EU Seeks Permanent Solutions To Temporary Problems

Government tends toward overkill in the service of an imperative to "do something" about problems that have natural solutions.  One case in point is the EU's search for a way to prevent future sovereign debt explosions:

European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.

Solutions in search of a problem don't fund themselves.  They require a demonstrable commitment of other people's money:

The ECB, in charge of monetary policy in the 16-nation euro area, said it would almost double its capital to 10.76 billion euros to cope with bigger credit risk and market volatility. Euro zone members will provide the increase.

Ten billion euros is a drop in the bucket but it sets a precedent for more.  The ECB can always follow the Fed's lead and just print away Europe's debts.  Alternatively, we can all let sanity reign and allow bankrupt states to go bankrupt and wipe out their bondholders.  That's my solution.  It won't happen.

YRCW Breathes Easier After Lawsuit

Troubled YRC Worldwide got an early Christmas present from the courts:

A federal judge on Thursday dismissed a lawsuit ABF Freight System filed against rival trucker YRC Worldwide and the Teamsters aimed at blocking a labor agreement central to YRC’s survival.

Of course, this does not mean YRCW will survive in 2011 or even turn a profit.  Note the Teamsters' apparent desire for an outsider to buy YRCW and save a lot of union jobs.  Unions will try tactics like lawfare and corporate subterfuge when they're stuck with accepting concessions. 

Full disclosure:  No position in YRCW.

You And BS Dress Code Hilarity

I couldn't pass this one up:

It took no fewer than 43 pages for the human resources department at the Swiss bank UBS AG to establish what bank personnel should consider acceptable corporate attire.

The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice.  Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there.  Good luck getting senior managers to give up cuff links. 

I used to work in one of their San Francisco offices several years ago.  The rich preppies running the show despised my honesty and competence.  They thought I was a joke.  Actually, their dress code is the real joke. 

Nota bene:  I have no position in UBS stock. 

The Limerick of Finance for 12/12/10

An MBA is a mistake
It's one many workers will make
It's not worth a dime
So don't waste your time
Throw that diploma in a lake

The Haiku of Finance for 12/10/10

Record deficit
Eats away at nation's wealth
Goodbye to empire

Smart Transportation Planners Wanted

There is intelligent life in Washington D.C. after all.  The Bipartisan Policy Center is calling for an overhaul of how our government plans its transportation spending.  The short version of a long story is that lack of comprehensive national planning leaves us with a patchy network unsuitable for a superpower. 

Improvement would be welcome news.  It would put an end to local nonsense thwarting the kind of national integration that global industry likes to see.    There is too much of such nonsense today with state governors turning down money for passenger rail lines that would help them build development around sustainable communities.  Shortsighted local politicians have no idea how much their communities will hurt when Peak Oil arrives and they missed the chance to build transportation systems to mitigate its impact.

Nobody likes kinks or hiccups in their supply chains.  Corporations will deploy capital elsewhere in the world where high-speed continental movement flows seamlessly into local distribution.  Politicians ignore this at their peril. 

Sovereign Debt Is Never Risk-Free

Let's get one thing straight.  There is no such thing as risk-free sovereign debt.  The European Union had excluded such debt from banks' capital requirements on the premise that it would never endanger a bank's balance sheet.  Now we all know better. 

Allow me to offer the EU a way out of its quandry on how to weight sovereign debt.  Skip the reliance on rating agencies.  Calculate a simple weighted formula for a given nation's bonds covering its entire existence as a sovereign state, then weight a zero value for any years in which that nation's debt was in arrears.  Let's say Country X has been independent for 100 years.  If it defaulted in 1933 and recovered in 1936, that's four calendar years weighted as zero.  The country's bonds thus have an expected value of 96% of their face value. 

My simplistic approach lacks the sophistication of the complex models built by PhDs at credit rating agencies and investment banks.  Those entities have proven themselves incompetent at assessing risk, so the Alfidi method is a clear improvement. 

Ireland Beats U.S.

It's hard to admit that a second-rate European economy has a better grip on macroeconomic reality than the U.S.  Today's headlines prove it true.  The U.S. continues on a delusional course of unsustainable fiscal profligacy:

The White House and Republican leaders in Congress reached a sweeping agreement Monday to extend expiring income tax cuts for two years, extend unemployment benefits and cut how much millions of workers pay in Social Security payroll taxes.

Meanwhile, Ireland bites the bullet and sits down to a cold supper of austerity:

One of the toughest budgets in the history of the State, involving substantial tax increases and welfare cuts, is expected to be approved by the Dáil today following the declaration by Independent TD Michael Lowry that he will vote for the measure.

Observers with at least half a brain can see that the reality facing Ireland will eventually face the U.S.  Such observers must be found outside Washington, D.C. 

Newsreel for Monday 12/06/10

Scanning today's headlines brings us gems.

A sluggish housing sector drags down the transportation sector.  You know how economists have been saying that housing recoveries typically lead recoveries from recessions?  Here's what we get when that doesn't happen.  There's no recovery folks!

