We’ve had a remarkable run in US notes and bonds over the past several weeks. The economically-sensitive 10-year note briefly yielded more than 4% in mid April. After an astounding rally yesterday, buying in the 10-year continues this morning, and its yield is down to 3.57 as I write.
I’m at a loss to convey the magnitude of this move in such a short time. Unless you’re a capital-markets obsessive like me, it’s hard to sense how big this is. Coming at a time when the euro is widely expected to drop sharply in value and Asian markets appear to be very overextended, the rally in Treasury debt has to be interpreted as a broad turn away from risk.
Why? The news stories are unanimous in blaming the ongoing and very serious situation in Greece. I’ve been sounding the alarm in this space about the weakness of Greek debt for months now. The underlying problem there is worse than elsewhere, and there are somewhat different drivers for it, but it still is a widespread problem: too much deficit spending by governments. To state the problem even more broadly: too much spending by governments, period.
In Greece, ridiculously overpaid public-sector workers are now going on strike. The country’s high earners (who illegally avoid paying most of their taxes) aren’t on strike but are almost certainly looking for ways to get their money out of the country. (Short-sellers love the smell of capital flight in the morning.) And in the last few days, the mobs have started throwing cobblestones and Molotov cocktails, and the police are responding with tear gas. Not a good situation.
And yet, I’m seeing contrary indicators. The great fear in the finance world is that Greece, even with the 110-billion euro bailout package from the EU and the IMF, will end up defaulting on sovereign debt. Greece has been spending far beyond its means, and that simply must stop in order to avoid a default. Have you ever tried to tell a spoiled child to eat his spinach or he won’t get his dessert, and had the child respond by throwing flaming gasoline at you? If so, then you know quite literally how the Greek prime minister feels.
Ultimately, this problem can and will be solved with massive transfers from the wealthy states to the heavily-indebted ones. In a way, the Germans have been collecting a rainy-day fund for decades, and it just started raining. Combine this with the fact that the European Central Bank, to its evident displeasure, has now committed to accept any Greek sovereign debt security as collateral in term repo for an indefinite period of time, a guarantee they will not be able to avoid extending to other states as well.
The result is that the fiscal profligacy of Greece and other states will be covered by the savings of others. (Now if you’re the type of person who saves carefully and never runs a credit-card balance, don’t you feel a little stupid?)
But you see, that’s why I’m seeing a contrary indicator here. I don’t expect to see a massive financial crisis, as many fear. (And those fears are being fanned by some German officials, who need to justify a deeply-distasteful diversion of taxpayer funds right ahead of a major election in Nordrhein-Westfalen.) And the Molotov cocktails and tear gas will stop flying after the Greek authorities complete their upcoming debt rollover, wait a few more weeks to make it look good, and then accede to the protesters’ demands.
But where does that leave the capital markets? There still are lingering questions about the sustainability of the economic recovery, which is being driven by Asia. And as I mentioned, Asian markets are seriously overextended and in need of a correction. And then there is the prospect of higher policy interest rates in the US, which I believe (contrary to many others) will not happen this year.
But the biggest contrary indicator of all is the sudden emergence of people making extremely bearish, even apocalyptic predictions, now that (admittedly strong) headwinds have appeared in markets. The old cliche is true in this case: markets climb a wall of worry.
The standard rule is that euphoria is contagious and resilient. Markets are currently in a bull cycle, with most participants expecting that the nascent global recovery is robust and sustainable. At times like this, declines often provide buying opportunities. Over the next few months, the euphoria should return, even though (as I’ve said elsewhere) a 5% correction or more in US stocks wouldn’t be a surprise.
This story first appeared at The New Ledger.
Steve Maley
KnightsofMalta
Dan Spencer
Moe Lane
Dan McLaughlin
Humorously enough
Death_of_the_Donkey (Diary) Wednesday, May 5th at 10:48AM EST (link)according to that NYT article you referenced about Greek tax evasion, it appears that the entire crisis could have been averted had the Greeks just paid their taxes all along. And it still appears that despite our profligate ways, we are still seen as the safe haven for cash in times of crisis.
Greek tax evasion
Francis Cianfrocca (Diary) Wednesday, May 5th at 10:58AM EST (link)I didn’t read a NYT article about Greek tax evasion, but I have heard this from many other sources. So let’s play a bit of dynamic analysis here.
If high-earners in the Greek private sector had been fully compliant with local tax laws, the result would have been to have the government spend a greater share of the country’s private wealth creation. That’s definitionally inefficient. Would Greece then have been able to sustain their levels of government spending, which exceed 50% of GDP?
I’m not disagreeing with your statement, but I am saying it wouldn’t have stopped Greek authorities from pumping their economy with foreign borrowing. Capital is mobile, and I believe that Greek wealth is looking for an exit to safer havens before the promised tax-enforcement crackdown hits.
In re our status as a haven for risk-averse money: yes, absolutely. And it’s ironic because this very status keeps our government interest rates low, which makes it easier for the Treasury to keep up deficit spending levels that, as a percentage of GDP, aren’t much lower than those in Greece!
