"HAVING GERMANY BY THE SHORT HAIRS"

KYLE BASS ADDS HUMOR WHERE THERE IS NONE
As I was postulating that Euro leaders saw no other way out of their debt problem than to speed up the fiscal reorganization and consolidation of power at a supra-national level, Kyle Bass was giving another wonderful interview with the BBC.  Since Kyle works in Dallas, he absolutely uses Texan slang and references even in the most stoic and formal settings.  In the interview he breaks down the challenges that the Eurozone faces and outlines a result that is 100% the opposite of what I described would happen.  He also logically lays out an argument as to why Germany would be stupid to continue bailing out the other Eurozone "partners".

While Kyle Bass is absolutely correct, I think he gives the leadership in Europe too much credit and assumes that they will be able to realize that they are throwing good money after bad and that it is just better to stop.  Funny, the Euro political class hasn't realized this yet and according to my post earlier today and the article by Clive Cook, they rationally won't either.

LOGICAL LEADERS NEED NOT APPLY
Please check out the EURO NATION which highlights just how disfunctional the thinking is at the ECB level and just why Kyle's logical conclusions may be totally wrong.  I think this is why it is so difficult to judge the outcomes of this situation, because these leaders are not managing the situation as a business owner would, they are driven by ideological motives that they feel are much greater than mere financial concerns.

The interview with Kyle is only a couple of minutes long and I highly recommend it. (Click the caption below the screenshot).

KYLE BASS INTERVIEW ON BBC

And just as I was publishing this, I noted this Tweet from none other than the Fed's mouthpiece Steve Liesman from CNBC.  This message contained within 140 characters summarizes everything wrong with central bankers, Euroleaders, and fiscal union supporters.

Steve basically says, "PRINT, PRINT, PRINT, cause if you don't the Eurozone is going to blow up, so might as well try to print anyway."  Thus, in a simple statement we see why Kyle Bass is so right, but will be wrong in predicting how Euro leaders will react to the situation.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

FAMOUS FOR DOING NOTHING

In the last week or so I've had to continue rereading my own posts to ensure that I am clear as to where I think we are heading.  As I stated last week this whole debt ceiling is an odd affair that is more like theater rather than an exercise in leadership, although this is exactly the kind of result I was looking for, going through it is frustrating.  As readers know I suggested that the drama would unfold and the participants would use the tension to drive markets lower and add to the urgency to get "any" deal done. 

Unfortunately we received the exact prescription I ordered.  The market for its part has handled the mess pretty well as it has been conditioned to believe that any close call will be met with the not-so invisible hand of the Fed, Treasury, or President Teleprompter each time.  I hate to admit it, but the President and the Democrats have this game of politics quite in hand and they have managed to make the Republicans negotiate against themselves and the RINOS have looked fragmented, unpolished, and inept.  While I don't believe the US should default and feel like a deal could have been cobbled together in a better manner, the Republicans have simply looked like amateurs.  Reading this you may feel like I'm bashing the "Tea Party Faction" of Congress, but you'd be wrong.  These are the only folks that have stood for a reasonable approach through this entire mess.  They have clearly laid out their expectations and have continually restated their demands.  As usual the press and everyone else has blasted them as unreasonable and part of a fringe, however they are the folks that have been on the leading edge emphasizing their position from the beginning.  I think Boehner and the President and the Democrats simply assumed that they would come in line just like all politicians do.  I think what all of the power players are finding is that the rookies are actually principled and mean what they say.

Remember, the Republicans got burned during the last set of negotiations, so it isn't so weird to think that they remember passing a bill with the expectations that billions were to be saved only to find out that nothing was actually cut.  If I was embarrassed like that, I would be demanding a pound of flesh this time.  My point in describing this issue is that I think it is the miscalculation by the Republican leadership, Democrats, and the President that has gotten us to the brink of a "default".  They expected a different outcome and therefore played their hand.  Now I will praise Boehner in all of this because he is a classic politician and he is weaker than previous Speakers because he promised that the Republicans would not add any earmarks to bills, in other words he'd stop the process of bribery that we've seen all too often.  (Remember Obama and his promises to the Nebraska leadership on healthcare?).  Because he isn't using this tool, he doesn't have the carrot to get our dirty little congressmen to come along with his crummy deal. 

As a final update on this, it looks like Boehner and Cantor have added the tea-party requirement that there must be a balanced budget, and it appears like this will pass the house.  It is absolutely necessary to send this over to the Senate because this puts Senator Reid and the President back on the hot seat.  They have talked about not passing this bill, but will they actually kill the bill knowing that THEY caused the default?  Who knows, but it will be interesting and it puts pressure on them.  At this point Boehner and Obama are famous for doing nothing on this issue.  Essentially they are non-leaders and that is clearly my feeling about the President.  While he likes to talk a lot on TV and use that teleprompter, he has little substance.  He postures and relates how things should be done, but never follows through.  Where is the President's plan to cut spending?  He has none.  If he doesn't get his way he vocalizes how its not fair.  At this point the President, Reid, Pelosi, and Boehner remind me of the world's most famous tennis player, who by the way never did anything.  She wasn't any good, never won a tournament, and never competed strongly at the highest levels, but she clearly was the most famous tennis player for years.

 Photo by www.eltiempo.com -

These times demand that our leadership reign in spending and come up with real solutions that are lasting.  Cutting $100 Billion each year for 10 years is a complete waste of time.  S&P told us we needed to cut $4 Trillion in spending, where is the disconnect between this dire circumstance and what these hacks are producing?  The Keynesian experiment where we blow out all budgets to stimulate the economy with massive government spending has failed, today's GDP revision has proved that.  If deficit spending failed there is only one solution left, to cut spending.  Our leaders need to get to work on their craft and stop working on being "famous".

