After failing to peg its financial collapse on evil short sellers and speculators, Greece has now turned its sights to the United States. Greek Prime Minister George Papandreou is considering suing U.S. banks...
"Greece will look into the past and see how things went," Papandreou said. "There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words 'fraud' and 'lack of transparency.' So yes, yes, there is great responsibility here."
In plain-speak, Greece wants to sue U.S. banks for letting their clients know Greece is a bad credit risk – which they had a fiduciary obligation to do. We knew Greece was stupid about its finances (how else could you achieve a debt-to-GDP ratio of 113%?), but this is ridiculous. A week after accepting a $1 trillion bailout (most of which came from the U.S.), the Greeks are now trying to shake Wall Street down for more cash. Papandreou is also trying to ban credit default swaps on his country's debt (insurance contracts which pay out in the case of default). Being that OBAMA!'s beliefs align more closely with European socialism than American capitalism, we wouldn't be surprised to see the U.S. dole out more cash for a European rescue or a CDS trading ban. The days of accountability are slowly dying, but we'd like to point out that Greece's problems lie squarely on the back of... Greece. And no one else.
Despite Papandreou's rousing finger-pointing session, the facts won out in today's trading... The euro is down to $1.23 against the dollar – its fifth-straight decline. The currency hit a four-year low today before recovering.
We now know why U.S. Treasury yields have been falling over the past three months (from as high as 3.99% to 3.42% today). Investors purchased the most Treasuries since November, according to a Treasury Department report out today. Net buying of equities, notes, and bonds totaled $140.5 billion in March, more than double projections. Net buying in February was only $47.1 billion.
We suspect investors' renewed interest in U.S. securities is more than a "flight to safety." It's about the crumbling euro. As the U.S. ramped up debt amid the financial crisis, countries started buying the euro to hedge themselves. Now, they're dumping. Also, as the euro falls, countries are under pressure to weaken their currencies... Specifically, China is under pressure to weaken its currency because Europe is the largest consumer of Chinese goods.
To weaken your currency, you must sell it and buy another currency. If you're China, would you rather buy the euro, yen, or U.S. dollar? In this miserable trio, the U.S. dollar is king.
Every country wants a weaker currency so it can export more goods. But the only way to weaken your currency is to make bad investments. These economics make sense to a central banker – more exported goods means more jobs and a higher GDP – but it baffles us. Why would you fundamentally weaken your entire nation for one good year of exports? We liken this action to breaking all the windows in your town, so you'll experience a building boom.
Bond King Bill Gross recently weighed in on the credit rating agencies issue. But Gross doesn't think we should change these companies (Moody's, Standard & Poor's, and Fitch), which he says "can't really die." Instead, he suggests we "dismiss them" and trade against their absurd credit ratings:
Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain "one notch" to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here's a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!
Now let's go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It's the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a "positive outlook!" For that, you can buy a GMAC two-year bond at 6½% (8% with what are called "smart notes" that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!
New highs: PowerShares UltraShort Euro (EUO), Portfolio Recovery Associates (PRAA), Silver Wheaton (SLW).
In the mailbag... one subscriber wonders what happens next in Europe. Our advice... avoid the rioting. Send your questions to feedback@stansberryresearch.com.
"I am a Canadian Chartered Accountant (CA) and an American CPA. I have a question if a company paying a ratings agency is a conflict, then how about a company paying its CPA firm to render an opinion on its financial statements?" – Paid-up subscriber Edward Sweet
Goldsmith comment: The main difference is accountants have a fiduciary duty to both the corporation and the shareholders of the corporation it audits. If the accounting firm conducts a fraudulent audit, shareholders can sue. As we've seen with Arthur Anderson, that can be devastating.
The rating agencies only serve the firms they are rating. And if the ratings are terrible (as they usually are), the companies can hide behind their first amendment rights. The credit ratings are just the "opinion" of the issuing firm. While shareholders can still sue the rating agencies – you can sue anyone nowadays – they won't get far.
"I have been a subscriber for over five years and I have learned immensely from your many insights, thank you. I recall we sold the Gold coin set last year. Is it better to buy gold bullion? From which traders would you recommend I buy bullion? Sentiment is high on gold I will wait for a slight pullback but wanted to get a heads up on who the trustworthy brokers/dealers are." – Paid-up subscriber Jose
Goldsmith comment: We recommend Van Simmons at David Hall Rare Coins (800-759-7575) and Rich Checkan at Asset Strategies International (301- 881-8600).
"My wife and I are planning a trip to France this coming Fall. With the state of the euro, would I be better off buying euros now or wait till I get to France in the Fall? What happens if France pulls out of the Euro Union? Do they go back to their old currency, the franc? Would holders of euros suffer a great devaluation? I hope you can answer some or all of these concerns." – Paid-up subscriber Brian K
Goldsmith comment: Wait. We expect the euro will eventually hit parity with the dollar. And yes, euro holders would suffer a great devaluation if France withdrew. Let's hope, for your sake, Europe hasn't broken out into mass rioting by next fall.
Regards,
Sean Goldsmith
Baltimore, Maryland
May 17, 2010