To further support this point, note that corporate spreads have significantly widened in the US these past few days. The cash is flowing not into US assets, but into US *government* assets.
capital flight?
jackhammer Wednesday, May 5th at 11:43AM EST (link)From what I know from most wealthy greeks is that capital has always flown….the cash was often brought out of country, many sales were done with small amounts over the table in greece and much larger amounts in Switzerland or wherever….Tax evasion is rampant…if the people had followed all the tax laws, then growth would have been non existent.
If the shortfall had really been 20 or 30 billion they could easily have gotten that back with a cut rate amnesty….but they never considered that….make all your out of country cash legit with a 15% off the top import tax…and they owudl have seen giant capital influx…but just offering amnesty from penalties but full taxation…no one there is stupid enough to go for that….not when they know that there aren’t enough auditors to even start those investigations….Every greek person cheats on their taxes…from the taxi driver to the doctor who claims $30k in yearly income while living in a $2 million appartment
You can't outrun a bear.
Common_Cents (Diary) Wednesday, May 5th at 11:46AM EST (link)You can’t outrun a bear, but you can outrun your buddy to buy yourself some time.
As long as the US gets new credit cards to tap everything is fine. It’s a benefit from the blowups of others to keep the flight to lesser evil, oops I mean flight to quality going.
The market will try and hold up until midterms.
“Elected elites” always try to frame a problem as a revenue problem when it is more of a spending problem. Spendaholics tend to deny that fact. Our spendaholics in govt around the world couldn’t give you an answer to “how much is enough”? they reply with how much you got? and then how much more can we get?
The market melt up pump game continues!
Obama=Golfer in Chief, Leading from,
behind, the Back Nine.Leaders don’t create movements. Movements create leaders. Get involved. Your future depends on it.
Govt “invests” YOUR tax money for POLITICAL return rather than economic return.
There's always someone's can to to kick
texasgalt (Diary) Wednesday, May 5th at 11:55AM EST (link)and always a new generation bred to master the universe.
Out running your buddies doesn't help
The_Gadfly (Diary) Wednesday, May 5th at 12:09PM EST (link)when there are more than twice as many bears as you have buddies.
The bears are loose in Greece and about to get loose in Portugal despite its protests to the contrary. It sounds like they are about to get loose in China, and I’m not entirely certain they were ever corralled in Japan. The Germans may have been putting money into a rainy day fund for the last 2-3 decades, but it won’t take long for the pigs to run through the larder once they get in. Let’s face it squarely: the Germans wouldn’t be hesitating to make the loan IF they thought they could get their money out at the other end (including a reasonable return of course). Greece and all the rest of the bailout scaremongers are leveraging political unrest against economic sense. That means we have ceased to be in an era where past performance has any kind of bearing on future events.
I meant the US outrunning other countries. nt
Common_Cents (Diary) Wednesday, May 5th at 1:00PM EST (link)Obama=Golfer in Chief, Leading from,
behind, the Back Nine.Leaders don’t create movements. Movements create leaders. Get involved. Your future depends on it.
Govt “invests” YOUR tax money for POLITICAL return rather than economic return.
I didn't assume differently.
The_Gadfly (Diary) Wednesday, May 5th at 1:55PM EST (link)I think there are still at least twice as many bears as there are other countries the US can feed to them.
There’s only one way to get out of the trap we are in: Elect a responsible government.
Granted, it has been a heck of a long time since anyone anywhere has done that. I’d say about 220 years or so in these parts. And some would dispute even that was a responsible government.
yes, but it buys time nt
Common_Cents (Diary) Wednesday, May 5th at 3:21PM EST (link)Obama=Golfer in Chief, Leading from,
behind, the Back Nine.Leaders don’t create movements. Movements create leaders. Get involved. Your future depends on it.
Govt “invests” YOUR tax money for POLITICAL return rather than economic return.
Elect a Responsible Government
Raven (Diary) Wednesday, May 5th at 5:00PM EST (link)And equip it with economic heavy machine guns to gun down the bears so we can feast on them.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Time to short some TBT puts
Redbirdfan (Diary) Wednesday, May 5th at 10:50AM EST (link)You can get 3 bucks or more by writing (selling) the Jan 11 40 puts.
You shorting them nekkid?
Francis Cianfrocca (Diary) Wednesday, May 5th at 11:00AM EST (link)That takes guts.
????
Raven (Diary) Wednesday, May 5th at 5:00PM EST (link)Can I get an explanation?
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Nekkid puts
Redbirdfan (Diary) Wednesday, May 5th at 5:37PM EST (link)Look up naked put. The Jan 11 40 refers to the expiration date jan 2011 and the strike price $40.
selling the rights to buy a stock you don't even own
Doc Holliday (Diary) Wednesday, May 5th at 5:56PM EST (link)the practice allows people to push a stock price down simply buy signing a contract to sell something you don’t even own. I know there are free market reasons to allow this practice, but it is certainly pushing the boundaries to the nth degree. There could be a free market contract law argument that the practice is at best shaky.
people sold credit default swaps for quick cash when they had no ability to make good on them, and from that, we got tarp.
Molon Labe!
well, if you sell a put
Doc Holliday (Diary) Wednesday, May 5th at 6:07PM EST (link)you are selling the right to sell. forget it, let Francis explain, I am a bit chillin’ right now and sick of thinking about the market. I tend to avoid options, futures, and derivatives, if I want to lose money I want it to be clear cut
Molon Labe!