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

WELCOME TO THE THEATHER - 1984 STYLE

WORLD MARKETS ARE THE FOCUS
I heard today that the President and CONgress were rushing to try to get some type of debt ceiling done (temporary or not) before Asian stock markets opened for the week (Sunday evening in USA time).  I'm struck by this because I'm simply floored by the fact that these politicians are spending any time focused on what equity markets are doing rather than focusing on the task at hand.  What I'm getting at is the notion that they are scurrying around to avoid a fall in markets shows me that this is all just a big show for the markets! 

Yes, this isn't some new revelation since the timing for all major announcements seem oddly planned EVERY single time to coincide with a Sunday night bombshell or options expiration Friday.  As I've noticed these events I've pinched myself saying, "no, it's just a coincidence".  However, after having an entire arm covered with red whelps, I am finally of the mindset that a game is being played to juice markets and keep them elevated. 

The story here - http://www.foxnews.com/politics/2011/07/24/leaders-seek-debt-deal-before-asian-markets-open/

"White House Chief of Staff Bill Daley warned Sunday that the financial markets are starting to have doubts about the ability of Washington to strike a debt deal, as lawmakers scramble to come up with a plan before Asian stock markets open.



The Asian markets will start to open Sunday evening Washington time, ahead of the Dow opening in the U.S. Monday morning. U.S. officials are cognizant of the possibility that a failure to outline a path forward by then on how to raise the debt ceiling could roil the markets."

Now give me a break!  We have several days until this deal needs to be done, and rest assured that our friend Ben Bernanke is quite willing to buy up all the debt in the world to keep us from having an interest rate problem.  I saw Tim Geithner on tv telling us how irresponsible those Republican politicians are being and how the apocalypse will be unleashed if something isn't agreed to immediately.  While the warnings are grave we can retain a sense of confidence in our financial overlords as every other problem we've faced in the last two years has been met with a change of the rules, a bending of all reality, twisting of economic paradigms, and a moratorium on basic math.  Forgive my tongue and cheek approach to the drama, but I personally don't think there is any chance of a deal not getting done, and with hours to spare they'll unveil another monstrosity that will solve nothing and only ensure that Amerika's future is just a bit dimmer. 

WASHINGTON GENERALS WOULD MAKE GREAT REPRESENTATIVES
Have you been to a Harlem Globetrotters game?  I love them and go every time I have a chance.  Those guys are funny and entertaining and the kids think they are a blast.  My kids haven't figured out that the Washington Generals (the perennial opponent of the Globetrotters) are laying down so the Globetrotters can win.  My kids don't realize that the entire game is a show and there is no competition going on down on the field of play.  Likewise, I think the entire drama unfolding in CONgress is simply a ruse where each side of the isle is attempting to make the most out of the situation.  They are all on the same team, they are just wearing different jerseys to keep up the facade that a competitive game is under way.

So, with that realization, I want to give you the opportunity to watch a movie you may have seen a long time ago.  You may have read it in high school back when they actually tried to teach you important ideas and challenge you to think.  The entire theater that is Washington relies on all of us buying into the divisions of a two party system where one can be good or one can be bad based on our frame of reference.  Let's face it, we all like to be on a team!  The problem sets in when you discern that neither one of these teams is good. 



I will leave you with these thoughts and questions from the movie.

Ignorance is strength!

The party gives them exactly what they want.

How do you know what exists?

I encourage you to watch it.  How Orwell would have ever imagined the things he did when writing it is amazing.  I am awed by the idea of the screen in every home and building monitoring every action.  It is very much like today.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

MR. ROBINSON MOVES TO A NEW NEIGHBORHOOD

Remember Mr. Robinson?  This brings back childhood memories doesn't it?




While it is fun to go back and watch those SNL episodes a real life Mr. Robinson is taking advantage of the real estate crisis in Flower Mound, Tx.  It seems like his neighbors aren't too happy, but I applaud his ability to do great research and use the system to his advantage.  I'm not really sure why his neighbors don't support his action other than the fact that it seems as though he may have the ability to get a better deal than they did.  Ultimately this could be a win-win for them and him.  I normally wouldn't play the race card, but it does seem as though that may be a factor as well.



Personally I'd rather see people take advantage of a bad situation versus have the asset waste away.  Think about how our government went out handing out the "bail outs" to our banks and industries.  What if they would have simply paid a check to each family for $100,000 or $200,000 but made the requirement that each person had to pay off outstanding debts with that newly printed money.  Essentially this is what happened, but the money skipped you and me and went to banks while they were able to keep your obligation as a liability on the books.  Isn't that simply a travesty? 

No, I'm no communist or socialist, but think about it.  Your government printed and borrowed money through huge deficit spending to "create" jobs that were green jobs or were going to be stimulative.  We've learned that the creation of those jobs cost more than $200,000 each and those jobs did  not last.  Have you forgotten all of the programs that have failed?  TARP, Cash for Clunkers, homebuyer tax credits, and Shovel Ready Jobs were just a few.  While the government was spewing money to huge multi-national firms that pay little or no taxes (GE) folks like the original owner of the house in Flower Mound were laid off and lost their homes to foreclosure.  In this case the mortgage company that actually wrote the loan (and kept it) also blew up.  Where were their bailouts?

Good for this guy, I hope he gets the property and I hope that he maintains the home and I hope the neighbors grow up.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

DISTURBING CONVERSATIONS ABOUT REAL ESTATE

I had an interesting conversation with an old acquaintance the other day and it reminded me that people make money related decisions without examining costs and benefits and they never look out farther than a few months.  In addition, I heard a radio program today that reinforced my view of the NAR folks (and their local associates) and realtors in general.  The conversation and the radio program have a lot in common so bear with me. 

