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Mark's Market Blog

9-17-11: Greece still teeters on the edge

By Mark Lawrence

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Markets were up all week on news that, um, uh, well, they were just up. Over the weekend the Greece bailout came into question an suddenly things aren't looking quite as bright. The IMF wants a commitment from Greece to lay off 100,000 more government workers and further cut state pensions. This is something like 3% of Greece's workforce.

S&P 500 March 14 2011 to September 16, 2011

Last week I predicted that Obama would pay for his jobs program with debt. I was completely wrong, and I'm still stunned. His proposal is to increase taxes on everyone making $250,000 or more, with a new minimum tax rate for incomes over $1,000,000. It really never occurred to me that he'd try to raise taxes in the current environment. His jobs bill is now DOA. What's next? The house republicans will write something completely different and call it Obama's jobs bill. Senate democrats will compromise on tax breaks for new jobs. Something will pass, but it will be so watered down it will resemble the open-bar drinks at your worthless cousin's fourth marriage. Probably taxes do need to be raised, but this must be a part of a larger deal where entitlements and defense spending are seriously cut back. And it must be that California go in trouble by taxing only the "rich." When the economy went south and the rich moved to lower tax states, California entered into a seemingly perpetual budget deficit. The lesson is clear, taxes must be broad based and perceived to be fair.

The post office, which lost $8.3 billion last year, looks to lose $11 billion this year. They're unable to make a scheduled $8.5 billion contribution to the federal employees retirement fund. Horrors! The problem? evry1 nw chts w/ txt msgs, nt mail. Actually text messages are going to switch back to normal text soon - the latest Android phones let you speak your message, then they convert it to text for you. The Post office's solution? Either a bailout (good luck with that - a bunch of union government employees asking a republican house for free money...), or a radical restructure. Expect to see a bit over 100 mail processing plants close, with the result that most 1st class letters take two days instead of one. Expect to see 150,000+ layoffs. Saturday delivery will be history. More and more post offices will be closed, replaced with kiosks rented inside grocery stores. Europe has been working with these changes for a decade, and their system works well.

You know that Greek default that's not going to happen? Bernanke and the European Central Bank announced a new program to make money available to European banks in the case of a big shock, you know, like maybe a Greek default. Treasury Secretary Geithner, the man who never met a bank he didn't love, is in Poland telling European officials how to save their banks in the case of a big shock, you know, like maybe a Greek default. Geithner's speech apparently didn't go over well: Greek prime minister Papandreou canceled a planned trip to New York to meet with the IMF and is heading home in a rush. And remember, if the Greeks default, then deposits in their banks are at great risk. Anyone in Portugal or Ireland who has at least the brains God granted to sea cucumbers will immediately withdraw their money from the bank, leading to certain bank runs in Ireland and Portugal, and highly likely bank runs in Spain and Italy. I still claim that if Greece defaults, Ireland and Portugal have little option but to default at the same time. George Soros, who is widely admired and hated, says it's time to start thinking about a default by Greece, Ireland and Portugal. Nomura bank estimates there's an 80% chance the Euro will hold together, and only a 20% chance it will break up. I think they're extremely optimistic. UK ex-prime minister and former treasury secretary Gordon Brown says Europe is in much worse shape than the US was at the time of the Lehman bankruptcy: during Lehman, the banks were all broke, but the government and the economy were fine. In Europe right now, the banks are all broke, the governments are all broke, and outside of Germany the economy is pretty rocky.

What do the Euro problems have to do with the US? Our banks are holding undeclared and undisclosed Credit Default Swaps with European banks, so if bonds go bad, our banks will have to pay up something, no one is sure how much. Our banks are currently consumed with borrowing from the Fed and loaning to the Treasury; they're not writing any new loans. If you want a loan to buy or lease a Boeing jet, for example, you would most likely go to a European bank. If the European banks lock up, Boeing and other large exporters like GE are screwed.

Jim Cramer interviewed Geithner, and asked specifically about CDS's, those unregulated stock and bond insurance policies that brought down Lehman and AIG. For normal insurance, you must have an "insurable interest." That means I can't take out a life insurance policy on you, as I have no financial interest in your life. CDS's can be taken out on anything, whether you own them or not. People were taking out CDS insurance on mortgage backed bonds that they didn't own. Cramer: "Should we outlaw CDS on things we don't own?" Geithner: "No you don't want to get in the way of people hedging their risk. That's bad for the economy. Bad for growth." I am completely befuddled on how outlawing CDS's on things you don't own makes you take on more risk. Apparently Geithner knows something I don't know - like how to make fortune at Goldman Sachs, then get a government job bailing out your friends.

Mid term elections in Germany continue to go heavily against Merkel's party. It's been estimated that the cost of bailing out Greece, Ireland and Portugal are about $2,000 per European tax payer; the cost of a Euro breakup and the resulting banking crisis would be more like $20,000 per taxpayer. None the less, bailouts of foreigners are intensely unpopular in the Germanic and Scandinavian countries.

Belgium has not had a government for 18 months, due to the last election which was split between the Germanic northerners who wish austerity and the French southerners who want a large welfare state. Last week the caretaker prime minister quit, so right now they don't even have a "temporary" government. Meanwhile Belgium's finances continue to be under strain and it would appear that perhaps soon they will be added to the list of troubled European countries.

Unemployment side effect? Drug deaths have doubled in the US in the last decade; more people died last year from drug overdoses than from traffic accidents. Popular drugs to die with: OxyContin, Vicodin, Valium, Xanax, Fentanyl. That last one is new to me - it's a new synthetic that's 100 times more powerful than morphine.

The regents of the university of California, in reaction to state budget cuts in their allowance, are considering an 18% per year tuition hike for each of the next four years, increasing tuition from about $10,000 a couple years ago to as much as $22,000 in 2015-2016. Meanwhile, California, which has about 10% of the country's population, pays out about 32% of the country's welfare. If we were to cut our welfare payouts to the level of Wisconsin or Minnesota, two relatively liberal states, we would save about $24 billion per year and our budget would go into balance immediately. Apparently free health care and subsidized food and housing for illegals is more important than educating our children. In 2004 spending on California prisons passed up spending on California universities and that gap continues to grow. This is one of the reasons California has so much trouble tackling the illegal problem: the prison guard union is big supporters of illegal immigration, they make serious money on guarding illegal felons.

Science: Dutch researchers report that eating white fruits and vegetables - apples, pears, apple juice, apple sauce, bananas, cauliflower, chicory, cucumber and mushrooms - reduce your risk of stroke. An apple a day reduces your stroke risk by nearly 50%.

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