One German parliamentarian suggested that Greece-owned stock and even unpopulated islands might be transferred to Germany as part of a deal.  The very idea that Greek islands might be on the table, propelled Bild to uncontrollably quip, “We give you cash, you give us Corfu“.

Meanwhile, the so-called “austerity measures” soon to be implemented in Greece seem to be a hit with investors.  Although, in reality, the Greek government is simply raising taxes and cutting spending evenly to total debt reduction equal to 2% of GDP.  That cut in spending is reasonable, but the tax increase is much less useful.  It is highly doubtful at this juncture that a 1% tax increase will lead to a 1% revenue increase.  In fact, it’s probably more likely to lead to a revenue decrease at the rate Greece is going.

Already, tax dodging is very widespread, and the maximum revenue possible from the Greek system may have been reached.  Further tax increases attempting to fill budgetary deficits may find that they have just the reverse effect: as more citizens are disillusioned with the higher taxes they will find ways around paying them (legal or otherwise), and this will lead to continuously increasing tax rates and continuously falling tax revenue.

But if the new plan is a hit with investors, it has only made the Greeks themselves angrier.  Their somewhat newly elected politicians are socialists, elected precisely to not cut spending.  This has left the Greeks themselves feel very vulnerable to the international economic system and to blame other countries, bankers, and politicians as well.  And the Greeks are following their natural inclination of rioting and striking.

If the markets and investors are pacified for a while and the Greek government can continue to rack up debts and rollover its existing debts at serviceable rates, then more of the same is likely to follow.  At some point though, not only Greece but all of the Western governments will need to face the true reality of their deep indebtedness.  Iceland’s failures should have served to wake up bond investors, but the dominoes of bad debt lining up in the Eurozone should be sending off every alarm bell.

Any investors still chasing high yields should expect to get burned.

And if your prediction happens to come true anyway, Taleb will kindly point out how some predictions are going to be right once it a while – but don’t think that means you were right in your predicting.  About the only thing that Taleb feels comfortable predicting is that really big important things will happen that no one predicted.

But curious things do happen sometimes.  One of them seems to have happened earlier this month, when Taleb made a rather uncharacteristic statement.  He said it in such strong language that it’s difficult to dismiss. He said, in fact, that every single human should be betting against US treasuries.

Now, to be fair, he didn’t actually predict the future – but as you can see from this Bloomberg snippet, the uppity Taleb  wasn’t holding any punches either:

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.

Bloomberg

One wonders just how many connotations “without being more specific” carries here… but obviously Taleb is no fan of the “bailouts and stimulus” crowd.  Still, for Taleb to predict anything should be raising eyebrows across the economic world.

And yet, as far as predictions go – which is perhaps not very far – predicting rising long term rates certainly does seem like something that must happen.  In honor, then, of Nassim Nicholas Taleb’s seemingly obvious yet surprising prediction, I am now adding TBF to the “Long Term Recommendations” list.

This is the first change to the recommended listing since the beginning of the blog, and I look forward to reviewing the past performance of the recommendations.  In addition, TBF will well compliment the other recommendations.  If you haven’t yet heard of TBF, it is TBT’s younger and less leveraged cousin, and it’s a new vehicle through which investors can bet against the value of the debt of the United States.

In the great scheme of things, this doesn’t sound like much, but rate cycles are long term events and while we shouldn’t be quick to signal a change, this is perhaps a test case for many more potential rate hikes to come.

Meanwhile, the currency markets have had an unsettlingly volatile feel to them for months.  Tomorrow should throw a little bit more fuel onto the fire, as interpretations of the rate hike will likely be “dollar positive” – although it’s hard to defend that point of view logically.

But the truth is that this is likely more smoke and mirrors.  Sure, the market has made a dramatic recovery and at some point interest rates will be pulled uncontrollably higher – but Bernanke is no protector of the currency.  We have already witnessed extraordinary efforts to simulate lower and lower interest rates that sometimes seem to violate every free market principle all at once.

In any case, the Fed has its hands full from a monetary standpoint and will likely be unable to simultaneously handle the looming fiscal crisis (assuming they want to) as the federal government’s budget balloons out of control.  Raising interest rates will only, one imagines, act to sacrifice the stock market to the bond market for a short time.

And yet… it seems like no one at the Federal Reserve or the  administration has been doing anything but biding time for years.

We’ve often discussed the problems with the Euro, and the dichotimies to be found within it. For a while, it seemed as if the Euro-zone could only expand. Now, quite to the contrary, the ECB has been delving into just how a country might “leave” the monetary union. It isn’t hard to figure out which countries they are talking about.

