June 1, 2011; Numb and Number: The Dangerous Non-reaction to the Current Crises

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, we are coming out of the Memorial Day Weekend – Barbecues, time off, sunshine, bike rides here in Durango.

David: Fantastic bike rides here in Durango.

Kevin: How was your barbecue?

David: I would say it was at least 10% better than last year’s.

Kevin: Okay, now Dave, I understand that you think in numbers a lot, but 10%?  How do you know a barbecue is 10% better than last year?

David: Well, by what we call hedons, these measures of hedonic enjoyment, of hedonism, if you will.  I would have to say that the meat was better, the barbecue was hotter, and we even had a little smoke going on, a little barbecue chips, the wood chips, and what not.  So, I would have to say that, adjusted for inflation, we came out good on this barbecue.  Kevin, if mine was 10% better, how would you measure your Memorial Day weekend?

Kevin: (laughter) You know, I wasn’t thinking in percentages, but I just read something, that the Memorial Day weekend barbecue this year cost 29% more than last year, and I have to ask myself:  Was this a 29% improvement in the meat that I was eating?  A 29% improvement in the tomatoes that were on the burger?

David: Those are more expensive, actually, more than 29%.  This was shocking to me.  My wife came home and said, “You know I had to request tomatoes on my hamburger?”  And I said, “Where were you?”  “McDonald’s,” she said.  At both McDonald’s and Burger King, now, you get tomatoes only on request.

Kevin: Right, because of the “shortage.”  I’ve heard of this.

David: The low end for a box of 25 pounds of tomatoes last year was $5, more typically, $18-20 per 25-lb. box.  Now it is between $48-75 a box.

Kevin: No wonder McDonald’s and Burger King don’t want to put those on the burger, because, frankly, they want to avoid having to raise the price of the burger, which is built into it.

David: And that would certainly blow up the dollar menu, wouldn’t it?

Kevin: Think about gasoline last Memorial Day versus the gasoline price this Memorial Day.  I think we were paying less than $3 a gallon last year.

David: Last year I paid over $3 for diesel, and now it is over $4, so roughly, a 35% jump in what I paid from last year to this.

Kevin: In other words, using this hedonic message, where things just get better and better with the price, what we are saying is, things are just about a third better than they were last year.  I certainly hope the listener felt the same thing.

David: I guess if you factor in hedonic adjustment, then the real inflation, from last Memorial Day to this, was probably closer to 20%, than 29%.

Kevin: Well, what is the government telling us right now?  If you look at the market, oil is over $100.

David: Let’s just look at the market real quickly, just as a sort of a recap, coming into the new week.  Oil is over $100.  Gold is over $1500 – about $1540.  Last year it was about $1200 at this time.  The Dow is at 12,500, and we have NASDAQ at roughly 2800.  The dollar, last year at this time, was about $86 and change, compared to the euro index, and we are at about 74.5 this week.

Kevin: So, a substantial drop.

David: Almost a 14% decline in the currency.

Kevin: You didn’t mention silver.  Everyone seemed to focus on this astronomical move when it went up close to $50, but in reality, just a year ago, weren’t we under $20?

David: $18 and change, and we are up from that point, about 116%, so even with a tremendous drop in price off of $48-49, we are still up 116%, year-on-year.  Gold is up 28%, year-on-year.  This is a pretty fascinating time.

When we look at the market, this is particularly fascinating, because it is beyond price.  This is the personality and the people involved in the marketplace.  There is a new immunity.  If you look at the news from a decade ago, any singular disclosure would have disturbed or destabilized the markets, but today, you have so many things happening, that it seems that everyone has just said, “Well, que sera, sera.”  Whatever will be, will be.  The future is not ours to see.

This is kind of crazy, because it is as if there is so much bad news that it is now banal.  No one cares.  No one cares, and they’ve checked out.

Kevin: There is a point, though, Dave, where let’s face it, we are all human, and we are hearing all this bad news on a daily basis, and you get to hear a lot of it here on a weekly basis with the program.  We are looking for good news and it is hard to find.  But there is a point where you say, “What do you do?”  You do what you can do, and then there is a point where you go and spend 30% more for a burger, and about the same amount more for gasoline, if you have it, and if you don’t have it – we have, unfortunately, the highest number of people right now, ever, on food stamps.