Most people use put options like a an insurance policy
Leopard1996 (Diary) Wednesday, May 5th at 6:28PM EST (link)For example, if someone buys Fedex Today which is at 88.56, they may buy a put option to allow them to sell it 85 a share, that way if fedex does tank within the time frame and goes below 85 a share, they will exercise the option and limit their loss to only the 2 – 3 dollars a share as opposed to losing more. If the price doesn’t go down you lose the price of the option. It’s the same concept of car insurance, you buy car insurance for a premium but if you never crack up your car or crack someone else up in your car then you pretty much lose the premium that you paid.
“The accumluated filth of all their sex and murder will foam up about their waists and all the whores and politicians will look up and shout, “Save Us!”….and I’ll look down and whisper, “No”…The Watchmen
Writing a naked put pretty much means
Leopard1996 (Diary) Wednesday, May 5th at 6:23PM EST (link)That you personally don’t own the asset that you are writing the put option on. For example, you call your broker and state that you want to write a put option on IBM to allow a person the right to sell the IBM stock for 120 a share. However you personally don’t own the 100 shares. Where it gets risky is if that put option actually gets exercised, it is incumbent on the writer of the put to cover the actual sale. Which could leave the writer wide open to a whole host of losses considering that someone would not exercise a put option unless the actual stock was lower than the 120 a share.
I am not a true financial professional, but I did study this stuff in college.
“The accumluated filth of all their sex and murder will foam up about their waists and all the whores and politicians will look up and shout, “Save Us!”….and I’ll look down and whisper, “No”…The Watchmen
What a short put is
Francis Cianfrocca (Diary) Wednesday, May 5th at 7:11PM EST (link)Raven, a put is a derivative that gives the owner the right to sell (or “put”) an underlying instrument (like a stock or an index) at a specific price for a specific period of time.
Like all derivatives, puts are zero-sum. There’s a buyer and a seller, and their positions cancel each other out.
If you sell a put short, that means you’re committing to the buyer of the put that you’re willing to buy (let’s say) a stock from him at a certain price for the duration of the put. You need to deposit enough money with your broker to ensure that you can buy the stock if it’s put to you.
And it WILL get put to you if the price of the stock falls below the strike price of the option. The seller of a put is betting that the price of the stock will not fall for the duration of the contract.
Note that this is a quite different market position from the buyer of the stock or of a call option: that person expects the stock to RISE. But the put seller only expects it not to fall.
Does that clarify?
Your explanation is a lot better than mine - nt
Leopard1996 (Diary) Wednesday, May 5th at 7:25PM EST (link)“The accumluated filth of all their sex and murder will foam up about their waists and all the whores and politicians will look up and shout, “Save Us!”….and I’ll look down and whisper, “No”…The Watchmen
nice explanation Francis, thankyou
Doc Holliday (Diary) Wednesday, May 5th at 7:36PM EST (link)but since it is a naked put short, in theory there is no guarantee the seller can cover the purchase and sale right? I am guessing like margin the seller would need to pony up more cash as the market price dictates to keep reasonably liquid, correct?
Molon Labe!
With listed options, this isn't a problem
Francis Cianfrocca (Diary) Wednesday, May 5th at 9:22PM EST (link)There’s a third-party entity called the Options Clearing Corporation that automatically steps in and assumes the counterparty relationship on both sides of the trade, whenever a listed (or standardized) option contract is created. (An option can be created by either a buyer or a seller, who buys or sells “to open.”)
In other words, when you have either bought or sold a listed option to open, the entity that must perform the other side of the contract is the OCC, not another market participant. You have no exposure to someone else’s potential insolvency. The OCC takes no net market risk, so there’s no question about their ability to perform the contract.
Listed options are not like over-the-counter options, futures, or swaps in the sense contemplated by your question. You don’t periodically exchange collateral payments with the counterparty as the market value of the contract fluctuates. However, just as with a margined position in a stock, your broker will protect himself by enforcing that you have enough cash or marginable securities on deposit with him to perform on all of your open contracts.
thanks for the explanation
Doc Holliday (Diary) Wednesday, May 5th at 9:49PM EST (link)that makes sense, the clearing corporation needs to keep the trades occurring, hence counterparty protection. so am I to surmise that the naked positions are allowed only on listed options? do the otc trades allow unresolvable positions, can some one short more than the available float?
In other words, where and when to the real blowups and squeezes occur? I know in the old days true squeezes occurred not just panic buys, but times when there were no securities available to cover a position. Can that still happen now?
thanks for the education
Molon Labe!
????????
Raven (Diary) Wednesday, May 5th at 10:43PM EST (link)And now I am twice as confused as before…
You can sell the rights to sell something you don’t own?
Okay, I get Buying a put, if you think the stock will fall below that point…
No I don’t. If you think the stock will fall like that, why not just sell the bloody thing at its current price? Why hold it until it falls to the point of the put?
This entire thing seems completely retarded. I Have to be missing something. Unless I’m not and people on Wall Street really Are as stupid as this description makes them seem. But that is a tad hard to believe.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Raven think about leverage
Redbirdfan (Diary) Thursday, May 6th at 9:39AM EST (link)If you buy an option you control a certain amount of stock ETF for a certain amount of time. For example, with TBT, the person who bought the puts that I created by selling controls $4,000 worth of stock for $300 until Jan 2011. He makes money when the stock price goes down or volatility increases or both. He loses money if the markets calm down and/or TBT goes up in value.
