Mish's Global Economic Trend Analysis

Critical Middle-Class Tax Cut Vote Coming Up: Will Democrats Divide and Conquer Strategy Work?
Corporate Bond Sales Collapse, Corporates on Pace for Worst Monthly Returns Since October 2008
UPS, Dow, Northrop Grumman Borrow Money to Fund Pension Plans; Massive Lies at CalPERS to Hide Pension Losses
Miracle of Survival and Falling Inflation Expectations
Vote of No Confidence
Terms of Enslavement; Irish Citizens Say "Default"; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro

Critical Middle-Class Tax Cut Vote Coming Up: Will Democrats Divide and Conquer Strategy Work?

Posted: 29 Nov 2010 10:16 PM PST

A critical vote on tax cuts and unemployment insurance benefits is coming up in the lame-duck session.

The president wants middle-income tax cuts extended, but he wants tax cuts for those making over $250K to expire. The Republicans have generally said "all or nothing".

Unless Congress acts, consulting firm Deloitte Tax LLP estimates the tax bill for a family earning $70,000 would rise by about $2,600. Moreover, tax rates on dividends and capital gains will go up, as will federal taxes on estates worth over $1 million.

All or Nothing?

It's very difficult to believe Republicans would throw everything down the toilet if they do not get tax cuts extended for those making over $250,000.

Moreover, Democrats want a number of things Republicans don't, such as unemployment insurance. This creates bargaining opportunities on both sides.

The Unemployment Benefits Bargaining Chip

Unemployment benefits for roughly 2 million unemployed are about to expire. That so many have used up 100 weeks of benefits is a testament to the length and severity of the recession.

It's the Democrats who want to extend unemployment benefits, not the Republicans.

This bargaining chip is why I have said on a couple of occasions that I expect a deal: Republicans will get their tax breaks while the Democrats get unemployment insurance extended yet again.

A Test of Mettle

With that backdrop, please consider Democrats to Test Republican Mettle With Tax-Cut Vote

U.S. House Speaker Nancy Pelosi will schedule a vote this week on legislation that would retain lower tax rates and increased credits that apply to the first $250,000 of a married couple's gross income or $200,000 for a single person, said her assistant, Maryland Democrat Chris Van Hollen.

"There should be an early vote on middle-income tax cuts" before the Senate considers alternatives on Bush-era tax cuts set to expire on Dec. 31, said Baucus, a Montana Democrat. The vote's timing will depend on the rest of the Senate's agenda, he said.

Extending the tax cuts permanently would cost the government $5 trillion in revenue and interest on the debt over the next decade, the Congressional Research Service estimated in October.

Failure to extend all the tax cuts would subtract 1 percentage point from growth in the gross domestic product, according to an estimate released in November by Barclays Capital, reducing projected growth in 2011 from 2.8 percent to 1.8 percent, with "sharply lower growth" in the first quarter.

Senator Dick Durbin of Illinois, the senate's No. 2 Democrat, said negotiations over extending the tax cuts also will include prolonging emergency unemployment benefits and other tax credits.

"I want to put a couple other things on the table," Durbin said today on NBC's "Meet the Press" on Nov. 28. "We do have unemployment running out," and "I also want to make sure the earned-income tax credit, the childcare tax credit, and the 'Making Work Pay' tax credit are part" of the discussion.

Divide and Conquer

The Democrat strategy is to divide and conquer. Dare the Republicans to veto middle-income tax cuts, while delaying votes on everything else.

Will divide and conquer work?

With procedural issues in the Senate the overriding factor, the question comes down to which party would get most of the blame if nothing passes. Sadly, that's what's become of politics.

There are several of ways this could progress:

1. Congress passes a bloated, unaffordable bill with every favor either side wants
2. Nothing passes at all
3. Something in between.

Let's assess the odds of each scenario.

The Bloated, Unaffordable Option

Senator Durbin may cave into Republican wishes as long as he gets everything he wants (earned-income tax credit, the childcare tax credit, the 'Making Work Pay' credit, and and extension of unemployment benefits).

Should that happen, expect one hell of a bloated tax bill which would prove the Republicans are hypocrites about reducing the deficit. It would also test Obama's mettle given that he has stated the country can't afford to borrow $700 billion to extend lower tax rates for top earners.

Would the president then veto the legislation?

I doubt it, and that would make Obama a hypocrite for signing the bill and the Republicans hypocrites for passing it. Unfortunately, neither side really cares about the "hypocrites label" given that hypocrisy is an everyday occurrence in both parties.

