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June 25th, 2009 | The Big Picture
Matt Taibbi’s latest Rolling Stone article, “The Great American Bubble Machine,” undresses Goldman Sachs–and finds a “giant vampire squid wrapped around the face of humanity.” Not only do former Goldmanites essentially run the world, they help manufacture and burst economic bubbles, harvesting mean profits the entire time. Taibbi details how the bank manipulated investors, starting during the Great Depression.
Zero Hedge scanned the entire article onto Scribd; find it here.
With a subtitle like "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again" run, don't walk, to your nearest kiosk and buy Matt Taibbi's latest piece in Rolling Stone magazine.
One of the best comprehensive profiles of Government Sachs done to date.
Speaking of GS, they sure must be busy today, now that Bernanke is about to be impeached and take the fall for all their machinations.
Taibbi’s conclusion: “It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but at least we know where it’s all going.”
Jun 28, 2009 | Calculated RiskThe Bank of International Settlements (BIS) will release their annual report tomorrow. The Guardian has a preview: Recovery threatened by toxic assets still hidden in key banks... Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world's financial institutions according to the Basle-based Bank of International Settlements.Also, the WSJ has an article on the incredibly shrinking PPIP: Wary Banks Hobble Toxic-Asset Plan
"Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks," the BIS says in its annual report. "At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses."
... As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS's assessment will carry weight with governments. It says: "The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy."
It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. "Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage," it says.
I think the stress tests showed that the U.S. should have pre-privatized BofA, Citigroup and GMAC. Oh well ...
Scrooge McDuck (profile) wrote on Sun, 6/28/2009 - 7:07 pm
Sorry, CR, but got pigged
States Turning to Last Resorts in Budget Crisis
"All but four states must have new budgets in place less than two weeks from now — by July 1, the start of their fiscal year. But most are already predicting shortfalls as tax collections shrink, unemployment rises and the stock market remains in turmoil."
"In all, states will face a $121 billion budget gap in the coming fiscal year, according to a recent report by the National Conference of State Legislatures, compared with $102.4 billion for this fiscal year."
"As a result, governors have recommended increasing taxes and fees by some $24 billion for the coming fiscal year, the survey found. This is on top of more than $726 million they sought in new revenues this year."
June 25, 2009 | moneyshow.com
A: I'm not sure that the risk/reward now is particularly favorable. The inflationary school of thought says the Federal Reserve has no other option but to print money, and that will lift asset prices. The Standard & Poor’s 500 could get to 1,000 or 1,100 or depending on how much money they print, possibly even higher than that.
Between March and today, the S&P is up 40%, and in an environment of zero interest rates, that's a huge gain. Many of the resource stocks we were recommending in November and December have tripled. So, maybe we have for two or three months now a reversal in expectations, where people suddenly realize that maybe the economy doesn't recover a lot and that deflationary pressures are still there. But if the S&P was to come down to 800 or 750, the Fed would probably increase its money printing activity. So, I kind of doubt that we'll see new lows.
Q. You've warned that US risks Zimbabwe-style hyperinflation and then more recently said US inflation could reach 10% to 20% in five to ten years. Isn't there a big gap between those outcomes?
A. We have the worst recession since the Second World War and actually the prices of necessities are still rising, including food and energy. So, one day within the next ten years, when the economy slowly recovers and when further dollar weakness occurs, inflationary pressures will increase. And once you have inflation increasing, it's not easy to stop it unless you implement tight monetary conditions, which would imply very high real interest rates. And I don't think that Mr. Bernanke or the US government have any intention whatsoever of having positive real interest rates. Combine easy monetary policies with large fiscal deficits, and the likelihood of much higher inflation is there. Once we go to 10% inflation, 20% becomes quite likely and once we go to 20%, we can easily go into hyperinflation.
While the CRB index is flat on the week, the implied inflation rate in the 10 yr TIPS has fallen 22 bps this week to 1.71%, the lowest since May 20th. It also coincides with the conventional 10 yr bond yield falling to the lowest since May 25th on the heels of the three solid bond auctions this week. Why is this? Inflation fears got ahead of itself (the y/o/y May PCE rose just .1% today)? The FOMC, while maintaining their current QE program, didn’t add to it and they also believe that inflation will remain subdued for some time due to ’substantial resource slack’? Yesterday’s jobless claims data has traders worried again about the economy and the labor market and the deflationary implications, notwithstanding the upside surprise in durable goods orders on Wednesday? Or is it just a consolidation of the sharp move higher in inflation expectations over the past few months?