David: Over 44 million people, coming up on 15% of the U.S. population…

Kevin: That’s amazing!

David: On food stamps.  Kevin, I think this is where people, certainly, in spite of coming into the summer doldrums, need to pay attention.  There are a lot of things happening in June, and there are a lot of things that have just been announced, which are worth looking at and being cognizant of, because it does represent shifting sands under your feet.  If you are in the marketplace, these numbers really do matter.

Kevin: I have a question for you.  Are we growing, or are we shrinking?  We get different information on the news, and a lot of times they are talking about GDP growth, but what, really, is gross domestic product running at right now?

David: Kevin, the soundest of the logic is based on your assumptions.  You can follow sort of a logical sequence of thought, but sound logic still needs to be based on sound assumptions.  You can have good logic, with bad assumptions, and end up on the wrong side of things.

Kevin: Sure.

David: We have watched J.P. Morgan, Goldman, and a number of the Wall Street firms, lower their GDP estimates for this year, and it still ignores some of the assumptions that go into that number.  We had the GDP figure come out at 1.8% versus what was expected at 2.2%.  Of particular note is the GDP deflator.  The deflator is the number that serves as the assumed rate of inflation when they are putting together their GDP figures.

Kevin: Surely they tell the truth on the deflator.  I would think that the government – they don’t lie.

David: We have the Bureau of Labor statistics which has said that the April figure came in at 3.2%.

Kevin: So even though the Memorial Day weekend was 29% more expensive, everything else comes in at 3.2%.

David: But the Bureau of Economic Analysis actually uses 1.9% as their assumed inflation number, so 3.2 isn’t the number.  6.5 isn’t the number if you are using an older model, which we have discussed.  10.7 is not the number.  They are figuring inflation at 1.9%, and as we have said, ad nauseam, on our commentary, understating inflation equals overstated GDP.

Kevin: In other words, even the 1.8% is overstated, using this logic.

David: It is.  If we did use the current and understated number, 3.2% inflation, that’s what the BLS gave us for the April number, instead of 1.8%, we would be at 0.56% – just over half of 1% GDP growth.

Kevin: That’s using the 3.2% inflation number, which we know is still understated.

David: Yes, just bumping it marginally from the assumed 1.9% to 3.2% takes it to almost a negative GDP number.  Then if you throw in the inventory buildups, which ultimately lower production in the future, you have GDP which would have come in at 0.6% instead of the 1.8%.  Any way you look at it, the economic fundamentals driving GDP are quickly deteriorating, and we are just wondering when Wall Street will wake up to that, or if they are just comfortable with bad assumptions as they go about their fairly logical business.

Kevin: David, you are actually giving the benefit of the doubt, even using those numbers, because with the bailout funds, and we have talked about the bailout funds adding 8%, 9%, 10%, to the GDP, we are actually in a very severe negative shrink rate, if you take out the bailout money.

David: Kevin, this is where our conversation with Richard Duncan this last year, I think, was very insightful.  He said GDP, whether it is up or down on a given month, or given quarter, or by the end of the year, what it neglects is that we are on life support – that this government deficit spending to the tune of 1.65 trillion dollars, is keeping the economy alive.  Without it, the patient dies, and we are in a 1930s-style depression.  What is the difference between the 1930s-style depression and today?  The government’s ability to add to its stock of IOU’s.  We will talk a little bit about that later, in regard to the debt ceiling.

Kevin, the Chicago Purchasing Manager’s Index, which is a good month-on-month look at the manufacturing trends, fell precipitously from 67 to 56.

Kevin: Basically, what this is saying is that manufacturers are less busy, even less busy than what was expected.

David: Truly, at 56.6, anything above 50 is still considered a positive number.  What surprised everyone was that the drop from 67 to 56 was the largest one-month drop since Lehman Brothers in the fall of 2008.

