Friday, September 30, 2011

Pensions Raising Cash, Trimming GPs in PE?

Still 100% cash in my portfolio and glad I'm not trading in the last days of this quarter. Been trading terribly lately and it's pissing me off because I'm in no position to lose any money. I'll tell you what else is pissing me off, this rigged market which continues to be hijacked by high-frequency trading assholes and naked short-selling criminals while the SEC and other regulators sit on their hands and refuse to take action.

Instead of covering up Wall Street crimes, providing them with more ammunition to continue the great retirement heist, the SEC should reinstate the uptick rule, but regulators in the US and elsewhere are proving to be the most corrupt, inept, incompetent fools of all the players in the financial world. I'd fire all of them but since they're public sector employees, they're protected and their incompetence goes unnoticed while they aid and abate Wall Street wolves. Then again, the 'United States of Wall Street' is headed down the wrong path as each successive government bends over and panders to the banksters running their country. I hope the new movement of occupying Wall Street takes off in a spectacular fashion so someone can knock some sense into these Wall Street thieves and their government cronies in the White House and Congress but I'm not holding my breath. Nothing happened after 2008 and nothing will happen now.

Pragmatic Capitalism posted an interview with Vanguard’s Jack Bogle who sat down with Fox Business on Thursday to discuss the US economy and the markets in general. The level headed market makes some interesting comments. He says the current market is “rigged” by speculators who are just driving prices all over the place on any given day. As for the general economy, Bogle says we have tough sledding ahead of us:

On if the market is rigged right now:

“The game of prices is rigged. The game of values cannot be rigged. In the long run, the returns on stocks are created by how corporate America does.”

On if anything is still too expensive in the market right now:

“I don’t even try to guess that. You’re pitting one investor against another in the market. It’s a loser’s game. I’d say three years before we can get the American economy doing what it is supposed to do again. It will take time and patience. The market is a great arbitrage mechanism.”

Bogle is 100% right. This market is beyond rigged, it's run by a bunch of crooks programming algorithms on multi-million dollar computers that send share prices wherever they want. I can easily prove this to you as every single day I sit down and trade, I see the bullshit going on in markets, typically at the open or close of day but lots of intra-day nonsense too.

I've learned the hard way that while I can't beat computers trading on a short time frame, I can beat them by extending my time horizon because computers or no computers, market trends are always occurring. I've also learned that in this wolf market, extremely oversold can become INSANELY OVERSOLD and it's not worth trying to pick a bottom (seen shares of solid companies get slaughtered in a few weeks for no good reason). I prefer to enter a trade a little later after my indicators confirm the price is reverting robustly than try to be a hero and get my head handed to me. Also if the price is going against me, I get the fuck out (unless you actually traded on your own, lost money and learned the value of losing money, you'll never make money trading).

I've also learned the value of not trading when your mind is preoccupied or when your just not sure of where this schizoid market is headed. Cash gives you powder to trade and make money. No cash, no powder, and you're pretty much screwed to take advantage of any opportunities that present themselves. There were several Bloomberg interviews that caught my attention this week. One of them was with Lawrence Schloss, chief investment officer for the City of New York, who discussed the outlook and asset allocation for the city's pension funds.

Schloss said that six months ago, they sold equities and high yield bonds to raise their cash levels because they were worried." He added: "There is too much uncertainty now to have their liquidity or cash in the stock market." Incredibly, they raised their cash levels to 8% when they're usually at 0%! He said they're not "day traders' but he prefers to slowly leg their way into stocks as they try to "catch the bottom." He said that US public funds don' have much exposure to European sovereign debt (except via their hedge fund investments) and that they don't plan on increasing the cash level more but I found this strategy to be an intelligent way to manage liquidity risk, one that more pension funds should think of when markets go haywire.

[Note: One senior corporate pension fund manager I spoke with yesterday told me they are now going long high-yield bonds as spreads have blown out too much. He told me they actually made money in Q3 on their leveraged bond portfolio and he warned me of another "perfect storm" for pensions as yields drop and equities sink.]

On NYC pension funds' private equity exposure, Schloss said they are slowly trimming their exposure to GPs because they have "110 GPS managing 170 funds." He rightly notes that this makes it a big "private equity index" and in private equity, only "top quartile managers" are worth investing in. I would argue that even top quartile managers are struggling in this environment which is why many Canadian public funds have decided to go the direct route in their private equity investments, cutting fees and having more control over their investments (many of these are co-investments with top funds).

The other Bloomberg interview that caught my attention was with Henry Kravis, co-founder of KKR & Co., who talked about the cost of capital for leveraged buyouts, the private equity industry and KKR's business strategy. Listen carefully to what he says about private equity today and the value of being flexible and the value of KKR's "operational expertise." As I've written, the old private equity model of financial engineering and leveraging up a company to wazoo is dead. The new private equity kingpins will go back to the basics and focus on operational efficiencies.

I also noted KKR is still investing in China (guess they don't believe in China's "hard landing" scenario) and that the cost of capital on leveraged buyouts today has gone up significantly for many transactions and "you can't put on as much leverage as before." The debt crisis has impacted the cost of capital and leverage these funds which in turn will impact returns for their investors. I like what he said about the easy part is "buying a company" but the hard part is to add value on operations. They use a 108-point plan and believe in measuring operational success by putting the proper metrics in place to measure operational efficiency. "Going forward in private equity, those opportunities will always be fact, we've always thrived when there were dislocations" but he added that you have to focus on the macro environment and be flexible.

Kravis also warned that there is higher risk in investing in private equity today but if you have a long enough time frame, you can still make a lot of money. He rightly notes that corporations are too focused on quarterly performance which hampers them and that many CEOs are exploring "taking a company private" to develop their long-term strategic plan which plays right into KKR's hand. He thinks valuations will come back to attractive levels but right now things are expensive. They're still trying to deliver 500-600 bps over public markets to their LPs but I think that's going to be next to impossible in this environment.

I also like what Kravis said about the culture at KKR and how every employee is an "owner" because it's a "team sport." Pension funds and investment firms can learn a lot from this approach but most of them have the wrong culture (and wrong people) in their organization where silos are put up and few people talk across asset classes or business units. Kravis agrees that pension funds should shrink their relationships with private equity GPs and have a more concentrated portfolio of managers. This is exactly what Réal Desrochers did at CalSTRS and what he's doing now as the head of CalPERS's private equity.

Finally, Kravis discusses the great uncertainty which is caused by "regulations and higher taxes." He thinks that America has a "spending problem, not a revenue problem." I would argue that America has both a spending AND revenue problem, and ultra wealthy folks like Henry Kravis should listen to the oracle of Omaha, stop complaining and pay their fair share of taxes (see Bloomberg interview below).

I recommend you watch all the interviews below. Also, want to remind you to please donate generously to my blog as I put a lot of time, effort and thought into my blog posts to inform you of insightful topics on pensions and financial markets. If institutions can afford to disburse millions on broker fees, hedge fund and private equity fees, independent research, then they can afford to pay me a fraction of that for my effort. And trust me, nobody has the guts, brains, time, experience or the contacts to keep blogging on pensions and markets the way I do.

Please contribute to this blog by clicking on the PayPal "donate" button at the top of my blog under the big pig (even though it says donate, I am not a charity, just PayPal's wording which I can't change). You can also contact me directly at ( to help me monetize this blog or discuss contract work. Thank you.

Thursday, September 29, 2011

Off to the Races Once Again?

Looks like we are off to the races once again. At this writing, global stock futures are rising as German lawmakers backed a plan on expanding the remit of the euro region’s rescue fund. Nowadays, stocks move up and down like a yo-yo on every little tidbit coming out of Europe. Very tough markets to trade in; I should know, decided to go 100% cash before the huge run-up on Monday and have not stepped back in this market.

Why did I go cash? Basically don't trust these markets and don't trust European lawmakers. It's like watching a bad soap opera. Policy blunders have crippled stocks, the global economy, giving naked short-sellers and high-frequency trading scam artists the green light to profit off all the doom and gloom. Zero Hedge posted a presentation by Bank of America's David Cui on Wednesday stating that he sees a "hard landing" in China.

