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/

DEBTOCRACY - GREEKS NEED A HERO, IS THERE ONE?

As we wait for a critical vote on austerity measures from Greece I wanted to share a few revelations I've had.  Before getting there, let me state emphatically that it doesn't matter if this 5 year austerity plan is approved, there will be another restructuring and another one and ultimately Greece will default on its creditors.  In addition, this same charade will be played out on the stage of each peripheral EU country for sometime. 

REVELATIONS

LACK OF CONTROL OF THE CONTROLLERS
A)  I have written several times and thought often more that Greeks brought this on themselves through over the top pensions and union handouts.  (They did, but I am realizing that the Greeks did in fact bring this on themselves because they did not have control over their corrupt leaders who made decisions to bury their country in debt and use the spoils to enrich political allies and powerful interests.)  (Sound familiar?)

DEFAULT ON YOUR PEOPLE OR DEFAULT ON THE BANKS
B)  Greece must choose default and essentially already has.  In life there are truly very few zero-sum games (fortunately!), but in this instance we have one.  At the present time by implementing austerity measures, Greek politicians have chosen to saddle their citizens with debt that is unpayable by any stretch of the imagination.  They have elected restrictions and tax increases and cuts that remove all doubt that they have defaulted on their citizens.  It is striking and mind blowing that a leader doesn't stand up and say no more!

FED'S POLICIES CREATE A GREEK SPRING....ERRR SUMMER?
C)  Oddly, the Fed's policies may cause yet another amazing uprising.  Think of the Fed as an extension or the same entity as the ECB or the IMF and World Bank.  These entities really are servant representatives of the largest of banks in the world.  Overtime these banks have extended loan upon loan to the Greeks and even helped them lie and hide financial truths in order to qualify for membership in the EU (Goldman Sachs).  Now that Greece has its back to the wall with an undeniable problem with unpayable debt, we may see the citizenry of Greece finally say, "enough is enough".  Can you imagine an entire nation facing hardships where the poorest of the poor cannot afford basic necessities and then our Fed is directly ramping up inflation globally?  While Tunisians, Egyptians, Libyans, and Syrians were trying to cast off the yokes of oppression in their Arab Spring, Greeks are looking to cast off the chains of economic oppression and slavery.

DEBTOCRACY
Please watch this video.  I understand that it is over an hour long, but I think your perspective will be changed by watching it.  In fact, I will go out on a limb and suggest that this is probably one of the best hours you can spend this year.  I am a pretty hard line conservative capitalistic guy, and this film was clearly made with a liberal point of view, but the truth is undeniable.  The leaders at the top of the global economic banking institutions are playing for keeps and willing to win at all costs.  This film shows the destruction that is caused by men in suits using corrupt local leaders to enrich the super rich.





REVELATIONS AND QUESTIONS - THEY NEED A HERO
There are so many powerful items in this film.

Can it be true that where ever the IMF has lent money, the life expectancy of the population declines?

"You can have freedom but no sovereignty."  Wow, that really is it isn't it.  When you owe so much you become so indebted to your masters that you essentially have been conquered with a bank ledger.  You are told how to spend your money, who to buy things from, and what you will be allowed to do for your people.  This is about control, power, and wealth.  The Fed, IMF, World Bank, and ECB have used Greece's desires and corruption against them to make them economic vassals.  Any real leader would have no choice but to cast off the chains of bondage.  Greek PM George Papandreou is clearly not the leader to stand for his people, do Greeks have a hero?

Oddly enough, if the Greeks resist they could make the global financial system shake if they have the courage to do what it right.

A WARNING FOR THE USA
When watching this movie constantly ask yourself if the US is any different?  How do we citizens express and exert control over our politicians and their spending?  What are we getting for our borrowing?  What power do we have to stop the borrowing of money and the subsequent allocations of the proceeds to giant corporations?  How can we even arrest the progress down this slippery slope when companies and paid lawyers write the laws our Congress passes?  Could we ever see Americans so frustrated and broken that they rise up like those in Ecuador or Argentina?  Are Americans just too fat and asleep to notice that we too are being shackled to unpayable obligations for the benefits of others?  Unfortunately I am pessimistic and scared of the answers we'd receive if we were brave enough to ask them.

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/

QE II AND OUR JUST REWARDS

I've noted several times over the last few months that although the program named QEII has a terminal date of 6/30/2011 we aren't likely to see the end of heroic measures to manipulate and game the free market system.  The Federal Reserve continues to highlight that they will continue to make purchases of bonds over the next year or so as maturing bonds roll off.

http://www.bloomberg.com/news/2011-06-27/fed-seen-buying-25-billion-a-month-in-treasuries-after-qe2-comes-to-end.html

Here is a choice quote from the article.