Kevin: That’s not just in manufacturing.  Real estate has been looking for a recovery now for a year-and-a-half.  They keep talking about this period of time when maybe more houses are going to sell, but the Case-Shiller Index just came out, and it looks like the shrinkage continues.

David: We forgot to mention, Kevin, when we were looking at our market review, that the 30-year mortgage is now 4.6%, which is lower by 18 basis points from last year at this time.

Kevin: You would think people would be buying houses left and right.

David: That is really cheap money, Kevin, it is really cheap money.  But you are right, the Case-Shiller Index was down 3.61%, and it is generally agreed, even by the National Association of Realtors, that this is confirmation of a double dip in housing.  There was one city that had positive year-on-year growth numbers, in terms of the prices that were garnered for a single-family home.

Kevin: Somebody is actually seeing an increase in real estate.

David: Yes, because the economy is as healthy as all get-out.  One city.  If you had to guess, what would it be?

Kevin: Well, let’s see.  It would have to be a city that is not dependent on manufacturing.

David: Right.

Kevin: It would have to be a city that is not really dependent on agriculture or keeping people employed.

David: Right.  You could loosely argue that it is dependent on finance, but it is more about collection of bills, than it is actually, creatively, putting deals together.

Kevin: David, there was a city last year, when things were really rough in the economy, (not that they are not rough now), where we walked down the street – I remember it was right after the Easter service, and we decided to walk home.

David: Boom time.

Kevin: It was a beautiful, booming city, and we were saying, “Gosh, there is no economic depression here.”  It just happened to be a city that was without a state.

David: You know you are in trouble when D.C. is out of money and you head into a recession in that particular place.

Kevin: So when a politician says they “feel your pain…”

David: Not really.  Not really.  (laughter)

Kevin: This sounds like Greece, Dave.  In Greece right now, there are tens of thousands that are rioting, and they are just completely upset at the political class.

David: I’ve got to be honest with you, though, Kevin, the fact that D.C. is the only city out of 20 that was not in decline – I don’t think that’s funny.

Kevin: No, it’s not funny.

David: (laughter).  I have a hard time not laughing, but I really don’t think that’s funny.  Political volatility – this is, I think, what we see in Greece, and what we are seeing is that this political volatility has followed on the heels of a public perception of mismanagement of public trust.  We are talking about assets which are being spent liberally in one part of the country, and the people are not happy with it.  That is certainly the case in Athens, where, on a daily basis, there are protests about austerity, and they want someone to pay, in government.  They feel like they have been abused and the trust has been abused, and there has been a tremendous amount of corruption endemic to the state, and their interaction with the EU.  Where did all the money go?  That is the question.  “Where did all the money go?  We have added all this debt, and it didn’t go to anything productive.  What did you guys do to us?”  That is a future question that I think will be asked here, stateside, as well as in other parts of Western Europe, not just in the southern peripheral states.

Kevin: Speaking of mismanagement.  Yes, we have political mismanagement.  It has almost become cliché, Dave.  You were talking about the numbness that people experience.  Something that got us into this trouble that wasn’t necessarily political mismanagement, was financial mismanagement, these collateralized debt obligations.  As we went into this real estate bust, these CDOs were packaged debts that nobody really knew what they were connected to, that were never going to pay.

David: Right, packaged debts that were certified by S&P and Moody’s as triple-A rated, and then sold into pension funds all over the world, sold into investment schemes all over the world.  We use the term schemes, but these actually were schemes, and they are back at it again.  This month, June, is the first month we will see CDOs back in the marketplace since 2007.

Kevin: So they are back.

David: And interestingly, Kevin, it is commercial real estate, in particular, that is being creatively packaged and offloaded onto investors.  I wonder why.  Is there a second shoe to drop in the commercial space?  Why would you be getting rid of the paper if you didn’t want to keep it?  Why would it have to be creatively structured along the lines of the packaging that was done in 2005, 2006, and 2007?

Kevin: Could it possibly be some of this Arizona desert kind of real estate… “Hey, we have this dream, out in the middle of the Arizona desert.  We are going to build this beautiful community – not really near anything – but it is going to be amazing.”

