Ripple Effect of Rig Collapse

View audio slideshow at FT.com.

The BP oil spill in the Gulf of Mexico means that hopes of an economic recovery anytime soon are going up in smoke. Sure, the banksters shuffling monopoly money on Wall Street are getting their own little recovery in quarantine. But for the rest of us dealing with the real world of tangible goods and dwindling resources, life just got tougher. Energy costs must rise to pay for clean-ups, collateral damage, escalating insurance premia, regulatory compliance, and ultimately the migration to a greener fuel mix.

These costs will be a drag on new business investment in the near term, as companies cannot reduce energy consumption as easily as they can, say, headcount. Add to the energy surtax the fiscal drag of over-extended local, state, and federal governments, and you have a recipe for protracted downtime in the U.S. economy.

There is one entity, according to Minyanville's Jeff Macke, that welcomes the spillage:

Exxon, though largely finished with a two-decade legal process, won’t be off the hook for the worst oil spill in history until BP’s spill takes the title sometime in the next few weeks. Somewhere in Exxon offices they’ve got a Gallons Spilled tote board that they are watching the way Jerry Lewis used to watch the donation total board during his telethons. Balloons will drop from Exxon’s corporate ceilings when someone else is officially responsible for the Worst Oil Spill in History.

P.S.--One of the rig workers pulled to safety, Jarod Oldham of Peru, played hoops for me at GRCC during his early grade-school years. Now a strapping 6'6", he was easy to find.

Jack Bauer Signs In from Baghdad

Scott Stewart, "Jihadists in Iraq: Down For the Count?"

[excerpt:]

This type of rapid, sequential activity against jihadists by U.S. and Iraqi forces is not a coincidence. It is the result of some significant operational changes that were made in 2007 in the wake of the American surge in Iraq. The then-commander of the Joint Special Operations Command (JSOC), Gen. Stanley McChrystal, was instrumental in flattening hierarchies and reducing bureaucratic inefficiencies in both intelligence and special operations forces activities inside Iraq in order to create a highly integrated and streamlined organization. The result was the capability to rapidly plan and execute special operations forces raids based on actionable intelligence with a limited shelf life — and then to rapidly interrogate any captives, quickly analyze any material of intelligence value seized and rapidly re-task forces in a series of follow-on operations. The resulting high tempo of operations was considered enormously successful and a key factor in the success of the surge, and recent developments in Iraq appear to be a continuation of this type of rapid and aggressive activity.

Such operations not only can produce rapid gains in terms of capturing and killing key targets, they also serve to disrupt and disorient the enemy. According to Iraqi Maj. Gen. Qasim Ata, AQI [al Qaeda in Iraq] is currently in disarray and panic, and he believes that the organization is also facing money problems... Following the recent raids in which senior operational commanders and bombmakers have been captured or killed, it also appears that the group may also be facing some leadership and operational-expertise difficulties.

Flattened hierarchies? Enhanced interrogations? Rapid turnarounds? I know who does that. All in 24 hours.

Complete article viewable at Stratfor.com.

Up, Up and Away!

Yield on Greece's Ten-Year Bonds

If you are Greek, you do not want to be borrowing money right now, because interest rates are going through the roof. The chart above is actually a few hours out of date. The yield on ten-year bonds issued by the government of Greece reached 9.68 percent yesterday, but that was before Standard & Poor's downgraded Greek debt to BB+, or junk status. Overnight the yield on the ten-year shot up to over 11 percent, more than 800 basis points above the benchmark German bund.

There are no meaningful prices available for Greece's two- and five-year notes, a huge red flag signaling that default is imminent. Portugal may be next, with Spain to follow. The dominoes left standing when this is all done? Your guess is as good as mine.

Red Tide

[click to enlarge]

This graphic comes from the Chicago Tribune. The "pink" debt could not be sold by the government to public investors without driving interest rates to punishing levels. Instead, it was swapped for funds held in trust for the citizenry--primarily Medicare and Social Security, which have been funded over the years by employers and employees for future benefits. The government has essentially absconded with these citizen contributions and can only replace the missing money by (you guessed it) taxing citizens. Heads we lose, tails we lose again.