Then Gary Shilling, president of A. Gary Shilling & Co., spoke with Bloomberg's Erik Schatzker and Deirdre Bolton on Bloomberg Television's "InsideTrack," discussing his strategy for investing during an age of deleveraging. He sees a huge markdown in all risk assets and maintains his long 30-year bond position until yields reach 2.5%, basically where they reached during the height of the 2008 crisis. Apart from bonds, he likes some segments of real estate, medical office buildings which benefit from an aging population and rental apartments as people realize that the housing market won't recover anytime soon. He's also been short copper since November and is shorting other commodities as he too sees a hard landing in China. Watch the Bloomberg interview below.

The "hard landing" in China scenario is the most important investment theme right now and its related to the European debt crisis. Any slowdown in global growth will impact China, commodities, commodity related stock indexes and currencies and pretty much all risk assets. Countries like Canada which have miraculously escaped the hardship that other countries experienced will get clobbered (S&P/TSX has already been clobbered; hope you took my advice and shorted the Canada bubble).

Jim Chanos, a well known short-seller warning of the "hard landing" in China scenario, has been right on his bearish China call. Moreover, as he predicted, Chinese solar stocks and other solars have been slaughtered in the latest market rout as hedge funds deleverage, shore up capital to meet redemptions, and get rid of any speculative long positions. Despite his "incredible timing," I continue to believe that Chanos is full of shit, talking up his book and that of his big hedge fund buddies. They profit from spreading doom and gloom on blogs like Zero Hedge but the world isn't coming to an end and China won't crash. Watch Bloomberg video, Ferguson says investors too bearish on China, another interview which I embedded below.

All I can tell you is to tread carefully in this wolf market where stocks go from extreme oversold to extreme overbought in seconds as computers and traders bet on every news item coming out of Europe, China or the US. Experts warn that even though stocks are not cheap, they offer better potential than bonds in the long-run. Robert Shiller sees stock market valuations as "high by historical standards" but thinks they will outperform bonds in the next decade while Jack Bogle believes stocks aren't cheap but still the best place to invest in. Bogle also thinks you shouldn't trade these markets, but stay fully invested as it's impossible to predict the next big move. You can watch all the interviews below.

Many pensions are hurting following the summer selloff. We'll have to wait to see how bad they got clobbered but I guarantee you the numbers won't be pretty. Also, I spoke with a senior pension fund manager last night who sees a "systemic shift" in financials and thinks private equity will outperform as the world restructures. He may be right, traditional private equity (not financial engineering) will do well but you still need robust public markets to exit from these investments. That's why financial oligarchs will be busy pumping up global equity markets and other risk assets trying to avert a protracted period of deleveraging and deflation that Shilling is warning of.

Wednesday, September 28, 2011

CalPERS Seeding Canadian Hedge Funds?

Dave Dorr of Dorr Asset Management sent me his monthly comment on these schizophrenic markets. I urge you to read it as the Dorr Global Macro fund continues to perform well, up 13% as of August. Dave also sent me an article last week about Calpers putting $100 million of ‘seed’ money in a Toronto hedge fund:

The California Public Employees’ Retirement System, the largest U.S. pension, invested for the first time in a hedge-fund startup, putting $100 million into a Toronto-based firm.

The deal with Breton Hill Capital, which invests in equities and currencies as well as commodity and financial futures, represents Calpers’ first foray into seed funding for a money manager, Brad Pacheco, a Calpers spokesman, said yesterday in a telephone interview.

Calpers, with $223.8 billion in assets, earned almost 21 percent on its investments in the 12 months through June, its largest gain in 14 years. The fund invests $5.3 billion, or 2.4 percent of its portfolio, in hedge funds, according to a statement.

“This is pretty unique,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors. “There is a significant opportunity for pension funds that have the right expertise and management to provide strong returns by doing this.”

Breton Hill principals had no comment on the Calpers investment, Ray Carroll, the fund’s chief investment officer, said in an e-mail.

Calpers began working with hedge funds in April 2002 and has an annualized return of almost 5.5 percent in that category, according to an Aug. 15 report by Craig Dandurand, who manages Calpers’ hedge fund portfolio. The S&P 500 index (SPX) gained 3.6 percent in the same period, Calpers spokesman Wayne Davis said in an e-mail.

New York Investment

The New York State Common Retirement Fund, the third- largest U.S. pension, provided $250 million in seed capital for an emerging-market hedge fund run by London-based Finisterre Capital LLP in January 2010.

“There’s been a very strong trend toward more pension funds investing in hedge funds and the average amount they invest is up sharply,” Steinbrugge said.

Pacheco said Calpers selected Breton Hill for its initial investment in a startup after an “extensive review” of the firm’s principals and investment process.

“Another key element in this review was determining that Breton Hill’s systems and infrastructure were well-prepared for institutional investment,” Pacheco said in an e-mail.

Let me commend CalPERS for having the brains and the guts to seed a Canadian hedge fund. I'm a firm believer in seeding hedge funds because if you do it right, it will pay off in droves. The problem in Canada is that apart from Ontario Teachers' Pension Plan, which has seeded Canadian hedge funds and fund of funds in Ontario, most of the large Canadian public pension plans are dominated by conservative board members who are basically clueless on hedge funds. Most these board members are dinosaurs stuck in the long-only era of the investment management world.

How do I know? Because I used to present to these board members and go head to head with them. I don't care how old they are, how many years of experience they have, when it comes to hedge funds most board members are ignorant fools who dismiss hedge funds as "risky investments" (as if there is no risk in long-only investments!). Don't get me wrong, I know that most hedge funds are mediocre, selling beta as alpha, but there are excellent funds out there and too many pensions are focused on brand names and not focusing enough on seeding the right managers.

When pensions invest in hedge funds, it's always "brand names" recommended by their brainless pension consultants. But did you know that the performance of most successful hedge funds peters out as their assets mushroom? Why? Because they become big, fat, lazy asset gatherers who collect 2 & 20 for turning on the lights. When you manage billions, that 2% management fee pays the salaries of a lot of young, hot, sexy, beautiful saleswomen who know how to bat their eyelashes, toss their hair, giggle at the right moment, show off their cleavage and pitch a fund to horned up, lonely pension managers at some silly hedge fund conference. The sales pitch of "uncorrelated alpha" is why so many institutions run by idiots are still horny for hedge funds.

I've seen so much utter nonsense in the investment world that I've got to get cracking on writing my book. It will make a lot of pension fund managers, fund managers, board members and pension fund lawyers extremely nervous but once I'm done exposing the nonsense I've seen and experienced, it will become an instant best seller and they'll make it into a sequel of the "Inside Job" (great documentary, saw it on the plane ride back from Greece; watch trailer below). There are a few "powerful people" (roll eyes, cough, cough!!!) at Canadian public pension funds who want to see me go away because it bothers them that a former senior pension fund analyst battling and beating progressive multiple sclerosis keeps exposing their dirty little pension secrets.

Tough luck, I'm never going away and will never be silenced. The great retirement heist continues under the radar and millions of workers are in for some serious disappointments in the future as they see their retirement age increase and benefits slashed. Most public pension plans are well managed, and I give credit where credit is due, but when I see CalPERS seeding a Canadian hedge fund, I rejoice because it's a slap in the face to many of the large Canadian public pension funds who are not doing what's in the best interest of their plan members and plan sponsors by seeding our own alpha talent.

Did you get that last comment? How is seeding a hedge fund in the best interest of plan sponsors and plan members? Isn't it risky? NO!!! If it's done properly, with the proper selection, proper terms, proper platform (managed account), proper supervision, proper liquidity, then pension funds will get high risk adjusted returns with reduced fees and they will build a long-term relationship with excellent alpha managers.

The arguments I hear against seeding Canadian hedge funds are "if they're that good why aren't Canadian public pension funds seeding them?" And my answer is simply "because they're stupid, risk-averse in the most ignorant way, and with few exceptions, they're rarely first movers." I'm not saying that all Canadian hedge funds are worth investing in or seeding. Most are terrible, but I know guys and gals with years of experience who know how to deliver true alpha but they can't get a dime from large Canadian public pension funds for political reasons or because it's "sexier" to fly first class over to London, New York, Chicago or anywhere else in the world and be wined and dined at fine restaurants by pretty saleswomen (or receive under the table bribes from unscrupulous fund managers with lots of money).