Thus, I believe passage of a bloated bill that both sides agree we cannot afford is the most likely possibility. Assume something like a 45% chance.

The Nothing Passes Option

It is certainly possible that nothing gets passed because of Senate infighting. Should that prove to be the case, it would be a forerunner of something that is all but guaranteed to happen in the next Congress.

If "nothing passes" expect a huge jump in bankruptcies and foreclosures and the economy to veer back towards recession, with everyone pointing the finger at everyone else.

Also expect Bernanke to go ape-sheet in unpredictable ways.

Bear in mind a huge jump in bankruptcies and foreclosures my be coming anyway, but passing noting will provide the opportunity for more political finger-pointing.

I rate "nothing passes" as the least likely possibility with something like a 15% chance.

The In-Between Scenario

In-between covers so much ground that it's hard to address every case. Should this happen, I would think it would be closer to the "one hell of a bloated bill" than not.

If so, the likely compromise would be extending most of the tax cuts but capping them at $350,000 or $500,000 instead of $250,000. In return, look for scrapping the 'Making Work Pay' credit, and a minimum extension to the number of weeks of unemployment insurance coverage.

I have the odds of this at roughly 40%, not much different than the odds that "one hell of a bloated bill" passes.

Depending on the exact nature of the compromises, this could be an extremely bloated bill as well.

Looking Ahead To 2011

Don't expect unemployment insurance extensions next year, don't expect cap-and-trade, and in fact don't expect much of anything other than gridlock and for Congress to pester Bernanke.

Whatever passes in this lame-duck session (if anything) could easily be it.

If banks get into trouble again (as is highly likely), bailouts discussions will be dead-on-arrival.

Bernanke needs help from Congress to continue his misguided reflation efforts, and he has even admitted as much. I doubt that help is coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corporate Bond Sales Collapse, Corporates on Pace for Worst Monthly Returns Since October 2008

Posted: 29 Nov 2010 05:41 PM PST

Bernanke's QE II policy did nothing for jobs, nothing for bank lending, nothing for the real economy and had negative benefits for small businesses. However, the Fed did ignite a rally in the stock market and corporate bonds.

That corporate bond story now shows signs of unraveling. Please consider Bond Sales Tumble as Ireland Crisis Spills Over

Corporate bond issuance worldwide is tumbling on concern that Ireland's debt crisis will spread across Europe as returns on the securities head toward their worst month since the credit market seizure two years ago.

Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg.

The Organization for Economic Cooperation and Development cut its global growth forecast for next year, predicting a "soft spot" as stimulus dwindles.

Corporate bonds are poised for their first monthly loss since May, when they fell 0.4 percent, according to the Bank of America Merrill Lynch Global Broad Market Corporate index as of Nov. 26. They're on pace for the worst monthly returns since October 2008, when the debt lost 4.44 percent as credit markets froze in the wake of Lehman Brothers Holdings Inc.'s bankruptcy.

Elsewhere in credit markets, Hewlett-Packard Co. sold $2 billion of bonds to repay commercial paper. The cost of protecting corporate bonds from default in the U.S. rose to the highest in more than five weeks. Leveraged loan prices fell for a sixth straight day, the longest streak since August. Interest- rate swap spreads narrowed from the widest in more than four months.

Companies are cutting back on commercial paper, short-term borrowings that typically mature in 270 days or less. The seasonally adjusted amount outstanding fell for a fourth straight week to $1.065 trillion in the period ended Nov. 24, the lowest since the week ended Sept. 22, Federal Reserve data show.

Global corporate bond sales declined 64 percent last week to $30.8 billion as European sovereign-debt concerns mounted, Bloomberg data show.

Companies may be postponing bond sales until after Ireland's situation is resolved, said Greg Tornga, the head of investment-grade fixed income at Los Angeles-based Payden & Rygel, which oversees about $55 billion.

"I don't think you can find anyone who thinks rates are going to go up so much in 30 days that they can't wait to issue until Ireland isn't in the headlines anymore," Tornga said.

It's Not Just Ireland

Corporate bond bulls like Greg Tornga may even be correct that no one thinks corporate bond rates are going up. If so, everyone should be buying the dip.

Then again, if Tornga really can't find anyone who thinks rates are going to go up much in 30 days, then perhaps everyone is already "all in".

The hook Tornga offers is just what the bulls want to hear - Don't worry; it's all about Ireland; the Irish spillover will soon go away.

