Market Talk

- The surging US dollar is “eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy,” the Pragmatic Capitalist says. “As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.”

- University of Oregon economics professor Mark Thoma isn’t on board with Yale professor Robert Shiller’s argument in a NYT op-ed that fears of double-dip recession could become a self-fulfilling prophecy. Bigger economic shocks would seem “the more likely trigger” of double-dip, Thoma says. “Even more likely is an outbreak of extreme hawkishness causing us to pull back too fast on fiscal stimulus, and to raise interest rates too fast.”

- Turns out Palm’s sale to Hewlett-Packard (HPQ) last month wasn’t exactly a last-minute deal. Digital Daily blogger John Paczkowski points to a PALM SEC filing, which reveals the buyout process began in February and the company was in contact with 16 potential acquirers.

- HAMP April data shows program slowing down.

- The “shock and awe” effects of Europe’s big bailout package are already starting to fade, and the concern is that long-term viability is being sacrificed for short-term gains, Pimco CEO Mohamed El-Erian writes at FT’s Alphaville blog. So far, the package is just giving investors an escape hatch, without addressing the real issue: solvency.

- GM isn’t putting on the hard sell for an IPO.

- Reuters blogger Felix Salmon looks at how government bailouts affect moral hazard and the role they play in market volatility. “A lot of investors have made a lot of money from the moral-hazard trade over the past 15 years or so. When that trade comes to an end, expect the losses to be just as big, if not bigger.”

- Ryan Avent shows how the role the declining euro plays in the global economy.

- Though it’s still early for conclusive evidence, it appears Apple’s (AAPL) Mac sales haven’t been cannibalized by the iPad, Digital Daily blogger John Paczkowski says, citing research from Piper Jaffray.

- Jason Zweig looks at the debate over holding brokers to a higher standard.

We don’t know who’s going to win this weekend’s Preakness Stakes, but in honor of that storied race, we’ve imagined a different race, taking place right now. Call it the Weakness Stakes.

AND THEY’RE OFF!

It’s Eurobail followed by Risk Trade and French Pride. Eurobail, Risk Trade, French Pride. Then it’s Grecian Burn, Average Joe and Helicopter Ben. Teutonic Beast, Vampire Squid, Fear Trade and Moral Hazard bringing up the rear.

Eurobail, Risk Trade and French Pride. Eurobail and Risk Trade running almost neck and neck. Eurobail in fact looks like he’s pulling Risk Trade by the nose.

Grecian Burn’s quickly falling back, he’s going to have a hard time keeping up with this pace.

Helicopter Ben’s moving up on the inside, Ben trying to keep his movements hidden, not wanting to commit too early, but we’re sure he’s going to do something unexpected.

Fear Trade still bringing up the rear, but he doesn’t seem to mind. Looks like he’s happy to let the field wear itself out. Eurobail, French Pride, Risk Trade.

Around the far turn it’s Risk Trade, Eurobail and Helicopter Ben. Vampire Squid keeping pace on the outside, waiting to make his move. It’s like he knows something. Moral Hazard moving steadily through the field with a vengeance.

And here comes Average Joe! Average Joe’s giving it everything he’s got! He’s moving up on the outside looking in. Past Helicopter Ben. Passing Risk Trade. Looking to catch up to French Pride. He’s almost there, neck and neck, he’s got the leader in sight!

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Making the world safe for profligacy, again.

Yesterday morning, I sent an email to Barry Ritholtz over at The Big Picture, and author of “Bailout Nation.”

“Looks like you’ll have to rename your book for the second edition,” I wrote. “Bailout Planet, or Planet Bailout.”

We’ve gone from bailing out individual home owners, to corporations, now to entire nations. And I do mean “we,” Mr. and Mrs. America and all the ships at sea. The U.S. taxpayer is on the hook for this one, again, through our contributions to the International Monetary Fund, of which the U.S. is the biggest contributor, and also through the Fed’s reopened “swap” lines with foreign central banks, which are essentially short-term loans.

So, as you sit there drinking your Pasbt or Coor’s, or sipping your California chardonney, stop thinking that this European thing doesn’t touch you. It does.

Why can’t anybody just take a loss anymore? Why are we so desperate to bail out everybody? Is anybody else bothered by the fact that it seems like absolutely nobody is made accountable for their actions, except, like, you know, you? Oh, no I’m not. John Mauldin of Millennium Wave Advisors got the flyer too:

Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 billion in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees.

The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a massive misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.

You can say the Europeans had no choice, I get it. The same argument was made in the United States after the government hatched the TARP, and hundred other bailouts I can’t even remember right now. But the debts weren’t extinguished, they were only passed from one balance sheet to another. Now the same thing’s happening in Europe. Meanwhile, the credit crisis is moving up the food chain.

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Basta!