If you are relatively certain a stock is going one way or the other, buying an option gives you a great amount of leverage. As with any kind of monetary leverage, it is like a power saw, in the hands of the right people it can be a powerful tool in the hands of the wrong people it can be bloody.
As a seller of a put, I have an advantange over the buyer, because first the stock has to fall significantly, in this case all the way down to $37, before I lose money. I can always buy back the option, but if the stock has fallen and/or volatility has risen, I’ll be paying more to buy it back than I sold it for. Also, as it gets nearer to Jan, the time value of the put goes down. Basically, that means there is less time left for the option therefore there is less chance the underlying stock/etf will move significantly.
Another reason people buy options is for the cheap insurance. For example if someone has a position in TBT and bought the put I sold yesterday that person cannot lose more than the price of the put ($3) and the difference between what he bought it at and the strike price. So if TBT suddenly falls to $25 that person can sell tbt to me for $40. I am obligated to buy at $40.
Put options
Francis Cianfrocca (Diary) Thursday, May 6th at 10:00AM EST (link)If you own a large quantity of a stock, you can buy a put option which gives you the right to sell it at a specific price. This means you’ve limited your potential loss in the stock. It’s a lot like insurance. But you need to pay someone else (who is now the short-seller of the put) to provide this insurance to you. And that can be very expensive.
Intuitively, the value of the put is related to the statistical likelihood that the stock will rise or fall by various amounts across a certain stretch of time. (There are a couple of different mathematical approaches to this, but a log-normal random walk is typical.) As a rule, the cost of insuring against declines is greatest when expectations for a market decline are high, which is why this is a very expensive kind of insurance policy. Professional investors will sometimes use long puts to hedge or partially hedge stock positions, but other approaches (like delta or gamma hedging) can be more cost-effective.
Why would you short-sell a put? Well, when you do that, you’re selling insurance to the guy who wants to protect himself against a decline in the stock. You can make a lot of money doing this when tension is high or when markets are expected to decline. But for exactly the same reason, you’re taking a lot of risk.
Another reason to short-sell a put is if you just want a slightly cheaper entry point to some stock. Your purchase price is reduced by the amount of the put premium.
Put and call options are very basic and useful financial derivatives, and have been around for centuries. They’re not a Wall Street invention. But being able to buy or sell standardized options on exchanges is a new thing, dating back only about 35 years.
See, now that makes more sense
Raven (Diary) Thursday, May 6th at 12:38PM EST (link)I was missing something.
Sometimes, you just have to break it down farther for people to understand.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Of shorts and squeezes
Francis Cianfrocca (Diary) Thursday, May 6th at 9:45AM EST (link)Doc, you’re asking a complicated set of questions, let’s see how much I can untangle.
The word “naked” is a little misleading with puts. You always have to put up enough cash to assure your broker that you can settle a short put (for example, by buying the underlying stock). Usually it costs less to margin a short put than to buy the stock, but if the put gets exercised against you, you’ll suddenly be liable for the full amount of margin required for the stock purchase. You don’t want to lose control like this, because you’ll find yourself having heavily overpaid for something you may be forced to sell immediately. But the stock probably won’t go to zero, so your downside isn’t all that bad.
If you sell call options naked, it’s considerably more dangerous. A naked short call is when you don’t already own the stock. If the option is exercised (the stock gets “called away” from you), you’ll suddenly be short the stock, and liable for the cash margin required to hold the short stock position. Worse, this will often happen when the market is moving away from you, and it can do so very, very quickly.
That’s really how short-squeezes occur. If you own a lot of stock and it falls, you can often sustain the losses and hold the position (assuming you believe the declines are temporary, or if your position is huge and illiquid).
But if you’re short a lot of stock and it rises, you’re in very deep yogurt, and you have to scramble to cover. On a percentage basis, stocks can rise a lot faster than they can fall.
To the question about derivatives covering more than the total amount of underlying instrument: of course, that happens every day. You don’t really see that in listed stock options because it’s far easier and cheaper to speculate with index futures. But look at the crude oil markets and interest rate swaps.
The total amount of futures contracts in force on crude oil is maybe five times the amount of real oil being traded. Interest rate swaps in force cover maybe six times the world’s total assets, including real estate.
OUCH!
Redbirdfan (Diary) Thursday, May 6th at 2:47PM EST (link)Fortunately the delta was low and I’m only down a buck though TBT has fallen $3. TBT is now $2 below anywhere it went last year. Its rather obvious that rates cuts are happening this year.
Sorry
Redbirdfan (Diary) Thursday, May 6th at 2:49PM EST (link)rate rises not cuts.
Small position
Redbirdfan (Diary) Wednesday, May 5th at 11:08AM EST (link)It takes too much portfolio margin requirement to do a large position. I’ll probably buy the front month against it.
Underpriced?
Francis Cianfrocca (Diary) Wednesday, May 5th at 11:56AM EST (link)I just did the analytics by hand so I could easily be wrong, but are you sure the Jan11 40 put isn’t underpriced? Might be easier and cheaper just to buy the stock.