Monday Muse

Juice Newton

Queen of Hearts

Quote for the Week, April 25-May 1, 2010

Do not go where the path may lead, go instead where there is no path and leave a trail.
--Ralph Waldo Emerson

Activity Without Productivity

George Soros, "America Must Face Up to the Dangers of Derivatives"

[excerpt:]

Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. It involved a complex synthetic security derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. This synthetic collateralised debt obligation did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. The primary purpose of the transaction was to generate fees and commissions.

This is a clear demonstration of how derivatives and synthetic securities have been used to create imaginary value out of thin air. More triple A CDOs were created than there were underlying triple A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors. The process went on for years and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue.

Complete article viewable at FT.com.

Job-Seekers Yield to Rent-Seekers

David Stockman, "Did Washington Save the Economy?"

[excerpt:]

At the end of the day, the central missing ingredient is the absence of any apparent prospect for significant secular growth in most job categories across the US economy. Moreover, that ingredient has been missing for more than a decade now, even if temporarily obscured by the past headlong expansion of the HES [health, education, and social spending] Complex. Here, the underlying reality is that the American consumers’ great spending spree during the Boom years didn’t fund a corresponding cornucopia of jobs on Main Street. Instead, these dollars flowed to the factories of East Asia and to windfall rents captured by speculators in domestic land, resale properties, and financial products. Stated more graphically, the boom-time spending that didn’t end up abroad flowed in the main, not horizontally to the job market multitudes throughout the American hinterlands but vertically into the towering incomes of the Wall Street few.

Not coincidentally, the recent frantic money-printing by Bubbles Ben and his posse hasn’t changed this condition. In the present case, nearly all of the $1.7 trillion monetization of government and agency paper undertaken by the Fed over the past year has literally been sequestered within the canyons of Wall Street. The freshly minted money so beneficently bestowed either sits idle as book entry excess bank reserves at the New York Fed or has flooded the Fed-controlled repo market where it provides zero-cost funding for Wall Street’s manic trading bots and a fresh installment of the bountiful rents they extract.

Complete article viewable at Minyanville.com.

Monday Muse

Pat Benatar

We Belong

Quote for the Week, April 18-24, 2010

I have a scheme for stopping war. It's this: no nation is allowed to enter a war till they have paid for the last one.
--Will Rogers

Weekly Wrap

"I'm doing God's work," said Goldman Sachs CEO Lloyd Blankfein in a newspaper interview last November. Today the Securities and Exchange Commission begs to differ, charging Goldman with defrauding investors in (pick a year, any year!) 2007. Specifically, the SEC alleges that the firm peddled a collateralized debt obligation (CDO) structured, and then shorted, by one of its own clients.

The client, hedge fund Paulson & Co., packed the CDO portfolio with residential mortgage-backed securities of the subslime variety, the kind built to fail during the mortgage frenzy of the mid-aughts. Then Paulson paid Goldman $15 million to market the ticking time bomb to well-heeled suckers. Goldman did so, failing to disclose to investors how or by whom the securities were selected. Meanwhile, Paulson purchased credit default swaps from Goldman as a bet that the portfolio would blow up. Which it did. Paulson made about a billion on the deal. The CDO investors were out the same amount.

MIT's Simon Johnson, blogging at baselinescenario.com, calls today's disclosure a watershed moment, the "Ferdinand Pecora moment" for which he has been waiting. He suggests that Blankfein has some explaining to do:

Either Blankfein knew what was going on – and is therefore liable before the law – or he was clueless and therefore incompetent. Either way, the much vaunted risk management and control systems of Goldman, i.e., what is supposed to prevent this kind of thing from happening, are exposed to be what we have long here claimed: bunk.

And don't think Goldman was the only one playing fast and loose. In the words of Minyanville's Jeff Macke: "if Goldman is dirty, Citi is Pig Pen from Peanuts." The selling of financial dark matter was (still is?) an industry-wide problem with consequences yet to be fully suffered.

I wish the SEC had made its announcement 48 hours earlier. Since July I have been trading around a bearish position on the U.S. financial sector, using an inverse exchange-traded fund. The sector nearly imploded in September 2008 before the TARP bailout bought the big banks some time. But with a new wave of mortgage defaults expected this year, I figured that time was about to run out. Silly me. When JP Morgan Chase reported boffo first-quarter earnings on Wednesday and sent bank stocks en fuego, the pain became too great. I sold my ETF shares and started looking for tech longs instead.

