|
Editor's note: We're at the Nemacolin Woodlands Resort in Pennsylvania for our annual Spring Editors Conference. Expect our Digests to be short this week.
"Who's on the other side? Who's the idiot?" is the question posed in Michael Lewis' subprime crisis book, The Big Short. Two employees at the hedge fund FrontPoint Partners, which made a fortune shorting subprime mortgages, wanted to know who was going long mortgages.
"Düsseldorf. Stupid Germans" is the answer Deutsche Bank bond trader Greg Lippmann gives. "They take rating agencies seriously. They play by the rules."
"Düsseldorf" was a German bank called IKB Deutsche Industriebank. Leading up to the crisis, IKB accumulated a portfolio of $114 billion of toxic mortgages. IKB was bailed out in the summer of 2007 – one of the first banks to take funds.
In the European Union's current crisis, the Germans are once again "holding the bag." According to data from the Bank for International Settlements (the international organization of central banks), German lenders were the largest foreign owners of Greek government bonds last year with $22.7 billion.
On the back of last year's $161 billion Greek bailout, the struggling European nation once again needs funds to survive. And the most popular idea, championed by Germany, is a "debt exchange." (Remember… Germany holds more Greek government bonds than anyone.)
The proposed exchange would solve Greece's liquidity problems and lessen the funds EU nations would have to commit (compared with ongoing bailouts). Under the proposed plan, the 17 euro-zone governments would ask Greece's creditors to swap soon-to-mature debt for longer-maturity debt. The plan could start as soon as July. And a Germany finance ministry paper proposes a seven-year extension on maturing debt.
The European Central Bank (ECB) opposes the debt exchange. And we know why... This "debt exchange" is, in fact, a debt default. It would result in large, permanent losses for investors (read "German banks") holding Greek debt. The ECB is concerned these losses would cause another round of bank bailouts.
Rather than face these unpleasant realities, the ECB would prefer to "paper over" the losses by printing more money and buying up the bad debt. Obviously, that wouldn't solve the core problems. But it spreads the pain around via inflation. Modern democracies seem determined to protect the people (bankers) who caused these debt problems, while forcing their citizens to accept the resulting losses via inflation. We wonder how long this trend can continue before the people finally "wise up." Judging by the gold price, we'd estimate not for long...
On a side note, credit ratings agency Standard & Poor's said it would likely consider Greece's proposed debt exchange as default if creditors received securities with less favorable terms than the market. We'd hope so… When a debtor can't pay its creditor, that's a default.
Ten-year Greek bonds currently yield 15%. Two-year debt yields more than 20%. We'd bet the creditors receive less favorable terms.
Every year, Warren Buffett auctions off a steak lunch in New York City to benefit charity. And most years, this lunch raises more than $1 million. One day into the eBay auction, bidding has already reached $1.51 million. Last year, bidding hit $400,100 on the third day and reached a record $2.63 million. This year's auction closes June 10. Place your bids here.
|
New 52-week highs (as of 6/3/11): BlackRock Corporate High Yield Fund V (HYV), Forest Laboratories (FRX).
In today's mailbag… How do you use our advice, dear subscriber… Tell us at feedback@stansberryresearch.com.
"Re: Today's Digest… 'Believe me, I understand most subscribers aren't interested in learning and the rest probably view these "lessons" as condescending. Nevertheless, I carry on.'
"I would describe today's Digest as educational and thought-provoking and I got a lot out of it. Neophyte investors just looking for tips for making a quick buck might be turned off by it, but I would hope it would appeal to more mature, stable, long-term investors who in the long run would be your most worthwhile subscribers anyway. Please 'carry on'!" – Paid-up Jay Rosenthal
"I'm a 58-yr-old new subscriber. I've never invested a dime, but I'm a good saver. I won't bore you with the long sad story of how I got here. Apart from my mortgage, I have about $35,000 in debt, and, over the last couple of years, have managed to accumulate a similar amount in savings. The debt costs around 8%/yr. Lately, I have been thinking that if I could invest the cash and get 10%-12%/yr, it would be wiser to carry the debt than to pay it off.
"A couple of weeks ago, I watched your video, became a subscriber, and have studied your newsletters, attempting to find the right investment for me. So much to learn... very confusing. After reading the Saturday edition of Growth Stock Wire, I was excited about high-yield corporate bonds. Upon further investigation, following the links provided, I was informed that 'it's not for beginners,' but for a mere 7% of my capital ($2,400), I could get some help in the form of True Income. So, ok, that doesn't make sense for me. Now I am back to square one, wondering if I should:
1. Pay off my debt, and keep saving.
2. Continue looking for the right investment vehicle, and keep saving.
3. Buy some gold, and some guns, and keep saving." – Paid-up subscriber R.H.
Goldsmith comment: We're not allowed to give individual investment advice. But for tips on saving money and building capital, read Dan's comment in last Thursday's Digest.
Sean Goldsmith
Farmington, Pennsylvania
June 6, 2011
Live from Nemacolin… The 'Stupid Germans'… The latest in the Greek bailout… Win lunch with Warren Buffett… Should you pay your credit card debt or invest?...