Disclaimer: this is not investment advice.
Why pay 43 when you can get it for 37?
Redbirdfan (Diary) Wednesday, May 5th at 12:52PM EST (link)Optionsxpress has the theoretical value at 2.04, I’m curious how you determined they are undervalued. Puts are almost inherently overvalued, because few people risk selling them.
One other thought on why short puts instead of buying the stock, when writing puts you never have to pay margin interest in case you are wrong. For example if TBT falls to 40, I’d probably want to hold onto it until it came back. Benanke does have to raise rates some day (2011?). That means I’d pay a lot of margin interest over time. If I write puts on it, not only do I get a much better price, but I can simply roll out further to a later date, thus further lowering my cost basis without paying any interest. Some knucklehead is going to be paying me a lot of premium hoping that the stock is going down.
I read a bad print
Francis Cianfrocca (Diary) Wednesday, May 5th at 1:40PM EST (link)It looked to me that the Jan11 40 call was priced to imply a much higher volatility than the 40 put. I just looked again, and the relationship was a lot closer. I may have gotten a bad data point. If I’d been right the first time, then I would have been looking for an arb rather than a position on the market.
If I bought TBT at today’s 43 and it fell, I’d probably get stopped out long before it hit 40.
There’s no free lunch. Having lived (and traded) through the exceptionally low-volatility period before the crash, I’ve come to believe that markets don’t price vol well. You may not be getting enough premium in return for the risk you take by shorting puts like this.
Of course, there’s a valid counterargument: in the wake of the crash, vol may be systematically overpriced. After all, Greenspan says it was a 100-year event! In that case, you win.
I decided to go nekkid for now.
Redbirdfan (Diary) Wednesday, May 5th at 2:26PM EST (link)You obviously know what you are doing, But sometime take a look at using portfolio margining and shorting puts. Lots of advantages, including selling overpriced (at least seemingly so) options which give you a chance to buy something at a much lower price in all but an extreme case, ala Lehman.
For example you can sell some wmt 40 Jan 11 puts for .55 while putting up a buck per share in PM requirements. And if you buy some very cheap front month OTM puts such as the May 45s, you’ll reduce your Pm requirement (at least temporarily) substantially. WMT hasn’t been below 40 since Monica was not having sex with Bill.
I generally use short puts...
Francis Cianfrocca (Diary) Wednesday, May 5th at 7:04PM EST (link)…when I want to own a stock. The option position reduces the cost somewhat. But that means I’ve developed a theory about the underlying instrument. If I’m in a hurry or I don’t like the illiquidity of the option, I just buy the stock.
As far as using the short LEAP put as a proxy for the stock itself, why would you do that over a longish period of time? You’re giving away most of the upside. Might as well just find a stock you have a stronger feeling about and buy it.
I wouldn’t want to own WMT under any imaginable circumstances, so that’s kindof my problem with your example.
I have an allergic reaction to the phrase “cheap front month OTM options.” The low-priced contracts are often the most expensive stuff out there. I forget which greek is the derivative of theta, but it works against you pretty hard if you’re time-spreading to protect a long-term short position.
But to each his own. You’ve clearly found a pattern that works if you’re still in the game.
Portfolio Margining is the key
Redbirdfan (Diary) Thursday, May 6th at 9:57AM EST (link)I would have agreed with you wholeheartedly before I started doing portfolio margining.
I know you hate WMT, but substitute any stock with a large economic moat, size and stability. Say JNJ for example.
You could sell the JNJ 50 Jan 11 puts for .77. You’d probably have to put up about 1.50 or so in portfolio margin. Then if you begin to worry about JNJ or the market in general you can buy the dreaded cheap front month OTM put options in this case the 57.5 May puts are going for something like .06. This does three things, it reduces your potential gain (.77 less .06), it decreases your portfolio margin requirements significantly, and it provides a great deal of protection against a market crash.
If JNJ and/or the market continues to be unsettled you can buy jun OTM puts. If you think buying those front or back month puts are eating too much into your potential gain, then you can sell some OTM calls say Jul or OCT. This will cause an increase in your portfolio margin requirements so don’t go overboard with this. And remember the calls are often undervalued so you only want to be doing this when there is a lot of Volatitilty. No volatitlity no reason to be buying protection.
The British election is a referendum on Labour's stark Satanic bills :)
streetwise (Diary) Wednesday, May 5th at 11:28AM EST (link)Seriously, if Portugal, Spain, and maybe Italy and Ireland are also crises ripening on the vine, and the UK has dug itself quite a hole with deficit/GDP stats not far from Greece, where does it all end?
And will German voters tolerate eternal subsidies and bailouts?
The Irish have been realistic
jackhammer Wednesday, May 5th at 11:32AM EST (link)whcih is a trait the Germans also share….they love their social state, but when reality sets in they get realistic…when they can’t afford something, they understand when it can’t be got.
The Irish are dealing witht eh wausterity program well…the eastern europeans did so when the iron curtain fell,a nd they did a decent job the last 2 years too….20% less in earnings or GDP is a tough pill to swallow…but just like trading in some more money at 1.32 was a 10% hit from having traded it at 1.50….80% is better than everythign under 80%….