Now the bank trade is back on. The SEC announcement comes after a relentless stock-market rally that has left even the bulls scratching their heads. In other words, we were due for a correction anyway. Add to the mix the risk of sovereign debt default (don't forget, Greece cooked its books with interest-rate swaps sold by Goldman Sachs, another piece of God's work) and a broken circle of trust, and we could have a rout on our hands. Options expiration may help prop the market today. Monday, though, could get interesting.

The stock market has been discounting a narrow slice of reality, the relative prosperity of a castle economy. Those inside the walls get to share the free money printed by the Federal Reserve and build their wealth on inflated paper assets. The unemployed and underemployed stranded outside the moat cannot understand what the party is all about. Could it be that the retail-sales boomlet in March was merely an artifact of transitory stimuli? I'm thinking of higher-than-normal tax refunds, redirected mortgage payments by strategic defaulters (the so-called "squatters' stimulus"), extended (for how long?) unemployment benefits, deep auto discounts (the Toyota-defect stimulus), an early Easter, summer-like weather, and temporary census hiring. Take those away, and what do you get?

A double dip.

Monday Muse

Grace Slick

Jefferson Airplane

White Rabbit

Quote for the Week, April 11-17, 2010

A patriot must always be ready to defend his country against his government.
--Edward Abbey

Weekly Wrap

Barack Obama is leaning on Governor Deval Patrick for a very good reason. Massachusetts, you see, is providing a test run for the kind of healthcare reform that the President envisions on a national scale. If universal health coverage can be made to work in the Bay State, then perhaps it can work in the other 49 states as well. ObamaCare needs CommonwealthCare to succeed.

But Massachusetts is struggling with costs. It has some of the best hospitals in the country--and some of the most expensive. It spends more per capita on healthcare than any other state. Insurance premiums continue to skyrocket. Campaigning for re-election in November, Patrick figures he has to do something to soothe voters. So when insurance carriers filed last month for hefty increases in rates for small-group coverage, Patrick said no.

That's when the sugar hit the fan. The insurers, caught in the same death spiral plaguing small-group pools all across the nation, need the higher premiums to break even. Since April 1 they have stopped enrolling new applicants in Massachusetts until they get a rate structure that makes sense. Patrick's insurance commissioner, on the other hand, has directed them to offer coverage at the old rates. The industry's response: we'll meet you in court.

Yesterday Suffolk Superior Court Judge Stephen E. Neel heard from counsel for the insurers that 2009 base rates are "completely inadequate and completely arbitrary." The Commissioner's office countered that insurers need to file an administrative appeal first before seeking relief in court. That is a delay that the Commissioner can more easily abide because, after all, it is not his bottom line that is hemorrhaging red ink. Judge Neel will decide by Monday whether the insurers must retreat to Square One.

By attempting to cap rate increases, the governor is skirting, not solving, the problem of runaway healthcare costs. As Scot Lehigh remarks in this morning's Boston Globe, "Patrick’s approach is a bit like banging on the TV screen because you don’t like the DVD that’s playing." The problem is embedded in the medical delivery system itself, according to a recent report by Massachusetts AG Martha Coakley. (Remember her? The roadkill plastered to Scott Brown's tire treads?) The insurers are merely messengers.

The crux of the dispute is this: can a government regulator compel private carriers to subsidize services at below-market rates? For that matter, can the government compel consumers to buy the services? And can the government dictate what providers charge for their services? These are all things that ObamaCare proposes to do.

Democrats who are celebrating the new health reform act as "historic" in the same way as Franklin Roosevelt's New Deal legislation in the 1930s should re-read their history. FDR's reform agenda came to a screeching halt when he tried to pack the U.S. Supreme Court. Some things, as today's dealers may soon find out for themselves, just ain't legal.

A cautionary graphic appeared in yesterday's Financial Times:

The graph plots the difference between the interest rate demanded for Greek government bonds compared to that for German bonds. The bigger the difference (or "spread"), the greater the perceived risk of default for Greek debt relative to Germany's (Germany being the safe-haven benchmark within the Euro-zone).

