Wednesday, March 31, 2010

Debt Hangover

Spring is here in the Northeast and along with green shoots in the ground there is continued talk in the financial media about green shoots in the economy. There will be conflicting bits of data reported, but no matter what anyone tells you to the contrary, there is no way we can experience any meaningful recovery as long as we continue to have the debt overhang in our system. The chart at the top of the post is a staple in articles written by Denninger, Mauldin, Mish and Jesse among others. It really deserves a second and a third look.

It's real simple, most of the reported growth we experienced going back to the early '80's was the result of adding leverage to the system. The thing is, we have to service that debt with interest payments and ultimately pay back the principal. How are we going to have future growth with that mountain in front of us? Many people I read believe that default is inevitable, whether that be through inflating the currency or outright default. The math just doesn't work.

The pathetic state of many of our individual states is finally being brought to light by the mainstream press. If California, New York and others end up getting a bail out the debt line will only get bigger. Is it possible? I guess we'll find out.

Wednesday, March 17, 2010

Saint Patrick's Day

I'm trying to figure out how a holiday commemorating the patron saint of Ireland has become a day filled with alcoholic intake. Maybe this is another example of the ongoing Hallmarking of all aspects of American life. One of the ironies is that Ireland has now begun to copy the bacchanalic aspects of the feast. Twenty-thirty years ago Saint Patrick's Day in Ireland looked like this:

In fact, all the pubs closed on St. Patrick's Day in Ireland. Families attended church and later went for a walk or worked in the garden.
The holiday was exactly that, says Carmel McCaffrey: a holy day.
"When I was a child in Ireland, the pubs didn’t even open. It was a holy day. We went to church," the Irish scholar and former Johns Hopkins professor said in a phone interview from Maryland. "We'd usually just meet up with friends and have a meal. There were no drinks."

That's not what you'll hear in Dublin today, as the holiday to remember the British missionary to the Druids switches focus from religion to revelry.

A couple interesting tid-bits, the story behind the story. March 17 is believed to be the date of Patrick's death. He lived in the fourth and fifth century and was born of Roman parents who lived in Roman- Britain. It's interesting how little is really known about him. Much of the writings about his life, and the legends that developed came from the 7th century and later.

It's hard to believe what his "day" has become. I'm not passing judgement one way or another. Just amazed.

Friday, March 12, 2010

And We Laugh at the Greeks

I realize it is easy to snicker at the sham that is the Greek economy. This NYTIMES article illustrates the folly of their system--- 580 government identified job categories that merit early retirement + government pension at age 50 for women and 55 for men. It's hard to believe. Before we laugh too much at the Greeks maybe we should take a closer look at what is going on in our own country because it seems to me that we are moving down a parallel path.

The US February budget numbers came out the other day and there is no polite way to describe the mess we face. It's almost surreal that we are only able to fund a third of our expenditures ( we are borrowing the rest). What blows my mind is the fact that we as a national economy are coming off of a 30 year cycle of relative prosperity, yet we face huge unfunded entitlement obligations in the not too distant future with no money in the piggy bank and an unfathomable credit card bill. And I repeat, this is after several decades of prosperity. I couldn't do a better job of describing the February budget debacle than Karl Denninger of The Market Ticker does ( highlights below). If and when we lose the abiltiy to borrow cheaply it will not be pretty.

50% of the federal budget right now goes to entitlements.
This last month we posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion.
Isn't that special. We only funded 32% of expenditures?
Remember - entitlements were half of that $328 billion.
So let's see if we can do the math here.
Entitlements were about $164 billion last month in spending. The rest was, of course, the rest.
But we only took in $107 billion.
So even if we eliminated all entitlement spending we still did not have enough money to cover the rest.
If you want to know why the market is floating higher it's for the same reason you feel all giddy and special when you strike out on the town with your shiny plastic. You have magic cards!
It doesn't matter if you have a job, it doesn't matter if you have any money in the bank, so long as you have magic cards.
For how long does the United States continue to have magic cards?

Wednesday, March 3, 2010

New Michael Lewis Book -- The Big Short

I love reading Michael Lewis. Lewis has the uncanny ability to capture uniqueness in the characters he writes about and in the process keeps the reader totally engrossed in the quest of his real-life protagonists. It doesn't matter if we are talking about a major league baseball general manager ( Money Ball), an inner-city black high school football player trying to fit in with his adopted white southern suburban family ( The Blind Side) or an Internet mogul looking for his next billion dollar score ( The New New Thing) Lewis's subjects are fascinating to follow.

I read an excerpt last night from the new Lewis book The Big Short I think he has another winner on his hands. Lewis has focused on one Michael Bury in his latest. Bury is a guy we've never heard of until now but boy is his story interesting. Picture a total loner, a guy that by the age of 29 really could say that he had no close friends.A guy that walked away from his medical profession to start a hedge fund ( at the time he had a negative net worth of roughly $100K) What Bury did have though was the desire and interest to fastidiously study hundreds of mortgage securities in the early years of the new century. He became convinced that the housing market was ready for a major tumble and his quest became finding a way for his hedge fund to profit from what he perceived to be an upcoming financial debacle.Others such as John Paulson have been chronicled as having been big winners in the mortgage meltdown, yet Bury was really the first one to identify the opportunity and until now has largely operated off the radar screen.The hoops he had to jump through to be successful were monumental. Many of the episodes chronicled go in the, " you just can't make this up" category. I am really looking forward to the book release as I found the excerpt to be " can't put it down" stuff.