I am not a corporate bond investor, but I suggest the time to buy corporates is when yields are high and defaults priced in, not when fools are chomping on the bit in belief lower yields are a "sure-thing".

Record-Low Coupon Punishes Investors

On November 23, Bloomberg reported Microsoft Record-Low Coupon Punishes Investors

Redmond, Washington-based Microsoft's $1 billion of 10-year, 3 percent notes have fallen 1.95 cents on the dollar from their Sept. 22 issue to 97.19 cents as of Nov. 18, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 2 percent loss on the top-ranked debt compares with a 0.2 percent decline for investment-grade bonds since Sept. 23, Bank of America Merrill Lynch index data show.

Since July, companies from McDonald's Corp., the world's largest restaurant chain, to drugmaker Johnson & Johnson, sold debt at record low borrowing costs as investors priced in a slower economic recovery and the Fed held interest rates near zero.

Microsoft, rated Aaa by Moody's Investors Service and AAA by S&P, obtained the second-lowest borrowing costs for 10-year debt, after Johnson & Johnson and Colgate-Palmolive Co., Bloomberg data show. Investor demand and record-low yields on investment-grade debt helped the world's largest software maker issue the securities in its second bond offering.

Wal-Mart, the world's largest retailer, sold $750 million of 0.75 percent bonds on Oct. 18 at the lowest borrowing cost for three-year notes, according to Bank of America Corp., which helped manage the offering. The notes lost 0.41 cent on the dollar to trade at 99.24 cents as of Nov. 18, Trace data show.

JNK - Lehman High Yield Bond Fund

click on chart for sharper image

What's the Risk/Reward Setup?

I use the Lehman JNK index as a proxy for junk bond risk. How much lower can corporate bonds yields go? If not much, then all investors are doing is locking in low yields.

On the other hand, consider the risks. There is a very decent chance that corporate bond yields have bottomed and companies are going to have to offer much higher rates to attract buyers. If so, junk bond funds are going to get hit hard.

Moreover, if corporates get hit hard, it is highly likely equities get hit at least as hard.

Admittedly, that is a decent sized series of ifs.

However, the gain for being an investment-grade bond bull is locking in pathetically low yields just because they are 30 basis points higher than treasuries. Whoop-To-Do.

I fail to see how buying 3-year Walmart bonds at .75% is an attractive offer. I would rather sit in cash, waiting for the right opportunity than to take such rates. Hells bells, a quick check shows 3-year treasury rates are .75%. Is it impossible for treasury rates to dip while corporate bond yields soar? Here's a hint at the answer - think about what happened in 2008.

Admittedly, the potential gain for junk bonds is higher, but so are the risks, especially after the massive rally in corporate bonds across the board.

On the other hand, if corporate yields soar for any reason, then corporate bond investors are going to get hit with underperformance on assets held to term, and huge realized losses if they sell.

How soon we forget what happens when credit markets turn. Was 2008 that long ago?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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UPS, Dow, Northrop Grumman Borrow Money to Fund Pension Plans; Massive Lies at CalPERS to Hide Pension Losses

Posted: 29 Nov 2010 02:08 PM PST

Thanks to Bernanke's efforts to push down interest rates by flooding the world with dollars, companies have gotten the not-so-brilliant idea to borrow money to fund their pension plans, hoping returns will exceed their borrowing costs.

Please consider UPS Fights 'Fire With Fire' to Fill Pension Gap

Companies facing the biggest pension deficit since at least 1994 are selling bonds at the fastest pace in more than seven years to plug the hole, betting that future returns will exceed their borrowing costs.

United Parcel Service Inc., the world's largest package- delivery business, Dow Chemical Co., Northrop Grumman Corp. and PPG Industries Inc. sold at least $5.25 billion of investment- grade U.S. corporate bonds in November to fund their pensions, making it the busiest month since June 2003, according to data compiled by Bloomberg.

The Federal Reserve's effort to hold down interest rates to stimulate the economy has caused corporate pension obligations, which are pegged to bond yields, to rise by $105.8 billion this year to $1.44 trillion as of October, according to Milliman Inc. Now, companies are taking advantage of borrowing costs at about the lowest on record as Goldman Sachs Group Inc. says interest rates will rise as the global economy recovers.

"They're fighting fire with fire," John Lonski, chief economist at Moody's Capital Markets Group in New York, said in a telephone interview. "They're being victimized by low bond yields, so why not go ahead and use them as an offset?"