From the American Trucking Association: ATA Truck Tonnage Index Increased 3.2 Percent in May
... ATA Chief Economist Bob Costello said the month-to-month improvement was encouraging, but cautioned that tonnage is unlikely to surge anytime soon. “I am hopeful that the worst is behind us, but I just don’t see anything on the economic horizon that suggests freight transportation is ready to explode,” Costello said. “The consumer is still facing too many headwinds, including employment losses, tight credit, rising fuel prices, and falling home values, to name a few, that will make it very difficult for household spending to jump in the near term.” He also noted that he doesn’t expect tonnage to deteriorate much further and that any growth in tonnage over the next few months is likely to be modest.
... ... ...
Trucking serves as a barometer of the U.S. economy, representing nearly 69 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods
There are many reasons for the rising delinquency rate. Earlier today we discussed some new research suggesting a number of homeowners with negative equity are walking away from their homes ("ruthless default"). There are also negative events that can lead to delinquencies - like death, disease, and divorce - but one of the main drivers is probably loss of income.
6/27/2009 | CalculatedRisk Here is an interesting new paper on homeowners with negative equity walking away: Moral and Social Constraints to Strategic Default on Mortgages by Guiso, Sapienza and Zingales. (ht Bob_in_MA)
The WSJ Real Time Economics has a summary: When Is It Cheaper to Ditch a Home Than Pay?The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
... ... ...
I think one of the key points in the research are changing social norms - the more people a homeowner knows that he believes "walked away" the more open the homeowner will be to mailing in their keys. This is what I wrote in 2007:One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.This research suggests that this is happening in significant numbers.
Thus, first some proposals on altering the foundation of our economic and financial system:
- Tightly regulate money supply by linking its growth to renewable energy and the creation of a Sustainable Economy. That's my Greenback proposal.
- Start actively dismantling the Permagrowth Economy. Some suggestions could be to tax "black" energy heavily, cap and trade greenhouse gas emissions and impose a national Value Added Tax (VAT) on all transactions.
- Place the financial sector back at the "tail" of the economy, where it belongs; it is the dog that should wag its tail, not the other way round. One example would be to gradually increase reserve ratios and capital requirements for banks (e.g. Tier I capital to 20%).
- Cease all financial sector bailouts and, where practicable, ask for the government's money back, with interest.
Taking a firm position in an ongoing debate in the financial markets, Buffett says he's not concerned about deflation, but thinks inflation will be a problem in coming years.
BECKY: It continues to be? You don't think any of the urgency has come away?
BUFFETT: No, I don't think the urgency has come away. The urgency has moved away from a total meltdown of the financial sector which we faced last fall. I've never seen anything like that. But I would give enormous credit to the people there. (Federal Reserve Chairman) Bernanke did a fabulous job. We were right at the point where people lost faith in money-market funds, when commercial paper stopped being issued. People would be having a problem meeting their payroll, very big companies, if that hadn't gotten addressed very quickly. And I give credit to people for doing that. So that part, we've moved past that particular period. We haven't got the economy going again.
The Coming Collapse of the Middle Class
Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America\'s credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class.
Series: \"UC Berkeley Graduate Council Lectures\" March 2007
On Monday, we looked at the impact of the Exhaustion Rate on Continuing Unemployment Claims (See Continuing Claims “Exhaustion Rate” and Exhausted Claims part II). Those charts and tables made it clear that Continuing Unemployment Claims were dropping not due to folks getting jobs, but simply using up all of their benefits.
Wednesday, we learned of a) record credit card chargeoffs and Increasing minimum Credit Cards payments from 2% to 5% at Chase.
