April 10th, 2010
CHICKENS COMING
HOME TO ROOST
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It is been a long
hard struggle, but the economy is showing signs of life.
Unemployment, however, continues to
be an extraordinarily difficult problem, especially if one looks
at the number of those who have been out of work for more than
six months and the underemployed. Those numbers show that "real"
unemployment is still closer to 17% than 10%.
Interest rates are beginning to
increase which will be very good news for investors who would
like to receive more than a pittance on their money funds and
decent returns on quality bonds.
Interest rates are increasing in the
marketplace despite the fact that the Federal Reserve continues
a policy of virtually zero interest rates hoping that flooding
the country with money will help the economy and therefore the
employment situation. That has not worked well so far, and the
doctrine of unintended consequences continues to be in effect.
In other words these policies could very well have the same
unintended consequences that got this country into the mess in
the first place.
Mr. Greenspan, former head of the
Federal Reserve, is presently trying to defend himself against
charges of causing, or at least failing to prevent, the economic
meltdown before the US Financial Crisis Inquiry Commission. Many
think his easy money policies caused the "Bubble." Greenspan
said on April 7: "I was right 70% of the time, but I was wrong
30% of the time."
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The question is whether the same mistakes are
being made all over again. This time by Fed Chairman Ben Bernanke.
Zero cost money ultimately results in Bubbles and Inflation.
From time to time we look out for
"Chickens coming home to roost."
Now is an appropriate time because there
seem to be an awful lot of chickens in the neighborhood. The Greek
chicken, for example, has actually managed to run out of money. The
socialist Greek government has given away more money than the
government has. They want the Germans or some sort of EU plan to
bail them out. Note: If the Germans do not come through and
generously give the Greeks the money to keep them from defaulting,
the Greeks will be very upset with the Germans.
People on welfare become extremely upset
not with themselves but with their caretakers if they fail to grant
every wish when the chickens come home.
Meanwhile there has been a run on Greek
banks as over €10 billion deposits have been lost in the last two
months, and interest rates on Greek bonds have been skyrocketing.
For example, yields on Greek bonds on several occasions were 450
basis points higher than on comparable German bonds during the week
of April 5, 2010.
There is a question as to whether there
will be takers for new Greek bond offerings that the country must
issue in order
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to pay off its maturing bonds and avoid the
first default by a European Union member. Despite this the
Greeks are prohibiting hedge funds from buying new bonds. We
wonder if hedge funds would ever buy the bonds to cover their
short positions? No, not possible. How foolish of us to even
have that thought!
Ultimately we suspect there will be
some sort of workout for the Greek chicken with the European
Union as the EU is greatly concerned about other members (larger
chickens) who will soon be coming after the Greek blowup with
similar but larger problems. Not surprisingly, the same causes
will produce the same effects.
The English chicken is marching
toward its socialist nirvana, and there are warnings by credit
agencies that English sovereign debt could lose its AAA rating
in the fairly near future. The American chicken is following the
English chicken as the government competently and persistently
borrows more than it can pay repay. There is talk of the US
losing the highest ratings on its Treasury bonds, and we have
heard of instances where certain high-grade corporations have
been able to borrow at rates less than comparable treasuries.
The US sadly continues to issue more
paper bonds and more fiat/paper currency. The gold market is
taking note of this, and gold is presently selling around
$1160/ounce. Serious talk continues about the dollar losing its
reserve currency status. China's thoughts?
The Citigroup chicken keeps coming
back again and again. Chuck Prince, a lawyer who had served as
general counsel and who was Sandy Weill's right hand man for 10
or so years, and Robert Rubin former Treasury Secretary and Citi
director, were testifying on Thursday, April 8, 2010, before the
US Financial Crisis Inquiry Commission as to
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how the bank under their supervision managed more
than $50 billion in losses that ultimately led to a $45 billion
government bailout. Citigroup after all has been deemed to be "too
big to fail." One can tell it's size by looking at the salaries
received by these most apologetic superstar executives.
According to the April 9, 2010
Financial
Times Mr. Rubin testified yesterday:
"Almost all of us involved in the financial system… missed the
powerful combination of forces at work and the serious possibility
of a financial crisis. We all bear responsibility for not
recognizing this, and I deeply regret that."
We do not know precisely to whom the
former Treasury Secretary was referring when he said "We all bear
responsibility…"
We don't bear that responsibility, and
we did not miss "the powerful combination of forces at work and the
serious possibility of financial crisis."
Chickens are coming from Los Angeles,
the state of California, and the states of New Jersey, New York and
Michigan to name a very few. Chickens are coming from everywhere.
The money is gone, and the chickens are coming home. They are
bringing a message that cannot be misunderstood.
The chickens will continue to multiply
and keep coming at us as long as governments, states, municipalities
do what they do best --- spend more money than they have and rely on
us, the taxpayers, to bail them out. And that ain't chicken feed!
John W. Hamilton
April 10, 2010
PRIVATE WEALTH MANAGEMENT SINCE 1980 - 30 YEARS
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2009 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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