Few, if any, borrowers have had their credit ratings cut for issuing debt to fund pension obligations, Lonski said.

Yields may not move substantially higher over the next several years, he said. "They're willing to make a gamble that future returns will exceed the current cost of debt," he said.

"If you truly believe that rates are going up, you should be issuing debt," said Gordon Latter, a managing director at RBC Global Asset Management in Minneapolis. Latter said his firm is proposing that clients issue bonds to help fill pension deficits.

Poor Advice

You do not borrow money to invest just because rates are going up. There's a set of not so insignificant factors including expected rate of return as well as risk management that should come into play.

After this massive rally in equities, commodities, and bonds, cheerleaders think speculating in the markets is a good idea. It could work out, but it's extremely foolish.

Equity prices in the US are priced for perfection if not far beyond perfection, China is tightening, a slowdown in Europe is inevitable, and commodities have been on fire but will likely come under stress because of China and Europe.

Moreover, state cutbacks are coming, and as many as 2 million people will lose all source of income unless Congress approved a benefits extension in the lame-duck session.

I can hardly conceive of a worse backdrop in which to go into debt for the sole purpose of betting on the market, yet that is the advice given. Just what are those companies supposed to do with the cash they raise from bond sales?

I suspect nearly all of it will go into long-this-long-that strategies. If correct, I smell a disaster for the borrowers.

But hey, Wall Street will win twice, first on underwriting the bond deals, then on fees to manage the investments. It's a sweeeet deal, for someone, namely those handing out poor advice.

Video Reveals Gimmicks Used by CalPERS to Hide The Decline in Assets

Inquiring minds are reading California State Pension System Makes Madoff Proud by Gwilym McGrew

Much has been written about The California Public Employees' Retirement System (CalPERS) being underfunded by $500 billion due to massive investment losses over the last decade, but now we have video of a CalPERS Senior Pension Actuary, Kung-pei Hwang, describing how they intend to change basic assumptions in their financial model to (please allow me to mix my metaphors) Hide The Decline in their assets held for municipal, county, and state employee's retirement.

Through this statistical gimmickry, CalPERS can push the loss into later years and appear solvent today. Of course, at some point in the future it will need to raise funds from state and local governments to compensate for these losses. But for now, they seem content to hide the disastrous condition of their fund.

As you can hear Mr. Hwang say in his presentation to the Huntington Park City Council last week, "that means we will defer most of the loss to future years." "This means the city will realize another increase in future years. I hate to bring bad news, but those are the facts." Well, the fact is this bad news will hit budgets for all cities, counties and the state of California and not just Huntington Park. By playing with its financial model in this way, CalPERS is treating all California taxpayers like Madoff investors by cooking its actuarial books to Hide The Decline in its assets.

The video in the above link is somewhat hard to understand. However, Gwilym McGrew details exactly what CalPERS is attempting to get away with via various "smoothing" and "re-smoothing" extend-and-pretend operations that are doomed to fail.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Miracle of Survival and Falling Inflation Expectations

Posted: 29 Nov 2010 11:37 AM PST

In Unthinking Economic Parrots and Deflation Fighting Madness I trashed unthinking writers who parrot the Fed's misguided beliefs about the importance of inflation expectations and why falling prices are bad.

I specifically quoted one parrot who said "Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further."

This was my rebuttal....

The ineptitude of Japan's policies hoping to combat deflation is staggering. Worse yet, unthinking economic parrots talking about the "economic damages of deflation" have no idea what they are even saying.

I wish economic writers had the ability to think rather than parrot ideas espoused by Keynesian clowns.

Series of Questions

If your refrigerator conks out, will you buy a new one or wait 6 months to take advantage of lower prices?
If the transmission on your car fails will you wait 6 months to get it fixed?
If your pantry is bare, will you wait 1 month to buy food even if you expect food prices to drop?
If you need a new winter coat, will you wait and if so, how long?

The answer to that last question is "Perhaps for a bit, but you will not wait 3 years even if you expect prices will be even lower 3 years from now."

Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.

Miracle of Survival

Today I received an even better example from "Chris" who writes...

Hello Mish

The best argument in your "winter coat" deflation comparison is consumer electronics. Everyone knows that as soon as they buy something from the consumer electronics department the price next month will go down or the same product will be offered with more bells and whistles for the same price. Yet by some miracle Best Buy seems to survive!

Thanks Chris

Thus, the next time you hear the Fed or some parrot taking about the importance of inflation expectations and how people will hold off buying stuff if they expect prices to fall, please calmly ask them how the hell Best Buy stays in business, making a huge profit on hundreds of stores, selling merchandise that will undoubtedly be lower in price in a few months.

