Archive - Jun 21, 2011

1999, the year the Matrix was released and the year dot.com companies trampled on the rules of fundamentals in investing. A look at the sustainability of Groupon's valuation and business model...

A few weeks ago we pointed out what may be the most troubling (and Marxist) observation in America's labor arena, namely that the labor's share of national income has dropped to the lowest in history as a record number of Americans now focus on wealth creation through assets (i.e. owners of capital) instead of labor. In his just released latest letter (below) Bill Gross piggybacks on this observation in what is one of the most scathing notes blasting the traditional of higher education, and in essence claiming that college, as means of perpetuating a broken employment status quo whcih redirect labor to a now-expiring Wall Street labor model, is now worthless: "The past
several decades have witnessed an erosion of our manufacturing base in
exchange for a reliance on wealth creation via financial assets. Now,
as that road approaches a dead-end cul-de-sac via interest rates that
can go no lower, we are left untrained, underinvested and overindebted
relative to our global competitors. The precipitating
cause of our structural employment break is both internal neglect and
external competition. Blame us. Blame them. There’s plenty of blame to
go around." And why college graduates have only a 6 digit loan to look forward to: "American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace." And some very bad news for the communists in the White House and the chimpanzees in the San Francisco Fed who continue to believe that unemployment is anything but structural: "The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street."

Anticipation of the Greek government passing through today's confidence vote successfully witnessed a re-emergence of risk-appetite in early European trade. This provided support to EUR during the session, witnessed strength in equities, and Eurozone 10-year government bond yield spreads narrowed across the board. However, EUR/USD did come under some pressure following much worse than expected German ZEW survey results, whereas Euribor futures received support after the ECB allotted higher than expected amount in its weekly refinancing operation. In other news, GBP weakened following dovish comments from BoE's Fisher, who said that further quantitative easing is still an option. Moving forward, markets look ahead to existing home sales data, allied with API inventories figures from the US later. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16-May'18, with a purchase target of USD 4-5bln is scheduled for later in the session. Moreover, any comments pertaining to the Greek debt situation or the vote of confidence will be keenly watched.

Open Europe has released a paper titled "Abandon Ship: Time to stop bailing out Greece?" which recaps all the salient points well-known to everyone on why continuing to bailout Greece is the worst possible decision available to Europe, yet which will come over and over simply to prevent the European banking oligarchy from encountering an Event of Actual Loss (as defined by Encyclopedia Britannica). "Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out. EU leaders should instead be planning for how such a default could be managed in as orderly a manner possible." Yet the main reason why European taxpayers should be concerned about the happenings in Athens, which are nothing but the latest in a now endless series of taxpayer to banker capital transfers, is that as Open Europe says by 2014, almost two-thirds of Greek debt will be taxpayer-owned! "via the bail-outs, so-called official sector (taxpayer-backed) loans are gradually replacing private sector loans. We estimate that today each household in the eurozone underwrites €535 in Greek debt (through loan guarantees). However, by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. The cost to European taxpayers of what looks like an inevitable Greek default will therefore  increase radically in the next few years, making a second bail-out far more contentious than any of the previous eurozone rescue packages." Open Europe economic analyst Raoul Ruparel added: "“A second Greek bail-out is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years. Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers....Although the uncertainty associated with such an exercise shouldn’t be underestimated, EU leaders should plan for a full, orderly restructuring, which would deal with Greece’s massive debt burden, as soon as possible. However, an honest discussion also needs to be had about whether Greece can realistically remain within the eurozone." But what "honesty" is possible when the only policy is to extend and pretend until it all finally comes crashing down?

• Papandreou Confidence Vote May Decide Greece’s Fate (Bloomberg)
• Fitch sees risk of Greece, U.S. debt defaults (Reuters)
• China’s new bond buying hints at shift to euro (MarketWatch) as was reported on Zero Hedge 3 weeks ago
• David Cameron: We won't bail out Greece (Telegraph)
• Change in China Hits U.S. Purse (WSJ)
• Debtors hail changes to EU rescue fund (FT)
• SEC Should Free ’Fab’ Tourre, Target Big Fish: (William Cohan)
• German energy plan seen as ‘viable’ (FT)
• Kenya Shilling at 17-Year Low on Inflation (Bloomberg)
• China Floods Claim Victims, Crops (WSJ)

Reuters has compiled a useful summary for everyone confused why the S&P may be trading with the volatility of a 3-page Hank Paulson blank check TARP proposal day, based on what a few MPs in Greece decide to vote, or not, for, in just under 10 hours.

• Confidence vote in Greek parliament at 2100 GMT
• Representatives from "troika" of EU, IMF and European Central Bank in Athens for talks through June 22
• European Union summit meeting in Brussels on June 23-24
• Parliamentary vote on more austerity steps tentatively set for June 28
• Main labour unions to launch 48-hour strike on day of austerity vote

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
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