Taipan Daily scoops Bloomberg... Europe faces “Lehman-style” implosion... rotten floorboards under the housing market, and more.

Does former SEC Chairman Arthur Levitt read Taipan Daily? How about Bloomberg columnist Jonathan Weil?

It’s probably a big fat “no” for both, but you be the judge. In a Feb. 4 column, “Obama’s $6.3 Trillion Scam is America’s Shame,” Weil wrote the following (underscore emphasis mine):

The White House is already forecasting a $1.3 trillion budget deficit for 2011, which is about $3 of spending for every $2 of government receipts. By all outward appearances, it seems Obama and his budget wizards decided that including the liabilities at Fannie and Freddie would be too much reality for the world to handle. So they left the companies out, in a trick worthy of Enron’s playbook, except not quite so hidden.

In response to the piece, former SEC Chairman Levitt had the following exchange with Tom Keene on Bloomberg Radio:

KEENE: Really? That big a deal?

LEVITT: It is that big a deal.

KEENE: Shades of Enron?

LEVITT: Absolutely.

Hmm. Now why does that sound familiar? Oh yeah, because we said it right here nearly a month ago:

The Government’s Enron

Remember the Enron fiasco? Remember all those off-balance-sheet entities with crazy Star-Wars-themed names like “Death Star” and “Chewco” that Enron used to hide losses and bolster fake profits? Enron died, but the trickery lived on...

Use of these entities has worked well for the too-big-to-fail megabanks – who are more powerful than ever now, after all! – and the government is making the same play with Fannie and Freddie.

Back in December, we gave advance warning of the dollar’s surprise uptrend. We said months ago the euro would be toast. We predicted what kind of year 2010 would shape up to be. And we beat Bloomberg to the Enron punch by nearly a month.

Taipan Daily: We scoop stuff.

Taleb Trashes Treasuries...

In other news, Nassim Taleb – the crash predictor of “Black Swan” fame – suggested that the world should be going short U.S. Treasury bonds.

It’s a “no brainer,” Taleb said from a conference stage in Moscow. “Every single human being should have that trade.”

With all due respect, your editor disagrees. “The entire world is a flowchart for capital,” as Paul Tudor Jones has observed, and for the moment capital is still flowing into bonds. Here are some other reasons to be cautious:

• As a liquid safe haven of last or near-last resort, U.S. Treasuries are graded on a curve.
• When risky assets are under global quarantine, USTs (for now) have a “best of a bad situation” appeal.
• The U.S. economy’s relative strength is increasing, even as the fiscal situation deteriorates.
• As turmoil increases, regular investors are still turning to bond funds.
• If shorting Treasuries is such a blindingly obvious trade, why aren’t they already lower?

Taleb and others are focused on America’s growing levels of government debt. “Deficits are like putting dynamite in the hands of children,” he says. “They can get out of control very quickly.”

...But Europe Looks Far Worse

Though true, investors are transfixed these days not by Uncle Sam, but rather by the “Lehman-style tsunami” unfolding on the old continent. The Lehman comparison was trotted out by Julian Callow of Barclays capital, bringing forth dark memories of September 2008.

Spain, Greece and Portugal are directly in the crosshairs. As sovereign debt contagion spreads, Finance Minister Elena Salgado has done her best to sound like ex-Lehman CEO Dick Fuld: “In Spain we have time for measures to overcome the crisis,” she snapped.

As the U.K. Telegraph reports, “It is precisely this assumption that is now in doubt. [Spain’s] budget deficit exploded to 11.4pc last year, yet the economy is still contracting.”

Some point out that Greece’s bad debt situation is no worse than, say, California’s. But there is a difference. Californians are also Americans. If push comes to shove, taxpayers in, say, Connecticut are not going to tell their fellow citizens to go to hell.

For the likes of Germany to bail out Greece, though, would be a different story altogether. The average German citizen is no doubt furious at the thought of writing a check to some spendthrift country on Europe’s periphery with whom neither history, nor culture, nor even language are shared.

Greece and Portugal are already close to street demonstrations and mass walkouts in protest against emergency budget cuts. (Things may well have worsened by the time you read this.) If the ECB (European Central Bank) refuses to step in, there is no telling what will happen. But if the ECB does in fact act, there is still no telling what will happen, as any confirmed rescue action would open the bailout floodgates.

Meanwhile, Europe’s top central banker is reduced to saying idiotic things like this (per The New York Times):

“When you share a common currency, the counterpart is that you have to behave properly,” the E.C.B. president, Jean-Claude Trichet, said at a news conference after a regular meeting of the bank’s Governing Council on Thursday.

Brilliant observation there, Jean-Claude. Perhaps Europe should have noted that a decade ago, before ne’er-do-well profligates were allowed to hang themselves with an EU-wide credit rating rope...

The Mother of All Bearish Crosses

The above chart from the Financial Times shows why investors are well and truly freaked out. The red line and the blue line both track the market’s perceived risk of debt default. The higher the line climbs on the Y axis, the greater the risk of default.

As you can see from the chart, the lower red line (sovereign government risk) is now threatening to cross above the blue line (investment grade corporate risk) for the first time ever. What this means is that Wall Street now sees a greater risk in sovereign government debt than it does in private, corporate debt.

This is very wild stuff. It is akin to saying that Microsoft and Wal-Mart (to pick two random examples) are better credit risks than the U.S. or the U.K. on the whole. This makes little sense for governments that have the power to tax and the ability to pay off debts in their own fiat currency. But such is the frenzied state of Mr. Market.

More to Come

A week ago we dubbed 2010 “the year of political risk.” Boy, has it been that. Unfortunately, these risks are not going away. If anything, more troubles get piled on by the day.

For instance, a new study from TransUnion – one of the major credit rating agencies – reports that consumers have started paying off credit cards ahead of mortgages, “with the trend occurring more readily than ever before:”

Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," said Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit. "However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments...”

What this means, in a nutshell, is that the banks are more screwed than ever. Faith in the system has been so badly abused, consumers are now actively giving their mortgage lenders the finger, seeking to preserve their day-to-day purchasing power at all costs. For countless homeowners now “upside down,” a grim resolution is setting in. The U.S. housing market is, as ever, a giant Ponzi scheme sitting on rotten floorboards. The coming double dip will lay the truth bare.

Gold Will One Day Rise Again

The performance of gold has been an utter disappointment in all this turmoil, but that is probably traceable to three key factors:

• The rip-roaring performance of the dollar has hammered all the metals, including gold.
• Speculative “hot money” gold holdings – leveraged hedge funds in particular – are being flushed out.
• Investors who held gold primarily for “the reflation trade” are now in confused retreat.

Your editor has been doggedly bullish on the $USD for months, even when it was unfashionable to be so. There will come a day, though, when the greenback’s crisis run peters out and the yellow metal sees its final wave of distressed selling. Mr. Market will overshoot in the prevailing direction, as he always seems to, and then belatedly come to his senses, as he always (eventually) does.

Then it will be time to buy gold with both hands.

Other Related Topics: Gold Investments , Justice Litle , Macro Trader , Stock Market Analysis , Stock Market News

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