Juggling Dynamite

Manic moves in world markets continue today with euphoria this morning (so far at least) on news that Ireland may be accepting a bail out offer from the IMF and EU. The bailout comes with a lot of strings but if accepted would buy Ireland further time to restructure and slash spending. This will be painful to their growth in the near term, but should be better for the country in the long term.
Ireland is near the beginning of a long line here. Others on deck for emergency help include Portugal, Spain, Italy and the 39 US States who have gaping budget holes coming to the end of 2010. US Municipal bonds have been under extreme duress the past couple of weeks, with prices in a free fall. This is a big problem for Municipalities, States, their employees and inhabitants who are depending on social services. It is also a huge issue for pension funds who are heavily allocated to Municipal bonds. This Tech Ticker interview with financial analyst Chris Whalen explains the risks inherent:

“Nowhere has this collapse been more visible than California, which faces a massive $25 billion shortfall and red ink for as far as the eye can see.
After years in which every looming financial crisis has been met with a government bailout, you might think that the same solution awaits California, as well as all the other states that have huge obligations that they can't afford to meet.
Whalen says California will default on its debt–hammering all the pension funds and other investors who have loaded up on apparently safe state bonds. The state won't immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California's bonds receiving less than 100 cents on the dollar.”

Ok, this made me laugh out loud. It is absolutely serious and correct in its points, but the characteristic Ritholtz humour is appreciated.

For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy.
But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd in the NYT today – Pretty Good for Government Work – paints an artificially rosy picture of the Bailout, ignores the negatives, and omits his own financial interest in government actions.
What might he have written if Sir Warren was dosed with some sodium pentothal before he sat down to pen that “Thank you” letter? It might have gone something like this:
DEAR Uncle Sam Sucker,
I was about to send you a thank you note for bailing out the economy . . . but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.
It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts….

Read the whole letter here for a good chuckle and some excellent insight.

Warning of a “death spiral” without drastic changes, a group of experts on the U.S. federal budget deficit on Wednesday called for a 2011 Social Security tax holiday, a soft drink tax and government spending freezes.
In an ambitious plan to slash the deficit and the fast-mounting national debt, the group also called for a new 6.5 percent national sales tax, as well as lower and simpler individual income and corporate tax rates. It comes as a presidential commission targeting the same problem reconvenes on Wednesday for another closed-door session with just over two weeks before its final report is due.
The bi-partisan panel called the deficit “a quiet killer” undermining the economy and compared the effort required to vanquish it to the sacrifices made by Americans during World War II.
My thought: this is the right line of thinking. If we can get citizens to buy into collective effort and sacrifice in the present in order to reign in spending and reduce debt for the future we will finally get the recovery back to long-term health underway. Now if we can convince policy makers to support the effort to increase savings and down-size consumption and spending rather than trying to goose it back up on more credit…