I've allocated to the best hedge funds in the world. Seen it all. There aren't a thousand George Soroses, Ken Griffins, Ray Dalios, Bruce Kovners, Steve Cohens, Alan Howards, Paul Tudor Jones out there but that's not the point of seeding hedge funds. You never know, you might land on the next great manager, but that's like winning the lottery. The point is that emerging managers are hungrier, performance driven, and they typically align their interests a lot better with those of pension fund managers, plan sponsors and members.

Given these volatile, difficult markets, it shocks me that more and more public pension funds are not hiring the right staff or partnering up with the right fund of funds to seed hedge funds. We have incredible, talented alpha managers in Canada but sadly, many go unnoticed and are struggling to raise seed capital. I urge more US funds to follow CalPERS' lead and come explore opportunities right here in Canada. Hell, I even urge US hedge funds to start seeding Canadian hedge funds. If you need help, just contact me ( as I already have a few top Canadian alpha managers that are worth seeding in highly liquid strategies (and some have secured funds from Canadian private investors).

Like I said, it's high time I get cracking on writing a book on the good, bad, and downright ugly things I've experienced and seen in the pension world. More than 700,000 people have visited my blog over the last three years but that's not enough. I want the world to know about the real "Inside Job" happening with their pension contributions. And to all the senior Canadian pension fund managers reading this comment, get cracking on seeding Canadian alpha talent. If you don't, US and European funds will beat you to it and they will embarrass you as they profit handsomely from these investments. And I'll have fun reporting every single time they do so.

Tuesday, September 27, 2011

The Great Retirement Heist?

Ellen Schultz, an award-winning Wall Street Journal reporter and author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, was interviewed on Yahoo Daily Ticker on Monday discussing the retirement heist, how US pensions were plundered by corporate greed:
It's pretty obvious times are tough for America's working class. The combination of a prolonged period of stagnant wages, high unemployment and shaky economy - including a decade of little or no returns (if you're lucky) on assets like stocks and real estate - make it harder to pay the bills. (See: As America's Middle Class Shrinks, P&G Adopts "Hourglass" Strategy)
Meanwhile, New York Times columnist and economist Paul Krugman, noted in a piece last week titled "The Social Contract," that while the middle gets squeezed, the rich keep getting richer in both real and relative terms.
"...the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn't changed —show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. That's growth, but it's slow, especially compared with the 100 percent rise in median income over a generation after World War II. Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn't a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million."
If the average worker didn't have enough to worry about, Ellen Schultz - an award-winning Wall Street Journal reporter and author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers -- says that in some instances the fat paychecks of the top paid executives are coming directly out of the pocket of average workers.
"As recently as a decade ago there was a trillion dollars, a quarter of a trillion in surplus assets," in corporate funds, Schultz tells The Daily Ticker's Aaron Task in the accompanying clip. "There was plenty of money in pension plans; there was plenty to pay the benefits but corporations went about taking the money away."
As the title of the book suggests, Schultz believes this was no accident, claiming corporations have been "exaggerating their retiree burdens" and plundering retirement plans in a variety of ways, including:
  • Siphon billions of dollars from their pension plans to finance downsizings and sell the assets in merger deals.
  • Overstate the burden of rank-and-file retiree obligations to justify benefits cuts, while simultaneously using the savings to inflate executive pay and pensions.
  • Hide growing executive pension liabilities, which at some companies now exceed the liabilities for the regular pension plans.
  • Purchase billions of dollars of life insurance on workers and use the policies as informal executive pension funds. When the insured workers and retirees die, the company collects tax-free death benefits.
  • Exclude millions of low-paid workers from 401(k)'s to make the plans more valuable to the top-paid.
According to Schultz, these and related measures have become commonplace among Fortune 500 companies, including AT&T, Bank of America, JP Morgan, IBM, Cigna, General Motors, GM, Comcast, UPS and the NFL, just to name a few.
U.S. corporate pension plans now face a $388 billion gap based on a recent report from Credit Suisse. That's a bigger hole than they faced at the height of the financial crisis. Companies claim it's a result of the 2008-09 stock market crash, higher costs and an aging workforce.
Schultz claims that's bogus. "It didn't have to happen," she says, noting executive compensation has risen dramatically over the same time frame. "As they've cut other people's benefits with pensions being frozen, they have increased the benefits of the executives both pay and pensions."
Unfortunately, there isn't much the average employee can do because what the corporations have done is legal and abetted by loopholes in accounting regulations. The only advice she offers is to be skeptical if you're offered a buyout. That means conferring with an actuary to guarantee the pay structure is as advertised.
You can watch the interview below. Ms. Schultz is absolutely right, US corporations have plundered their pensions, all under the watchful eye of pension regulators, padding their earnings, inflating executive pay and engaging in all sorts of questionable practices. Some will dismiss this as an exaggeration but the truth is that corporate pensions were routinely plundered and workers will never see that money again. And now that there is no more money left to plunder, corporations have decided to dump defined-benefit plans and move into less costly and more risky defined-contribution plans, shifting the retirement burden onto workers and leaving them at the mercy of this volatile wolf market.

Monday, September 26, 2011

Post Paradise Stress Disorder?

It's official, my journey to paradise has now ended. I arrived in Montreal on Sunday afternoon but my head is still in Greece. I think I'm suffering from post paradise stress disorder. Went for an amazing workout this morning to clear my head, and here are some random thoughts on everything I'm mulling over:
  • Why did I leave paradise?: I had an awesome vacation and really didn't want to leave. I can easily live in Greece. I love the weather, the food, the beach, the sea, the sun, the beautiful women from all over the world, but most of all, love being close to my family. I even love the hustle and bustle of Athens, including the dust, pollution, traffic, and chaos. Athens is alive whereas Montreal is dead. I feel so healthy there. Montreal is my home, love it here too, but the weather here just isn't for me and it's especially hard on people dealing with a chronic disease like multiple sclerosis. Everything seems so heavy here. The minute I walked off the plane, walking became harder. It's as if my body rejects this weather and is telling me to head back to Greece and trade from there. My dream is to gather some buddies of mine with experience in managing money, get seed money, and start a global macro fund in Athens and trade everything under the sun - stocks, bonds, commodities, and currencies. The hours are perfect. We can wake up at our leisure, enjoy the beach and sun, eat like kings, start trading in the late afternoon, and after markets close, go out for a late dinner and drinks and enjoy some eye candy. Screw London, Athens should be an international hub for hedge funds and trading (don't know what happened to those guys at Vega Asset Management, but they were so smart to operate out of Madrid, another one of my favorite cities in the world).
  • How bad is the Greek crisis?: A friend of mine asked me "how bad is it?". I told him if you go there you wouldn't notice a drastic change in the way Greeks live but it's terrible, they are going to have to default, which means a substantial haircut for their lenders, and once again, the burden will fall on the poor, working poor and pensioners. Stores are closing, unemployment is soaring, no thanks to austerity, but Greeks are fed up with the crisis and being the whipping boy for all the world's economic ills. Those that have money are still going out to clubs and restaurants, and even those that don't try to enjoy their life. What choice do they have?
  • The real Greek disease: I had dinner at my cousin's house my last night in Athens. She invited friends of hers and her husband which included an editor of a foreign paper covering Greece, and self-employed business people. My cousin's husband who deals in real estate told me flat out: "We are tired of paying taxes for an over-bloated public sector. There are almost 1 million public sector workers in Greece for a population of roughly 12 million. The comparable figures in Germany and France, with populations of roughly 80 and 60 million, are 800,000 and 600,000 public sector employees respectively, or 1% of the population. Each successive government in Greece kept buying votes by hiring in the public sector, increasing wages and stupid incentives like "showing up to work on time," and the Ponzi scheme has now ended. The private sector is fed up paying higher taxes to keep the Greek public sector intact. We want drastic cuts in public sector jobs, incentives, wages and pensions. Period." Those sentiments were shared by all at that dinner and while I agree, I reminded them that the economy is already in a deep recession and drastic cuts in the public sector will ensure a long-term depression. There also needs to be cuts in taxes, focus on growth and investments, and a serious effort to tackle tax evasion once and for all.
  • Looking beyond the Greek debt crisis: I posted several articles on Twitter this morning (follow me by searching @PensionPulse). One of them was an op-ed in Ekathimerini by Thanos Skouras, professor emeritus at Athens University of Economics and Business, and Alfred Steinherr, honorary chief economist at the European Investment Bank, entitled Looking beyond the debt horizon in Greece. The authors rightly note that policies are needed to stimulate productivity growth in Greece where unit labor costs have been rising faster than any other country in Europe and that "getting out of the euro does not offer an immediate easy solution or longer-term gain." But the authors also warn that "if personal political survival counts for most politicians more than the economy’s survival, as regrettably seems to be the case so far, exit from the eurozone will be the inevitable outcome of a default."
  • Barriers to stave off Greek default?: Bloomberg reports that German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area. She rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed. “Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.Glad to see she's finally realizing the severity of the situation but we still need to implement what Soros and others are calling for, namely, a euro bond market backed up by a strong European treasury.
  • Some sun in the Greek economy?: Ekathimerini reports that German firms checking out investments in Greece and are reportedly interested in three main areas: energy, airports and minerals. It's about time! I also think American, Chinese and Canadian firms should be looking at investing in Greece now. I see incredible potential in Greece in agriculture, solar, shipping, tourism, airports, ports, bridges, infrastructure, minerals, information technology, biotech, and banking. Tread carefully, however, as Greeks are sharks, but if you have the right people in place in these projects, you can make a killing.
Think I will end it on that cheerful note. Don't know what surprises await us this week in the markets but I am well rested and will continue to blog, tweet and trade. I'm also looking for work, be it full-time or contract, and have reached out to some pension funds and hedge funds. My first choice would be to work with good, smart, and ethical people who know how to manage money properly.