Now, lets see what happens if we can put those two together:
- dead hobo Says:
June 25th, 2009
Charge offs hit a 10% annual rate and may go to 12% soon. In personal terms, this is an indication of a lowered quality of life. After reading the below link about the history of GS, I can only do two things
1) Want to start punching people
2) Campaign for chargeoff rates to go from 10% - 12% to as much as you fricken don’t want to pay off. These banks don’t care about anyone but themselves. Why should anyone who is feeling a little crimped worry about paying them off? They’re all criminals and don’t play using the same rules. Why should those who are paying the highest prices care about these thieves?
At this time, almost everything in finance is a rigged came, courtesy of Uncle Stupid and clever crooks of finance, with help from an incompetent and often complicit media.
- call me ahab Says:
June 25th, 2009 at 9:09 am
“Why should anyone who is feeling a little crimped worry about paying them off? They’re all criminals and don’t play using the same rules.”
I have made this same point- hostility against the banks may get to the point that folks who would normally want to do the right thing will just tell the credit card issuers to screw themselves and quit paying- where is their special treatment?- where is their bailout?- especially now with record bonuses being reported-
here are the keys to my house- thank for the 2 or 3 years I lived in it . . .oh . . .and by the way, those credit cards- I won’t being paying those in the future either
- dead hobo Says:
June 25th, 2009 at
I’m feeling especially pessimistic this morning. I’m starting to think that talk of a recovery in a few months is completely wrong. We’re on a plateau on our way down to the new normal.
1) Massive CC charge off rates forecast to go higher
2) High unemployment compensation exhaustion rate likely to go much higer
3) Massive initial claims and both increasing massive continuing claims
4) Poor real estate market
5) Poor retail sales
6) Recent stock market increase probably partially due to liquidity injection into markets for the purpose of making it easier to sell new bank stocks at best prices. Fed injected liquidity possibly gone.
7) Durable goods orders up BUT shipments, inventory and backlog down substantially. Orders much less than shipments. A growing market would show orders exceeding shipments and an increasing backlog, just like any growing business would show. Inventories not being replenished.
Massive continuing failures in auto business
9) Transportation companies describing dismal current and dismal expected future conditions
10) Speculator driven high oil prices, choking the economy of sustainable life
11) I can’t find even ONE good thing that points to growth, with the possible exception of people changing behavior and downsizing their consumption behavior, improving the business of low price substitutes. If any real green shoots exist that have real economic effect, please enumerate.
I’m at a loss to see a green shoot here. I think a new level of down is coming. Once computers lose interest in jiggling the stock markets, look out below.
Right now, the market is very tough. But in two years, or at most three years, it will recover so we want to make sure we have the means to meet demand then," said Niimi, who heads manufacturing operations in Toyoda's new-look executive team.
"The company will have to learn to adjust to this new paradigm of lower sales growth and higher technology spending. But they are definitely in a better position than U.S. companies to do so," said Yoji Takeda, a Hong Kong-based vice-president with RBC Investment Management (Asia) Ltd.
In the United States, Toyota's biggest and until recently most profitable market, its sales have dropped 38 percent year to date.
6/24/2009 | CalculatedRisk
From Bloomberg: King Says U.K. Recovery May Be ‘Long, Hard Slog’ (ht Jonathan)“There has to be a risk that it will be a long, hard slog” because of the problems in the banking system, King told lawmakers in London today. “I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we’ve seen since the 1930s. Having an open mind and not pretending to foresee the future when it’s so uncertain is important.”
King said that there’s “not much evidence to change our view” since the bank released forecasts in May showing that the economy won’t return to growth on an annual basis until the second half of next year.
Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009 - 4:58 pmwrote on Wed, 6/24/2009 - 5:04 pm
Someone clearly did not get the memo. Fed says stuff is sorta OK, no deflation, no inflation. Life goes on, bra.
Apparently there is a new branch of the Appalachian Trail that runs to Argentina.
It's called the Happy Trail...
I'll be here all week, folks.
Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009 - 4:58 pm
Someone clearly did not get the memo. Fed says stuff is sorta OK, no deflation, no inflation. Life goes on, bra.
Mike in Long Island (profile) wrote on Wed, 6/24/2009 - 5:05 pm From the prior thread(.
Citizen AllenM wrote,
This model was beyond stupid, yet pursued with great vigor.