I thinkt eh portugese can deal with reality too…but the love of all encompassing strikes is national sport in Italy, spain and Greece….
It sucks for work for me, btu I see € Parity again….at whcih point I will be converting a lot fo US$ assets back.
Nice William Blake reference there
civil truth (Diary) Wednesday, May 5th at 11:46AM EST (link)Though from reading Melanie Phillips, the Tories won’t be much better unless they rediscover their heritage and principles and take a right turn. Apparently Cameron did a bit of turning to the right in his last debate (after failing miserably in the earlier ones with his Labor-Lite sound bites) and thereby won the debate.
We’re all watching to see what happens in tomorrow’s vote.
The greatest evil…is conceived and ordered (moved, seconded, carried, and minuted) in clean, carpeted, warmed, and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voice. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the offices of a thoroughly nasty business concern. -C.S. Lewis
http://www.gmsplace.com/
Yes, circumstances will bring the Thatcherite out of Cameron,
streetwise (Diary) Wednesday, May 5th at 11:53AM EST (link)whether he wants it or not, and he probably doesn’t want it.
An ironic state of affairs….
Agree -it's much easier and popular to keep pouring the alcohol
civil truth (Diary) Wednesday, May 5th at 12:09PM EST (link)…than to take away the punch bowl. Secular muliculturalism is a heady brew.
The greatest evil…is conceived and ordered (moved, seconded, carried, and minuted) in clean, carpeted, warmed, and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voice. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the offices of a thoroughly nasty business concern. -C.S. Lewis
http://www.gmsplace.com/
Cameron would be a liberal in this country
Doc Holliday (Diary) Wednesday, May 5th at 5:11PM EST (link)The Tory party has decided they can only be relevant if they are Labour-light. They have given up, it is that simple. I would go for Blair over Cameron.
Molon Labe!
I'm hearing an unfortunate amount
Raven (Diary) Wednesday, May 5th at 5:05PM EST (link)Of love for the Dem-Libs and for sitting it out.
I don’t predict good things tomorrow in the UK.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Sounds like Simon Cowell would be better than the three up for PM
Doc Holliday (Diary) Wednesday, May 5th at 5:16PM EST (link)http://www.thesun.co.uk/sol/homepage/news/election2010/2959573/Simon-Cowell-says-General-Election-MUST-bring-change-to-Britain.html
Molon Labe!
Germany needs to kill the €
jackhammer Wednesday, May 5th at 11:28AM EST (link)I live in Germany, and the disgust at thsi bailout is enormous. The € has been a horrible experiment,a nd if you think Ron Paul has points with his criticism of the US$ as FIAT money…then imagine allt he flaws int he cosntruction fo the €….
There is no motivation for Germany to be in the € anymore…the countries of the south, with whom trade increased because of a common currency are in for a long round of austerity, which means they’re not going to be demanding a lot of german goods for a long time. All the € has done, is handicap the currency used in countries like germany to inaccurately reflect their individual productivity levels (Imagine taking the average 100m time of Usain Bolt and his heavily overweight 75 year old uncle and claiming that as his average time).
This has lead to Germany running an insanely high trade deficit ever since the introduction fo the €, one larger than China’s for the last 5 years. Forget about China manipulating their currency….the € has manipulated Germany’s currency more.
So there is no motivation other than recurring war guilt to keep Germany in the €…but internally Merkel woudl probably be made Chancellor for life if she said tomorrow, “we are abandoning the € and ging back to the DM with an exchange rate of 1.98 effective immediately!” I mean some German banks with exposure to greek sovereign debt woudl take a hit, btu that hit is probably shy of the 22 billion€ they are startign to shovel at this problem (It is more because one of the biggest debt holders is HRE, who the government already bailed out once AIG style….
I did the smart move in the last 2 years….have been buying real estate in Germany (never a bubble here, most real estate is equal to 12-15 years of rental income), borrowing as much as the banks woudl give me, sold all my stock 2 months ago, and have moved all money that isn’t covering those mortgages for the next 3 years into US$…when hyperinflation comes I want to owe the bank lots at fixed 3% interest….
I don’t know why everyone under 40 would be so worried about a total financial meltdown….it is not like a war woud destroy infrastructure..so some banks disappear, money becomes worthless….it is like a reset button on the game…everyone sort of starts over….great for the younger and ambitious
German tenant laws
Redbirdfan (Diary) Wednesday, May 5th at 11:35AM EST (link)I’m a landlord here now, but I used to be a tenant in Partenkirchen for several years. I had a great landlady, but she talked about all the issues regarding tenant laws. Also, I have an acquaintance who emigrated from Germany some time ago. He is a landlord here in CA, where there are strong pro-tentant laws, but he says they are nothing as bad (for the landlord) as they are in Germany.
I’m curious as to your dealings with tenant laws there.
You gotta be vigilant
jackhammer Wednesday, May 5th at 11:54AM EST (link)The laws are very one sided….you can’t kick anyone out if they show a willingness to pay, which means paying once every 3 months pretty much…and there are tails of people abusing the system and being tenant nomads, who occupy, destroy, and demand money ot move out.