While on vacation, I re-read the New Yorker article on Ray Dalio Mastering the Machine. I'm far from perfect but all I know is that I'm not interested in working with insecure and arrogant weasels who are more concerned about managing their career than managing money. Been there, done that, and it's time to put myself first and build my future by surrounding myself with the right type of people both at work and in my personal life.

Saturday, September 24, 2011

Moment of Truth?

A friend of mine sent me an excellent chart from the BBC displaying Greece's debt crisis odyssey. My friend is exasperated with the debt crisis, ratings agencies, financial bailouts, incompetent politicians and financial oligarchs:
Nothing like spreading panic based on total nonsense. A default is probably the best thing that could happen now. Once you reach the precipice, the best thing to do is jump and break your leg. Sitting at the edge of a cliff, looking down into an abyss, wetting your pants, and making yourself feel better by giving a massive donation to the banking system is not helping.

I am now convinced more than ever that the capital markets need to undergo harsh medicine. The EU and the Fed need to stop interfering. No more tarp, quantitative easing, or IMF bailouts. Yes, this will wipe out the half of the financial institutions in the U.S. and Europe. However, this is happening anyways so may as well restore market discipline after years of debauchery. The banks will restructure and segregate their toxic assets (i.e. shitty loans andtrades) into a discounted asset pool for sale.

It is amazing but in a short ten years, this generation of bankers have managed to dismantle any semblance of orderly markets and created a mess that will take many years to unravel. If a bank or an institution makes dumb decisions, they should suffer the consequences. We need to return to the 1930's so that when a Banker does something really stupid, he does the honorable thing and jumps out of his office window.
I agree, the mess we are going through now is all because of the tyranny of financial oligarchs who have managed to screw up the financial system and global economy almost beyond repair. Of course, the legacy of debt is also due to political incompetence, ignorance and intransigence.

Last night, I went out to dinner to Agora, a trendy restaurant-bar right around the corner of the Athens Hilton. The place was jammed; no signs of austerity in the bars and restaurants of Athens. I was accompanied by another friend of mine's cousin, a young lady in her mid-thirties who works as an advertising professional in Athens.

I hadn't seen her in over ten years. She was just as beautiful and level headed as I remembered and we discussed the past, present and future of Greece. According to her, the real crisis is social and it preceded the economic crisis. Lots of Greeks were looking to get a job in the public sector and sit on their hands, collecting a paycheque for doing nothing and then a nice pension for life. In the private sector, she told me wages have been slashed, people are losing their job or scared they will lose it, and many businesses owe money to banks.

She told me there are no more morals and values in Greek society. "Everyone is looking to screw over the next person." I told her that's exactly what my brother-in-law told me in Crete. He too thinks the real crisis started decades ago with people losing their morals and values. He told me he overheard two customers talking about how they were going to screw over a competitor of his and not pay him back. "In the old days, people had honor, your name meant something. If you didn't have the money, you didn't buy stuff on credit. And if you did, you would pay back your debt promptly. It was dishonorable to owe money to people and never pay them back. Nowadays, it's common practice."

That's the problem in Greece. Many businesses are hanging on by a thread as customers refuse to pay them money they owe, honoring their debt. The justice system is a total mess. If you take them to court, you will wait forever to get a ruling. The government should totally reform this joke of a justice system and protect the rights of legitimate businesses. They should also reform the tax system, starting by firing corrupt tax collectors who take bribes and facilitate tax evasion.

I also had long discussions with my uncle in Athens who is a self-employed businessman and a friend of mine in Patras who works as a sales rep in a pharmaceutical company. My friend left Canada over 20 years ago to move to Greece. They both gave me a good overview of a lot of the problems in Greece that led to this massive debt bomb:
  • First, the bulk of the 350 billion euro debt was accumulated in the public sector over decades as each successive government kept buying union votes by hiring workers and promising them jobs for life.
  • There are now close to 1 million public sector employees in Greece, a staggering figure for a population of 12 million, especially when compared to Germany and France who have close to 800,000 and 600,000 public sector employees respectively for populations of around 80 million and 60 million.
  • Second, there is a lot of waste and mismanagement in the Greek public sector. The bureaucracy is sclerotic, completely frustrating foreign investors who want to invest in Greece. There is too much red tape, purposely done to protect useless jobs in the public sector. This has been going on for decades.
  • Third, some unions here act as if there is no crisis. My friend told me that workers at EPT, the national broadcasting company, recently asked for raise, completely oblivious to what's going on. He reminded me of what Reagan did to air traffic controllers when they went on strike: "He fired them all, which is what we should do here with many public servants going on strike."
  • He also told me that most of the taxi drivers are "thugs" and went years not declaring their real income. Now they are protesting because the government wants to open up their profession so more can work (the government is doing this across many professions). While he feels for the taxi drivers who bought licenses at inflated prices in recent years and stand to lose a fortune with the new law, he has no sympathy whatsoever for the majority of them and thinks Papandreou should bring in the army whenever they go on strike and act like soccer hooligans.
  • My friend told me a lot of the truck drivers and public transport workers in Greece make an insane amount of money. "Some of these guys are grossing and netting more than doctors when you include all their stupid incentives, like showing up to work on time." Have to admit, the encentives in Greece (called "epidoma") for those working the public sector, including ministers, are a total farce. They should cut them all out.
  • On tax evasion, my friend told me that bars and restaurants are charging 23% valued added tax but not cutting receipts. "I demand receipts wherever I go. Fuck 'em, they're the biggest tax cheats in Greece. I know guys selling souvlakis and bar owners grossing more than a million euros a year and declaring next to nothing on their income taxes. It's a scandal that the government hasn't been able to crack down on bars and restaurants."
  • My uncle agrees, while most legitimate businesses pay big taxes, bars and restaurants are getting away with murder. He also warned me not to generalize: "Most doctors, lawyers and business people in Greece pay taxes and are legitimate, only a small percentage are robbing the system blind. The majority of the debt was due to decades of political partisanship, waste and mismanagement."
  • My uncle also explained to me why shipowners pay no taxes. "That was because of George Papandreou Sr., Papandreou's grandfather, who rightly put that law in place to bring shipowners back to Greece and create jobs. Unlike manufacturers, if you tax shipowners, they will move to another country. That's why Greeks remain leaders in world shipping."
  • My uncle told me the real tragedy in Greece is youth unemployment, now running close to 40%. "Without any job prospects, they can't build their future. Those that are lucky will leave in search of work and a better future but most will be permanently unemployed."
  • Finally, my friend told me flat out "Greeks have been lying to their lenders which is why troika is putting pressure on them now." He added: "They have not implemented any of the drastic cuts they promised because they're all looking to assuage various unions and their political base." Like me, my friend hates the communists (what a frigging joke of a party!) and other fringe parties looking to score political points by claiming Greece can easily default on their debt and never pay back their lenders. Even Samaras, the leader of New Democracy is making poltical promises he will never be able to keep.
Nikos Konstandaras of Ekathimerini is right, Greece's moment of truth has arrived:

If there is anything positive in these feverish days, it is that no one can pretend not to understand the severity of the crisis, be they in Greece or elsewhere.