I think you meant to say
This model preyed upon the stupid and was pursued with visions of great vigorish yet to be collected.
creditcriminalslovetarp (profile) wrote on Wed, 6/24/2009 - 5:05 pm
maybe he's onto something with that Argentina Happy Trail.. Good for trade..
.Not One Cent (homepage, profile) wrote on Wed, 6/24/2009 - 5:05 pm
We need a hedonic adjustment for British understatement.
Mike in Long Island (profile) wrote on Wed, 6/24/2009 - 5:05 pm From the prior thread(.
Citizen AllenM wrote,
This model was beyond stupid, yet pursued with great vigor.
I think you meant to say
This model preyed upon the stupid and was pursued with visions of great vigorish yet to be collected.
creditcriminalslovetarp (profile) wrote on Wed, 6/24/2009 - 5:05 pm
maybe he's onto something with that Argentina Happy Trail..good for trade..
UnrealEstate (profile) wrote on Wed, 6/24/2009 - 5:08 pm There will be a recovery? I thought the Western Civilization has been now in the initial stages of the meltdown with the Globalist pit bulls having a death grip on its throat.
HomeGnome (profile) wrote on Wed, 6/24/2009 - 5:09 pm
World wants "major reserve currencies" stable: China
China suggested in March that the International Monetary Fund's Special Drawing Rights, or SDRs, could play a role as a future reserve currency, which would lessen the reliance on the U.S. dollar as the world's top reserve unit.
A review of the basket is due in late 2010.
The End, my friend.
Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009 - 5:11 pm
Since Mervyn is talking macro, I've been trying to figure out the best indicators to look at for a possible up turn and to watch for inflation spikes.
Here are main things I am watching:
- Chicago Fed National Activity Index (CFNAI)
- Treasury yield curve
- St. Louis Fed EMRATIO (continuing claims no longer much value)
- Initial jobless claims
- price of oil, gold, and copper
- Case-Schiller home prices
What does everyone watch?
nincompoop (profile) wrote (in reply to...) on Wed, 6/24/2009 - 5:20 pm
Comrade Coinz Best indicators to look for possible up turn?
Unemployment figures only. Forget about the rest. In addition I want to see unemployment figures which can be used to determine where the jobs are coming from. Forget about unemployment figures being a trailing indicator as who cares if you are a little late with your assessment.
barfly (profile) wrote on Wed, 6/24/2009 - 5:42 pm
Green Shoots is one of the boldest con games I have witnessed in my life.
- how does it stack up against WMD in Iraq?
Lucifer (profile) wrote on Wed, 6/24/2009 - 5:41 pm
I thought the great con game started in 1980... it is still going on.
//"Green Shoots" is one of the boldest con games I have witnessed in my life. //
Mike in Long Island (profile) wrote on Wed, 6/24/2009 - 5:46 pm
We will have to agree to disagree. Maybe I'm too cynical but I bet that the majority of those "loss leaders" of unsecured lending were predicated on a certain percentage of borrowers running up huge balances and then missing a payment triggering the penalty rate.
Kind of like the meth dealer who gives away some product knowing most freebies will result in return business at much higher margins.
6/23/2009 | CalculatedRiskProposals for reform of financial regulation are now everywhere. The most significant have come from the US, where President Barack Obama’s administration last week put forward a comprehensive, albeit timid, set of ideas. But will such proposals make the system less crisis-prone? My answer is, no. The reason for my pessimism is that the crisis has exacerbated the sector’s weaknesses. It is unlikely that envisaged reforms will offset this danger.Wolf discusses how it is rational for management and shareholders to gamble when the risks are asymmetrical (huge potential winnings, limited losses). And he argues that "creditors ... appear to have lent to a bank. In reality, they have lent to the state." He also discusses how tighter regulation isn't enough because the banks will find a way round the new regulations.
At the heart of the financial industry are highly leveraged businesses. Their central activity is creating and trading assets of uncertain value, while their liabilities are, as we have been reminded, guaranteed by the state. This is a licence to gamble with taxpayers’ money. The mystery is that crises erupt so rarely.
Wolf concludes:Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.Talk about pessimism.
Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.
