Week of 10/9/11

Apple Remembers Steve

Steve Jobs memorial at Apple site

EU Getting Madder

Nigel Farage told the European Parliament in Brussels on Wednesday that there’s a detachment between Brussels and the real people of the European Union, that it’s almost as if the debate has been going on in a padded cell that is the European parliament as people compete for who can be the most stupid — who can waste the maximum amount of taxpayer money.

“I really do think, as a political class you’re all wrong, and you’re all wrong democratically because nobody has ever given consent for this behavior.” When people vote no, they’re ignored or told to vote again and get it right. “We’ve got 17 countries trapped inside this economic prison of the Eurozone. … In economic terms it’s getting madder and madder. … Good God, Greece is going bankrupt. If you lot continue, the whole banking system in Europe is going bankrupt!” — 10/14/11

Germany Rising

John Taylor of FX Concepts sent the following in a recent note to clients: “The only solution is to transfer, not loan, money from the creditor countries to the debtors … For this gift, those that give will get some form of control over those that receive it. As Germany is over four and eight times larger than the second and third largest creditor countries, reality is that Germany will be sending money and monitoring / controlling the fiscal performance of the 11 debtor states.

“It is not hard to argue that as the Eurozone’s divisions deepen, Germany will be more in control of the future of Europe. Now that armies are passé it is commercial and financial success that wins the day, and Germany has won. Do Germans want the prize? The Nazis did but today, the German political elite can’t decide and the people are against it.” — 10/14/11

Blue Chips Are Cheap

Donald Yacktman says that in his 40-plus-year investment career, he has “never seen so many large, profitable businesses selling on a relative basis to other things as cheaply as they do today.” He especially likes News Corp (NWS) and PepsiCo (PEP).
— 10/14/11

Gullible Occupiers

For further proof that financially stupid people are as much to blame as bad banks, here’s Peter Wallison at the WSJ: “Anger should be directed at those who developed and supported the federal government’s housing policies that were responsible for the financial crisis. Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30 percent. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50 percent by 2000 and 55 percent by 2007. … When more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.”

Thus subprime mortgages covered the land, home ownership rose as unqualified people occupied homes they could not afford, prices went bubbly, then collapsed in 2007, Fannie and Freddie went insolvent, and investors turned to private mortgage-backed securities. The subprime junk killed the private sector banks, too, though. When Lehman went bust, investors “withdrew their funds from the institutions that held large amounts of privately issued MBS, causing banks and others—such as investment banks, finance companies and insurers—to hoard cash against the risk of further withdrawals. Their refusal to lend to one another in these conditions froze credit markets, bringing on what we now call the financial crisis.” — 10/14/11

Duy: Worse Before Better

University of Oregon economist Tim Duy writes: “Although there is optimism the European situation can be resolved in three weeks, they seem to be walking a very fine line between attempting to recapitalize the banking system without undermining sovereign debt ratings while maintaining what effectively amounts to a pegged exchange rate system that is fundamentally inconsistent with the economic needs of more than one nation.

“In addition, they have an odd situation where every nation needs to issue euro-denominated debt, but no nation can actually print euros as a backstop. It’s as if each nation issues only foreign-denominated debt, with ultimately no lender of last resort on a national level. Of course, the European Central Bank could fill this role, but will they?

“My experience is that when a financial landscape is as ugly as we see here, there is no rescue plan. Things tend to get much worse before they get better. That seems to be what financial markets are telling us.” — 10/11/11

Occupy WS = Greece

Bill Frezza of the Competitive Enterprise Institute writes: “The original protestors have no hope of defining themselves because, quite simply, there is no there there. Their incoherent demands range across the vast junkyard of leftist thought. The proto-movement is at best a media vacuum waiting to be filled; the protestors’ slogans as empty as the heads of the celebrities rushing to pose in front of them. Hence, a new force is stepping in to both finance the disturbances and repurpose their aim: Unions.

“Enter the scruffy, volatile, nothing-to-lose Occupy Wall Street protesters. … Feed them, flatter them, bring them porta potties so they stop pooping in the streets, and hand them printed signs with the message of the day. Then bus them to the location of whoever it is you are trying to intimidate, whether a governor or a corporate CEO, and voilà, you’ve got a volatile rent-a-mob ready for mayhem as the TV cameras roll (along with plausible deniability when the sparks start to fly).

“As civil servants, pensioners, anarchists, and anti-capitalist protestors rage against greed while clamoring for a free meal ticket, it’s not hard to see what the dead end of democracy looks like. Which is why the union strategy of making common cause with the Occupy Wall Street protestors is ultimately going to backfire. Americans are not Greeks. The attempt to paint crony capitalism and market capitalism with the same broad brush is not going to succeed here.” — 10/11/11

China Overextended

James Kynge at FT: “At no time over the past three decades of “reform and opening” has Beijing’s control over the supply and price of credit in its economy been so tenuous. The reasons for its enfeebled position derive from the state-centric nature of its 2009-10 stimulus. They also help explain why a repeat would be hard to pull off. … Beijing now finds itself largely at the mercy of an unregulated collection of trust companies, private banks, kerb lenders, and loan sharks.” — 10/11/11

Shapiro on EU Meltdown

IMF Adviser Robert Shapiro told the BBC: “If they can not address [the financial crisis] in a credible way, I believe within perhaps two to three weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected.

“All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008.” — 10/11/11

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