What do I care? asks Joe Six-Pack, I only drink Bud anyways.

See, Joe, here's the deal. A higher debt premium makes it more expensive for Greece to service the debt, thereby impairing its credit standing (Fitch just downgraded Greek debt to BBB-, one notch above junk status), thereby driving rates even higher. It is a vicious feedback cycle over which Greece has absolutely no control. None. At some point the bond vigilantes take over and cause the default that lenders and borrowers both are trying so desperately to avoid. (Think back to Lehman Brothers in September 2008.) Minyanville's James Kostohryz reports today that bank runs have started in Greece, presaging that the end is near. In his words, "If Greece goes down, this is a big deal."

The bigger problem is that there are a raft of countries ready to "go Greek," including (I hafta tell ya, Joe) the U-S-of-A. Through its Zero Interest Rate Policy, the Administration here at home has been able to roll over government debt at historically low rates. But ZIRP can get zapped at any moment, if the bond vigilantes so decide. Earlier this week the rate on 10-year notes flirted with 4%. If we get a breakout on yields, the federal budget deficit (now running at about $1.5 trillion annually) will explode higher.

That makes America's economic recovery a lot like Cinderella's coach at 11:59 p.m. It looks good--until it doesn't.

Monday Muse

Sharon Corr

Goodbye

Quote for the Week, April 4-10, 2010

A man's silence is wonderful to listen to.
--Thomas Hardy

Weekly Wrap

Cool! Tax error in my favor. Collect $800. Do not pass Go. Proceed straight to my bank and deposit. Now. Before the ink disappears or the check self-destructs. Maybe it's a hologram of a check, because I can't believe this thing is for real. What did I do to deserve this?

Turns out that my wife and I each qualified for something called a Make Work Pay tax credit of $400 each. When I filled out our joint income-tax return two months ago, I did not claim the credit. I did not realize it was for us. When I saw "credit," I figured it was for illegals or NINJAs or fat-cat investors, not for plain ol' middle-class folks. I thought "Make Work Pay" was just a variation of the usual "Make Workers Pay." No way was I going to trigger something like that. I decided to leave that part blank and hope that the IRS computers would not flag me.

Apparently the computers have been re-programmed. It used to be that they would scan your return in search of additional ways to gouge you, even for ridiculously small amounts (I was once billed, incorrectly, for five bucks). Under Obamacare, they look for ways to pay you back. And the Make Work Pay program is a big-time payback. Anyone with annual earned income under $95,000 is eligible. That adds up to over $10 billion a year. The IRS power-vacuum that used to suck greenbacks out of your wallet has turned into a leaf-blower. Now there is Change that y'all can believe in!

If the money really belongs to us, then why did the government take it in the first place? Think of the time and expense involved in bureaucrats' collecting, fondling, then returning what's yours (the money, I mean). When lawmakers sell their votes for bribes, it's called corruption. But when they dispense "credits" to buy votes, it's called stimulus. Eventually the credits will have to be taken back anyway to repay the creditors (the buyers of U.S. Treasuries) who financed the give-away in the first place. Watching the money go back and forth is enough to give you whiplash.

The monthly employment report from the Bureau of Labor Statistics reminded us this morning that there are still 15 million out-of-work Americans who would love a paycheck, not to mention the Make Work Pay credit that goes with it. Headlines trumpeted that 162,000 jobs were added in March, the biggest gain in three years. But 48,000 of those were temporary census hires who will be back on the street by mid-summer. So think instead of 114,000 net new jobs, not enough to offset the increase of 398,000 in the labor force. The unemployment rate remained at 9.7%.

The jobs-gained number would have been higher except for one thing: the Census Bureau is having a hard time finding enough temps to finish the headcount. Here in Oxford County positions, particularly for counters in sparsely settled areas, go unfilled. Short-term, part-time jobs apparently hold little attraction for displaced workers looking for real, lasting jobs. Those folks are still waiting, no matter what the government cheerleaders are saying. And three months from now they will be joined by tens of thousands of teachers to be laid off before the start of the next school year.