Another financial crisis is unfortunately inevitable - all we hope to do with reform is to put it off for a couple of decades or more.
pavel.chichikov wrote on Tue, 6/23/2009 - 6:01 pm"A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that."
Lobbyist Ben Dover wrote on Tue, 6/23/2009 - 6:02 pmIt is not abnormal to over do it a bit. It is totally abnormal to put a blind eye to the most basic signs of theft. Our Federal regulators and politicians are the real crooks for not doing the slightest discipline or for not warning of what was taking place!
Counterpointer wrote on Tue, 6/23/2009 - 6:09 pmThere was no meaningful reform after the Asian Crisis, related to global systemic weaknesses, but there were one hell of a lot of meetings and new acronyms created. Countries had already gone national, G-L-B as a rather good example. IMF multilateral surveillance was a late run to address the impending bubble. No systemically important regulator had the remotest intention of seeing that it worked.
patientrenter wrote on Tue, 6/23/2009 - 6:11 pm
Martin Wolf is correct, I am afraid. We have responded to a problem by making its causes worse. Investors (including people who buy homes for well over twice their income) no longer bear the full risks of their decisions. Taxpayers and savers (through the subtle tax created by future inflation) pick up the tab for many of the losses. This was what created the bubble, and now we have expanded, formalized and institutionalized the process. This fix will last for a shorter time than the last one, and the next fix after that will last for an even shorter period, and so on, until all credibility is lost and real (lasting, sustainable) solutions must be developed.
Far from some inevitable, harmless evidence of progress, this increase in risk transfer is a mistake. It's an avoidable mistake as much as Greenspan's extended cheap money policy was an avoidable mistake.
How kind of them.. banker= worker
Citigroup Is Said to Be Raising Pay for Workers
By: Eric Dash, The New York Times | 23 Jun 2009 | 08:56 PM ET Text Size
After all those losses and bailouts, rank-and-file employees of Citigroup are getting some good news: their salaries are going up.
The troubled banking giant, which to many symbolizes the troubles in the nation’s financial industry, intends to raise workers’ base salaries by as much as 50 percent this year to offset smaller annual bonuses, according to people with direct knowledge of the plan.
Lucifer> wrote on Tue, 6/23/2009 - 6:39 pm
But we rewarded them for lying and scamming us..
The 86 Biggest Lies On Wall Street
Posted By:Gloria McDonough-Taub
In his newest book, The 86 Biggest Lies on Wall Street, John R Talbott answers my question first by writing, "I know what you're thinking, how was I able to narrow down the number of lies to just eighty-six."
Here are some samples from the "Biggest Lies on Wall Street"
Going into the current crisis, the American economy was the strongest and most resilient in the world
This was simply a subprime mortgage problem that no one could have foreseen
Like the Great Depression, this is primarily a liquidity problem, and injecting cash into the system will solve it
CEO pay is deserved because it is determined in a highly competitive market
Excessive regulation is not needed in the financial markets because anyone who is harmed can seek redress in the courts
Government regulation is bad for economic growth and prosperity
pavel.chichikov wrote on Tue, 6/23/2009 - 6:42 pm
"In his newest book, The 86 Biggest Lies on Wall Street, John R Talbott answers my question first by writing, "I know what you're thinking, how was I able to narrow down the number of lies to just eighty-six."
But when lies are compulsive and compulsory, it means that reality is sliding out of our grip. Compulsive drinking, compulsive gambling - compulsive banking?
pavel.chichikov wrote on Tue, 6/23/2009 - 6:47 pm
Not quite, patientrenter. I believe it's social break down that's leading the financial crisis.
"I think that people here in the US have enough remembered history of individual economic responsibility to come to their senses when the carrots stop coming even as they keep pushing the "easy food" button."
I hope you're right.
dryfly wrote (in reply to...) on Tue, 6/23/2009 - 6:51 pmRegulations are useless (anyway the regulations that Obama wants). Do you think that it's regulations that kept 1929 from happening for 80 years? No it's psychology. The bust turned out so bad that market participants became very risk averse.
The bigger the bubble, the bigger the bust (and in this respect the bubble of the 20"s was a picnic compared to today). Odds are that the outcome will be so bad that such a crisis will not happen again before, a long, very long time.