According to the incredibly silly "inflation expectations" model, Best Buy cannot possibly exist, so it must be a miracle that it not only exists, but thrives.

Are Falling Prices a Bad Thing?

Ask anyone on fixed income if falling prices are a bad thing. Ask students or those on minimum wage if falling prices are a bad thing. Ask anyone but the Fed, the Banks, or Government if Falling Prices are a Bad Thing. Look in a mirror and ask yourself.

Parrots trumpeting nonsense about inflation expectations and why lower prices are bad, are nothing but pawns for the wealthy, for central bankers, and for government officials all of whom benefit from inflation because of rising taxes and/or because they have first access to money.

Government in particular benefits from a bigger piece of your paycheck via rising sales taxes, rising property taxes, and rising income taxes.

In reality, inflation is theft from the middle and lower classes for the benefit of government, the wealthy, and also public union workers who have inflation adjusted benefits written into many of their contracts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Vote of No Confidence

Posted: 29 Nov 2010 10:05 AM PST

Inquiring minds might be interested to see the "Vote of No Confidence" by the market in response to the agreement that was supposed to "Save the Euro".

The brief feeling of "Hooray We're Saved" lasted from approximately 1:00AM to 2:00AM depending of course on your time zone. Regardless of time zone, the rally was 1 hour long.

No Confidence in Trichet, Noyer

The exit poll by market participants, shown in the above chart, is a vote of no confidence for ECB President Jean-Claude Trichet who forced German Chancellor Angela Merkel to abandon her plans to make bondholders participate in the pain.

And certainly no one in their right mind believes ECB policymaker Christian Noyer and Governor of the Bank of France, who said "As far as I'm concerned, I exclude that there will be haircuts in the future." See ECB Noyer plays down chance of haircuts on euro debt

How Will The Fed Respond?

One hour is not a season, nor is a day, so we really do not know precisely what lies ahead, or what cockamamie plan the Fed will come up with in response to trash the dollar.

However, that vote of no confidence has to strike fear into those who want to save the euro as well as those on this side of the Atlantic who want to trash the dollar.

Make a New Plan, Stan

I am not a lawyer, but I suggest it is not up to either the EU or Prime Minister Brian Cowen to casually violate Irish law and the laws of the EU. Given the Terms of Enslavement violate both EU and Irish law, the agreement is arguably unconstitutional.

If I am correct, all it takes is for the next Irish Parliament to abide by the will of the people and say "It's time to make a new plan, Stan. The old plan was unconstitutional."

As an alternative, I suggest "Drop off the key Lee and get yourself free." After all, there must be "50 ways to leave the Euro" and threats of doing so would soon get Ireland a much better deal than the preposterous terms Prime Minister Brian Cowen and Finance Minister Brian Lenihan agreed to.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Terms of Enslavement; Irish Citizens Say "Default"; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro

Posted: 29 Nov 2010 08:48 AM PST

ANY Ireland bailout terms are onerous given that it is not Ireland that is bailed out but rather banks in the UK, Germany, US, and France (in that order).

Moreover and unfortunately, the exact deal foolishly agreed to by Irish Prime Minister Brian Cowen is not only amazingly bad for Ireland, but one of the provisions violates EU and Irish law.

Terms of Enslavement

Please consider these terms as outlined in EU agrees on $89 billion bailout loan for Ireland

Ireland gets Euro 67.5 billion ($89.4 billion) in bailout loans
The 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund each commit euro 22.5 billion ($29.8 billion).
Interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF.
Ireland will have 10 years to pay off its IMF loans.
The first repayment won't be required until 4 1/2 years after a drawdown.
Prime Minister Brian Cowen said Ireland will take euro 10 billion immediately to boost the capital reserves of its state-backed banks

Comparison to Greece

For comparison purposes Greece has three years to repay its loans at an interest rate of 5.2 percent.

Debt Slave Entrapment

The key to understanding how quickly Ireland is made a debt slave can be found in this not so innocuous paragraph.

Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute euro 17.5 billion to its own salvation.

The last sentence in the above paragraph should read "Ireland will contribute euro 17.5 billion to its own destruction"

Moreover, once all of its own funds have been deployed, Ireland would be dependent on the IMF for life.

Salt Onto Open Wounds

Like pouring salt onto an open wound, the EU finance ministers agreed on a permanent mechanism, starting in 2013, that would allow a country to restructure its debts once it has been deemed insolvent.