While I'm sure writing this post will be therapeutic for me, my hope is that readers will lock in on the absolute concern I have for this economy and the need for us to make meaningful, thoughtful, and hard financial decisions quickly, and now before our options and our cash stores have been wasted.  Before we get too detailed, let's have a little background discussion first.

In the area of the country I live we have been blessed economically.  Despite the US recession, our region suffered very mildly, and now have largely come back to the same employment or even grown since the last set of highs in 2007 and early 2008.  Because this area is in the energy corridor we've have been insulated.  Having said that, the suburban areas in our city did not enjoy such luck.  Lower income areas surrounding the city did get hurt and home values fell some 10% to 20%.  Still, compared to areas like Arizona, Nevada, and Michigan, this is great.  Specifically, the person I had coffee with lamented that their home value had fallen 5% below what they purchased the home for 10 years ago.  In this case, that paper loss is about $10,000 assuming all closing costs and a recent market valuation by a realtor.

As I chatted with my friend I asked a few more questions about their situation and found that the family is really struggling.  After all of their paychecks and bills each month they need about $2,000 additional cash to be able to meet their expenses.  Needless to say, I was shocked.  When I hear that kind of talk and I think of that kind of situation I feel like we should be in crisis or battle mode, not enjoying a coffee at a Starbucks!  It seems that the major issue creating a hole in their finances is their home.  Fortunately for them they had about $70,000 in emergency reserves to draw on to help cover this shortfall.  I was happy to hear that they met with several realtors and had received estimates of their home's value and the found that they would probably end up with a $10,000 loss due to falling home values in their area.

I asked when they were going to list the home for sale and I was met with silence.  It seems like it was a hassle to sell their home right now (during the summer busy season when there are a lot of buyers)  and they were planning on putting the house on the market next June.  I said, "WHAT?" and she mentioned that it was just too much trouble to try to get things ready all the time and next year would be better and they could de-clutter their home between now and then.  Additionally, by waiting another year, the home values would come back a bit. 

I could see how committed to this line of thinking she was so I didn't go much further.  I proposed a couple of scenarios for her about selling earlier and tried to highlight how her cash position might be different yet there was no movement.  This is when I realized that I was not there at the Starbucks as a male Mr. Fix-it goat, I was supposed to be playing the role of the sympathetic "listening only, no fixing" goat.  Like a Phil Jackson having a total Zen moment, this powerful realization hit me and I suddenly found peace.  There was not a chance this person was going to listen to the words she might hear, so I simply stopped, changed the subject, and finished my coffee.  I hugged my old friend goodbye and wished her family well, knowing that she was only deferring her trouble and hurting her family's longer term position.

In my youth I would have pulled out some paper and charted scenarios to try to show and convince my friend that a move now was needed, but I've aged and learned and know better.  So here's the frustration.  Assuming that these guys do put their home on the market next June and their $2000 a month shortfall remains they will be at least $24,000 poorer as their cash reserves will be liquidated. (12 months till listing).

In addition to that, they then must hope that the home actually sells and it is sold in a reasonable time of 90 day or so.  That is another $6,000!  We must also hope that their loss on their home is only $10,000.  As I mentioned in the July update, we are getting indications that banks are not beginning to release underwater inventory and breaking up the log jam of non-foreclosed properties.  In other words, these banks are increasing the flow of supply on the market and that may be bad for future sales prices.  No matter what, let's just assume that they sell the home for a loss next year of $5,000. 

Here's how it could work out;

SCENARIO 1
$5,000 loss on the property
$24,000 income drain for 12 months before listing
$6,000 income drain while waiting to sell the property.
In total, these guys suffered a $35,000 loss but a net cash loss of $30,000 by staying in this home!
They have $70,000 in cash reserves and would end up with $40,000 in remaining emergency funds.  If they were able to trade down to a home that needed only $1,000 additional income from their reserves, they could live a little over 3 years in this situation.

SCENARIO 2
On the flip side, they could list the home this month and face this situation.
$6,000 income drain while waiting to sell the property.
$10,000 loss on the home.
A total of $16,000 in losses but only a $6,000 cash loss. 
Let's assume they buy a home or rent and can drop the out of pocket needs to $1,000 a month to be very conservative. That results in a $9,000 cash drain.
At the beginning they had $70,000 but suffered a $6,000 cash drain and then a $9,000 drop due to still falling short of their expense needs.  Their total cash remaining would be $55,000.  While not optimal, they could still live in this situation for more than 4 years.

The family would probably be better off in the second scenario as well as many of their other expenses like air conditioning and heating would drop because they would be in a much smaller home. 

The point of this is simply that while it would be an inconvenience to move now, it is still going to be a hassle that must be endured.  Why not go through the pain now and come out the other side with a larger war chest for the future?  Why not cut your losses on the home instead of gambling that things work out for the best?  What if things actually get worse and the home value drops? 

KEY POINTS
CONSERVATIVE IS GOOD!
In this economic environment with all of the uncertainty isn't it best to attempt to have the smallest amount of debt and largest amount of savings to ensure that you can stay solvent as long as possible?  I love how this family had a pretty big store of savings, I hate how they plan to destroy their cash by taking too long to act on an important decision.

