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June 12, 2010

Financial Briefing: Weekly Wrap-Up

The equities markets ended the week up signficantly from their lows of mid-week. The Dow closed on Friday at 10,211.07 and the S&P 500 at 1,091.60. Volatility is still very high, which is frightening away many individual investors.

More after the jump.


Interesting interview with Congresscritters about the FinReg bills in Congress.

The BP oil-spill saga has matured into a full-blown international crisis with Britain. President Obama's fiery rhetoric (particularly the "kick someone's ass" remark) has inflamed public opinion in Britian, who think that Obama's now-legendary dislike for Albion is once again bubbling to the surface. The most contentious issue concerns the fact that BP's dividends form a core part of many of Britain's pension funds -- if BP suspends the dividend, it will cause pain to many British pensioners. (And if BP eliminates the dividend due to liabilities incurred by the spill, or goes out of business altogether, it could wreak grievous financial harm on Britain as a whole and not just on its pension funds.)

Like their American cousins, the British are worried about inflation. British austerity plans, like those in other European countries, rest largely on the willingness of the population to endure deflationary policies (spending cuts and reductions in services) since economic growth is pretty much out of the question. But since Britian has a huge welfare state (the NHS, the dole, etc.) for more than fifty years now, it's not clear that the British people will be willing to accept any cuts in their entitlements any more than their Greek or Spanish counterparts. This means that the English government's only alternative will be to run the printing presses.

It's fashionable for governments and corporations to hate hedge funds. They tend to form the nucleus of the "speculators" who politicans like Angela Merkel and Nicholas Sarkozy rail against. Yet they serve a valuable and maybe vital function in the markets, as WSJ reporter Sebastian Mallaby exlains in "Learning to Love Hedge Funds"..

Via Minyanville comes the story of Chamillionaire (a fellow who does some sort of urban performance art called "rap") who has decided to strategically default on the mortgage to one of his homes. A quote from Mr. Chamillionaire: "I felt like I didn't want to pay that much money a month for a house I'm never at. ... I just didn't feel like it was a good investment. ..." You'd think a man who chose "millionaire" as part of his name would be more honorable about meeting his contractual obligations, but then we do live in debased times.

US retail sales in May disappoint even as stock markets rise, showing a fairly clear disconnect between the equities markets and the "real" economy.

The European fiscal crisis grinds on. Greek default has become a near-certainty to most observers, but a larger issue is the indebtedness of many European banks who hold significant stocks of sovereign bonds issued by the PIGS nations. A prisoner's dilemma has ensued whereby a bank cannot reduce the risk: if they sell their foreign sovereign bonds, the sovereign bond market would collapse; if they hang on to the bonds, a default will trigger a massive loss on their investment. The $1 trillion aid package cobbled together by the ECB and the IMF will only buy a little time, not solve the problem.

Japan may be queueing up behind Europe as the next economic basket-case to threaten the world economy. The Japanese Prime Minister has warned that unless Japan gets its debt under control (which currently amounts to more than 200% of Japanese GDP), it will follow the same path of Greece. Japan has an aging workforce and a lowest-low birthrate, which along with the massive debt combine into a time-bomb that is primed to explode sometime in the coming decade as Japanese workers retire in greater numbers. (My own view is that Japan is hosed -- like Greece, their only possible alternative, long term, is to default. Luckily at the present time most of their debt is held by their own citizens, but this could change when they need to roll over their debt. They'll need to start selling to foreigners, and will need to offer competitive rates, which will in turn increase borrowing costs...at exactly the time that tax revenues are falling and entitlement spending is skyrocketing.)

And for those contrarians out there: ignore the doomcriers! Debt is good! Lever up and go wild, baby!

California? Boned.

Today's message brought to you by the lesser salty snacks: Funyuns, Bugles, pork-rinds, and pretzels. Life is not all potato chips and peanuts!

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posted by Monty at 09:20 AM

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