David: Kevin, what you are talking about is the CalPERS property that they bought for 400 million dollars back in 2006.

Kevin: CalPERS, in the California Pension Plan.

David: Correct.  They had a dream.  They had an amazing dream.  This stretch of desert was going to be 42,000 homes, a new model community 60 miles southwest of Phoenix.  They bought the raw land for 400 million dollars, and it was, hammer price, last week, sold for 32.5 million.

Kevin: Wow that’s sounds like a little bit of a loss, Dave.

David: It’s about 8 cents on the dollar.  A good piece of land, 10,200 acres, but 8 cents on the dollar.  Reminds me of what Warren Buffet has often said. “You see who is swimming naked when the tide goes out.”  Or better yet, after 20 minutes at the card table, if you can’t figure out who the patsy is, it’s probably you.

Kevin: But in this particular case, Dave, it took California five years.

David: Five years to figure out they were the patsy.  It’s a good thing they have billions to burn, and they don’t have any other fiscal issues in the state.

Kevin: We’re taking shots at real estate, but there have been homes sold.  There has just been a tremendous amount of foreclosure homes sold.

David: 28% of all homes sold in the first quarter were foreclosures.  That is about 6 times higher than a normally functioning housing market.

Kevin: So, basically, the real estate market is consistent, mainly, of foreclosures.

David: A good percentage of the volume has been these foreclosed homes, which, of course, depresses prices of the regular homes that are sold, as well.  We have banks that are currently in possession of about 872,000 homes.  That is an immense inventory, twice what it was in 2007, so the bank inventories have doubled since 2007, but that is not all.  There is about a million additional homes coming into the foreclosure process.

Kevin: So, it is like that tsunami wave coming in after the earthquake.

David: Right, so there will be added homes under the bank inventories, and that is not all.  There is a pipeline of foreclosures being fed by an additional 5 million problem and delinquent loans at present.  So the idea of recovery – certainly the Case-Shiller Index is saying, “Nope, we’re not going to get it, and we’re not going to see it for the foreseeable future,” but you have a massive, massive volume of homes behind it.  So when you look at the 4.6% mortgage rate, that is not indicative of a thriving market.  You can’t get a loan today unless you are a pristine borrower, with perfect credit.

Kevin: Which affects housing starts.  I have a couple of good guys working on a deck of mine right now, that new artificial decking.  These guys are very good at their jobs, but they were honest.  They said, “Look, the last two years we have had a really hard time getting work.”  These guys are two of the best in town.

David: If you compare to peak numbers, you are talking about housing starts and new home sales, both categories, 75% below peak numbers, with existing home sales being 29% below peak numbers.  Again, with those existing home sales, one-third of them fit in the foreclosure category.

We talked earlier about food stamps and the fact that 44.199 million people are now on food stamps.  That is up from 26 million in 2007.  The problem is not getting better.  Unfortunately, the problem is getting worse, and I fear that it is the same cause here as in Greece, and in many places in Europe.  We are not looking at primary causes.

Kevin: David, from a federal level, we have Congress debating how much more money to spend, or if they can raise the ceiling, or if they are not going to raise the ceiling.  They are really using it mainly as a political tool, right now, to get their message heard.  But we have, at the same time, states whose bills are coming due, and they can’t raise their debt ceiling.  They can’t print money.

David: And I think we have addressed this before, Kevin.  When you were talking about the debt ceiling, and it being raised a proposed 2.4 trillion dollars more this week, Republicans will grandstand, Democrats will grouse about what needs to be done – an increase in taxes is preferred over a decrease in spending.  All of this is really a political charade, and in coming back to that one word used earlier to describe CalPERS – patsy – the general public is the patsy if they think that this debt ceiling debate is at all relevant.  20.7 trillion is the real-world number, factoring in Fannie Mae, Freddie Mac and the off-balance sheet liabilities, so the debt ceiling is a little bit of a non-issue, in my opinion.  But when we do come to the state level, we are dealing with a real issue, that 2012 is front and center.  2012 is closer than you think, because for most municipals, their fiscal year begins in July, so we are coming into fiscal year 2012, for most municipalities, just here in the next 30-45 days.