Regulations are like traffic laws - they only work if the population wants to makes them work [i.e. the psychology]. After the depression almost all market participants wanted to make them work... the few that didn't were constrained by enforcement of those 'useless regulations'. By the 80s the majority of participants wanted those useless regulations thrown aside and didn't remember why they were there in the first place. They got thrown aside. They now why they were there.
Lucifer wrote on Tue, 6/23/2009 - 6:52 pm"Experience keeps a dear school, but fools will learn in no other"
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:01 pm "REGULATE THE MORTGAGE INDUSTRY
30 yr fixed, 20% down on EVERYTHING."
Amen to that, Danny. That one simple step would be a huge step in avoiding another housing bubble.
Ain't gonna happen, unfortunately.
Lucifer wrote on Tue, 6/23/2009 - 7:03 pmIt will work out that way.. eventually.
//Why can't you all just accept that everything is for the best in this the best of all possible universes.//
patientrenter wrote on Tue, 6/23/2009 - 7:05 pm
"They are failing today just as then... we can't cover them all or even cover some of them all the way. We aren't halfway through this pain fest."
In the 1930's, when banks failed, the people who put their money into them lost some of it. Not true today. It really is different today.
Oh, and another amen to the 30 yr fixed, 20% down on everything comment. With that one change, our housing market would be almost normal again. But the house price gain orgy would be well and truly over for 2/3 of our population. The end of the biggest free lunch scheme ever hatched. So, it ain't going to happen.
Lucifer wrote on Tue, 6/23/2009 - 7:06 pm
You mean, common people should be more moral than banksters or businessmen? Why?
//When people decided they wanted it, deserved it NOW.//
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:07 pm
"Going into the current crisis, the American economy was the strongest and most resilient in the world"
Agreed, anyone who still believes the US economy is/was the strongest and most resilient in the world needs to think some more.
The real joke though is how, during the Asian crisis, people like Geithner et al went around and lectured the Asians on how to run their economies.
No wonder they are trying to bail on our currency and economy today.
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:08 pm
"A resonance phenomenon? "
I think so, brought to you by a pure fiat currency and fractional reserve banking.
Lucifer (profile) wrote on Tue, 6/23/2009 - 7:09 pm
Respectibility of western thought and people is one of the biggest casualty of this crisis.
//The real joke though is how, during the Asian crisis, people like Geithner et al went around and lectured the Asians on how to run their economies.//
Lobbyist Ben Dover wrote on Tue, 6/23/2009 - 7:12 pm
Twenty percent down will show also the home prices are to high. Flake financing has created the need to pump people into homes they can not responsibly afford. Bang we have a warped reality!
Lucifer wrote on Tue, 6/23/2009 - 7:21 pm
Is UBS not leveraged 50x and > 4X the GDP of Switzerland? Do they have any credibility? Does anyone big have any credibility left?
//UBS cuts Swiss Life to "sell"//
km4 wrote on Tue, 6/23/2009 - 7:25 pm
What .....you mean financial ( ponzi scheme ) engineering of the US economy is not sustainable going forward
Anak wrote on Tue, 6/23/2009 - 7:37 pm
Who was it some time ago who opined that in future banking should be no more exciting and remunerative than a public utility?
Lucifer (profile) wrote on Tue, 6/23/2009 - 7:38 pm
Many have opined that.. including Taleb.
//Who was it some time ago who opined that in future banking should be no more exciting and remunerative than a public utility?//
Comrade Dazed and Amused wrote on Tue, 6/23/2009 - 7:42 pm
josap (profile) wrote on Tue, 6/23/2009 - 9:04 pm
The problem started not because of infaltion. During the high inflationary times we just bought less or on sale only. Still no credit card.
When people decided they wanted it, deserved it NOW. And credit card, TV rental companies figured out how to give it to them. That was the begining of the end.
Marketing helped, allot. All the you "deserve it" commercials, the "you can have it now" ads.
In 1994 I started a business in Mexico. After the peso devaluation in Dec 1994, I lost everything, including my house in the US and $40k in credit card lines of credit. It was the most liberating experience of my life because it forced me to live on a cash-only basis. You really CAN live on cash only. It forces you to evaluate very purchase, and to plan what and where you are going to spend your hard earned cash on.