YOUR HOME IS SHELTER, NOT AN INVESTMENT
Have you noticed that the "Flip This House" and Carlton Sheets infomercials are no longer on TV?  This is happening because people are still getting killed in real estate.  As home-buyers we need to get rid of the notion that we'll be able to sell our home in 3 year or 5 years for a mint, it just isn't going to happen again.  We need to buy affordable homes that provide for our needs.  We don't need a home or a mortgage that fits the description that my mortgage broker and realtor told me when buying our first residence.  They stated, "Buy a home that is big enough and costs as much as you can possibly get even though it is uncomfortable now, with raises you'll be able to grow into it ."  What happens if you lose your job or those bonuses and raises don't materialize?  What if the economy takes a nasty turn and we enter a double-dip?

RADIO, REALTORS, AND NAR ASSOCIATES ARE SALESMEN
When is the last time a realtor told you it was a horrible time to buy?  Exactly.  As I mentioned in the introduction, I heard a radio show here locally that interviewed the local version of the Chairman of NAR.  He explained that home values were increasing and that is might be a good time to get out there a buy a home.  The realtor that was interviewing him continued to hammer home the idea that investment rentals were such a good deal because rents were up and that first home buyers should get out there and buy.  While that all may be true we just don't know and these guys didn't reference once that values could easily go down.  I wonder what my friend's realtor told them 10 years ago?  Probably the same thing they are saying now and everyday..... Buy! Buy! Buy!.

Financial decisions can be tough and they can be scary.  We always need to seek wise counsel and also remember that many times doing nothing is a decision.  Inaction due to fear, uncertainty, or over-analysis can sometimes be very costly.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

INDEPENDENCE DAY - DECLARING FINANCIAL FREEDOM

I wanted to wish you a very happy Independence Day.  I pray that you have a very special time with family and friends and that you take time to reflect on the blessing that it is to live in America and to be an American. 

As many of you know I often lament about how being an American is changing and that we are losing the key traits that have made us a great nation.  Despite these fundamental losses we are still a wonderful nation comprised of amazing people.  We are still a nation that largely recognizes that Jesus is our sovereign king and we have a history that can only be explained by understanding that a supernatural being had a hand in making things work out "just right".  Without that direction, there is no way that the United States could have formed. 

Having recognized these things, I want to challenge you to make this year a year of freedom and independence.  Freedom and independence from what you may ask?  Plainly, we must declare freedom from financial bondage.  I don't write this as one that has claimed victory over these things although I do a solid job most of the time.  I challenge you to look at the compulsions that drive your purchases of many items and identify your real needs and the motivations behind the outlay of hard earned cash.

I live in an area of absolute affluence.  When I take my children to school, they are surrounded by homes that cost in excess of $1.5M per house.  My children play with kids that have parents that are CEOs and executives of large oil and technology companies.  In other words, my family lives in a fantasy land.  No matter who you are, when you live in this environment, it is difficult to have a realistic view of life and not have your point of view shifted to this alternate reality.  I admit although I love my home and believe it is perfect for my family, I often see these mansions and think, "we could live there, why don't we make it work".  Well, the reason we don't make it work is that in my state, property taxes for homes like this would be at least $30,000 a year!  That is a deal killer for me, but more importantly I need to examine the feelings and desires in me that make me contemplate such a drastic move given how wonderful my situation is currently.

Presently, we live in an incredibly small neighborhood where everyone knows each other.  We love all of our neighbors.  My kids have kids their age right behind our house and we have a connecting gate where they can play at any time.  We can easily pay all over our utilities, mortgage, and taxes with half a month's salary from my spouse.  Our home was completely renovated several years ago, so we have no maintenance issues.  In other words, we are really blessed.

So, we come back to questions about why we would even consider moving, and the answer is simply that we have been programmed to want more and believe we need more when all of our needs have been completely met.  The next step in this path of deception would be to believe that I deserve more and therefore should act to change my circumstances.  Unfortunately, if I followed this path to completion,  there would be terrible consequences including stress, resentment, and fear.  We would be signing up for debt bondage that could be terrible for our family.  It is so important to recognize the destruction this kind of move would make and quell these desires that might jeopardize my family's financial position and happiness.  In my opinion, we need to combat the noise of society and the internal justifications to make wise choices.

To wrap up, please think about the areas in your life where you make financial decisions that don't make sense and are based on thoughts that you deserve possessions and are really not necessary.  Think through experiences of regret and damaged relationships because you had to have a car or home and acted to meet those desires.  One of my favorite authors, Patrick Morely wrote, "We buy things we don't need with money we don't have to impress people we don't like".

Today on the 4th of July I declare independence from thoughts that I don't have enough and that I need something better or bigger to make me happy.  I declare that I will breakout of the thought process that says I deserve things and that once I have them they will somehow complete me.  I declare that I will use my excess resources to bless others and work to enlighten them about the trap of financial bondage so they too can experience freedom.

HAPPY 4TH OF JULY!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

AMERICANS TAKE NOTE - TOP 10 AUSTERITY MEASURES WE'LL FACE IN THE FUTURE

The Greek Parliament sold out its people once again today and there is one more vote that will come down tomorrow to determine the specific measures that will be employed to destroy the life style of Greeks and pillage their public coffers.  I've written a lot about the concept of these austerity measures, but let's review a list of these changes to see how it might impact the everyday lives of Greek citizens.  I've used this slide show from CNBC as a source -

TOP 10 AUSTERITY MEASURES IN GREEK BAILOUT PLAN
1)  Property taxes and their VAT (Value Added Tax) will increase.  Their current VAT is 19% on each item purchased, it will increase to 23%.

2)  Luxury items will be taxed more and profitable businesses will also receive an additional tax.

3)  Taxes on fuel, cigarettes, and alcohol will increase by 33%

4)  Civil servants and other government workers will take 15% pay cuts

5)  Defense spending will be cut by 200 million euros and more in following years

6)  Education cuts will force mergers and closings of almost 2000 schools.