One aspect of that provision is that it would encourage any country needing help to delay getting help until 2013. The other aspect is that any country wanting to renege on a bailout may wish to hold off until 2013.

Those aspects explains the provision "Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout."

If Ireland "runs down its own cash stockpile" as required by the agreement, it will be broke by 2013.

Just who were the morons negotiating these terms on behalf of Ireland? They are so egregious that one has to wonder "What the hell did the EU promise Cowen to accept these terms?"

Default! Say the people

The Independent reports Default! Say the people

A SUBSTANTIAL majority of the Irish people wants the State to default on debts to bondholders in the country's stricken banks, according to a Sunday Independent/Quantum Research poll.

The finding that 57 per cent favour and 43 per cent oppose default reflects a growing view among policymakers and opinion formers that the State simply cannot support the debt burden it has taken on.

The telephone poll of 500 people nationwide has also found that a majority of around two-thirds opposes the headline measures in the Government's four-year plan.

As Ireland awaited the fine details of the international bailout, which are expected tonight, it was learned last night that the Irish delegation negotiating with the EU-IMF last week raised the issue of default.

"The Europeans went completely mad," a senior government source said.

Completely Mad

If you want to know who is "completely mad" look straight at fools like Irish Prime Minister Brian Cowen who agreed to these preposterous terms.

Certainly Irish voters, in aggregate, are not mad.

European Banks "Nearly Bust" If Euro Collapses

To help understand the pressure placed on Ireland, please consider European Banks 'Nearly Bust' If Euro Collapses, Evolution Says

The European banking system would be "nearly bust" if the euro were to be abandoned which means the 16-member currency "cannot and should not go," Evolution Securities Ltd. said.

"If the euro is abandoned, and we go back to the peseta, lira, escudo, drachma etc., devaluations would follow immediately," said Arturo de Frias, head of bank research at Evolution in a note to investors today, adding the industry is a "great buying opportunity." Devaluations mean write-offs "of a size that would render the whole European banking system completely insolvent."

If Spain, Italy, Greece, Portugal and Ireland devalue by 30 percent on the way to readopting national currencies, total losses for German banks alone would be 120 billion euros, said de Frias. That's almost half the total equity of German lenders, he said.

In such a scenario, losses at U.K. banks would reach 80 billion euros, equivalent to nearly half the equity of Barclays Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc., he said.

"And this is only the banks. What would happen with the investments of the large European multinationals" like Siemens AG, Tesco Plc and others. "More multi-billion losses, and future profits lost."

Once it's clear that the euro will survive, "it will become clear that some of our banks are 50 percent, 70 percent or 80 percent" undervalued, he wrote.

In Search of Madness

If you are searching for madness, the statements from Arturo de Frias, head of bank research at Evolution, certainly qualify.

Somehow European banks would be "nearly bust" if countries abandoned the Euro but otherwise banks are as much as 80% undervalued. Yeah right.

Excuse me for asking the obvious but what happens if the Euro is saved but after extending "bailouts", Ireland, Greece, Portugal, and Spain simply opt to default?

To Ireland With Love

Some may have missed this weekend's edition of Sunday Funnies so I offer this repeat.

IMF's Trojan Horse Gift to Ireland

I believe we have all heard the story and know how it ends.

For additional commentary and details including a comparison of Ireland and Iceland, please see

By agreeing to take on that debt and sticking it to the Irish taxpayers who will be forced to accept various austerity measures to pay back that debt, Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan just sold Ireland down the river.

50 Ways to Leave the Euro

With a tip of the hat to Paul Simon

The problem is all inside your head, I say to thee
The answer is easy if you take it logically
I'd like to help you in your struggle to be free
There must be fifty ways to leave the Euro

You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free

Make a New Plan, Stan

I am not a lawyer, but I suggest it is not up to either the EU or Prime Minister Brian Cowen to casually violate Irish law and the laws of the EU. Given the terms of agreement violate both EU and Irish law, the agreement is therefore unconstitutional.

If I am correct, all it takes is for the next Irish Parliament to abide by the will of the people and say "It's time to make a new plan, Stan. The old plan was unconstitutional."

As an alternative, I suggest "Drop off the key Lee and get yourself free." After all, there must be "50 ways to leave the Euro" and threats of doing so would soon get Ireland a much better deal than the preposterous terms Prime Minister Brian Cowen and Finance Minister Brian Lenihan agreed to.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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