, all the intervention was done in the name of the people, but make no mistake, it was done to save private players from the consequences of their own bad decisions. People innately understand this, but have no way to “fix” it. What’s done is done. That’s led to a lot of lingering hostility, which isn’t likely to go anywhere until somebody figures out how to focus it. Which, come to think of it, I believe the tea party is doing pretty well right now.