Kevin: Are you saying that bailout money was used before to pay state debt, and at this point, that is not there?

David: Essentially, we had state tax revenue, and, for 2012, we had a federal subsidy which is going away.  If you recall, last year we had the American Recovery and Reinvestment Act, which pumped 137 billion dollars into state budgets.  We had a budget gap of 191 billion, so 191 missing, 137 to fill the gap, and there was only a partial underfunded portion, so the problem is, we don’t have the American Recovery and Reinvestment Act in play for 2012, but we do have a 112 billion-dollar budget shortfall for fiscal 2012.  Again, that begins July 1st.

Kevin: Delaying the problem, versus addressing the problem, seems to be the real issue.  Look at Greece.  Didn’t the CIA actually say that a military coup is possible in Greece at this point?

David: That’s the rumor.  The rumor is that there is a CIA report indicating that if things get much worse in terms of social unrest, a military coup will be in play to bring about greater stability.

Kevin: That is a factor that was caused by the same things we are talking about here, stateside.  Now we are looking at it in Europe, it’s just that they are a little bit ahead of the game, or starting to see the financial go to the economic, go to the political, go to the strategic, or the military side of things, fairly quickly, and the military side of things could actually come from within, couldn’t it?

David: Yes, and politicians are not wanting to look at how severe this is.  Merkel has finally agreed to a further bailout within Greece, which, if you look at what that did to compromise her place in the German state in the last 12-18 months, she may have just ended her political career.  Saving the German banks is obviously a priority, and not wanting them to take a haircut, but in an attempt to save the German banks, she is allowing the German public and the European public to essentially pay the price, rather than restructuring the assets that are sitting on their bank balance sheets.

Kevin: David, you brought out last week, and you have brought out in weeks prior to that, the real event is the thing that they are not talking about.  They are trying to keep this huge, huge event from occurring, that has to do with credit default swaps and if Merkel doesn’t step in and do something…

David: Then you have a credit event which triggers credit default swap payment, and a whole slew of counter-party problems.

Kevin: That could level things.

David: Right, and we talked about that a few weeks ago.  There is now growing conflict within Germany.  We have Merkel, who is agreeing to a further bailout.  Then you have ministers of parliament who are suggesting that Greece just leave the EU.  There is going to be greater and greater conflict between different political factions, whether it is in Germany, whether it is in Spain, whether it is in Portugal, and this is where we see a tremendous amount of volatility, politically, in the whole equation.

Kevin: It is like having a guy at the party that you step up to and say, “Why don’t you just leave, at this point?”

David: (laughter).  Italy is not immune from this, either.  Berlusconi had tapped one particular mayoral candidate, and he lost the election.  Berlusconi’s reputation was on the line.  This is seen as a watershed event in Italy, where he is losing credibility, the same way Merkel has, in the different state elections, starting about six months ago, and coming forward to the present.

Lastly, we have Spanish protests which have turned violent over the weekend.  This is not a problem that has been solved, and it is not a problem that is easy to solve when you are looking at it from the wrong perspective.

Kevin: Aren’t we at about 40% unemployment for people under the age of 30 in Spain right now?  So they have plenty of time on their hands for these protests.

David: That is correct.  This is coming from an interesting quarter, but the former central bank governor in Argentina, who was on the scene during the 2002 default and de-valuation, Mario Blejer, does bring an interesting insight into the European debt wrangling.  His appraisal of the IMF, the ECB, and the EU understanding of the crisis, is that they are coming at it from the wrong perspective to begin with.  They are viewing it as a liquidity event: if they add new debts to old, that will sort itself out, that all they need to do to buy time.  Mario is saying, “No, no, this is a structural problem.  There is too much debt, folks.  There is too-much-debt, and there is no way to pay it off.”

Kevin: It is a little like putting a Band-Aid on a heart attack.  It is just the wrong thing, for the wrong problem.  It is a structural problem, Dave, isn’t it?  You have to get to the very core of the structure.   You can’t just keep throwing money at it.