“I don’t think the Fed wants to remove accommodation in any way, shape or form,” said Matt Toms, the head of U.S. public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “It’s quite natural for them to reinvest cash,” he said. “That effectively maintains the accommodative stance.”

The Fed will continue their operations for a number of reasons.  First, they can't draw down liquidity in the system because much of the gains in asset values in stock markets and commodity markets come directly from the additional stimulative work the Fed has done.  By forcing Mom and Pop and institutions away from money markets and fixed income investments and into risky assets they have provided the feeling that things are getting back to normal.  Remember, if stock prices go up, the wealth effect kicks in and you and I get to spending right? 

Second, the Fed and Treasury are working in tandem to buy treasuries and mortgage backed assets because if they were not the buyer of last resort the USA couldn't not meet its debt and interest payments and continue the amazing pace of deficit spending and government growth.  There is no way the government could actually find enough buyers at these rates without the Fed and Treasury's influence in the bond market. 

Third, the activities the Fed will continue under this program gives them cover for operations overseas.  I hadn't really thought about this until today, but the massive size of the Fed's balance sheet and their constant work in markets gives them an incredible ability to run "black programs" elsewhere in world financial markets.  Think back to the 1980's when we heard of $200 hammers or $600 toilet seats, did those items really cost that much?  Clearly the answer is no, but the marked up tools and fixtures were ways of diverting excess money to other projects that were not approved and were funded by these creative financing methods.  In the same way, the Fed is working under its self-appointed power in QE I & II, but the sheer size of their work probably has allowed them to mask repos and swaps with foreign banks and countries that would raise concerns domestically.

In summary, the Fed is wrapping up QEII only to not wrap it up at all.  The USA cannot afford to allow a market with full price discovery because we would not see buyers at these treasury levels.  Buyers of treasuries today will lose significant amounts of money if interest rates rise even 1% on the 10 year.  Given those pricing dynamics, I wonder who is stupid enough to buy all of those new 10 years bonds?  If your answer was the Fed you'd probably be correct.  Welcome to massive losses Mr. Taxpayer, this is your reward for failure to rein in the Federal Reserve. 

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/

MONEY MARKET RISK - WE'VE LEARNED NOTHING

My eye was caught by this story this morning regarding the potential risk US Money Market funds have to Greek and European defaults.  Please view the story here by right clicking and hitting "open in a new window" (don't click away from the blog!).

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201106241206dowjonesdjonline000447&title=us-house-witness-says-greek-default-not-a-risk-to-money-funds

YIELD SEEKING THANKS TO UNCLE BEN -
Why in the world do US money markets have exposure to the Greek debt bomb?  Well, the easy answer is that if it weren't for the Fed and Ben Bernanke, they probably wouldn't.  How is that you ask?  Well see, since short term rates are artificially low in the USA, investors must find alternative investments to find yield.  Great Grandma, Baby Boomers, Money Market Funds, and investors that are risk averse are being forced into investments they normally wouldn't ever consider in an effort to receive just compensation for their investment dollars.  While the Fed's plan has been all along to make money markets unappetizing, there are some investors that have no choice and must use them as an asset class.  The problem is that money market fund managers have this problem too.  They can't buy treasuries or mortgage backed securities anymore because yields are being manipulated lower by QE II and other invisible hands in the market.  They can't buy commercial paper, because that doesn't pay enough since everyone is competing for the same investments and prices are bid up.  They must find enough yield to earn enough to pay their fund expenses and then deliver some sort of return back to investors.  What is a money market to do?  The managers turn to buying paper across the pond and buying high rated bank and insurance company short term paper.  These funds are yield seeking and are probably taking more risk than they should due to the interference in the markets by the Fed. 


During the press conference, Ben Bernanke added to fears that we could be in a situation similar to the Lehman Brothers/Bear Stearns debacle where liquidity in the financial system simply froze up.  In situations where no one trusts each other, no one is willing to lend to one another, unless it is at astronomical prices.  This is a fear that is actually one based on truth - that if Greece defaults, European banks will be hurt financially, and that could impact other institutions.  The freeze could impact the banks and their lenders in several ways.  First, money markets and lenders could see those banks with Greek holdings as a perilous risk, one that perhaps shouldn't be traded with or one who should not receive favorable terms.  In that credit evaluation process things either slow down where lenders take a lot of time to make investment and lending decisions or they stop all together.    Second, if you are the bank on the receiving end of the freeze, you might consider holding on to money that has been lent to you and not returning it on time as you need to keep capital in house as long as possible.   As you can see, a simple default event in one insignificant country could end up being one big problem on a global investment stage.