Check your references, and settle for less rent with people who check out well, and you do fine. i actually have a friend who bought an appartment building tailored to people on welfare…whcih measn the rent rates come in at the highest rates that welfare pays for the destitute….he swears by it, because he gets his checks straight form the government, so at least the checks come…
I have 8 tenants, and have only ever had 2 months missed in 3 years. but I rent out at about 10% under market value, have ZERO vacancy, and have 3 months deposit on hand..I had bigger problems with renters in the states…the lawyers are more expensive.
And when all else fails I have some serbo croatian friends who kindly ask people to seek another place to live for about 1000€
Jackhammer
DefendUSA (Diary) Wednesday, May 5th at 12:25PM EST (link)What area of Germany are you in? Is it expensive to invest in property there?
*starred thought*
To be a leader is to do the uncomfortable thing. Man up, Mr. President.
North Rhine Westfalia
jackhammer Thursday, May 6th at 5:14AM EST (link)Düsseldorf to be mroe specific.
Investing in property in germany is no problem, I am a US citizen, and am allowed to own as much property as I want. They have no yearly property tax here, so holdign real estate isn’t overly burdensome. You pay all your property tax up front with the registration of property…which is about 3% of the value.
Not sure where you would get a mortgage for real estate abroad….I would also advise against turning $ into € now….but when it would got to parity it would be a good idea…
I prefer property to gold….that is my safe haven….and debt is my hedge against inflation…
The Elliott Wave guys agree with you
streetwise (Diary) Wednesday, May 5th at 12:03PM EST (link)I agree, they should bring back the mark
Doc Holliday (Diary) Wednesday, May 5th at 6:12PM EST (link)and the independent bundesbank. The eurozone was started by Americans to stop all the fighting over there, but it turned into a statist desire to take on the Americans on a level playing field. People said from day one it made no sense to link risky emerging markets like Spain and Italy (greece is just a basket case) with Germany. As you know, these countries will rarely need the same monetary policy. The Brits were so right to stay out.
Molon Labe!
It's like health care deform
Common_Cents (Diary) Wednesday, May 5th at 7:01PM EST (link)Socialize the unchecked costs where nobody is really responsible by spreading it out over a bigger group. The problem is always accountability. Nobody is until they are. It encourages “get me mine” syndrome and overwhelms the system.
Another analogy is not cutting off the cancerous appendage and the cancer invades and robs the entire body.
Obama=Golfer in Chief, Leading from,
behind, the Back Nine.Leaders don’t create movements. Movements create leaders. Get involved. Your future depends on it.
Govt “invests” YOUR tax money for POLITICAL return rather than economic return.
yep, good analogies -nt
Doc Holliday (Diary) Wednesday, May 5th at 8:33PM EST (link)Molon Labe!
Markets climb
texasgalt (Diary) Wednesday, May 5th at 11:48AM EST (link)a wall of worry. Yes and it has already been a steep climb.
Zero interest rates are not sustainable. . . in a free society.
I think 18% government notes are about the funniest thing I have ever seen -nt
Alberta (Diary) Wednesday, May 5th at 12:58PM EST (link)Sir, my concern is not whether God is on our side; my greatest concern is to be on God’s side, for God is always right.
Abraham Lincoln
The US stock market
actuarius (Diary) Wednesday, May 5th at 1:04PM EST (link)is overvalued, overbought, and over-bullish. The market has shown a willingness to over-look these conditions while continuing to bid up the price of stocks (see 2000 and 2007). It has been uncomfortable recently for those unwilling to risk being long, but history is replete with sudden precipitous drops after such overvaluation (1929, 1973, 1987, 2000, 2007).
As measured by price to normalized earnings, the S&P currently is higher than at any time but 1929, 2000, and 2007.
I hope your 5% estimate is accurate (we’re already through more than 2% of that), but I’m hedged just in case.
De-fund, repeal, and replace the abomination that is ObamaCare.
3 bank workers dead in Athens
texasgalt (Diary) Wednesday, May 5th at 3:14PM EST (link)Three bank workers perish in fire as riots erupt again over austerity measures. Protestors blocked emergency responders from rescue.
http://news.yahoo.com/s/ap/20100505/ap_on_bi_ge/eu_greece_financial_crisis
This could happen here
Hugh (Diary) Wednesday, May 5th at 3:36PM EST (link)when we are forced to close the candy store. My grandfather once told me that when there are more people riding in the wagon than there are pulling there will be a problem. The riders will become angry with the pullers when they stop pulling. I predict that we will have much pain when we decide that the riders can’t ride any longer.
Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it.
Thomas Sowell
Too bad for the riders
Raven (Diary) Wednesday, May 5th at 5:10PM EST (link)The pullers have all the guns here.
“If you do not have a sword, sell your cloak and buy one.”
Luke 22:36
Raven, is it loaded? Markets in violent upheaval, Euro Contagion
texasgalt (Diary) Thursday, May 6th at 3:15PM EST (link)The Dow plunged Thursday amid buzz in the market that European banks have halted lending.
One trader, on the condition of anonymity, said he heard fixed income desks in Europe shut down early because there was no liquidity — basically European banks are halting lending right now.
“This is similar to what took place pre-Lehman Brothers,” the trader said. –CNBC
So much for climbing that wall of worry. The Dow has been off as much -800. Appears to be trying to rally near the close.
It's our work or their guns
texasgalt (Diary) Wednesday, May 5th at 5:24PM EST (link)They can’t have both. They’ve chosen “guns” already in Greece.