7)  Social security programs will face significant cuts and the retirement age will be raised from 61 to age 65.

8)  Greek government businesses will be privatized.

9)  Government jobs will be terminated via attrition.  Only 1 job out of every 10 retiring positions will be filled.

10)  Health care spending will be cut by 310 million euros this year and more in subsequent years.

CUTS ARE GOOD RIGHT?
Well, yes and no. Financial management of programs and social services are necessary, and the Greeks obviously didn't do a good job over the last 30 years of maintaining any sense of responsibility. The issue here is that these measures will be debilitating AND they will not make any dent in the piles of debt that have been amassed. The Greeks are past cutting to be able to repay all of these obligations; the figures are just insurmountable.

Take a close look at these provisions and it is clear that any normal person is going to get crushed as a result. Perhaps you are employed by the government or employed by a firm that provides a service or product to government. If you do keep your job, you will obviously take a substantial pay cut. Next, your fuel costs are going to rise and your property taxes are also going to increase. You health care costs too will be noticeably higher, and everything you buy will cost 4% more due to the move up in the VAT.


EXODUS OF EARNERS AND SMART MONEY
Any able bodied person that has any financial means will obviously be incented to employ any tax avoidance scheme possible. I would assume that high income earners would attempt to move to another country or at least off-shore their earnings and assets to shield them from these provisions. Clearly these efforts will undermine the financial projections of GDP and Greece will miss revenue targets, only to repeat the crisis again and again.

Is there any doubt why people are rioting? Is there any doubt there is a disconnect between the people of Greece and their politicians? No one questions that the Greek citizens did have a part in getting into this mess. However, it is quite possible that corrupt Greek leaders were bribed into taking bad loans that were not in the interest of their people. These politicians used the proceeds to hire unions and fund projects that were a form of political payback rather than society-enhancing endeavors.

The move this morning does nothing but extend the process for Greeks to default on unpayable liabilities. Major life style changes and hardships will be endured by common folk while connected politicians and the wealthy remain relatively comfortable. For more information about this topic, please read - GREEKS NEED A HERO - IS THERE ONE? The posting includes the documentary "Debtocracy" which is a must watch.

USA TAKE NOTICE -
This is the future of the USA if we don't take measures to arrest our spending deficits and our out of control entitlement programs. We continue to look at Greece as some third world country that can't get its act together, but the reality is that the country is simply playing out our future today.

In the midst of seeing all of the results from catastrophic debt it is clear that the USA is rushing headlong into policies and promises that emulate the European model. Unfortunately it is obvious that we'll be implementing many of the same austerity measures to pay back our lenders too.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

WHEN SOFT PATCHES BECOME HARD LANDINGS - JUNE MACRO UPDATE

JUNE MACRO UPDATE -
I am back to publishing the macro update in one huge post again.  I found that trying to break it up might be good for web-traffic rankings, but doesn't do much for continuity and simply getting it done.  In fact, last month, I posted only half of the data.  To simplify life for readers and myself, I'll just post the whole enchilada here.  If there is too much, simply scan the pretty charts.  If you desire more detail or Goatmug's take on the data, simply read the fluff. 

RAILS - http://railfax.transmatch.com/

Rail traffic in the US continues to push higher in year-over-year comparisons.  We did see coal shipments under perform last year during this week.  So far year to date, only food tonnage is down from last year at this time.

TOTAL RAILS
We continue to see the improvement over last year's shipments, while the economy has encountered a "slow patch" it will be important to follow the trend to see if we see a further regression toward last year's totals.

CP - Regular readers know that I often examine individual rail company delivery statistics to try to catch an edge on short term trades, especially to identify outpeformers and poor performers.  Canadian Pacific continues to be a laggard that I'm watching.  It appears as though railfax had some data issues because we don't see the chart populated for the last several weeks, despite that, I don't see much change in the information from other sources.

UNP is barely exceeding last year's hauling numbers so I thought it would be one to put on our radar.  It is also notable that the only other rail that is showing negative y-o-y shipping totals is Ferromex which UNP owns a 26% stake in.  Don't pull the trigger on this one, just add it to your watch list as a potential short.

THE RECESSION INDICATORS - CRUSHED STONE AND CHEMICALS
Railfax continues to tinker with the information they provide and in fact are toying with the idea of limiting much of their data (boooo!).  In the last couple of years we saw shipping information on autos, scrap metal, and timber, but this month we are back to Crushed Stone and a new one, Chemicals.  Both of these metrics are good for gauging economic health.  Crushed stone is used in the commercial real estate areas and obviously chemicals are used in manufacturing, agricultural, and energy applications.  There is nothing shocking to report here.

MOODY'S/MIT TRANSACTION BASED INDEX - http://web.mit.edu/cre/research/credl/rca.html
If the Crushed Stone data didn't give us a tip off, the MIT Transaction Based Index sure will.  Once again the index is showing that real commercial real estate transactions are losing ground and seller's positions are weakening.  We note here that there was a 4.23% decline in March in the value of deals getting done.

MONSTER.COM EMPLOYMENT INDEX - http://about-monster.com/employment-index
It all can't be bad right?  Despite the poor jobs reports, Monster Worldwide is showing some pretty positive numbers in terms of the number of job listings on Monster.com.  May dipped a little, but clearly April and May indicated that job listings are a a higher point than they have been for almost two years.  I'm generally pretty skeptical and negative about this economy, but this is a good sign.