If you’re wondering, or have been wondering, where the bailout express ends, the answer may be it doesn’t. At least, that’s the way it’s looking these days.  Back in the day, it was the odd one-off, like Chrysler. Then it was emergency bailouts, Mexico, Long-Term Capital Management. Then it was serial bailouts, AIG, Citigroup, Northern Rock…ah, you know, everybody.

Now, it’s becoming nations, not just the kinds of “developing” nations that everybody expects will muck up their finances, but “developed” nations, mature, advanced, cultivated nations, like Greece.

European leaders are going to dither this weekend about Greece this year, when the market has not only moved on to years two and three, but it’s also thinking about who’s going to be next. Spain? Portugal? Italy? “Basta” is Italian for “enough,” although it sure doesn’t seem like anybody’s saying it in any language.

If you say yes to Greece, how do you say no to the others? And the others, incidentally, are all larger than tiny Greece. And lest you think this is just some European problem, know two things. Europe is the United States’ largest trading partner. And, if the IMF is taking the lead here, the United States is that organization’s biggest contributor. So indirectly, and not all that indirectly either, We the People will once again be bailing out Them the Profligates.

Gluskin Sheff’s David Rosenberg nails it, I think:

First we have governments bailing out banks (and auto companies and mortgage providers), homeowner debtors, and now we have governments bailing out governments. When does someone finally say — enough is enough!

Oh no — bank ABC is too big to fail. Company XYZ is too complex to fail. And now country GRK is too interconnected to fail. Give me a giant break.

Look, Greece is not going to “fail”. They are going to default. There will be a debt restructuring. And there will be some recovery. Bondholders will take a haircut — why shouldn’t they? Why should Angela Merkel care if German banks own Greek bonds? Greece has been in default in its recent 200-year history almost half the time. So has most of Latin America come to think of it. What about Russia?

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Congress takes another look at the AIG bailout.

Bloomberg is out with an ire-raising breakdown of the AIG bailout and its aftermath, especially the details that emerged from the notorious “Schedule A” list of AIG’s counterparties to its credit default swaps, a document the government fought for more than a year to keep suppressed.

If you haven’t kept up on this little topic, and feel like raising your blood pressure for masochistic some reason, read the whole thing. But, curiously, Schedule A was inserted into the public record in January by Rep. Darrell Issa during the January Congressional hearings on the bailout (here’s a Reuters story on it from late January, which includes a link to the document itself; print it out if you want a true piece of Americana scandaloso.)

It’s curious that Bloomberg published its story now, though, when the documents have been in the public realm for some time. But it does show that rancor over the bailout isn’t going away, Yves Smith notes at naked capitalism. And the bailout still needs to be more fully addressed.

A further investigation of Goldman, SocGen, Deutsche Bank, the major AIG counterparties, is long overdue. Having wrestled with the data in the public domain, we can only conclude it is impossible at this juncture to understand the motives of the major players, which is essential to determining how much of this disaster was due to incompetence versus nefarious intent.

Now some may complain that people will continue to harp about AIG regardless, but that’s a spurious argument. Its rescue was a huge taxpayer commitment, done in great haste, and much of the background and the critical decisions remain in the dark. Sus looking details, like the decision to pay the counterparties at 100% of notional value of the CDS, were investigated by SIGTARP and criticized roundly in its report.

Note to Fed: if you want the media to stop worrying at the AIG bone, disclose all information that will give insight into the roles and objectives of the major AIG counterparties, including details of the Abacus deals. And if this step does not provide answers, it’s time for SIGTARP and the Financial Crisis Inquiry Commission to demand information from the counterparties themselves.

Tonight on a very special episode of Tomorrow’s News Today, Madeleine, Eduardo and Paul tackle rumors of a bailout for the Greeks, and what the ramifications of profligacy are for the Grecians as well as other nations.

It’s not exactly an EU summit, but it may be the next best thing.

It's just a little debt.

The Greeks may have designed a new kind of Trojan Horse.

Sometimes it’s kind of hard to articulate exactly what the danger is with Greece, as it concerns the United States. Warning about Greece can make one sound like a Cassandra (we couldn’t resist.) After all, Greece isn’t a major power. It’s on what lately’s been fashionably called the periphery of Europe, and less fashionably one of the PIIGS (Portugal, Ireland, Italy, Greece, Spain; pretty insulting, no?)

Most people over here don’t quite understand what all the fuss is over Greece. So what if they default? Is it just the dollar? Is it the CDS market? Is Greece the next subprime? The kind of frightening truth is, it could be all of those. The biggest lesson of the past few years is that the absolutely unimaginable can happen, and happen with frightening speed. It’s best to be prepared to anything.

The dollar carry-trade, which had been so profitable in 2009, has already been largely unwound, as evidenced by recent dollar strength, which in turn drove down all the risk assets — stocks, oil, gold (oddly enough, gold has been trading more as a risk asset than a safe-haven asset, no matter what G. Gordon Liddy says.)