David: Right.  But Brussels and Frankfurt had assumed that the Greece bailout last year, 12 months ago, would be sufficient to get them on their feet, and they would be able to borrow from the capital markets and start getting some IOUs back in play.  That hasn’t happened.  That hasn’t happened at all.  This is what Mario calls a European Ponzi scheme.

Kevin: Is Blejer basically saying that they need to do what they did down in South America?  Just default?

David: That is exactly his conclusion.  Default is a requirement, in his opinion, to return to any sort of economic normalcy.  He says, “The real question isn’t whether – but when, and how.”

Kevin, I think this is interesting, because there is not an exact parallel between a state like Greece, and Argentina, going back to 2001-2002, because in the case of Argentina, they both defaulted on debt, and devalued their currency.

Kevin: Because they had the sovereign power to do that.

David: And they don’t have that in the peripheral states.  They don’t have that in any of the European states.  They cannot devalue.

Kevin: They can default.

David: They can choose to default.  That is the difference between the European peripheral countries and Argentina.  But Blejer suggests that rather than pretending that this is a liquidity event, and spending money, to little or no effect – default.  Start over.  And if you are going to spend money, rather than do it perpetuating something that is not going to be workable in the long-run anyway, take the money that you would have spent in the bailout, and give it to the banks.  You know that the banks are going to take a significant haircut in the case of default, you know you are going to destabilize the banking system, so go ahead and create a backstop for the banks and financial institutions.

I am not saying this is my suggestion, but certainly, the former central bank governor of Argentina.  Again, this comes from an interesting perspective.  “Hey, we don’t have the money – default!  Hey, we don’t have the money – print!”  This is almost serial in South America, but he is saying something very clearly here, which I think is spot-on, and that is, the EU, ECB, and IMF, are viewing this as a temporary problem, and it is anything but temporary.  It is structural in nature.

Kevin: David, on a lot of the things that you talk about on a weekly basis, and the guests that we interview, we don’t necessarily agree with the solution when they come up with some of these things like, “Yeah, just default, pay the banks off.”  But, what it does is it brings  an insight into the problem, itself, because that actually, as foolish as that sounds – just go ahead and default, go ahead and pay the banks what they would have lost – that sounds ludicrous, but actually, it is probably smarter than what is going on right now, which is just printing money and throwing it at a problem that gets bigger and bigger every year.

David: Kevin, there are a couple of EU officials who have argued strongly that they can’t allow a default to occur, because it would just be an utter disaster, and these peripheral countries would never be able to borrow again.  “They would be ostracized forever.  It is the scarlet letter.  You can’t default.”

Mexican debt defaults, and other Latin American debt defaults over the last 20-30 years, corrected the conventional wisdom, which was, in fact, that you would be locked out of the capital markets.  That is not the case.  The countries that defaulted, quickly, in Latin America, after about six months, had access to the capital markets, because the capital markets – the financial markets – whether it is London or New York – they have a memory which is about two nanoseconds.  “Oh, we lost money on you?  Oh, but we could garner new fees from doing new business with you?  What happened yesterday is irrelevant.  What can we do today?  What’s the deal of the hour?”

Kevin: So, it is like when the mad parent says, “You are grounded for a year!” And then within about 20 minutes they are back on track doing what they are doing.

David: Exactly.  Exactly.

Kevin: David, conventional wisdom would be that when this debt comes due, it is going to have to be paid.  Are there unconventional ways that they can deal with this?

David: This is pretty unique, Kevin, because I think in the attempt to avoid default, in the attempt to avoid a dislocation of the debt markets by having some sort of a credit event, what is being suggested currently, with Greek debt, is that to relieve rollover pressure, these debts that are coming due, instead of having to pay cash, pay the principal back on the loan, they are talking about there being no defaults, but no redemptions, either.

Kevin: In other words, I can’t get my money out of my bond?

David: The bond will mature, just as you expect it to.  There will be a pay date, but rather than being paid in cash, they will issue you a new bond instead of cash.  This is one of the proposed solutions that captures the current audience of bond-holders, and keeps them captured, if you will, as an audience for these bonds.

Kevin: This sounds like something that has happened every once in a while during time of war.  War bonds, things like that, where it just goes on and on, without a maturity.