NAR - EXISTING HOME SALE PRICES - http://www.realtor.org/research/research/ehsdata
The average home price is finally moving up and we'll call this a trend.  Yes, of course in some parts of the nation things are nasty, but overall we are seeing a pick up in the average home price.  Pricing is still at levels that are equal to the "pits of hell" of late 2009, but at least we're heading higher.  The recent drop in the stock market and resulting bid for treasuries may actually be a boon for housing data as mortgages rates are falling.  Now, the only trick will be for those scrappy realtors to find quality buyers to scoop up all those deals!  (I've had two conversations this week already with home sellers and realtors that have lamented about the inability of folks to actually borrow).

ECRI - http://www.businesscycle.com/resources/
I've decided to put the ECRI data back into the monthly packet, but have avoided populating my own graphs.  I'll simply highlight their information here about the trends in home prices, and while real home prices continue to dip, leading indicators for home pricing seem to show that there is some rebound happening.  This is of course backed up by the NAR data, which makes me feel better about the NAR data, because we've already seen that NAR economists are essentially an arm of the realtor marketing alliance.  They would never, ever, ever, come out and say that it wasn't a good time to buy, would they?  The area I live in has been totally insulated from much of the drop, so I feel like I live in some alternate reality where everyone I meet can afford a home that costs $1 million and more importantly can afford the $3,000 a month in property taxes that comes along with that house payment.  In that price range, things have been fine in my town, but clearly other parts of the US have not been shielded by such fortune.



In addition, we find the ECRI Weekly Leading Index information showing a downturn for the fourth consecutive week. I think this is one data set that has the market spooked and this is really why I brought this back out.  The "rate of change" is indicating that the "green shoots" are turning yellow and are wilting. 

SCRAP METAL - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Good old Alan Greenspan used scrap metal as a bell weather for the economy's health, however perhaps we should say he used it for a measure of the health of a bubble.  If it's good enough for Uncle Al, it's good enough for the Goat!  Scrap prices hit the skids since peaking in February.  While the composite index has tried to build a base over the last two readings I am not sure that the downward trend has abated.  Frankly, base metal prices and all commodity prices have been under attack since Ben Bernanke's declaration that commodity price inflation is "transitory", so the correction is not surprising.  It is in the economy's best interest to see commodity input prices fall and relieve some of the stagflationary risks we are faced with presently.

UCLA / CERIDIAN FUEL INDEX - http://www.ceridianindex.com/
I find the Ceridian / UCLA Fuel Index study full of information, however I despise that it offers this data with a two month lag.  As I've often reminded visitors to the blog, this piece of data is great for confirming direction and slowdowns that have occurred in long term trends, we just have to deal with the dated data.  The PCI (fuel index) seems to have peaked in March and turned downward.  This study is so great because the PCI (fuel index) consists of real time (errr not so real time for us) data from commercial trucks.  Each time they fill up, they transmit the amount of fuel they consume.  This information gives us a powerful view into the real transportation activity and health in the nation's economy.

6 MONTH EURIBOR - http://www.homefinance.nl/english/international-interest-rates/euribor-rates-6-months.asp

Despite all of the tremors related to Greek insolvency and all of the undeniable issues with the PIIGS, we see that 6 month Euribor is just under 1.75%.  Remember the amazing days when interest rates had a 3% handle on them?  Rates have been climbing over the last couple of month and are up almost 65% since last September.

6 MONTH USD LIBOR - http://www.homefinance.nl/english/international-interest-rates/libor/usdollar/libor-rates-6-months-usd.asp

In contrast to those really expensive 1.75% Euribor rates, we see that the 6 Month USD Libor rate is  down to an eye-popping .40%.  Unlike our friends across the pond, our rates have about 15% since last September.  Obviously "one of these pledges is not like the other".  The divergence between the two sets of rates continues to illuminate how differently our central bankers have attacked these problems.  Their leadership has attempted some sort of fiscal control and monetary restraint in an effort to actually begin steps toward normalcy, our guys have thrown caution to the wind and jammed rates lower and lower and lower. 

US FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND#

I always find that Bloomberg's US Financial Conditions Index is one of my favorites.  Yes, it has it's flaws especially since it is driven by liquidity flows and stock market gyrations, but despite that, it seems to tell the truth quite often.  Over the last month, we've seen a total meltdown in the FinCon Index and it has steered itself toward a sub-zero reading.  Anything below zero is a recession, while numbers above also indicate that there is growth.  We are in that no-man's land area where we can't say one way or another where we'll end up, but if we are growing, it isn't overwhelming, that is for sure.

BALTIC DRY GOODS INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND#

In a valiant effort, the Baltic Dry Goods Index has battled through May to just under 1400 again, where it looks as though it may drop.

USD - http://www.bloomberg.com/apps/quote?ticker=DXY:IND#

The USD has risen a point or so against an incredibly bad chart.  The buck is in a make it or break it position here, and if it doesn't hold these critical support levels, we'll see commodities off to the races with $140 oil within striking distance.  As we've discussed many times, the devaluation of the USD must be thought of as a dance, something that is choreographed and one that has a rhythm.  Our leadership simply couldn't "crash" the dollar, they have to walk it down gently or else the entire scheme would fall apart very quickly. 

LONG TERM VIEW OF USD -
If you had any doubt that your purchasing power had eroded, look now further than this graph to clearly understand what Alan Greenspan and Ben Bernanke have done to your dollar, business, family, and lifestyle.  In order to support bubble after bubble and keep interest rates artificially low, they have purposefully crushed the value of your currency.  Isn't paper money great?

COPPOCK TURN INDICATOR -

I've been keeping this one around for entertainment purposes only.  As if right on queue as soon as the Coppock signaled a reversal and gave a buy signal, all hell broke lose!  Interestingly, if the Dow Jones stays under 12,350 it will signal a SELL.  Perhaps the indicator will redeem itself after all.  Please note, according to Coppock rules, it is still in a BUY till the end of the month as these are monthly data inputs.

