Commentary for the Week of March 8

Anyone betting that the global financial system will continue to muddle along indefinitely deserves to reap the whirlwind that’s coming.  As the rest of us well know, the international banking system is being kept afloat solely by political lies, stupidity, corruption, greed and, most of all, egregiously misplaced confidence. It would seem to be only a matter of time before the rotted timbers of this belief system give way.  But what will be the catalyst?  The possibility or even likelihood that the financial system will be toppled by some event no one was expecting was the novel theme of Nassim Taleb’s widely read 2004 book, Fooled by Randomness.  In the New York Times, Taleb noted the following:  What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. In the seven years since Taleb’s book rose to the top of the bestseller list, any number of factors could have caused the banking system to implode but did not. Thus has the passage of time strengthened his thesis by challenging still-widespread expectations of a collapse “any day now.”  The possibility has not been negated, of course, but it seems increasingly unlikely that any of the well-known dreadnoughts that have been bearing down on us, including the Mayan calendar’s prophecy of the end of days, will terminate economic life as we know it. For in fact, the financial system has survived the de facto bankruptcy of Europe; a U.S. budget

[From sun-drenched Spain, here’s a dispatch from ‘Buster,’ an occasional contributor to the Rick’s Picks forum.  Much as Buster loves the warm climate of Spain, the economic and political climate have grown so frigid that he’s thinking about moving to…Iceland. The country is becoming a very appealing place to live, says Buster, because it has taken to heart lessons learned from the banking collapse of 2008. RA] Sunny Spain…or Iceland? Many may mistakenly think of Spain as a comparatively less developed nation, since it emerged from the Franco era only relatively recently. However, Spain could actually be seen as a more advanced model of where we are all heading. The story goes that, as part of Spain’s acceptance into the world order of things, her administrators spent some time visiting and learning from the dark tax overlords of various countries to get up to speed in the modern methods available for wealth extraction and bureaucratic empire building. Today, many of the consequences of their diligent hard work are abundantly clear. A quick scan of the news over the past year will supply a list of corruption allegations against many of the past administrators, with the burdens that they lay still continuing to stifle prosperity, and thousands losing their homes to the banks, and record numbers unable to pay their property taxes. Further, a visit to Spain may seem to some like entering a cross between the Third Reich and the People’s Republic of China, since nearly all activity will involve some bureaucrat demanding the equivalent of  “Papiere, bitte!” with a quick “No possible” or worse still, a fine or penalty when one is unable to supply the correct one;  plus seeing so many Spanish shops being turned into a Chinese bazaar. This is due to Spain’s government having given Chinese

Alas, the devil is in the details for Europe’s latest attempt at financial alchemy.  Much to the investment world’s apparent dismay yesterday, it turned out that the ECB’s Draghi had nothing very specific in mind when he pledged last week to defend Europe’s monetary union by any means necessary.  In theory, and most immediately, such a rescue would entail using printing-press money to mop up Spain’s leprous bonds, lest rates push above 7%. Seven percent is the generally accepted danger threshold for sovereign borrowers, but we’d lower the red zone to around 2% ourselves. Our argument is that even a “mere” 2% rate imposes an asphyxiating burden in real terms, given the combination of deflation and fiscal austerity that has put Europe in a choke hold. Regardless, we won’t quibble over a spread of five measly percentage points if Europe’s bankers have indeed convinced themselves, as they seem to have, that servicing loans at a rate above zero is do-able in a negative-growth environment that could linger for years. No doubt Mr. Draghi feels a twinge of Helicopter envy whenever he is called on to make heroic promises.  His colleague Mr. Bernanke can say and do things that would get Draghi hauled in front of a tribunal – if not in his native Italy, which has always thrived on gray markets, then in Germany, where bankers continue to vex the rest of Europe with their prissy insistence that i’s be dotted and t’s crossed.  With Germany riding herd on any tactic that Draghi might attempt, his task of fixing Europe is akin to Bernanke trying to bail out California with Ron Paul holding a veto.  And while Bernanke could be counted on to evade even the most deadly surface-to-air inbounds, Draghi lacks the experience and political cover to stay airborne.