The fact that the government is preparing measures that include tens of thousand of layoffs in the public sector and a further reduction in pensions means that it understands it has no room to maneuver: It will do that which it fears will lead to its fall. It has to deal not only with the dictates of the troika but also the fact that even its strongest supporters -- such as France -- can no longer hide their exasperation with Greece’s inability to carry out policy.

Today not even the most zealous of conspiracy theorists can convince anyone that the turbulence in German politics, the cracks in the French banking system and the rollercoaster rides on the international markets are nothing but a concerted effort to buy Greece on the cheap.

The truth, though, is a double-edged sword, as foreign politicians and economic players have discovered after trying to present Greece as a ghetto of all the structural problems of the single European currency (problems that will exist as long as no mechanism evens out the differences in production and behavior between eurozone members). Populists inside Greece and in other countries are united in presenting a danger toward Greece and the European Union itself. When the catastrophe becomes evident, then the majorities in each country will turn on the demagogues. By then, though, it may well be too late for Greece.

The Greek government bears a great measure of responsibility for the crisis -- for doing too little too late, for not believing in the policies that it was forced to carry out, for not restructuring the public sector so that it would not have to take measures whose outcome it cannot predict. This responsibility, however, cannot excuse the main opposition party’s tactic of continually taking a different position to the government’s. None of its arguments seems to be leading Greece, the European Union, the International Monetary Fund and the international markets toward the path of righteousness; rather, the lack of consensus and the triumph of personal obsessions among our politicians are useful reminders of how we got into this mess.

I think this is a great comment, one that every leader should read. Greece has a 24 century history of defaults, but the time has come to clean it all up and focus on the future. This debt crisis odyssey will bring more pain, especially if myopic policymakers focus only on austerity and not growth, but it will also bring some much needed structural changes to a country that desperately needs them. I also hope it will bring about a change in the Greek mentality which has been corrupted by the worst type of materialism and a culture of self-entitlement which has evolved through years of political cronyism.

But this isn't only Greece's moment of truth. As I argued in my previous comments, policymakers across the planet need to step up to the plate and start taking tough political decisions, ones which may anger the financial oligarchs but are in the best interest of the global economy. If they don't, they will be responsible for the next global depression.

My moment of truth has also arrived as I have to head back home to Canada and prepare for my future. I leave Greece with mixed emotions. I love this country, now more than ever, and feel a bit like Henry Miller did when he left Corfu as the second world war was about to break out (Collossus of Maroussi):
I had never expected to leave Corfu under such conditions. I was a bit angry with myself for having consented to go to Athens. I was more concerned about the interuption of my blissful vacation than about the dangers of the impending war. It was still summer and I had by no means had enough of the sun and sea. I thought of the peasant women and ragged children who would soon be without food, and the look in their eyes as they waved goodbye to us. It seemed cowardly to be running away like this, leaving the weak and innocent to their doom. Money again. Those who have escape; those who have not are massacred.
There are many Greeks now struggling with austerity. They are typically pensioners living on a fixed income, the poor and working poor, but many others are on the brink living with great uncertainty. As I get ready leave Greece, I wonder how long before other countries face their moment of truth and how will their citizens cope with the harsh realities of austerity and a dim future?

Friday, September 23, 2011

Fiddling While Rome Burns?

Voice of America reports, Global Markets Plunge on US Economic Recovery Doubts:

Global stock markets plunged Thursday as investors worried that the U.S. economy, the world's largest, would not turn robust anytime soon and instead help drag the world economy into another recession.

U.S. stock markets plummeted about 4 percent in late-day trading, with the broad-based S&P index of 500 companies retreating to its lowest point of the year. The sharp stock sell-off began in Asian markets, quickly spreading to bigger losses on key European exchanges in London, Paris and Frankfurt, where investors also feared a possible Greek debt default.

The closely watched Dow Jones Industrial Average of 30 key stocks on Wall Street lost more than half of the amount it has dropped for all of 2011 in just five and a half hours of trading Thursday .

Prices for commodities also dropped, with oil sliding nearly 5 percent, dipping below $80 a barrel for the first time in a month on worries there would be less demand with a global economic downturn. Even the price of gold, often viewed as a safe haven for investors, skidded, but U.S. bonds were still viewed favorably as a protected investment.

The managing director of the International Monetary Fund, Christine Lagarde, said the world's biggest economies need to strengthen their collective efforts to restore stability to world financial markets. She said that global leaders have not exhibited the same sense of momentum and spirit they did to resolve economic difficulties as they did at the height of the recent recession.

Lagarde said the risk against global economic growth has “increased markedly,” but added that so far world financial markets have ignored “bold” corrective efforts taken by European countries to cut their government debt.

The global stock sell-off began after the U.S. central bank, the Federal Reserve, said Wednesday it sees “significant downside risks” in the outlook for the American economy.

The Fed said a complete economic recovery is years away, and announced a plan to sell $400 billion of short-term bonds and buy long-term Treasury notes in an effort to keep interest rates low and boost economic growth. The central bank's action had been expected.

Analysts said that the gloomy forecast for the U.S. economy, coupled with worries that Greece may eventually default on its international bailout loans, could lead to a new global downturn or at best continued sluggish growth.

It's not just the US and Greece, economic indicators are turning down all over the world, including China and Germany. As discussed on Yahoo Tech Ticker on Thursday, Apocalypse Now? Markets Tumble as Europe Approaches “Tipping Point”:

Global stocks and commodities tumbled Thursday amid a string of disappointing economic reports and fears of meltdown in Europe's banking system.

"The rapidly burning fuse is in the European banking system, particularly in France, and Europe is getting very close to yet another tipping point," PIMCO's Mohamed El-Erian writes in The Financial Times, which separately reports executives of BNP Paribas plan to tour the Middle East in an effort to raise capital this week.

Amid acute concern over French banks, the CAC 40 plummeted more-than 5% intraday in Paris Thursday before stabilizing a bit. Major bourses across Europe were down more-than 4.5% in recent trading and the price of credit default swaps on European corporate and sovereign debts were surging; the price of default insurance on German and French sovereign debt hit record levels, Bloomberg reports.

In recent trading, the Dow was down 283 points, or 2.5%, while commodities such as gold and oil were falling sharply as the dollar rallied vs. the euro. (Update: As of 12 p.m. ET, the Dow was down nearly 400 points, or 3.6%, at 10,728 while the S&P was off 3.3%.)

In addition to fears of a European banking crisis, global markets were hammered by weaker than expected manufacturing data in Europe — which showed contraction for the first time in 26 months — and China, as well as a rise in U.S. jobless claims.

"A recession is at this point unavoidable," writes NYU Professor Nouriel Roubini via Twitter. "Only issue now: Will it be a mild G7 recession or a severe recession plus global financial crisis as bad or even worse than the 2008-09 one?" (See: Shades of 2008: A Greek Default Won't Be 'Contained', John Mauldin Says)

As Henry and I discuss in the accompanying video, the surprising thing is that anyone is surprised this is happening. The Greek debt crisis has been long in the making and European policymakers have had more-than ample opportunity to address the resulting problems among EU banks.

There are reasonable solutions to address the crisis, including the so-called "Swedish Solution" where banks are forced to take major write-downs before getting a capital injection. Alternative, Europe could adopt a TARP-style program to provide a capital cushion for banks ahead of an inevitable Greek default. Neither program is perfect but either beats doing nothing, which appears to be the plan in Europe right now.

Literally and figuratively, EU policymakers are fiddling while Rome burns.

On the other side of the Atlantic, some traders are apparently disappointed with Ben Bernanke's Fed for not doing more yesterday. But there are limits to what monetary policy can do, as former Fed governor Mark Olson explains. (See: Bernanke Can't Save the Economy: Congress Needs to Step Up, Says Former Fed Gov. Mark Olson)

Plus, Bernanke would be pilloried if the Fed had launched a $1 trillion QE3 program or some other outsized plan this week. From where I'm sitting, Bernanke gets an "A" for effort and looks good compared with our dysfunctional Congress and, especially, Europe's disastrous policymakers.