WHERE SOFT PATCHES BECOME HARD LANDINGS
William Dudley, NY Fed Governor said  recently that "Despite our recent soft patch, economic conditions have improved over the last year."  Typically Dudley, Yellen, and Bernanke are the only 3 Fed bankers that you need to pay attention to, because they are the driving force behind the Fed.  As you might expect, they usually support the same positions and don't ever go "off the reservation" like some of the other guys.  As many of you know, I believe the "other guys" are simply there to make it seem like there are honest discussions occurring at the Fed, when in reality all the other players matter little.

As I mentioned though, Dudley is one of the guys that matter, so I often make sure to read and re-read his statements because they are another read into Bernanke's views.  In fact, they often use the same words and language to describe our economy and its challenges.  In this case, Dudley gives us more of the reasoning behind the famous "commodity price inflation is transitory" because he lays out that our weakness in the economy is due to several key issues.  He states that rising commodity prices, the Japanese earthquake, and severe weather are passing issues.  Dudley goes further, just like Ben Bernanke and highlights that they can have faith in their notion that inflation is transitory because long-term inflation expectations are stable, BUT what is even more illuminating is that he says that these levels are now elevated and it does have the Fed concerned.  This is much less confident of a statement than what we heard from the Chairman in April. 

This is the rub.  The Fed still believes that it is in control of the situation despite the fact that it is having funding issues, has tremendous balance sheet risk when interest rates rise, and is backed further into a corner when commodity prices rise.  No wonder why we are seeing them impress upon us how small inflation is, how temporary it is, and how it really isn't anything to worry about.  These comments are part of the PR campaign to make expectations a reality. 

The problem with this "soft patch" is that many of the important metrics we are watching are still falling and weakening.  If the continued weakening persists and they can't force oil, gas, softs, and other commodities lower to kill longer term inflation expectations they'll be at risk for driving us off a cliff.  We've noted many times before that each basis point of interest rates cost us taxpayers billions, and this doesn't include all of the bad execution on treasuries we've bought at less than best prices.  If this soft patch gets any worse, we'll certainly be in for a hard landing.

TRADING UPDATE
I have continued to hammer home the idea that we've lived through this before.  We've endured the issues with falling economic metrics, a weak stock market, and political threats to collapse the financial world if the debt ceiling isn't raised.  Couple that in with a few legitimate jitters over the status of the Greek bailout and you have a perfect storm for trading challenges.  The question is really though, can the markets deal with it and still go higher?

Here are specific plays to think about over the next few weeks as you position your portfolio.

SECTOR ROTATION TRADES
Look, about 80% or more of professional money managers must be fully invested all the time.  As they perceive areas like energy and industrials to be more risky, they need to rotate out to the next thing.  In the sector rotation model I posted a couple of days ago we find that Consumer Staples, Defense, Utilities, and Healthcare are all part of that next step in the process.  I personally love cash, so I view these trades differently, as usual we need to know the game that is being played by portfolio managers that are trying to beat the index.  The gamble is that these defensives will lose less or outperform the risky stuff, therefore they can incrementally beat their benchmark and get paid their bonus.  We on the other hand have cash as an option, I'd use it too.

PPA (Defense)
XLV (Healthcare)
XLP (Consumer Staples)
XLU (Utilities)
Oh yes, I'm short a few technology names in anticipation of the rotation out and a slow down.  I'll highlight a few of these in other posts where I can give more specifics.

EUROPEAN COLLAPSE TRADES
GLD or physical gold would be the answer here.  Everyone knows this will be the final outcome, no one wants to end up holding the bag.

SUMMER DRIVING SEASON AND MORE MIDDLE EAST UNREST
Gasoline has continued to be a tough trade that has been very volatile.  I have closed this trade, but there is still a good potential for a move higher, one little hurricane in the Gulf of Mexico would move this solidly higher.

COLLAPSE OF THE DOLLAR TRADE (DEBT CEILING ISSUES)

EMLC - I like this play here, it is an etf constructed of sovereign and foreign debt in the local currency of the issuers.  If Bernanke is able to slide the value of the dollar  lower, you will gain in the currency play as well as the yields associated with these foreign bonds.

Physical gold or silver and GLD if you like fake paper stuff.  My view on silver and gold is oddly different here, I am a long term holder, therefore this is NOT a quick hit trade like I usually focus on.  Silver could easily test $32, but I still have a very large position in physical silver and it isn't going anywhere.  Who knows, I may need to kill an intruder with a 40lb brick of silver if we go Mad Max anytime soon.

That's it for the monthly update, I'll do more in the coming days about specific trades mentioned here and also reveal other positions that I have on now.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at www.goatmug.blogspot.com .

THIRD TIME IS A CHARM? VIETNAM TRIES DEVALUATION AGAIN!

When the idea of having a healthy economy with low debt and low expenses is out of reach, what else can a country do?  Devalue your currency of course!

VIETNAM DEVALUES ITS CURRENCY FOR THE THIRD TIME THIS YEAR

The wiggle room for global governments is quickly disappearing and these countries are competitively attempting to make their currencies worthless.  (These meaning all countries - don't think the US isn't really doing this.)

Since January 1st, Vietnam has devalued two other times and Venezuela has also devalued.  What does this mean to their citizens?  Basically any good that they bought from outside the country is immediately more expensive.  Think paying 10% or 20% more for gas or imported goods overnight.