How did Stockton, California get mired so deeply in muck, stuck with paying an estimated $417 million over the next 30 years to provide free lifetime healthcare to its pampered workers?  The short answer is that voters were too busy to care about such things. Indeed, if they’d attended city council meetings or kept up with the minutes from those meetings, they’d have realized a decade ago that the city was on a path to financial disaster. Instead, irresponsible and too lazy to be bothered, they paid little attention to how their tax dollars were allocated by a city government that turns out to have been either grossly incompetent, recklessly negligent or a combination of both. Now Stockton and its workers are in a full-tilt battle over whether the latter will ultimately receive all of the absurdly generous retirement benefits they were promised. It needn’t have ended so badly for Stockton, which, with a population of 292,000 ranks as California’s thirteenth largest city. All it would have taken to avert the downward spiral that's coming is the diligent attention of one or two civic-minded gadflies and a local newspaper that cared. In bygone days, the alliance between them has proven highly effective in rooting out fiscal excesses and raising the awareness level and constructive ire of taxpayers.  These days, unfortunately, the local gadfly has all but disappeared from civic life. After all, who has time to attend city council meetings any more, or to ride herd on local decision-makers? Like most of us, erstwhile gadflies are too busy trying to make ends meet to have the time or energy for haggling with local pols over line-items in the budget.  As for the newspapers, they are fighting for their lives, too strapped for cash to cover local government diligently -- but

As usual, the stock market was vexatiously out of step with reality last week, soaring on word that the ECB plans to do “whatever it takes” to preserve the euro and the political union that it binds. For U.S. investors, especially those who believe in hope and change (and, presumably, the Easter Bunny), there was also the invaluable news that the U.S. economy is once again verging on recession – a development which is widely believed to portend yet more Fed easing. Completing the delusional vision that good times are soon to return nonetheless, crude oil finished the week with a gain of about $4 per barrel.  Of course, no one actually believes that so strong a recovery impends as to squeeze current supplies of crude that are more than adequate. Even so, the news media, feigning ignorance of forces that have been pushing the global economy toward an abyss, and abetted by the stock market’s steroid-addled lunge, were only too happy to report events in a way that did not challenge officialdom’s cynically crafted, positive spin.  The Establishment’s most useful memes were dutifully trumpeted by The Wall Street Journal in two headlines that ran above the fold on Friday:  Weak Economy Heads Lower, said the topmost, in a heavy font; and, immediately below it, in italics, the implicitly good news:  Markets Jump as European Leaders Vow to Protect Euro; Flagging U.S. Recovery Could Spur Fed. Such headlines have the seeming heft of history-in-the-making. Notice, however, that it is not facts that have borne this weight, but mere hope and speculation. To say the markets have responded positively to some banker's speech is hardly an assurance that the ECB’s latest nostrums will work.  As for the Fed’s supposed ability to revive the economy with yet another monetary nudge, it is

Rep. Ron Paul’s bill to subject the Fed to broad audits sailed through the U.S. House of Representatives yesterday; now it goes to the Senate, where it is certain to die. Those who believe that Democrats and Republics are fundamentally indistinguishable should ponder the bill’s fate when November rolls around.  While it’s true that Paul’s Federal Reserve Transparency Act drew bipartisan support in the House, garnering the votes of more than three dozen Democrats, Senate Democrats can be expected to take a harder line.  If and when they kill the measure, it will probably be the last time for a very long while that anyone in Congress seriously challenges the Fed’s right to withhold the truth and to answer to no one but its lords and master on Wall Street. For his part, Helicopter Ben Bernanke seems so confident that the Senate will uphold the status quo that he did not even speak out against HR 1207. Appearing before a House panel last week, he was Mr. Cool, sounding like he’d been scripted by Goebbels himself:   “We are quite transparent and accountable on monetary policy,” the Fed chairman testified. “Besides our statement, besides our testimonies, we issue minutes after three weeks. We have quarterly projections, I give a press conference four times a year, there’s quite a bit of information provided to help Congress evaluate monetary policy as well as the public.” Pure Bull Yeah, sure: “Quite a bit of information.”  All of it pure bull. Friends of the Fed have argued that airing the full details of, for one, the banking bailout would damage the financial position of the firms involved and destabilize the economy.  True enough. But if you pile their lies and secrets high enough, the whole, rotten system is eventually going to collapse anyway.   “An audit