HMMMM, COULD THAT HAPPEN HERE?
Now let's simply dream a little here and simply make up a fanciful situation where there actually was a default in a small island nation that didn't really matter.  (I know, I know, it could never happen with all powerful institutions like the Fed, IMF, and ECB making sure that all risk is taken only by the tax payer, but run with me on this).  As a risk manager for an investment company, the first thing you do is run a counterparty report to see who you are exposed to once you learn of the default.  You do a little bit of digging and you find out that one or two of the banks you lend money to overnight have significant exposure to Greece.  (Mind you, you don't have direct Greek exposure, you just do an overnight repo or reverse repo with them).  Upon reading the report you quickly fire off an email to your money market traders and portfolio managers directing them to immediately cease all investing in those bank names and put them on a credit black list.  As soon as all outstanding investments (short term loans, repos, swaps, commercial paper) to these banks are paid back to you, your desks will not buying their issues again no matter what the yield.  As this process is repeated, the cascade of capital starvation sets in on the offending banks and they quickly die.  The death of those banks causes waves that destroy other banks because they have long term risk outstanding to the banks at ground zero and now are in jeopardy of not getting paid back.  Sound familiar?  Of course, it is what happened in the financial crisis of 2008.  And yet, here we are again, facing the exact same set of problems, yet this time we are looking at it on a global scale.  We are taking about nations defaulting and being the genesis for the financial tsunami that will swallow the gigantic ponzi-scheme that has captured the world. 

BACK TO THE ARTICLE - COMPLETE HOGWASH
I feel so much better after reading the article where Mercer Bullard (professor) assures us that everything would be great if the SEC would just step forward and tell us it will all be okay.  There are a couple of problems with Mr. Bullard's statement. 

First, although money market funds can only hold short term investments there is no guarantee that a bank or company will actually return those investment proceeds on time if they are in financial trouble.    Banks in crisis don't always play by the rules and if they are dying they could care less if you are a money market fund, a church, or the US government.

Second, the notion that anything the government tells me will make me feel better is simply nuts!  Do you  think the SEC, the Fed, Treasury, or the Administration would tell me if things were really bad?  During the financial crisis did they tell us to get out of Washington Mutual, Lehman Brothers, Wachovia, Citibank, or a host of others?  No, if anything they came out to say that those institutions were fine and stable.  The FDIC said INDYMAC was great, only to find out they were completely insolvent.  Isn't that where we are with Fannie and Freddie too?

The SEC is too busy trying to find some small time trader that made $20,000 for insider trading when there are HFT (co-located high frequency trading computers that step in front of each trade and give you bad execution) that are ripping off investors every day to the tune of millions.  The SEC is too busy watching porn to worry about actually enforcing rules to protect shareowners of fake Chinese companies that don't actually do any business aren't they?  Suddenly the SEC is going to step in and reassure us that money market funds are just great and this will mean anything?
 
 Despite the stupidity of the professors comments, I am struck by the idea that we are two and a half years removed from the pit of the financial crisis and nothing has changed.  We have systematic risk embedded into the system and we have money market holdings that are still at risk of seizing up and collapsing the financial scheme.  What have we learned?  NOTHING!

GOATMUG

WHISTLING PAST THE GRAVEYARD ALL WEEK LONG

WHISTLING PAST THE GRAVEYARD
This week has already been very interesting.  We've had the confidence vote for Greece, which means that we'll have more Greek default discussions and posts in the near future.  We also had the FOMC meeting and press conference today where Ben Bernanke seemed much less confident.  I almost feel like the market is whistling past the graveyard in hopes of not disturbing the situation.  Over the last couple of days I've sold many of my shorts and waited for an expected bounce.  Now that we've had some of a relief rally, I'm focused on two specific names that seem to have attributes of weakness.  Specifically, GS has entered a significant period of decline where the 14 day EMA has crossed over the 40 day EMA.  There seems to be some support at $131 for the broker, but it may be worth a shot with the opportunity for a much deeper decline.  FXI also is showing the same qualities although it has not officially crossed over (I expect it to be official at the end of this week).  The "crossover" usually portends nastier things to come.

From a macro perspective we have two issues that will help these trades. We have the Fed removing stimulus (no better said, not stimulating and that should deprive GS of some trading proceeds at our expense) and also China is slowing and confronting inflation while trying desperately to keep from a hard-landing.

FXI
Weekly 14/40 EMA Crossover pending.

FXI (3 Yr Weekly)

GS Weekly View
13/40 EMA Crossover

Goldman Sachs (GS) 10 Year Weekly
The 10 Year view of GS is really interesting.  There is an obvious risk that GS could go up to around $165, but with all the uncertainty and misery in global credit markets it may be worth a short shot.  I think a move below $131 could take us to the lower portion of the downward channel which is at $115 which just happens to be the level that Warren Buffett got his shares.  It would be really interesting to see GS back at those same levels wouldn't it?
 

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