The Biggest Story of 2010, Three Short Plays, The Bull Market in Lawyers and More!

• Greece accepts bailout… with terms so strong it might go under anyway

• Agora Financial analysts and advisers react… two sectors to short, below

• Dan Amoss offers one asset class just beginning to bounce off generational lows

• Plus, a little gloating… one post-crisis forecast come true, below

“Capital is going on strike,” the Richebacher Society’s Rob Parenteau warned us late last week when he swung by our Baltimore offices for a quick interview and update on the crisis. Rob was early… and right on the money with his analysis of the event.

  Opening the virtual papers this morning… et voila, the physical manifestation of the idea:

Depicted here, a general strike, as the mob fears austerity measures the government will introduce as part of a deal to borrow an additional $146 billion from the EU and IMF.

Assuming EU approval, the bailout will clock in as the largest sovereign bailout in history.

  Soon Greek citizens will see their taxes at record highs and public pensions and benefits cut to the bare minimum. One analysis this morning projects the deal will put Greece in recession until 2017.

“This is going to be the biggest story in financial markets this year,” Mr. Parenteau continues. “When the Greek government cuts expenditures and raises taxes, it will suck cash flow out of the private sector. Houses and firms will not have as much cash flow. That means the existing debt load to the private sector will be harder to service. So we’re not going to see just public debt distress — which investors understand now — but private debt distress as well. Some of these countries, like Spain, have very highly leveraged private sectors — even more leveraged than their governments.

“What this means is that banks that have exposures in terms of private loans to households and in the eurozone periphery are going to find their loan losses going up. And then investors are going to start asking questions about their capital adequacy. And then, how can they raise capital in such an environment?

“I think many of the eurozone banks could be wonderful shorts.”

Rob mentions two banks by name in the interview we posted on Friday, along with some other on-target commentary and actionable advice. It’s free to watch, right here. You’ll also receive an invitation to become a member of the Richebacher Society, which seeks to educate individual investors on the proper course of action through this era of massive debt meltdowns.

  More than a few Greek banks are at stake here. This New York Times graphic illustrates how large these PIIGS’ debt problem has become.

Click here for a larger look… it’s really something.

It’s hard to decide who has it the worst: Spain, Italy, Greece or Portugal… or the German, French and British banks that have lent them so much money.

  “If you have investments in the U.K. that can be easily liquidated, I would urge you to move fast,” our friend Peter Cooper wrote to us this morning. If you recall, Peter is part of that unique set of British expat known as the “Desert Brits.” He’s also our man on the scene in Dubai, where he’s been residing since late last century. Peter knows a thing or two about sovereign debt under fiscal duress.

Mr. Cooper is concerned over the EU debt contagion infecting the U.K.’s markets, for sure. But he’s also concerned about austerity measures on the heels of the U.K.’s coming elections.

“If you have been considering further investments in the U.K., then please do wait until markets have corrected. Basically, the argument is that much higher rates of interest are on the way. All politicians in this election are complicit in lying to the electorate about the true state of the nation, and it is going to come as a nasty shock, particularly in terms of asset values.

“The places to be now are gold, dollars, and very shortly UAE stocks should hit rock bottom. Short positions in global equities should do very well in the coming month.”

  On the other hand, one certainty: The dollar is once again the “flight to safety” currency trade. Of course, you can see the irony — that one day the U.S. will suffer a very similar debt crisis. But it won’t be today, and not before Europe deals with its deficits.

So the dollar index is up two points from its April low, to 82 and change. That’s less than a point from a one-year high… which we expect it to surpass soon.

  U.S. Treasury bonds are still a safe haven, too. Despite the end of the Federal Reserve quantitative easing (QE) program — in which the Fed was buying Treasuries outright to keep the yield down — yield on U.S. 10-year bonds fell 30 points in April, to about 3.7% today.

Better U.S. debt and Euro debt, the thinking goes.

  Short-term yields, however, are on the rise.

“Here is a weekly chart of the yield on the 2-year Treasury note going back to 1990,” Dan Amoss offers. “It has risen from 0.8% to 1% over the past two months. It could easily keep rising, especially considering the scarily low duration of the U.S. national debt. The average maturity of all outstanding Treasury securities is a little over four years.

“If 2-year note yields keep rising, the Fed may soon have to abandon its ‘zero for an extended period’ policy. This is why most Fed governors will keep playing the tired, industrial-era “output gap” card as long as possible; that is, until investors no longer believe the argument that they should fear deflation in a world of fiat money and “make-up-any-earnings-you-want” accounting in the banking system.

“The risk of a deflationary depression ended in late 2008, once the Fed figured out how to stop the panic in the shadow banking system, which paralleled the banking panic in the early 1930s. The new administration in early 2009 then decided to recruit the big banks as deficit-financing allies, rather than restructure them with new capital and new management. From there, it was necessary to suspend honest accounting in the banking system; engineer a wide yield curve for the carry trade; and, ultimately, claim a ‘profit’ on TARP investments.

“But just because the worst-case deflation scenario is off the table doesn’t mean the stock and real estate markets should be ‘off to the races.’ On the contrary, valuations and hopes are high for an economic rebound that’s based in faith and little else.”

As with the Greek scenario, the system of sovereign finance is one of confidence — a “con game” in the classic definition of the phrase. If you’d like to learn how to bet against it, please read Amoss’ ideas here.

  Stocks opened up over 0.5% in the U.S. this morning, on word of the Greek rescue plan. Bank stocks are leading the way, thanks in part to Warren Buffett’s predictable defense of his Goldman Sachs investment during the annual Berkshire shareholders meeting over the weekend.