The euro is rising this morning, on word that ECB president Trichet left Australia a day early; this is leading to speculation that a bailout is in the works (although, to our knowledge, the eurozone members have a no-bailout clause in their charter.)

Meanwhile, although polls showed a majority of the Greeks approve of the difficult austerity measures, civil servants are threatening strikes. The Greeks are pretty good at striking, in case you never noticed. (Editor’s note: there’s great stuff after the jump. Oracle at Delphi kind of stuff. Keep reading (nope, couldn’t resist that one, either.))

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So the Greek plan got an approving vote from the European Commission, but it’s getting a slightly less enthusiastic response from the Greek people, upon which the plan’s austerity measures will fall.

From the NY Times:

DIMITRIS DAMIANIDIS is a high school teacher and a strong supporter of Greece’s socialist government. But that won’t deter him from going on strike with hundreds of thousands of other public sector workers next week to fight for the 28,000-euro pension that he expects to receive annually after he turns 60 next year.

“Why should I as a worker pay for the errors in policies?” he asked, in response to reports that the embattled Greek state will cut his pay and, by extension, retirement benefits. “The worker can’t be the scapegoat. So we have to defend ourselves.”

As Mr. Damianidis and others on the state payroll prepare to stop work on Wednesday, fear is building that the country’s new government may lack the nerve to cut public wages and pension payments, which make up 51 percent of its budget.

There’s a reason they call them “entitlements,” and in Europe, as here, they have been sacrosanct. But membership in the eurozone, as well as the bond vigilantes, may force some very uncomfortable decisions to be made. What’s unfolding in Greece right now, and could very easily move into the so-called periphery countries, is the exact reason why nobody in this country is willing to address the imbalances in our nation’s Social Security and Medicare accounts. And don’t even talk about the states’ pension plans. Because doing so will really, really up-end the apple cart.

Of course, not doing so eventually leaves you where the Greeks are. There are, in the end, no gimmicks. A government that spends more than it takes in will run into trouble. There is no substitute for fiscal responsibility. You can fool the voters, the bond market, even your trading partners for a while. But the United States is coasting off its reputation right now, and that will not last forever.

The criticism’s are already cropping up of the Volcker Rule, named after former Fed chairman Paul Volcker and championed by him this week in front of a relatively skeptical Senate banking committee, and not just from the banks that would be subject to it. One I came across today demands a response. Over at Reuters, Felix Salmon criticizes the proposed rule, saying there are two loopholes:

Firstly, the Volcker rule seems to apply only to depositary institutions: if you don’t take deposits, then you’re exempt. The result is that it’ll be easy for Goldman Sachs and Morgan Stanley to get around the rule just by returning their current (tiny) deposit base and voluntarily withdrawing from access to the Fed’s discount window.

That’s not a loophole. That’s the point.

As he made clear in his testimony, there is a “strong public interest” in protecting the deposits of the customers of commercial banks. No such interest exists for protecting speculative activities of the sort engaged in by banks’ proprietary trading desks.

If Goldman or Morgan Stanley wants to make billions worth of speculative bets, they are free to do so, and if those bets pay off, they will be fabulously wealthy, and God bless them. But if those bets go sour, the federal government will not rescue them. Let them go bankrupt. Let them wipe out the creditors, wipe out the bondholders. No more bailouts for recklessness. That is the entire point of the Volcker Rule. I’m not sure Salmon gets that.

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Hi, my name's Paul, and I've come for the big banks.

Somebody finally said it.

“What we plainly need are authority and methods to minimize the occurrence of those failures that threaten the basic fabric of financial markets,” former Fed chairman Paul Volcker will tell a Senate committee today, according to a prepared testimony obtained by Fox Business. “It is critically important that those institutions, its managers and its creditors, do not assume a public rescue will be forthcoming in time of pressure.”

In other words, no more bailouts, boys.

It’s amazing that it took the Obama administration a year to finally unleash Volcker on the bankers. He was without a doubt the most senior and capable member of Obama’s economic team, but for some odd reason the old man wasn’t heard from for the better part of a year. It was like they had him chained to a radiator in the basement somewhere. But now that the White House sees the handwriting on the wall, it’s let loose its most potent street fighter.

And not a moment too soon. The “Volcker Rule” is already under attack from the bankers, who seem determined to fight any serious efforts at financial reform. As the Journal reports, the banks are already throwing sand in the bull’s eye, arguing that it’s hard to say exactly what “proprietary” trading involves, and any overreach could constrain the capital markets. The old man’s having none of it.

“Every banker I speak with knows very well what ‘proprietary trading’ means and implies,” he says in the testimony. He wants to shave off prop desks, and wants to create a resolution authority, essentially an FDIC for the big banks, with the power to intervene and take control of institutions on the brink of failure. And not so they can be propped back up with public monies. The resolution authority would be performing a “euthanasia, not a rescue.”

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