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Harry Tuttle
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Harry Tuttle is an aspiring independent thinker who is barely arrogant enough to create a blog, but not enough to take himself too seriously. He is a mildly successful speculator who has managed to survive many bear markets resting mainly on his cynicism and paranoia. He prefers anonymity in the... More
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  • What Bernanke Doesn't Understand
    The United States Constitution was designed to create a government of checks and balances.  Even during the Civil War, Lincoln could not ignore the powers vested on Congress and the Supreme Court.  Which is why it is at least curious that we have come to vest quasi-dictatorial powers in the office of the chairman of the Federal Reserve.

    Like his predecessor, Bernanke seems to be able to ad-lib extreme and profound policy initiatives with the sole backing of his "I know better" reserved for the most powerful dictators in History.  Dictators, by the way, the American system has worked hard to avoid.  Even Roosevelt in the midst of the Great Depression, had to deliberate, negotiate and even back down before the Supreme Court.  Since the Federal Reserve was not contemplated in the Constitution, there is no mechanism to keep them in check, force them to debate, and even reconsider their actions.  The confirmation process, as we have seen, is opaque enough to be out of the reach of most Americans.  Yet, this individual (the other members just seem to go along for the ride) wields more economic power than the President of the United States.

    As the Greeks described long ago, efficiency is the main advantage of a good dictator.  The main disadvantage is that is hard to tell the dictator when he is wrong.  For all the trust we seem to place in his wisdom, Bernanke has shown in the past not only a dangerous lack of understanding of the complex global financial system (see "The sub-prime crisis is small and well contained," or "American financial institutions are strong and well capitalized," among others), but also a willful disregard for the consequences of his actions.  After all, is there anyone on this planet who still disputes that the Greenspan policies created the housing bubble? The most dangerous leader is the one who does not seem to acknowledge the past and learn from his mistakes.

    Unfortunately, for us, Bernanke is a prisoner of his academic record.  As most know, the studied the Great Depression and the Japanese debacle long ago.  Back then, he decided what the problem was and what the solution should have been.  As far as he is concerned, Japan could have avoided the two lost decades after their real estate bubble burst by throwing money from a helicopter.  Never mind what History says about the aftermath of bubbles, or how high the relative value of Japanese land was in 1990, or the effects of an older population in a country without immigration, or any of the dozens of factors that have influenced the Japanese economy.  Bernanke wrote a paper saying the monetary-hammer was the tool and, to him, every crisis looks like a monetary-nail.

    Today, our esteemed professor has and OpEd in the Washington Post explaining HIS decision from yesterday.   If you want to save time allow me to paraphrase, "core-inflation is too low, unemployment is too high and I do not know what else to do."  That's it. 

    Sure, there is some academic language about lower rates encouraging consumption and investment which is dutifully parroted by our media, but who are we kidding? Does anyone really think that driving the 10 year bond from 2.80% to 2.50% will spur even one project? Would you buy your neighbor's house as an investment just because mortgage rates go from 4% to 3.5%? Would you buy it if the rate was zero?

    As anyone following our economy knows, companies and individuals have been borrowing money at record low rates for a while.  Those who haven't probably cannot because of lack of income, collateral or future earning streams, not because rates are too high.

    What Bernanke conveniently ignores are the risks of his policies.  No, I am not talking about hyperinflation, the destruction of the US dollar or other medium to long term calamities that may indeed result from his actions.  My contention is that we are creating obvious problems right here and now. 

    Like Greenspan, Bernanke has very particular views about inflation.  Not only does he choose to ignore important service components like health care which are underrepresented in the indices, but he explicitly ignores food and energy, two of the three most important items in a poor family's budget (the third being housing).  Not only is much of our oil imported, but all commodities, even if locally produced are priced in dollars in the global market.  In addition, for the past 10 years or so, commodities have become an active asset class for global investors/speculators.  If QE results in a lower dollar, we will in all likelihood see higher commodity prices.  Yet Bernanke will insist that there is no inflation, which will encourage even more speculative flows into commodities creating vicious circle that will heavily impact on the American poor.  Talk about helping the little guy.

    A policy of lower rates in a deleveraging economy neither spurs growth nor encourages employment.  Hard as it is for Bernanke to understand, context matters and influences the economy's sensitivity to interest rates.  Lower rates, instead, are nothing but a subsidy to those willing to take on leverage (banks and speculators) from those owning the capital (savers and retirees).  As we know, money is fungible.  Thus, the is no reason why the banks and speculators will all of a sudden rediscover productive projects at home because rates are 0.50% lower.  Instead, they will continue to pump money into commodities, projects abroad and maybe stocks.  Unless you own some of these, I fail to see how that benefits the average American. 

    I suppose it is what we can expect for forgetting the principles that made this country great and bestowing to much unchecked power in one individual, even one with a PhD.

    Disclosure: no stocks mentioned
    Nov 04 8:39 AM | Link | Comment!
  • Why Is The Greek Bailout Not Working?
    Although Greek's debt problems did not appear overnight it is obvious that something has radically changed in the last 30 days. In a world used to thinking that policy makers can fix markets at will just by deploying their balance sheets it is disconcerting to see the lack of market reaction to the ongoing efforts by the IMF and the EU to avoid a Greek default. The question is why isn't anything working? Is it because the money won't come, because the Greeks won't deliver on the conditions, or are there other factors?

