Dear rss free blog,
Canada
reader RG wondered at my quoting Joseph E. Stiglitz yesterday, based on a Bloomberg article. I wrote:
The Nobel laureate economist said both
countries “deserve to keep their AAA rating” adding “the likelihood of a
default is small in the US
because all we do is print money to pay it back.” He called the panic over US default
“another reflection of the absurdities in the financial markets.”
RG, a
libertarian, wondered: “Is this some sort of a tongue-in-cheek joke?” Here is
the explanation.
What Joe
Stiglitz was saying is that the US
does not risk default on debt because we can always pay it back by printing
money. The US$
is a reserve currency. This is what the US Treasury Secretary means when he
says our USA AAA rating is unlikely to end, except that unlike Stiglitz, a free
spirit, Geithner does not explain what he means.
We will
never default but we can depreciate (devalue) our currency. Stiglitz criticized
how the IMF imposed conditionality on countries it helped deal with a crisis,
the “Asian Contagion” of 1995. The Fund set conditions for receiving money
like cutting the budget deficit, raising taxes, slashing civil servant salaries
and numbers, reducing social programs and pensions, and other unpopular
measures. (The same ones Greece
is imposing now, despite a general strike).
The Fund
also imposed other conditions like allowing more free trade and investment, in
the package because the developed countries wanted them although in some cases
they worked against the bail-out.
The US is a reserve
currency country and if it prints money within reason it can get away with it;
long term it will push up alternative currencies like your loony, why I keep
buying gold. But no default.
Emerging
market governments have access to emergency funding and a system for
refinancing and rescheduling (delaying debt repayment) called The Paris Club.
Then Brady bonds do the same thing with
private (non-govt) bonds. They were invented for Latin America by Nicholas Brady, US Treasury Secy under Bush
I. This is not free money. It too comes with strings
attached.
As the
Asian crisis spreading wildly in 1995-5, the IMF sent out the team to deal
with the issues on the spot. Mahathir Mohammed in Malaysia threw them out and in
the end Malaysia uffered less than countries which let the Fund bash them
around like next-door Indonesia where IMF director general Micehl Camdessus
stood with his arms crossed in that famous photograph. Camdessus is actually a
nice warm fellow who was deeply concerned about derailing development in these
fragile countries, not a monster as he was presented as.
That is
not what Joe got his Nobel for; he got that for earlier academic work on how
buyers and sellers have different access to the price discovery (i.e.
the car-dealer knows the car is a lemon but the buyer doesn’t).
How did I
get to know Stiglitz? Along with some old-time subscribers I invested in a fund
of closed-end funds (CEFs), Brookdale Global
Opportunity Fund set up by Andrew Weiss, a Prof. of economics at Boston U.
When Stiglitz was dropped by IMF, he was put on Andy’s company board. The
Brookdale fund is run out of Grand Cayman and
its minimum investment size put it in the GlobalInvesting-pro portfolio.
Andy by
the way is the legit Bernie Madoff, deeply researching and exploiting the
irrationality of CEF pricing in exotic lands to produce steady Eddie gains
month-in month-out.
In today’s
Financial Times, columnist Martin Wolf
says the cause of the PIGS problems is German over-saving and failure to
consume. This sounds like the Ben Bernanke argument that the US housing
bubble was caused by excessive Asian savings rates.
From the
current issue of Institutional Investor, an
article by Eric Uhlfelder, who writes in yesterday’s monthly issue:
“Most observers expected big banks that
survived the credit crisis to suspend preferred stock dividends to husband
cash. Instead, virtually all banks undefined domestic and foreign undefined continued to pay
dividends on their U.S.-traded preferreds.
“’To do otherwise would have been a
confidence killer, and in today’s market environment, they simply couldn’t
afford not to pay,’ says Brian Gonick, of Senvest International,
a NY hedge fund.
With “’continued payments ‘preferred stocks may offer greater returns with less
dividend suspension risk than thought, especially given the severity of the
crisis,’ explains Barry McAlinden, analyst at UBS Wealth
Management Research. ‘The
results have been common equity–like returns from large-cap investment-grade
bank preferreds.’
“Bank preferred stocks haven’t been
behaving at all normally, considering their place in these institutions’
capital structure. ‘For the first time since the 1980s, when preferreds started
to become a major source of bank capital financing, these shares got pummeled
indiscriminately’ observes Daniel Campbell, former head of hybrid securities
(at both Merrill Lynch and Deutsche
Bank). Although preferred shares are considered income securities
whose prices move in response to interest rates, credit issues, and yield
spreads, many bank preferreds ended up tracking common shares, Campbell says, as fear of insolvency,
reorganization, or nationalization slashed their values to unprecedented lows.
“For example, Deutsche Bank saw one
of its $25-par trust preferreds, backed by subordinated debt and pay[ing] a
coupon of 6.375%, collapse from $20 in mid-2008 to below $5 in March 2009 undefined
producing a yield at the time of nearly 32%. Investors who didn’t buy the end-of-the-world
scenario made out like bandits: On January 14 these shares closed at $23.63.
“Although such extreme opportunities
are gone, there is still significant dislocation in the preferred market,
making it one of the most attractive places to invest, according to William
Scapell, head of fixed income at NY–based mutual and hedge fund firm Cohen & Steers. Until recently, he notes, preferreds
were typically rated two notches below senior unsecured debt, reflecting their
place in the corporate capital hierarchy. ‘Today we are seeing much greater
rating gaps, and that is putting further pressure on preferred prices.’”.
We didn’t
buy Deutsche Bank at the absolute bottom but we have been loading up on these
instruments and have made good loot well before the institutional market
stumbled into this money machine. We told you first. Now the institutions are
buying in with huge volumes, making the prices of these preferreds very
volatile. If you buy use a limit order.
News about
our companies follows from Australia, Britain, Denmark, Norway, Brazil, Portugal, Canada and Mali.