An article by Ambrose Evans-Pritchard in the Telegraph reported this story last week, but the article no longer appears on the Telegraph’s website. A little investigative work yields a copy of the article here, and the dryly titled document (“Withdrawal and Expulsion from the EU and the EMU Some Reflections”) still exists as a PDF on the ECB’s website. Ambrose Evans-Pritchard savagely lays into the ECB’s musings:

The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a “new legal order” that transcends a “largely obsolete concept of sovereignty” and imposes a “permanent limitation” on the states’ rights.

Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text.

The Euro-drama is certainly worth watching. On the 13th of January the ECB held their interest rates flat despite palpable crises in several member countries. Let’s be clear, these are countries desperate for lower interest rates, and they won’t have this precisely because they yielded their monetary futures to the European collective.

Now, we know exactly how the very German ECB will respond. Rather than considering interest rate reductions, they are investigating the methods by which members of the Eurozone can leave. The ECB only made one false calculation: they assumed that if the less responsible countries of Europe signed agreements promising they would be fiscally responsible they actually would be.

The Germans run a tight ship – to their credit – and they have been excellent stewards of the Euro. The idea Spanish, Greeks, and Italians can whine enough and get them to weaken their currency to bailout a reckless Southern Europe, is proving laughable.

But there is no laughter in southern Europe. Only the unrelenting descent into chaos.

A little known secret is that if you build it, they don’t always come.  There are more than a few building complexes in the world that remain largely empty.  Not surprisingly, these projects tend to involve the helping hand of governments. Whether they are in North Korea or Detroit, empty office buildings stand around the world as a testament to our inability to predict the future.

When any individual’s wealth is on the line, while he is not necessarily cautious, he wants to make sure he’s doing something reasonable – if he doesn’t, he won’t stay wealthy very long. It’s always a little bit easier to spend money on something unreasonable if you’re spending someone else’s money.

If nothing else, the tower is certainly a display of architectural prowess. But there is no doubt that the city of Dubai and the United Arab Emirates as a whole hope to showcase to the world that there is no longer any doubt of their permanent place in the global stage.

Today, we found out that the tower has been renamed. No longer the mundane “Dubai Tower”, it is now the “Khalifa Tower”, paying well-deserved tribute to UAE president Sheikh Khalifa bin Zayed bin Sultan al-Nahyan who indirectly lent the Emirate $6 billion dollars to pay off its debts. That’s a little steep for a tower to be named after you, but I’m sure the Sheikh couldn’t help but smile today.

If that sounds a little bit out of your price range, don’t feel too badly: apartments are  said to be available for a little over $1000 per square foot.  While no one can yet be sure whether Khalifa Tower will be a colossal success or a colossal failure, it sure seems to be on the path to becoming one or the other. With the centers of power incessantly gravitating away from the grip of Western Civilization, there’s no especially good reason other than schadenfreude to bet on failure.

There are, of course, a few problems with this simplistic view of the banking system, as recent depositors in Iceland’s Kaupthing discovered. While some depositors quickly received their money from insurers, others weren’t quite as well insured, having deposited money in different jurisdictions, while other investors were technically bondholders and not depositors.

It will be 2017 by the time these depositors receive 80% of their money back – and they won’t be getting the remaining 20%… ever. Of course, the usual suspects are calling for a “bailout” of these depositors.

There are several issues that separate us from George Baily’s savings-and-loan conception of how banks should work. The insurance company scheme sounds like a great idea on paper. And, in truth, it has worked pretty well since its implementation. The problem, however, is that it really only protects against depositor losses during normal times.

For example, a fire insurance company looks up statistics on house fires in an area, and sets its premiums accordingly. The insurance company makes money, and homeowners feel safe that even if their house burns to the ground, they will be able to rebuild with the insurance payout. However, their feeling of safety should be mitigated by the realization that the insurance company itself could go bankrupt.

This is the case more often than we realize. When we buy fire insurance, we are adequately protecting ourselves from the chance that our house will burn down. We are not, however, protecting ourselves from the chance that our neighborhood will burn down – because of the high probability that the fire insurance company will owe too much money to too many people. Both we, and the fire insurance company underestimated the true risk.

The first sober realization we must make, is that we are currently facing a systemic threat to the banking system. In short, the whole neighborhood might go up in flames. If there were any doubt of this, we can simply look at how much money the FDIC has left to repay depositors. The answer is that they have none. To solve this, they are requiring banks to prepay their insurance premiums three years in advance – something not all of them will be able to do.

