Thursday, May 27, 2010

David Einhorn Op-Ed: Easy Money, Hard Truths

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Hedge fund manager David Einhorn has fast become one of the up and coming stars in the financial world after his calling out of Lehman Brothers pre death spiral. But he was certainly an up and comer before that, and has now become one of the more widely watched investment gurus.

Einhorn has become a bit of a gold guru as he shares many of the same worries I do. [Oct 19, 2009: David Einhorn's Speech at Value Investing Congress]

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar.....

... I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.


But most of all I appreciate his lack of political correctness and willing to speak the truth, or at least the version of the truth I share - the nonMatrix world. His co-authored op-ed back in 2009 on our financial oligarchy [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn] should have been the framework for any serious financial reform in this country.

  1. The End of the Financial World as We Know It
  2. How to Repair a Broken Financial World

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Today he had another fantastic piece of work in the New York Times, 'Easy Money, Hard Truths' which long time readers of FMMF will see overlays the concerns I've been outlining year after year. In this piece David believes the United States will not be able to kick the can to our grandkids... in fact, our generation will be the one paying for our non stop excesses. Again let's be clear - the United States, with the ability to print currency up the wazoo can never technically 'default'. It can just steal all your hard earned savings by devaluing each of those IOU's you carry around in your wallet and purse with headshots of Washington and Lincoln. Which is where we are headed.

Einhorn makes an EXCELLENT comparison of the federal government to our automotive companies cost structure - the very thing that led them to bankruptcy. [Jan 24, 2010: For the First Time, More Union Workers Work in Government versus Private Sector] As I have mulled the federal worker wage and benefits the past few years, I keep coming back to the out of whack labor costs (and job security - literally there have been job banks where 'unemployed' people are paid to sit in a room and play cards all day - getting paid - due to union contract) in the car companies as the closest parallel. This continued for years, until finally a "black swan" event caused reality to be imposed. Of course General Motors or Chrylser could not print money to kick the can down the road - which is a key difference.

I encourage you to read this entire piece - and pass it along. (click me to exit the Matrix)

A few clips:
  • Are you worried that we are passing our debt on to future generations? Well, you need not worry. Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.
  • According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market.
  • We have not seen the bills for bailing out Fannie Mae and Freddie Mac [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"]
  • Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.
  • A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs.
  • How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.
  • Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
  • The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues
  1. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms?
  2. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?

  • It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side. Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?
  • I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.
  • Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.

This is just the intro - there is 2 full pages after that of must read content.

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[Jan 28, 2010: Senate Votes to Increase Debt Limit to $14.3 Trillion]
[Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]
[Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme Ever]
[Aug 26, 2009: US Federal Budget in Pictures]
[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

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