The epicenter of this crisis remains Europe, but I have to tell you, watching the price action yesterday, I remain convinced that naked short sellers, high frequency trading (HFT) scammers, and large hedge funds and bank prop desks are having a field day, making a killing in this wolf market (still waiting for the SEC to reinstate the uptick rule!!!).

And why not? With the Fed pretty much out of the way, they're watching inept European politicians incapable of coming up with a robust solution to their debt crisis and shorting every risk asset in the world, including stocks, commodities, commodity currencies, corporate bonds, and even gold. Only US bonds rallied, pushing yields on Treasury 30-year bonds down the most over two days since the depths of the financial crisis almost three years ago.

Let me reiterate something: If Greece defaults, it will be catastrophic for Greece, Europe, and the global economy. The bond market, which is much bigger than the stock market, is worried about global deflation. It's sending a clear signal to global policymakers but this warning is falling on deaf ears. The global economy alarm bells are ringing but politicians all around the world are incapable of coming up with a coordinated response to put an end to these endless speculative attacks which are feeding off their incompetence and wreaking havoc on global markets.

So is it time to get out of the market or short it waiting for the "Mother of All Crashes"? NO! I think short sellers will get whacked hard because they're getting extremely greedy, but I warn global policymakers, if you do not come up with a timely coordinated response -- THE MOTHER-OF-ALL RESPONSES -- which includes reinstating the uptick rule, regulating rating agencies, hedge funds and all OTC derivatives, prosecuting naked short sellers and HFT scammers, recapitalizing European banks, restructuring debt from some countries, creating a European Treasury which emits euro bonds, then global markets will implode and another great Depression will ensue. I can't be clearer than this. It's time for global leaders to step up to the plate and stop fiddling while Rome burns.

I leave you with an interview with Nobel-prize winning economist and economic advisor to prime minister Papandreou (not that he's listening to him!), Joseph Stiglitz, which was broadcasted Thursday on Greece's SKAI TV. It was in English but there is a Greek voice-over. Mr. Stiglitz warns us that austerity measures are failing in Greece. He thinks the focus should be on growth, not austerity, and that a default and exit are going to end up costing Europe a lot more than restructuring the debt and keeping Greece in the eurozone. Click here to watch the interview.

Thursday, September 22, 2011

A Greek 'Twist' of Global Deflation?

Left my beloved Crete yesterday to make my way up to Athens. Greece's capital is eerily quiet this morning as buses, taxis, metros, and trams are all on strike. People are striking to protest against the new austerity measures unveiled on Wednesday:

A set of austerity measures to be applied straight away were announced by the government on Wednesday evening as it tries to convince the International Monetary Fund, the European Central Bank and the European Commission, known collectively as the troika, that it is serious about meeting its fiscal targets and should receive its next loan tranche.

After a cabinet meeting lasting some seven hours, government spokesman Ilias Mossialos set out in a written statement the steps to be taken, pending Parliament’s approval in the next few days, to reduce Greece’s deficit. “These choices send the message to our partners and the markets that Greece wants and is able to fulfill its obligations, always remaining in the central core of the euro and the European Union.”

The Cabinet decided the tax-free threshold on income should drop from 8,000 to 5,000 euros. It also approved a unified pay structure for the public sector, whose details were not announced.

The government will not touch state pensions below 1,200 euros but anybody in retirement earning above that threshold will see the extra amount reduced by 20 percent. Any pensioners under 55 will have anything they earn above 1,000 euros reduced by 40 percent.

Some 30,000 public sector workers will be placed in a labor reserve by the end of the year, according to the plans announced. This means they will earn a reduced salary for a limited period before the government has the right to sack them or re-employ them.

In his statement, Mossialos also said the Cabinet had approved several structural reforms and privatizations but did not give any details. He said a new tax code would be presented to Parliament next month in a bid to rectify “inequalities and injustices that have existed for decades.”

The government hopes these measures will be enough to convince top troika officials, who will be back in Athens next week, that Greece should receive its next loan installment of 8 billion euros. Without it, the state will run out of money by the middle of October.

Speaking in Parliament before the cabinet meeting, Finance Minister Evangelos Venizelos admitted that a series of failures and the worsening recession made it necessary for the government to go on a new austerity drive.

“Do we have to take additional measures? Yes we have to take supplementary measures... because of the recession, because of the difficult task, and the weakness of the central administration have not produced the required results,” he said, while adding that the troika’s presence in Greece was necessary if the country wants to improve its public finances.

“If we did not have the supervision of the troika... we would have again unfortunately slipped off the fiscal track,” he said. “It’s not a question of intent. It’s a matter of mentality, lack of ability, management structure, methods, habits and inertia.”

The government also announced higher gas taxes and cuts in "EFAPAX," the lump-sum payment all workers get upon retiring. Meanwhile, Ekathimerini also reports that foreign officials are playing down default:

A flurry of foreign officials on Wednesday played down the prospect and the consequences of a Greek default.

The International Monetary Fund “is absolutely not discussing and will not discuss a controlled default of Greece, or an exit of the country from the euro,” the organization’s financial counselor and director of the Monetary and Capital Markets Department, Jose Vinals, told Skai TV in an interview.

“To date, European leaders have stated their strong support for European unification and this is very important. They have declared their express commitment to Greece remaining a member of the eurozone,” he said during a press briefing on the presentation of the IMF’s biannual Financial Stability Report in Washington.

“We have a very strong and close cooperation with Greece so as to ensure that the country remains on the right path and the implementation of the program continues, not just regarding the fiscal adaptation leg but also for the measures that will support growth,” Vinals said.

Separately, France’s Budget Minister Valerie Pecresse said Paris was not considering a Greek default scenario and “is doing everything to save Greece.”

German Finance Minister Wolfgang Schaeuble said Greece was the focus of speculative pressures.

“As soon as the markets are convinced that the Greek problem has been permanently solved, the risk of contagion to other countries will be significantly reduced,” he said.

Questioned as to what will happen in the event that Greece does receive a new bailout and declares default, Schaeuble said a responsible government has to take all scenarios into account “but cannot publicly consider its options for everything.”

Separately, Germany’s liberal FDP party leader Philipp Roesler toed the line of Chancellor Angela Merkel by saying, “We want Greece to stay in the eurozone, but for this to be achieved we must do everything so that it regains its competitiveness.”

The FDP’s former Economy Minister Rainer Bruederle expressed the view that Greece itself will choose the moment of a “haircut” to its debt.

For his part, Portugal’s Prime Minister Pedro Coelho warned that the consequences of a Greek default would be “catastrophic.”

As I've argued in my previous comments, a Greek default will be catastrophic for Greece, Europe and the global economy but tell that to rating agencies which Eric Reguly of the Globe and Mail aptly calls the hitmen of Europe:

What might the collective noun for credit ratings agencies be? Certainly not a pride (lions), given the agencies’ track record of untimely calls. Maybe a descent (woodpeckers). Better yet would be a murder (crows), because Italy could get killed by the ratings agencies. Italy is the new epicentre of the European debt crisis and if the country is buried under a mountain of junk-rated sovereign bonds, the euro zone is finished.

Earlier this week, Italy was downgraded by Standard & Poor’s by one notch, to single-A from single-A-plus, with a negative outlook, meaning another ratings whack job is likely. Because the agencies tend to move together, Moody’s is bound to follow with its own downgrade. On Wednesday, S&P went after the Italian banks, downgrading seven of them, including industry leaders Mediobanca and Intesa Sanpaolo.

What triggered the downgrade? And why now? Difficult questions to answer, especially since Italy was one of the few euro zone countries whose fiscal situation, if anything, seemed to be on the mend. To be sure, Italy has a gruesomely high debt, equivalent to 120 per cent of gross domestic product. But its debt has always been fat and no one in bond land seemed overly worried about it. Italy has a deep and liquid debt market – the world’s third largest – and willing buyers were always found (though Rome has had to pay much higher yields in recent auctions).