The Teamsters tried to get two underperforming truckers to merge.  See what happens when unions get too much power?  They try to foist disastrous strategic decisions on their employers.  I have no idea why any executive team would take a Teamster proposal seriously after seeing them try a stunt like this. 

Uncle Sam's DOT is sending big bucks to the states for transportation.  It's too bad that most of it goes to road projects.  Rail and barge traffic is much more economical and energy efficient in moving tons per mile. 

The U.S. and South Korea are almost free trade partners.  There is more to this deal than meets the eye.  America desperately needs to prevent Asian countries from falling into China's orbit as its military supremacy wanes.  Kicking open a free trade door with an Asian tiger is one way to maintain a regional foothold. 

U.S. lawmakers want to continue handouts of all kinds, whether tax cuts or jobless benefits.  Stupidity still grips Capitol Hill.  Our nation's leaders will never wake up to the unsustainability of deficit spending.  Working on Capitol Hill must be like living inside a bubble, where the unpleasant realities of the outside world never intrude. 

Unemployment is finally catching up to college grads.  Now a whole bunch of liberal arts grads can learn their most important lesson in life:  A bachelor's degree in anything except a hard skill is worth nothing.  That degree in women's studies will come in handy when you're panhandling as long as you show some cleavage. 

China raises the reserve requirement for its banks.  This is what we should have done with our own banks!  Once again China shows the world why it is a more responsible custodian of capital.  Let's see if China has the guts to allow some overleveraged banks to implode. 

The Limerick of Finance for 12/05/10

Bernanke says bond buys are great
But he's got a lot on his plate
Helping bond market out
Will spark a dollar rout
Gee, Fed Board's a job I would hate

The Head-Fake Recovery of 2010

This economy is looking more and more like the early 1930s before the Great Depression really cratered people's hopes.  Green shoots seem to be sprouting into another jobless recovery, like the early 2000s:

Despite weeks of brighter economic news, employers still aren't hiring freely. The economy added a net total of just 39,000 jobs in November, the government said Friday.

This steady drumbeat of somewhat brighter news ignores some major icebergs on the horizon.  Iceberg #1 is the inability of the federal government to come to terms with its addiction to debt, as evidenced by lack of agreement on implementing austerity measures:

Despite receiving a majority endorsement, the president’s deficit commission failed to obtain the 14 vote supermajority needed to pass its $4 trillion deficit reduction proposal as the “official” plan of the commission to Congress.

 

It's very telling that players from both parties know what must be done but cannot summon the courage to do anything.  The bond market will have to do it for them. 

Iceberg #2 is the massive debt burden facing local and state governments, thanks to unfundable promises:

But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

Anyone counting on their muni bonds to provide comfortable returns in their golden years will be rudely surprised when local governments start going bankrupt.  The foolishness of borrowing to fill gaps in pension funding should go without saying, but this is a new America that our founders wouldn't recognize.  Someone has to point the finger.  I'll gladly take on that job. 

I could go on like this until the cows come home but that would be too, well . . . depressing.  We'll be in for enough Depression soon enough.  The great head-fake recovery of 2010, sustained by unprecedented peacetime deficit spending and the Bernanke Put under the bond market, must come to its eventual end. 

The Haiku of Finance for 12/04/10

Told ya, weak job growth
Not enough to recover
The lost job decade

Unemployment Surprise Casts Doubt On Recovery

Still think the U.S. economy is recovering?  Unemployment is getting worse:

The U.S. economy added fewer jobs than expected in November and the unemployment rate rose, dashing hopes that the recovery is gaining momentum.

That rate rose because job growth is not keeping pace with the growth of the working-age population.  In other words, not enough McJobs in retail and customer service are available to absorb the nation's cohort of liberal arts graduates. 

Employment figures are traditionally considered a lagging indicator.  Taken in conjunction with growth in the Non-Manufacturing ISM Report for November, traditional economists might interpret this collective news as typical of an early recovery.  That opinion isn't justified for an economy with a 300%+ debt/GDP ratio. 

The Haiku of Finance for 12/02/10

IMF loan cap
Soon to double in power
More bailouts to come

Fed's European Bailout Details Revealed

Here's confirmation of something that has leaked out in pieces for many months.  The Fed's crisis backstop extended to Europe:

The Federal Reserve revealed details Wednesday of trillions of dollars in emergency aid it provided to U.S. and foreign banks during the financial crisis.

I'm surprised that some of the aid was in the form of revolving credit facilities.  Using it to support short-term borrowing and corporate paper would be one thing, but was this support also used by European banks' prop trading desks?  Inquiring minds would like to know. 

Central banks also drank deeply from the well.  That explains why foreign buyers of U.S. Treasuries haven't balked at buying enormous new bond issues.  They know the "Bernanke Put" in the bond market has supplanted the "Greenspan Put" in equities. 

The global financial elite is uniformly terrified of deflation and is willing to let the U.S. lead a headlong charge into renewed asset bubbles.  How about that. 

We should ask ourselves whether the Fed's new QE2 purchases will first target bond inventory at these same European banks now that the EU is fully engaged in bailing out the PIIGS.  There is no reason not to anticipate a repeat Fed bailout if the EU / IMF rescue of Ireland and Greece falters.