And yet, even this point of view  is both simplistic and optimistic. It’s not just that, as George Bailey said, the banks don’t have your money. In reality, they aren’t restricted to loaning out the money they take in deposits. They loan out many times the amount of deposits, and actually hold the deposits in reserve as “insurance” against the loans they make.

Worse still, the FDIC made a mistake early on, when they tried to stem the panic by repaying more than was insured to depositors. And worst of all, in case you forgot, banks weren’t merely loaning out money, but they were speculating wildly in derivatives that they still don’t understand, and still value at extraordinary optimistic levels.

Let’s put it this way, if your fire insurance company asked all of their customers for three years of premiums up front, how safe would you feel in their ability to repay you if your house burned down?

Sometimes our modern age can feel so anchorless  that we long for something real to rid ourselves of the detached feeling. Often, the more our jobs deal with the abstract, the more we crave the concrete in our private lives. Neel Kashkari ran the infamous TARP program in Washington, DC. He didn’t ask for the job, and no one had ever had a job like it before.  And he worked in a very detached and thoroughly abstract world.

For a few brief months, Kashkari had more influence over the American economy than any individual had ever dreamed of having. He could save companies or let them lie in ruins. He was Bailout-in-chief and the Tarpmaster. On his shoulders were heaped the combined desires of Congress, two Presidents, and at the time, seemingly the fate of the United States itself.

The American taxpayers might cringe if they knew the truth. The $700,000,000,000 spent on the Troubled Asset Relief Program was really just a crapshoot at trying to save the financial system from melting down. The number itself, Kashkari recounts, was arbitrary:

“Seven hundred billion was a number out of the air,” Kashkari recalls [...] “It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’

Washington Post (emphasis added)

You might think that bureaucratic appointees are just pencil-pushing robots, but not Kashkari. He made some of the most important decisions in the financial crisis, day after day, with no appreciable sleep. He gave everything he had to give to his country all at once, and then burned out completely.

He resigned after 7 months in office. Everyone in Washington now seemed to hate him. Congress hounded him and blasted him in congressional hearings. He was the face of TARP, an extremely unpopular (and misguided) effort. He was a wreck. His marriage was strained, he was now overweight, it was assumed that he skimmed a little bit of the $700 billion somehow, and he now hated DC more than it hated him.

So he moved to a remote location in the mountains of California with his wife, and decided to build a shed:

“I had to do something with my hands. It’s a big amorphous unknown — what’s going to happen to our economy. And the shed is solid, measurable. I can see it, I can touch it. It’s going to be around for the next 30 years. It’s the opposite of amorphous.”

Here, Kashkari has given us the truth. Those of us who live lives that are abstract, digital, intangible and “amorphous” can easily grow tired of the supposed sophistication that comes along with this life. Indeed, in many cases it seems as if there is something very unreal lurking within the modern structures we create for ourselves.

While some analyses may seem jarringly pretentious and feigned, the solution to modern man’s amorphism is easy. If you burn out on life, restart with what you know is real (physical objects and your family). Don’t try to do more than you can handle. Start simple. Appreciate what you have. Reorient your relationship to the world around you.

And most importantly of all, don’t delude yourself into thinking that you can predict the future.

Both trends continued today, as Fitch downgraded Greece’s debt rating to BBB+. The Hellenic Republic now has the distinction of being less credit worthy than Malaysia, and has the same rating from Fitch that Libya has. Libya, at least, is on a “stable” outlook, while Greece is still “negative”.

However, the most important factor is that Greece’s debt is Euro-denominated, and that it has issued debt in a currency that it cannot control. Unlike the United States, which has trillions of dollars of debt but can more or less print up dollars to repay debts, Greece will simply be depending on the goodwill of a Germany-controlled Central Bank to ease its debt burden.

ECB President Jean-Claude Trichet on Monday said Greece’s debt situation calls for “very courageous measures” but said he was confident the recently-elected Socialist government would take appropriate measures.

MarketWatch (emphasis added)

I suspect Trichet is more hopeful than confident. Still, a quick look at a blog post here from 11 months ago shows that Greek bonds have been worse off in relation to Germany’s now “benchmark” bond – a dangerous development in itself. The same MarketWatch article contains the phrase “core euro-zone countries” to distinguish the “respectable” (Germany, France, Austria…) Euro countries from their “riskier” counterparts (Italy, Greece, Portugal, and Ireland).