I think this is something that many people in the US are going to have to come to grips with soon. "You can have it now" is going to become "You can have it when you pay off the lay-away".
Life will go on. It's just the transition that will be painful.
broward wrote on Tue, 6/23/2009 - 7:57 pm
Their debit is my credit. Folks will get it soon enough.
"Survival of the fittest" don't work so good when your lifeline is tied to the guy you put out of work.
Rob Dawg wrote on Tue, 6/23/2009 - 8:03 pm
Tech bubble -> housing bubble -> government debt bubble.
I knew an old lady, she swallowed a fly...
peAk wrote on Tue, 6/23/2009 - 9:04 pm
Credit cycle becomes increasingly unstable as debt gets larger and larger..
Historians will note that while the credit-collapse was swift, the ensuing fall in asset prices was anomalously slowed, intentionally by those seeing the danger of liquidation and undertaking to disguise the reality of the price drops so as to discourage self-reinforced selling, and unintentionally by those who hopefully or ignorantly expected buying and lending to re-emerge at each new low. The antidote to the credit-asset-price-collapse contagion will prove to have been the liquidation of non-distressed business and personal assets, even at decreasing "below-market" levels, and the preservation of cash in whatever forms appeared more essentially durable, but the remedial solution will have remained invisible to almost all, hiding in plain sight.
June 22, 2009 | Yahoo(ETFguide.com)
Is the worst over? It's an open-ended question that solicits many diverse opinions but none that yields any clear answers. And no matter how good the thesis sounds about which way the market is headed, the future is forever unknowable. What does this mean for your investment portfolio?
Not knowing the future is hardly an endorsement for leaving your investments up to chance.
Even during difficult economic periods and directionless markets, it's possible to achieve profitable results. For example, four of ETFguide.com's live model ETF portfolios have outperformed major benchmarks like the S&P 500 (NYSEArca: SPY - News) and the MSCI EAFE Index (NYSEArca: EFA - News) on a year-to-date basis. What does it prove? Getting the correct mix of assets inside your portfolio still works. Desirable results don't typically happen by accident.
What can you do to prepare your money for the next market decline? Let's evaluate three simple strategies.
Avoid Financial Puberty
'Financial puberty' is a term I invented to describe a state of financial immaturity that prevents people from prospering. The three main aspects of financial puberty are:
- Having behavioral disorders counterproductive to successful investing;
- Having limited or no education about the realities of successful investing, and
- Having a distorted investment philosophy or having no investment philosophy at all.
Do you have symptoms of financial puberty?
One way to know is through self-examination of your attitudes. For example, many investors have adopted a defeatist attitude. 'If my neighbor's portfolio is down 60% and mine is down 50%, I'm not gonna complain,' they tell themselves. Other investors have become callus to risk. They've convinced themselves, 'My portfolio is down so much, I need to take on more risk to earn back my losses.'
In both cases, this kind of flawed reasoning is rooted in financial puberty, an all encompassing self-destructive characteristic.
Remember: This isn't 'Play Money'
Entrusting your money to investment managers is no guarantee of success and sometimes results in full-blown disaster. Not realizing this caught many people by surprise.
In 2008, the Oppenheimer Core Bond A (Nasdaq: OPIGX - News) cratered 35.83% yet the Barclays Aggregate Bond Index as tracked by Vanguard's Total Bond Market ETF (NYSEArca: BND - News) climbed 5.17%. How long will it take Oppenheimer's bond fund shareholders to make up that 41% deficit?
'Thousands of parents of college-age children who thought their college savings were sheltered in low-risk portfolios watched their accounts shrink last year after a bond fund (Oppenheimer Core Bond Fund) offered by at least four state 529 plans lost more than a third of its value,' reported the USA Today. OPIGX was offered by 529 plans in Oregon, Texas, Maine and New Mexico.
What if 529 state administrators in charge of this mess had enough sense to just use low cost index funds or index ETFs? Is it possible they could have protected college savers from the nightmare scenario they're now facing? Treat your money and invest your money like you care. It isn't play money.