WHY DEVALUE?
Governments want to devalue the currency because it provides them two benefits.  Primarily, these exporting nations devalue to make their goods cheaper on the global market.  Since Vietnam makes cheap plastic stuff when they devalue, a foreign countries buyers can buy more cheap plastic junk.  Take comfort in the fact that the $1.00 store in your neighborhood can buy more crap for less dollars and sell it to you!  A second reason that governments might devalue is to cheapen the value of the debt that they owe to foreigners if they are able to repay in their own sovereign currency.  Clearly they would not want to devalue if they had to pay back creditors in a foreign currency.  Many countries must weigh the benefits between cheapening their exports and the added cost of borrowing if the debt is priced in another currency. 

ANYONE ELSE IN THE RACE?
Look for other nations to follow suit as the race to zero heats up.  We will begin seeing talk of Japan trying to intervene in its currency, (although I don't expect them to do an outright devaluation yet - give it 2 years tops), and they will begin by selling yen to attempt to reduce the value of their currency.  As an example of why Japan must consider this - Toyota's have become more expensive in the world as people outside Japan must pay for cars with more of their currency.  This is exactly why Toyota makes cars in the US because it is attempting to regulate the impact of the currency differential as the yen can goes higher versus the US dollar.

TRADING IMPACT
The risk of holding an ETF that focuses on these emerging countries like Vietnam is that you deal with market, political, interest rate, economic, and currency risks.  Today's action by Vietnam brings the last risk into focus.  When the government devalues the currency there should be an immediate decline in the value of the stocks in the stock market relative to the US dollar ETF.  As I look at the etf for Vietnam (VNM) it is down about 2% today.  Year to date the etf is down around 7%.  You must keep these risks in mind when investing in any foreign investment.  Speaking specifically to the strategies I've discussed where we would invest outside of the US due to a low growth rate and poor political policies, we must endure these risks, but ultimately the growth potential outside the US is much greater and we obtain more potential for compensation for the risk taken than focusing in our domestic investments.

GOATMUG

THIS CORROSION - LIBOR MELTS UP

I found an interesting chart to examine.  This is the 1 week-Libor rate (or the rate in which banks lend to each other overnight or in this case a 1 week rate).

Basically this is the level of trust between banks as each needs different levels of cash to support operations on a daily basis.  If they have money left over, they will lend it to others at the specific Libor rate for that time period.

As you look at this rate you must discern what the "normal interest rates" are for the current period, meaning that comparing today's Libor rates against that of 2007 will show that Libor rates are much lower now, but remember the economic climate back then was that we were coming out of a recession in 2002 and 2003 and the Fed had raised interest rates and their really was a global bull market in place in all assets - stocks, bonds, real estate markets and everything else were roaring.  What is interesting though is to examine the rate conditions on a very short time frame to see what is happening to examine stress in the market.

Currently the 1 week Libor rate is at .32% or 32 basis points (1/3 of 1 %).  Doesn't sound like much does it?  Well, it isn't as it is a direct result of the low overnight funding rates provided courtesy of central bankers that want to pump liquidity into the banking market.  Central bankers manipulate overnight lending rates in an effort to drive down borrowing costs in the front end of the curve and stimulate economic activity.  What is interesting though is that we examine the movement of the 1 week Libor over the last couple of months.  Despite promises of a trillion euros of liquidity and support for country debt, we see an escalation of prices or a corrosion of confidence between banks. 

While these rates are NOTHING like we saw in October of 2008 in the Lehman and Bear Stearns crisis, they are elevated and signaling trouble.  THESE NEED TO BE ON OUR RADAR as this was one of the key metrics that allowed me to pull all of my money out of the market in December of 2007.  Note also that this is the highest rate for 1 Wk Libor in more than 1 year.  If this rate begins to recede, great, but if it doesn't it will be cause for further concern regarding a credit meltdown.  And it is the fixed income market that pre-warns of stock market weakness.

If I have time I'll create some of my own charts and compare these rates to FF rates.  In the mean time, this is a 12 year chart of 1 week Libor that shows that despite the big % move up in the last 3 months, we are still at historic lows.  You might say, "Well look, we are so low what's the worry?"  The answer is the change in rates on a % amount is signaling that there is a risk in the market.  We need to understand that risk and identify it.

Oh, and by the way, Spanish sovereign debt had a little trouble this morning and they last issued debt at 73bps, guess what - this week they funded debt at 126 bps.  This means there was greater than a 50% increase in the cost of running and funding their government.  Try to do that with your bills at home and see how long that is sustainable.  Just another warning sign.  Spain is next up,  Portugal next, Italy, etc with Japan as the next debt crisis within 3 years.  This is ugly and about to get uglier no matter what the stock markets do over the next week or month.  I would sell all rallies especially if we climb 10% or so, in fact I'm praying for that kind of rally. 

GOATMUG

WEB OF DEBT - WEB OF DEATH

If you are wondering why I keeping making posts about Greece and ranting about how the entire system is built on excessive debt look no further than the NYTimes for a graphic that says it all.

Can you imagine a German looking at Greeks rioting because their pensions may be reduced thinking that you are actually going to extend these people more money? I believe Greeks can retire at age 55 on a public pension, I guess I'd be rioting too if I had grown used to the idea that someone else would take care of me for the next 40 years!!!

DEBT WEB



As I type the Dow is down 276 points. I am hopeful for some turnaround here, but there is a real possibility that later in the week the Europeans vote down a bailout for Greece. Remember what happened in the US when TARP funding was voted down the first time? The S&P500 went down almost 8% that day. Be on your toes this week.

WANT MORE?

- Read this pretty good article on the "What If" the Euro collapsed by Julian Phillips

I don't agree with everything he says, but I've found few folks that actually outline what they think will happen, so I like it!

What will happen to currencies if the Euro collapses?



Goatmug