Be ready. The looters are restless.
_____________
The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. —Ayn Rand
AP bulletin out on deaths in Greece due to riots
lineholder (Diary) Wednesday, May 5th at 3:24PM EST (link)Sorry, but I couldn’t get the link to copy. Three deaths in fire, protesters blocked fire personnel from entering building for rescue effort
Call me a contrarian
Marcus_Traianus (Diary) Wednesday, May 5th at 3:29PM EST (link)The costs of Greece will probably come in North of $110 billion and vis a vis the IMF we will indirectly own a piece (albeit small) of this nonsense. Spain is at 20% unemployment and their real-estate market is a disaster. There are a few other Euro economies that are also causing some concern. Good signs? Very few.
Europe’s anemic growth and high debt levels were said to be a byproduct of their “social conscience”. They flogged the US for years as unconscionable, since we did not adhere to their socialist philosophy. Unfortunately, they still do not see the unsustainable position Europe is in and view this problem as an “market event”, not a signal for an economic paradigm change to ensure long-term survivability. I lived in Europe for years and therefore am not stunned at my friends continued state of denial.
Frankly, I don’t see many positives in the greater Euro markets and openly wonder who else has been lying to the ECB about debt levels. I will also go out on a limb and say parity, or close to parity, (EU vs. USD) is a potential outcome.
That picture does not even include Asia with their (IMO) fully priced markets, falling property values and other related problems on the horizon.
That doesn’t even include our economy. Don’t even talk about our stability until we get unemployment claim numbers consistently somewhere below 400k and there is serious talk about reducing long-term debt.
Sorry. Call me Eeyore.
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
Red tape in starting businesses an issue in Greece
lineholder (Diary) Wednesday, May 5th at 3:41PM EST (link)I like snooping around on international newspapers and came across an account of a business person who had to wait ten years to open a hotel. The writer stated that this particular businessman was lucky because it would have taken twenty years if the business person hadn’t had an inside track with a few politicians. There is red tape on top of red tape. That’s how they support their economy for the most part.
Indeed
aesthete (Diary) Wednesday, May 5th at 3:45PM EST (link)It would appear that the perennial sick man of Europe only manifests symptoms in cases of extreme market manipulation on the part of the government.
The act of defending any of the cardinal virtues has today all the exhilaration of a vice – G.K. Chesterton
Symptoms of psychosis, maybe
lineholder (Diary) Wednesday, May 5th at 3:48PM EST (link)Irrational behavior beyond what I’ve ever come into contact with. I really hope the people of our country have the common sense to realize the hole we will be digging ourselves into if we follow this kind of lead.
They are using remedies in place of cures
Marcus_Traianus (Diary) Wednesday, May 5th at 4:25PM EST (link)There is a consistent unwillingness of EU countries to admit their model is a failure and debt levels attributed to social programs are unsustainable. That begets, cheating, lying propagandizing and obfuscation of facts. The “sick man” could be dead and they would prop him up in a chair and declare him king for life.
Many of these countries are hoping they will somehow remedy things for a short time and then revenue streams will return. They are trying to let this crisis play out long enough for favorable spreads to come back. However, what they don’t realize is that egregious taxes do not promote growth, ensure revenue streams or offset careless spending caused by outrageous and irresponsible public sector economic policies. The affect will be either economically disastrous or a drag on EU productivity for years to come.
We should pay attention. Closely.
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
As we witness this car wreck of the EU I hope we learn a lesson
Common_Cents (Diary) Wednesday, May 5th at 7:07PM EST (link)in reducing entitlements, pursuing decentralization and restoring power back to the states as 50 experiments in competition. But I don’t have much hope in that most people have to experience the fall themselves and reinvent the wheel . Denial of something similar happening here is big.
Obama=Golfer in Chief, Leading from,
behind, the Back Nine.Leaders don’t create movements. Movements create leaders. Get involved. Your future depends on it.
Govt “invests” YOUR tax money for POLITICAL return rather than economic return.
IMF to the rescue?
toadold Wednesday, May 5th at 7:02PM EST (link)Well Greece is in trouble because the government spent to much and the tax rates are too high and complex and thus drag business development and also lead to tax evasion on the large scale.
So the IMF will lend them money according to the standard IMF requirement formula, decrease spending and increase taxes. …………
Right, that increase in taxation will really help get things turned around. It has worked so well in the past….NOT!
Sometimes I have to wonder...
kowalski (Diary) Wednesday, May 5th at 9:09PM EST (link)Sometimes I have to wonder if this is all really the long-delayed payback for Onassis/Kennedy.
Defend Liberty — Join the NRA | Live in Massachusetts? Join GOAL.
Heh, that's funny.
Francis Cianfrocca (Diary) Wednesday, May 5th at 9:28PM EST (link)Hope you’re doing well these days, Kowalski.
I'm trying (in a good way)
kowalski (Diary) Wednesday, May 5th at 9:42PM EST (link)And not so bad. Insightful analysis and a little disturbing as usual, on your part, but much better than a lot of the rest of the stuff I’ve read.
I have other comments on Greece’s fate but I fear they’re too personal to divulge. In the meantime, while all of this plays out, please keep analyzing and telling us what you think.
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