And of course, oil stocks are the laggards… those oil-spilling, environment-destroying evildoers.

  Some “positive” data points are also giving traders a reason to buy today. Personal income and spending in the U.S. both rose, according to expectations in March, the Commerce Department reports. Does it matter that income rose 0.3% while spending jumped 0.6%? Nah…

The national savings rate slipped to 2.7%, too, the lowest level in 18 months. Hooray!

The Institute for Supply Management’s gauge of U.S. manufacturing inched up in April, also giving traders some confidence today. It’s now at 60.4.

  But as we noted last week, strong American prices — in stocks, bonds and dollars — no longer demand lower gold prices. Au contraire, the EU crisis has bumped gold up to $1,180 today, a high for 2010.

Fear of the contagion spreading across the Atlantic sometime in the distant future help gold retain its luster as an insurance policy against the “flight to safety” trades mentioned above.

  Other commodities priced in dollars have been largely immune to this spat of greenback gains. Oil’s up four bucks over the last week, to $86. The Deepwater Horizon spill in the Gulf of Mexico is just getting bigger and more expensive by the day… more on that with Byron King later this week.

  Last today, a little Monday morning gloating:

On Oct. 10, 2008, one month after Lehman’s bankruptcy, we wrote: “Looking for another sector to buy? We offer this off-the-cuff tip: Buy lawyers. UCLA law professor Lynn LoPucki recently estimated total fees for the Lehman bankruptcy to exceed $900 million, by far the most expensive bankruptcy of all time.”

The New York Times, yesterday: “The lawyers, accountants and restructuring experts overseeing the remains of Lehman Brothers have already racked up more than $730 million in fees and expenses, with no end in sight. Anyone wondering why total fees doled out in the Lehman bankruptcy alone could easily touch the $1 billion mark merely has to look at the bills buried among the blizzard of court documents filed in the case…

“While most of corporate America may be just emerging from the Great Recession, bankruptcy specialists have spent the last two years enjoying an unprecedented boom.”

Classic wealth redistribution! Heh. Just not the kind politicians can advertise.

  “It is deflation that we must first confront,” a reader asserts confidently. “The whole euro debacle will make credit so very hard to come by, which leads to strong deflation, not inflation. Housing defaults and resulting loss of bank capital are all strong, massively deflationary forces. Further distress selling leading to dropping housing prices will be deflationary. The flight from the weakened euro to dollars will push the dollar up and U.S. interest rates down, which is deflationary.

“Concomitantly, there is as yet no indication whatsoever of any strong wage increase pressure at all as an impetus to future inflation. Not only is the consumer price index still very low in terms of inflation (especially with volatile food and energy omitted), but the intermediate direction for energy will be down as European exports decline precipitously amidst the unfolding capital crisis. So next up is and will be deflation.

“Nonetheless, once this force of strong deflation has its way with us, the underlying forces of inflation will be unleashed. However as investors, focus on deflation for now. First things first.”

The 5: Agreed. Deflation now, inflation later. The trick, as we noted last week upon our return from the 2010 Fiscal Summit, will be to prepare for the latter, which is likely to return with a vengeance.

  “I am a housing inspector and property manager for much of Detroit,” another reader writes, referring to our observation that stealing valuable commodities from vacant homes is back in vogue.

“I worked with a California couple who bought seven houses from another manager around Detroit. They weren’t happy with his performance or communication. I was contracted to see if I could rehab two of the houses in their portfolio. Upon arriving, I found each house without boards. The house was boarded up prior, but sat for a year. The thieves stole the aluminum porch covers and back porch cover. No biggie, happens all the time. But then upon going inside, I saw the thieves took the bathtub, toilet, sink and every single small octagon tile in the bathroom. Now, that’s a first for me on any level. Every lead window was gone.

“If you don’t have someone living in the house while it’s being rehabbed or without a renter, you will lose your furnace, water heater, lead glass windows and copper if you have any. Needless to say, I have some scruples and told the couple to just let these two houses go, as the rehab alone would be way over what the home will be worth in 10 years.”

  “Thank you for making the special effort to produce and make available so timely this video,” the last reader writes, referring to the breaking news broadcast with Rob Parenteau we refer to above.

“There are lots of moving parts to the equation, and every little bit helps. I would encourage you to use the ‘breaking news’ video format again to keep your members on the cutting edge of being the best-informed investors in the nation. At least we like to think so anyway.”

The 5: You’re welcome. Honestly, we got a kick out of listening to what Rob had to say, too. If you missed the broadcast, we’ve archived it here. Thanks again to Mr. Parenteau for swinging by Baltimore on his way to New York and sharing his insights. We’ve been diligently working behind the scenes, remobilizing our axioms, and will be introducing many new features to the society this summer and beyond… stay tuned.

We’ll also be holding our second annual meeting of the society during the Symposium in Vancouver. Your formal invitation to that event will arrive in your inbox later this afternoon.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. We’ll also be broadcasting an important new video of a different sort on May 11th, 2010 at 1 p.m EDT. This web event will take an in-depth look at the exploding demand for high-grade collectible coins in China, the impact of this new global market on collectables here in the U.S. and the importance of the grading system in determining authenticity of coins in both markets. If you’d like to be involved in the initial screening of that broadcast, enroll here.

P.P.S. Saturday was May 1, 2010. Forthwith, our annual salute to the caffeine-enhanced down the block at Red Emma’s Bookstore Coffeehouse. Viva la revolucion!