David: Kevin, in essence, they are extending the maturities, but they are doing that, allowing existing debts to mature first, and then issuing new bonds in their place, to avoid that credit event, to avoid the default or credit default swap trigger.

Kevin: And you think that will avoid the triggering of this huge event if they just extend the maturities?

David: But they are not extending the maturities.  That is the nuance.  It allows one bond to mature, end of contract, beginning of new contract, and they are giving you a new contract and a new maturity date.  You may not have been complicit, you may not have been interested in receiving a new IOU instead of cash, but that’s what you get.

Kevin: I guess that’s why we used to call them perpetuals.

David: Exactly.  Kevin, the last issue regarding the Greek debt is that when you look at the ten-year paper, as we mentioned, it is 13 percentage points above German paper.  We talked about that in recent weeks.  But if you look at two-year Greek paper, it is fetching 26%.  These are the kinds of numbers that you see immediately before a default.  If you are buying two-year Greek paper, it is paying you 26%.  For anyone who is income-hungry, you may say, “Wow, that’s attractive.”  Just beware, you are getting ready to have your head handed to you.  Default is imminent.  Granted, somebody who is value-hungry is going to say, “No, no, no, the EU won’t allow it to happen.  This represents the greatest bargain since the beginning of time.”  Maybe.  Maybe.  But you have to realize there is risk that comes with that reward.

Kevin, I think one of the things we have to look at here in June is this.  This is our advice:  Do not go on vacation this month and leave your investments on auto-pilot.  Do not go on vacation this month and leave your investments on auto-pilot.

Kevin: What you are saying is, “Watch and be wary.”  Why is that?

David: You have the issues relating to Europe, and the issues relating to U.S. credit, all clustered in the month of June.  As Juncker, the EU official, has said, details of a further bailout for Greece will be determined by the end of the month.  I am quoting Bloomberg here.  “We will try to solve the Greek problem by the end of June.”  What is interesting is that nothing definite was agreed upon this last weekend.  They tried to figure out how to solve the Greek issue and couldn’t get it done, so they basically said, “Well, we’ll get it done by the end of June.”

Kevin: But that money comes due, does it not, in this next month?

David: We have a whole bunch of things coming due.  We have the Greek IMF tranche, which is due for repayment June 29th.  That is the date when Greece is officially out of money – minor detail.  Note to self:  Try to find some more money by the end of June.  QE-II, here in the United States, ends June 30th, and on that same day they are talking about putting the new IMF chief, who is to be chosen between now and then, in office.

Kevin: So, when it rains, it pours, but you don’t want to be on vacation, and you don’t want to be not paying attention.

David: Kevin, this comes back to the main issue.  Not enough has been done over the last 12, 18, 24 months, to look at the real structural issues.  Insufficient adjustments have been made and now we have default and restructurings which have to occur, at some point, in Europe.  The question is, will they happen in the United States, as well?

Kevin, I think this summer is going to be anything but dull.  If we are used to the summer doldrums, I would not expect it this year.  Everyone from Mark Mobius, who is the Executive Chairman of Templeton Asset Management, to a number of different asset managers in the hedge fund space, look at what we have done to ignore the structural changes which needed to occur here in the United States, and just as a reminder, here come the CDOs, month of June.  Have we changed anything?  Have we changed anything, in terms of the real regulation of the derivative space?  No.  We are in a position now to do a repeat, as we head into the fall, of 2008.

Kevin: And this is something probably to consider, even for people who are very experienced in the financial and economic markets, because we have all been set to a pattern.  I know, after decades of watching these markets, both of us, in the summer, usually, watch the Europeans go on six-week holiday.  There are a lot of things that are built into the system to sort of relax the system during the summer months, and then of course, you have pointed out in the past that the fall comes, and it can be tumultuous.  But in this particular case, I don’t know that the Europeans have that six-week luxury that they have had in the past, and it is the same thing here in America.  It may be a long, hot summer, but not because of relaxation.

David: No, I think, June to October, 2011, will be a time frame to remember.  It might, in fact, be seared into an investor’s memory.