Apple, the mother of all bellwether stocks, has taken a flying dive Tuesday night on news that Q2 earnings were merely sensational  (i.e., up a little more than 20 percent). Presumably unaware that Samsung’s excellent smart phones have been breathing down iPhone’s neck, speculators were evidently caught unawares when Apple’s earnings report included the peevish detail that iPhone sales had slowed markedly.  The ubiquitous product has accounted for most of Apple’s revenues in the last few quarters, so even a mild slowdown was bound to stampede pass-line bettors.  So, because of Apple’s bellwether status, does the stock’s apparent failure to soar to new highs on this latest earnings report portend tough times for the market as a whole?  Very probably, yes.  Without Apple to pull shares higher this summer, don’t expect them to make much headway.  Regarding Apple itself,  although we’d told subscribers earlier to buy the Sep 650 – August 650 call spread for $5 as a relatively low-risk bull play, because of the way the stock is acting this evening, we’ve recommended that the order be canceled. Meanwhile, Rick’s Picks subscribers who followed last week’s advice to short the market are enjoying what has been a painful decline for most investors.  One of two trades that caught the precise top of the so-far mini-avalanche was the result of a challenge we issued to subscribers back in May to pick the perfect spot to short the Mother of All Bear Rallies. Permabear that we are, we have been top-picking for years (and also trading the rallies. Of course), never expecting to catch the actual Summit. Our goal, repeatedly, has been to get short at “a” top rather than The Top, and to make a few bucks even if we are wrong.  And if we are right? This time, perhaps?

Gun rights advocates have been understandably quiet as the nation obsesses over the horror of Friday night’s movie theatre massacre in Aurora, Colorado. Yet another whack-o from out of the blue, this one clad in SWAT team gear and armed with a Glock pistol, a shotgun and a semi-automatic rifle, has indiscriminately killed or injured scores of innocent people. With 12 dead and another 58 hurt, the episode is destined for historical notoriety, even if the gruesome details are forgotten in a year or two. When was the last time something like this happened?  How many were killed? We’ve begun to lose track because so many of these horrific incidents have occurred in recent years. Meanwhile, those who would reflect nostalgically on earlier times as having been less troubled will have forgotten Charlie Starkweather. Imagine the damage he could have done if he’d been armed with an assault rifle instead of a revolver. As it happens, James Holmes, 24, the man charged with the Dark Knight Massacre, didn’t have an automatic weapon, but rather a 'semi' with a 100-round magazine that reportedly jammed early in the assault. He also had no police record, only a speeding violation. This means he could probably have bought a gun even in states where weapons permits are tightly controlled. None of this will matter to political liberals in the weeks and months ahead as they use Holmes’ rampage to press their case for a total ban on, for starters, handguns. Their chances of prevailing, fortunately, are nil.  It’s not going to happen. Although a total ban would undoubtedly make it harder for Holmes and other crazies to acquire murderous firepower, it would never to stop them. Nor will any liberal remedies mitigate the culture of violence that increasingly coaxes psychopaths like Holmes to act

We now know that financier Leon Black was the anonymous bidder who acquired “The Scream” for $120 million at Sotheby’s in May. Although Black is known in art circles as a discerning connoisseur and collector mainly of drawings, in this case his supposed good taste seems to have suffered a lapse. Only a billionaire art collector with an outlandish ego would pay so much for such an atrocious work – one that neither you nor I would hang on a basement wall let alone display where everyone might see it. Black bought Norwegian painter Edvard Munch’s 1893 work simply because it is one of the most recognizable paintings in the world. But if it had been undiscovered and unknown until yesterday, only someone with very peculiar taste or a bizarre sense of humor might have given it a second look at a flea market.  If we had bought it ourselves, it would be to give away as a gag gift, or to hang in a bathroom. This is nothing against Munch, who clearly had “issues.” As we know, more than a few great artists were borderline nuts (although we would not classify Van Gogh as such. The guy had every right to be crazy-angry when his paintings failed to attract even a single buyer).  Far be it from us to begrudge the tortured artist the right to exorcise his demons on a canvas. But we – pardon the pun – draw the line at paying good money for the result.  We’d rather spend our art dollars on objects of beauty – as why not, since beauty is arguably the only sensual path we have to things spiritual. Black, by paying a fortune for The Scream, seems intent on finding a path to something else.  Notoriety, perhaps? Not in the art