We can only marvel at the events surrounding the Euro. Since 1999, the Euro has been supplanting nearly all European currencies, and yet, it’s inherent weakness is its success. It has been so successful that a fault line has developed that threatens the entire Euro experiment, as it enveloped countries with habits for running up huge deficits, and letting inflation erode them – a mentality altogether un-German.

(Euro Stress sidebar updated with a 221 basis spread)

The Swiss people have passed a ban on all minaret (a Moslem tower from which prayers are sung) construction within the country – despite the Swiss government’s active campaign against the ban. Unsurprisingly, worldwide criticism quickly flooded European media outlets. Presumably, tolerance should be extended to everyone – except to those deemed intolerant, who should be savagely attacked.

All coverage has focused on covering the outrage of those prone to being outraged, rather than covering the event. Words like “extremism” and even “Islamophobia” are being thrown at the Swiss electorate, while precious little commentary is given to the fact that Switzerland is in many ways the only country in Europe to maintain a truly representative democracy.

Dubai World Teeters, No One Totters

Those waiting for the end of the market rally thought they had found it over the weekend. It seemed like we might get a return of the long-weekend-market-collapse syndrome of 2008. Everything was in place, as the emirate’s “investment company” Dubai World seemed to be dragging the international markets down in a chaotic rumor mill fashion.

But it wasn’t to be. Markets stabilized today, and investors seemed pacified by mediocre promises of the UAE’s federal government. So far, the market has treated the news as a bump in the road rather than a rally killer.

Russian Federal Reserve Chief Killed

In what the Russian government called an act of terrorism, a train carrying more than 120 passengers was bombed leaving more than two dozen dead. Tragically, or fascinatingly for the conspiracy-minded, Russia’s federal reserve chief Boris Yevstratikov was found among the dead.

We will repeat that which should be obvious, in case you have doubts about where this writer stands: Gold is NOT in a bull market. The dollar is in a bear market.

Kitco

No word on why he thinks the two are mutually exclusive in this case. Let’s turn to a gold price chart I found at Kitco’s own website (his employer) to make sure that we are looking at the same information that Mr. Nadler has: The above chart is a fact, and it is also the chart of something in a bull market. One of the biggest problems with modern journalism has been that we keep having events interpreted to us instead of simply being told the facts. Despite what we may want to believe, historical data represent facts – not opinions.

To believe that the above chart does not show gold in a bull market, we must try to redefine what a bull market means. Nadler contends that the price history of gold is simply a dollar in a bear market and he tacks on several requirements for a bull market that he insists should be met for a bull market in gold regardless of what has actually happened to its price:

• Demand should outstrip supply
• The stock market must be falling
• High inflation numbers
• Gold increasing in all currencies

This is essentially, not merely an arrogant position, but an insane one. It isn’t our place to construct arbitrary preconditions on assets and tell them when they should increase in price – at best we can try to reflect accurately upon what has happened. Even so, his fourth condition has been satisfied, and gold is now busting records in various currencies.

His belief that demand is not outstripping supply is also flawed. Price is determined by supply and demand. If the price is rising, it is insane to say that supply exceeds demand. If that were so, the supply of gold available at lower prices would have contained gold’s rise. Nadler’s mistake is assuming that gold is a commodity and not a currency. Since gold isn’t used up like oil or steel, examining it as if it is a commodity necessarily leads to false conclusions about supply and demand.

Whether we have high consumer price inflation now is irrelevant to whether the market believes we will have high inflation in the future. All signs are flashing a giant neon YES for the moment, and until that changes, the markets will price various assets accordingly, regardless of what the official government statistics project or report.

The very idea that gold can’t be in a bull market because the stock market is going up betrays so much ignorance that it is nearly unfathomable. For one, when measured in a collapsing currency, stocks and gold always move up together. For another, the stock market itself is far below it’s recent highs. At this point, one begins to wonder why a stock market that has stagnated for 10 long years while the dollar depreciated means that gold can’t be in a bull market because the stock market isn’t falling. Hmm.

Today’s article from Nadler compares people buying gold to people buying stocks in 2007, and he derides the talk radio listening public for being gullible enough to fall to radio advertisements pushing the yellow metal.

It’s very true that gold may move up and down in price, but as long as we are talking about price in federal reserve notes, transferring wealth to tangible assets will remain the only sane move available to most investors. Quite simply, all assets appear cheap when the alternative is holding pieces of paper with numbers printed on them.