Prieur’s readings (May 24, 2011)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

•  Irwin Stelzer (The Wall Street Journal): Waking up to Greece’s default position, May 23, 2011.
Have I got a deal for you. You can earn close to 25% on the bonds of a sovereign country that has the support of the entire eurozone. Of course, that country is Greece, again downgraded last week, this time to four notches below investment grade, and the support is not quite rock-solid now that German Chancellor Angela Merkel says she is through playing Lady Bountiful to an unreformed Greek economy, and also wants private investors to feel her taxpayers’ pain. And although you will never be at risk of a default, you might be “repositioned,” or “restructured” or asked to drop in for a voluntary haircut. There is the risk that you will be paid in drachmas rather than euros, but, hey, no investment is without a bit of risk.

•  Doug Noland (Asia Times): Greece, Spain and deja vu, May 24, 2011.
Greek debt worries; issues in the European credit-default swap (CDS) marketplace; and a US economic “soft patch.” Yes, the backdrop does recall the year ago period. Contemplating the similarities – and some key differences – seems a worthwhile exercise.

•  Clive Crook (Financial Times): America’s deepening default chasm, May 22, 2011.
A week ago on Monday the US government hit its statutory debt ceiling of $14,300bn. With outlays running vastly in excess of income, it began “extraordinary measures” to prevent the limit being breached. Until the beginning of August, according to the Treasury, the government can shuffle accounts, for instance by suspending payments to federal retirement and disability funds, so that its debts to third parties stop rising. But on August 2, says the administration, those options run out and there is “no plan B”. The government defaults.

•  Bill Fleckenstein (MSN Money): Debt ceiling: Onward and upward, May 20, 2011.
Last weekend’s Wall Street Journal carried an interview with Stan Druckenmiller, a former fund manager for billionaire George Soros, which began: “A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we’re behaving.” Druckenmiller is referring to the ultimate funding crisis we are heading for – in which the dollar plummets, Treasury bond yields leap higher, or both – something I have been concerned about for some time.

•  Mark Gongloff (The Wall Street Journal): Bill Gross: When will he be right? May 23, 2011.
Bill Gross, peaceful yoga master of Pimco’s far-flung bond empire, does not care for your Treasury debt, and he has been betting against it since March (he claims he is not actually “short” Treasurys as we mortals understand it; he’s just underweight his usual allocation of the stuff. But there are reasons to believe he’s muddying the waters on the issue, seeming to contradict his own firm’s disclosures). And he is on Twitter and CNBC pretty much every day telling you why you shouldn’t buy Treasurys. Trouble is, nobody’s listening to him. His campaign against Treasurys has been an epically bad call, as people keep finding plenty of reasons to buy the stuff.

•  Richard Milne and Anousha Sakoui (Financial Times): Corporate finance: rivers of riches, May 22, 2011.
It is a remarkable scene being played out in boardrooms around the world. Less than three years on from the dark days of the financial crisis, companies are sitting on a bulging war chest of several thousand billion dollars of cash, according to calculations by financial analysts. What they do with that cash has even become elevated to a presidential matter, with Barack Obama urging US business in February to “get in the game” and spend some of the $1,900 billion sitting idly on balance sheets.

•  Buttonwood (The Economist): In defence of the Shiller P/E, May 18, 2011.
Ever since the publication of the book Irrational Exuberance, there have been critics of Robert Shiller’s cyclically adjusted p/e ratio. It wasn’t actually a new idea on Shiller’s part. Ben Graham, the value investor who was Warren Buffett’s guru, had suggested a similar measure, involving the averaging of profits over an extended period to smooth out the effects of the economic cycle.

•  Tom Stevenson (Daily Telegraph): Why boring is often best when it comes to investments, May 24, 2011.
As they tend to when greed overpowers fear, investors plumped for the possible over the probable – and to hell with the price. First dealings in LinkedIn created the kind of stock market buzz that we had almost forgotten during the Lost Decade, even if the doubling in the value of “Facebook for Suits” was a pale shadow of some of the crazy market debuts at the height of the dot.com bubble.

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