Italy is running a budget deficit, but one that has been admirably low by euro zone standards. Last year’s deficit figure was 4.6 per cent of GDP, which was half of Spain’s or Britain’s. This year the figure should land at 4 per cent, according to Deutsche Bank, and less than 2 per cent next year. With a little help from its austerity programs, Italy intends to balance the budget in 2013. In the meantime, the government is actually running a primary budget surplus (the measurement that excludes interest payments).

S&P cites falling growth as one of the main reasons for the Italian downgrade. Fair enough, but most countries in the 17-member euro zone and the wider European Union are watching their growth rates get slaughtered. The International Monetary Fund has just reduced its growth forecast for Britain to 1.1 per cent his year; it had forecast a 2-per-cent bump at the start of the year. Italy is arguably in no worse shape than Britain, yet Britain gets away with paying very low yields on its bonds, almost as low as Germany, whose debt is considered Europe’s safest.

So what’s the real reason behind the downgrade? S&P appears to have picked a subjective reason: It doesn’t have much faith in Silvio Berlusconi’s “fragile governing coalition” to make the tough decisions. Never mind that Italy last week approved a €54-billion ($74-billion) austerity program or that “fragile” could be used to describe half the governments in Europe. If general elections were held today, both German Chancellor Angela Merkel and French President Nicolas Sarkozy would be tossed onto the political scrap heap.

Of course, Mr. Berlusconi should be spending less time entertaining showgirls and more time figuring out how to protect his country from the debt crisis in Greece that threatens to sink the entire euro project. Still, the S&P downgrade seems both unwarranted and dangerous, given the economic reality.

The reality is that ratings downgrades and austerity programs are all feeding on one another to crunch growth, at best, or at worst to plunge Europe into a deep recession that could end up with busted banks and a busted common currency.

Investors drive up bond yields because they see waning growth and rising deficits and debt. The finance ministers, who are utterly obsessed with public debt ratios, launch punishing austerity programs during an era of private sector retrenchment. The economy sinks, in turn triggering more downgrades and pressure for more austerity. Fresh austerity programs arrive, hammering growth again and renewing the attention of the ratings agencies. And so on.

This vicious cycle could push Europe to the brink of destruction. Greece has already reached that point. The austerity programs demanded by the European Commission, the European Central Bank and the IMF (the “troika”) have gone from sensible to nasty to counterproductive. The Greek economy is imploding and the streets of Athens are becoming dangerous as society breaks down.

The Italians are watching in horror as the Greek economy unravels at alarming speed. They wonder whether the troika and the ratings agencies are evolving from saviours to executioners.

As I stated before, the "brilliant" economists at the troika are implementing measures which are counterproductive. Instead of focusing on growth, they are slashing wages, pensions, benefits, government jobs and increasing taxes hoping to restore "fiscal sanity." All they're doing is ensuring a Greek and European depression.

I ask again, why isn't troika going after Greece's biggest tax evaders who have parked billions offshore in Swiss and Cypriot banks and London real estate? I'll tell you exactly why: because many of the worst tax evaders are corrupt government officials who accepted millions in bribes (remember the Siemens scandal) from rich Greek corporate cronies they're now protecting. They all have a vested interest in hiding their ill gotten gains and shifting the debt burden on the poor and working poor.

And don't look for any help from the Federal Reserve whose "Operation Twist" was nothing more than just huffing and puffing. The markets showed Ben Bernanke how thoroughly dissatisfied they were following the Fed's announcement on Wednesday afternoon as stocks plunged and the 30 year US bond yield reached 2.99%, the lowest level since January 2009.

Some think this is a flight to quality as global investors, fearing systemic risk, rush into the safety of US bonds. But I also think the bond market is legitimately worried about global deflation. Participants are watching what is going on in Greece and southern Europe and think that the winds of deflation/depression will spread throughout the world.

Finally, a friend of mine sent me an interesting article on how neurosteroids may treat multiple sclerosis, giving me and others battling this disease more hope. Below, I leave you with a video comment from Tim Knight of Slope of Hope blog. Tim is one of the best technical analysts I track and he remains very bearish (a bit too bearish for me). I continue to trade risk assets, but I am concerned with the many policy blunders across the world, increasing the risk of global deflation.

Given these policy blunders, I question whether troika, rating agencies and global policymakers all need some "neurosteroids" to get their thinking straight. Indeed, stupid is as stupid duhs, but their stupidity will end up costing us all.

Wednesday, September 21, 2011

Troika Flirting With Disaster?

Ekathimerini reports, Troika keeps Greece hanging on for loans:

Greece will have to wait until later this month or even next month, after top officials from the European Commission, European Central Bank and International Monetary Fund have returned to Athens, to find out if it has done enough to secure an 8-billion-euro loan installment that would stave off default.

Finance Minister Evangelos Venizelos held a second teleconference with the troika representatives on Tuesday night to discuss the measures that the government can adopt straight away to reduce its deficit. A brief statement after the talks said that the two sides had reached an agreement that paves the way for the troika officials to come to Athens next week.

Prime Minister George Papandreou is due to chair a cabinet meeting this morning to discuss the steps that were set out during the teleconferences on Monday and Tuesday. These included public sector sackings, reductions to pensions, civil servants’ salary cuts and some tax hikes.

Sources indicated that the measures likely to be adopted include at least 25,000 sackings in the public sector with another 70,000 civil servants being placed on labor reserve, where they will receive reduced wages for a limited time before being laid off.

Public servants’ salaries are likely to be cut by up to 50 percent, while state pensions are due to be capped at under 1,700 euros per month.

The government is also thought to have agreed to equalize heating oil tax with the levy on diesel fuel, which will lead to the price of the former rising by 40 cents per liter.

There were also discussions between Venizelos and the troika about reducing the tax-free threshold for incomes. Currently at 8,000 euros, the ceiling could be brought down as far as 4,000 euros. Combined with other measures, the adjustments are designed to save at least 1 billion euros this year and 6.5 billion in 2012.

Earlier, deputy government spokesman Angelos Tolkas said that PASOK’s priority would be to reduce costs in the public sector. “Our primary target is to shrink the state,” he said. “The state budget had stopped paying the wages of about 200,000 civil servants over the past two years and we will continue with this.”

Meanwhile, credit ratings agency Fitch cast doubt on whether further austerity measures would help Greece avoid default. Fitch said that it foresees a Greek default but that the country would not leave the eurozone.

“Concerns over the risk of a breakup of the eurozone are greatly exaggerated,” said David Riles, head of global sovereign ratings at Fitch.

I agree, with every new austerity measure, the risk of default increases but concerns over a breakup of the eurozone are greatly exaggerated. This crisis, however, has exposed another concern, namely, indecisiveness in Europe and how they still do not have a game plan to tackle the debt crisis. And problems in Greece are already impacting the global economy as the IMF sees a deeper 2012 recession:

The International Monetary Fund on Tuesday upped its forecast of contraction for the Greek economy this year, in line with an increasingly gloomy global outlook.

The economy will not recover in 2012, as previously expected, and unemployment and debt will keep rising, the IMF said in its autumn report.

Gross domestic product is seen contracting by a further 2 percent, after a projected slide of 5 percent this year, reversing a forecast last June, when the IMF saw GDP falling 3.8 percent this year and returning to recovery with 0.6 percent growth in 2012.

Biting austerity measures, agreed to under pressure from Greece’s international creditors, seem to be depressing the country’s ailing economy further still.

Greece’s GDP shrank 7.3 percent in the second quarter from a year earlier, after a decline of 8.1 percent year-on-year in the first quarter, the Hellenic Statistical Authority said on Tuesday.

The IMF sees unemployment climbing from 12.5 percent last year to 16.5 percent this year and 18.5 percent in 2012. Among European Union states, only Spain is seen faring worse than Greece, with the jobless rate falling from 20.7 percent this year to 19.7 percent next year.

An increase in the number of jobless is also expected for Portugal, from 12 percent last year to 12.2 percent this year and 13.4 percent in 2012.

The IMF’s projection for Greece’s public debt this year remains unchanged at 166 percent of GDP, but is forecast to increase to 189 percent in 2012 from 172 percent in June. It is then seen falling to 188 percent in 2013, 179 percent in 2014 and 165 percent in 2015.

The projections are based on the assumption of no default for any individual country.