    Although the Greek debt/deficit problems have been known for some time they did not seem to have any market impact until late last year. In fact, as late as October 2009, the Greek government didn't seem to have any trouble getting financing as Greek bond yields were around 2.3% for 2 years. During the first quarter of 2010, in the midst of shocking discoveries about off-balance sheet debt and accounting irregularities the yield on 2-year paper soared to 6.6%. By then, conversations about a European bailout began to appear on a daily basis in the financial press. After much dithering by the German government, European commitment to Greece was firmly declared and the IMF was enlisted in the rescue. The process should have climaxed last Sunday with the announcement of a gigantic package of more than 100 million euros which should be sufficient to keep Greece out of the public markets for, at least 18 months.

    Under the Hank Paulson description of TARP ("If you have a bazooka in your pocket you won't need to use it") large amounts of public money commitments do their work without ever being deployed as private financing usually steps in to capture, in this case, the Greek spread for the German guarantee. After markets sold off yesterday, the consensus (if after the fact) opinion was that the markets either did not believe the monies will be forthcoming or that they process will fail over Greek intransigence. Although Ms. Merkel's speeches do not betray any conspiracy, the 48-hour Greek strike does give this theory some credence. In my opinion, however, there is something completely different and perhaps unavoidable at play.

    Last Sunday, the NY Times published a useful diagram to show why Europe is so concerned about Greece ("Europe's Web of Debt"). In simple terms, the German and French banks have too much Greek debt much in the SAME way many banks own too much real estate and/or toxic assets (they still do, by the way).

    Consider the case of a risk manager at a large German bank. You have been told, very recently, that owning so much Greek debt is bad banking and that you should have never accumulated so much. As luck will have it, you, your boss, and the regulator, agree that you will get a chance to get out either through bond maturities or by selling your risk as Germany will not allow Greece to go bankrupt. You are just waiting for the bonds to rally from the low 80's to something closer to par, where you have them marked as investments held to maturity often are, to cut your exposure.

    Under the scenario above, every announcement meets the aggregate of all banks who have been natural buyers of Greek debt over the past n-years as better sellers and NOT as buyers as the bazooka deployers would want. In other words, the EU tried to bluff the market into financing Greece for a while longer and the market, unbeknown to its individual components, is calling the bluff.

    Markets are about mass psychology. What policy makers fail to understand, is that the same participants who had no trouble accumulating Greek bonds at 150bps over German credit are unlikely to be enticed to resume financing at 14.5% over 2 years because they already own too much Greek debt. This, in my opinion, is why the Greek curve has stayed inverted in the face of positive announcements and why it is likely to stay that way. In other words, even if Germany would somehow agree to underwrite Greek risk no matter what for 3 years, which is very unlikely, the curve will stay inverted from 4 years forward (i.e. beyond the German guarantee) until all the excess Greek debt (that over what banks really think is too much) matures.

    Like our sub prime borrowers, Greece borrowed too much over many years. The banks who bought this debt are now chocking on the risk and there aren't any new risk takers to take the balance. No amount of austerity from the Greeks will change the fact that 120% debt to GDP is now perceived as too high.  Debt binges usually work themselves out over time or through defaults and this time is...the same.

    Disclosure: No positions
    May 05 1:31 PM | Link | Comment!
  • Is TARP Greek for "Save the Bank(er)s?
    There was a time when we thought that the biggest problem with bailouts was moral hazard. Like with so many things in life, the only loss is to one's innocence and only the first time.

    As it is well known, the Greek government is on the receiving end of an ever increasing bailout package. In exchange, for such a ridiculous amount of money and the invaluable tutelage of the IMF, which by the way will become a super-senior creditor ahead of ALL bondholders, the Greek government promises to produce what amounts to a balanced budget.

    As we know, balanced budgets are as rare as honest politicians as nobody likes to pay taxes and everyone is rather attached to their salaries and/or entitlements. In my opinion, the Greeks are as likely to deliver a balanced budget in 2013 as anyone else in Europe and beyond, which means not at all. How does anyone think that raising taxes and cutting salaries will deliver short term growth in the presence of higher rates is a mystery to me. More importantly, the market for Greek bonds seems to agree with my assessment as the curve is still inverted from 2 years onward signaling concern about default.

    Yet, we still get comments from various analysts and politicians to the effect that the situation is under control and it has a fair chance of getting better (if only the market would finance Greek debt at "reasonable" prices).

    In this context, it is interesting to find out that the money from the package seems to be following a familiar script. In other words, just like our TARP, the Greek package is already mutating from "fund the government" (or pay the debt, which is equivalent) to "stabilize the banking system" which means the banks will get the money and decide what to do. Maybe even pay bonuses.

    The problem with this (global) crisis is that it is destroying whatever credibility we may still have on the financial/political system. Enormous amounts of public money are being doled out on an attempt to keep the party going. The tragedy is not that, if History is any guide, it will not work, but that people will feel cheated out of their hard earned taxes. Money comes and goes, however, credibility is easy to lose and hard to get back.

    Disclosure: No positions
    May 04 2:34 PM | Link | Comment!
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