The IMF has also revised downward its growth projections for the eurozone to 1.6 percent in 2011 and 1.1 percent in 2012, from respective figures of 2 percent and 1.7 percent previously.

For Greece, the report forecasts that the consumer price index will slow down from 4.7 percent last year to 2.9 percent in 2011, and will in fact fall 1 percent next year.

The only positive forecast for Greece concerns its current account balance, where the deficit is seen shrinking from 10.5 percent of GDP in 2010 to 8.4 percent this year and 6.7 percent in 2012.

There is nothing positive about the Greek economy as politicians are caving into troika's demands and going after pocket change from overstretched Greeks. I can tell you that reducing the tax-free threshold to 4000 euros is sheer lunacy! Even 8000 euros is peanuts to live on in Greece. And cutting pensions of older Greeks is completely unfair as many are struggling to get by on a pittance.

I often wonder if these economists at the IMF and EU have a clue about what is really going on in Greece. The real unemployment rate is double the official rate and even though there is a huge underground economy, the majority of the population is suffering and fed up with these austerity measures. Meanwhile, billions of euros have fled the country and are in Swiss banks or invested in London real estate. Instead of going after the real big tax evaders, troika is putting the screws on regular hard working Greeks. And now they're "revising" their forecasts downward, realizing how way off they were in their economic scenarios.

Unless troika and European policymakers come to their senses, I see tensions in Greece boiling over this winter. With the tourist season pretty much over, unemployment will climb and people will take to the streets to protest deep cuts. I understand the structural nature of the Greek debt crisis but policymakers are going about it all wrong. Instead of stabilizing the crisis and focusing on growth by fast-tracking foreign investments, guaranteed by troika, they're cutting across the board, placing the onus on poor, working poor and pensioners.

In short, troika is flirting with disaster and the repercussions will be felt across the global economy via a banking crisis. They should be forcing Switzerland, England and Cyprus to help Greece catch its biggest tax evaders and stop imposing draconian austerity measures which will only sink the economy further into depression and highten the risk of another global meltdown.

Tuesday, September 20, 2011

Rescuing the Titanic?

I've been taking it easy, slacking off from blogging and tweeting, but tracking the news in Greece very closely. Have to admit, it's depressing and I understand why Greeks are so turned off, not bothering watching the news. But there are also some excellent discussions going on in the news here that none of you will hear or read about in mainstream media.

I've also benefitted from my discussions with family members. One of them is my uncle who is one of Greece's most successful entrepreneurs. He started a plastics company, Plastika Kritis, decades ago and he knows what is ailing the Greek economy. Over dinner on Friday night, we had a long discussion on tax evasion which he calls "Greece's national sport." He said the public system is riddled with corruption and waste and that Greek labor is too expensive and unable to compete with other countries.

My uncle also told me that he will read what George Soros has to say about Europe and the global economy but he's less enamored with economists. "Economists have gotten it wrong because their models cannot take into account the huge underground economy in Greece and the corruption and waste that takes place in the economy." He gave me a few examples and I paid close attention to everything he cited.

My cousin, his son, was at that dinner. He also gave me examples of big tax evaders who even after getting caught, continued cheating on their taxes. Interestingly, he told me Turkey has now surpassed Germany as Greece's number one export market. Greece also imports a lot from Turkey, underscoring the important nature of the trading relationship between these two countries which have a long and difficult history.

But it was Greece and its problems that concerned us. At one point, I agitated my uncle, father and brother-in-law because I said that if they caught the big tax evaders and threw them in jail, at least the masses would see there is some justice in the system." My father told me that only a small portion of the 350 billion euro debt is due to these big crooks. My uncle and bother-in-law agreed, stating that fraud, waste and inefficencies caused the debt to spiral out of control, but I remain convinced if you throw some of the crooked politicians, business people, doctors, lawyers, accountants and tax collectors (yes, tax collectors!) in jail, seize their assets, make it public, the government would be sending a strong message to the public that they're getting serious on cracking down on tax evasion.

Instead, the government is increasing real estate and other taxes, cutting pensions, and now they're going to make drastic cuts in the public sector. Some of this is needed, as there is abuse and the public sector is overbloated, but these austerity measures are wreaking havoc on the Greek economy. And I'm not sure they will even succeed. For example, they haven't been able to collect taxes from 2009 and 2010 and we expect them to collect taxes on real estate?

Then there is the issue of the Greek Orthodox Church which is exempt from paying real estate taxes on their non income generating properties. We are talking about a fortune here. The Church is very rich (owns 18% of National Bank of Greece and prime real estate), very powerful, and politicians fear it and would never in a million years impose taxes on their properties. I guess when the Church talks about "shared sacrifices," they mean the masses have to sacrifice more, not the Church.

There is a lot of money in Greece that people aren't aware of. Just like Italy and Spain, there is a huge underground economy. When I say huge, I mean huge, easily 40% or more of GDP. On Friday evening, after my dinner, I went to share a drink with another cousin of mine who owns a popular bar in Heraklion. He told me that many employees at bars, shops, businesses and even hotels are undeclared. This means that businesses get away from paying "IKA," a payroll tax for social security, and many employees collect unemployment while working "under the table." And because tax collectors are seeing their incomes being cut, they're extorting many businesses to make up for lost income. And Greece has become a haven for drug trafficking and weapons smuggling, all of which goes on with the full knowledge of authorities who turn a blind eye.

(Note: my cousin is long National Bank of Greece, "NBG", and thinks foreign investors just don't understand its Balkan and Turkish operations and how cheap it currently is. He dismisses rumors of nationalizing this bank as "pure fear mongering" and reminded me that the Church owns an 18% stake in NBG and "it will never sell its stake").

In short, Greece's tax system is a joke. With every new tax, tax cheats find ways to circumvent it. This happens everywhere, not just Greece, but here it truly is a national sport. And the big fish with political connections are getting away with murder. They're the worst offenders. This forces the government to pensions and impose taxes on hard working Greeks that are already having a tough time making ends meet. If the government wasn't so corrupt, they would sign a tax treaty with Switzerland and immediately cease assets of these tax crooks.

At a minimum, Greece should introduce a tax amnesty program just like the one the IRS recently introduced in the US, allowing them to reap $500 million in back taxes and interest. Of course in the US, cheating on your taxes is worse than drug trafficking and the penalties are extremely harsh. Greece -- and dare I say Canada -- can learn a lot from the IRS and US tax system, which is far from perfect but at least they impose tough penalties on tax cheats.

But Greece is now the eye of a massive debt hurricane that threatens the global economy. Greek creditor talks will continue on Tuesday and now the Papandreou government is considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the eurozone or by exiting the single currency (as if Greece has money to waste on referendums!). And if that's not bad enough, S&P decided to downgrade Italy's debt by a notch (news coming out of Italy on Greek television is truly disturbing).

Sometimes it feels like the entire global financial system is hanging by a shoe string, and that Leo de Bever is right, "they're rearranging the deck chairs on the Titanic." It's depressing watching the news in Greece and elsewhere, but I remain hopeful that Greece, Europe and the world will survive this crisis. Admittedly, even I get frustrated with the slow and stupid responses from policymakers around the world, but the financial oligarchs have too much at stake to let the global financial system sink.

Finally, I want to end by plugging a book by a Greek economist, Nikos Christodoulakis, called "Rescuing the Titanic." It has not been translated into English yet but when it is, I urge you all to buy a copy as soon as possible. I heard him speak on Sunday morning on Skai TV and he's excellent. Below, for those of you who speak Greek, watch the latest episode of Skai's "Kiriaki me Drasi." A must watch discussion on the Greek economy.

Feedback: Someone who knows the Greek economy well sent me his thoughts:
The Titanic sank in the 1980's. This is a massive salvage operation to bring it back to the surface and we know how this will end.

Over my time in Greece, I met plenty of successful Greek entrepreneurs and they all understand the problem.

What surprises me is that they are incapable of doing anything about it. The political class is so powerful and so entrenched. They have rotted the system to the core.

The country needs leadership and it needs to expunge itself from New Democracy (ND) and PASOK. The political families that have ruled Greece since '74 must be shown the door. The old ND and PASOK must be dismantled completely in such a fashion that they can never resurrect themselves.

This type of wholesale change requires someone who is total SOB or a military dictator. Sometimes, I wonder if they are heading down the military dictator route.