Be Alert, Stay Vigilant
Nothing can be more dangerous to a soldier's safety than his or her own complacency. Sometimes when it appears everything is calm and safe is right when the enemy strikes! From an investment perspective, being inattentive, apathetic or lazy could cost you a bundle.
Towards the end of February and early March, the downtrend for the Nasdaq Composite began to slow (NasdaqGM: ONEQ - News). Much earlier the Dow and S&P 500 had already dropped significantly below their 2008 lows, whereas, the Nasdaq did so much later and to a smaller degree, which indicated a shift towards riskier stocks.
This, along with a composite of other indicators, led the ETF Profit Strategy Newsletter to issue a Trend Change Alert on March 2nd, only four days before the S&P 500 bottomed on March 6th. Along with a number of ETF profit strategies for conservative, moderate, and aggressive investors, the alert forecasted the following: 'A multi-month rally, the biggest rally since the October 2007 all-time highs, should lift the indexes by some 30-40%. Tuesday's 4% spike may be an indication of the initial intensity of the rally.' Being alert to this reversal in stock prices paid off. For aloof investors, they were too busy doing nothing to notice.
What's Your Action Plan?
This is not the friendly stock market of a few years ago. Combining today's bear market and economic recession with the wrong investment philosophy will inevitably lead to financial disaster. Millions of investors have lost more far more of their wealth than they expected to lose. And millions more will join them. What will you do?
If the stock market has trashed your portfolio, isn't it time you made the necessary changes to get your money back on track? Avoiding financial puberty, treating your money with care and staying alert are three simple steps to preparing your money for whatever lies ahead.
...much of the rise is not justified, as it is driven by excessively optimistic expectations of a rapid recovery of growth toward its potential level and by a liquidity bubble that is raising oil prices and equities too fast too soon. A negative oil shock, together with rising government-bond yields — could clip the recovery’s wings and lead to a significant further downturn in asset prices and in the real economy.
Jun 21, 2009
"Decidedly the worst (of the crisis) is already behind us," said Soros, a 78-year-old Hungarian-born American with Jewish roots.
He did not elaborate but went on to stress the uniqueness of the current economic turmoil.
"This is not like previous crises but marks the end of an era. The system to date had been based on the false assumption that markets can independently regain their equilibrium and that the system is self-correcting," he explained
By Chris Reiter
June 20 (Bloomberg) -- Chancellor Angela Merkel said the slumping German economy has nearly hit bottom and will unlikely recover quickly, the AP reported, citing a speech she made in Berlin.
The chart of the German economy may look more like a “bathtub” than a “V” as output stagnates before recovering, she said, according to the news agency. “I hope it is a children’s bathtub and not a bathtub for people with particularly long legs,” Merkel is quoted as saying by the AP.
June 20, 2009 | The Big Picture
Some 15 weeks after the March 666 lows, indices are 40% higher. After that sprint, might the buyers be suffering from some fatigue? Are the markets now fully reflecting a second half recovery?
Are we priced for perfection?
Those questions are looked at in Barron’s Up & Down Wall Street column this week:
“There were hints, as well, that bullish sentiment, which for a spell remained fairly constrained, had escalated to something approaching euphoria. Investors Intelligence readings of advisory sentiment showed most of these supposed savants, who often function best as contrary indicators, have come a bit late to the party; in recent weeks, the percentage of bulls among them have registered in the mid-40s, compared with the low 20s for the bears.
Moreover, trading took on a distinctly more speculative tone, with small stocks chalking up big gains despite their conspicuous lack of very much in the way of sales and nothing in the way of profits or prospects. And perhaps the most persuasive evidence of the gamier spirit abroad in Wall Street is that, despite the mounting demolition of the commercial-property market, Morgan Stanley plans to sell re-securitized commercial mortgages.
Which, as one portfolio pro acidly observed to Dow Jones Capital Markets, amounts to peddling tarnished assets nicely repackaged with higher ratings. That kind of thing has been going on in residential asset-backed securities in recent months, presumably fueled by the notion that the housing decline has bottomed. But that it now has spread to commercial mortgages when things are getting notably worse is clear indication that the mind-set and, indeed, some of the very stuff that got us into such a jam is back. Alas.”
Hence, the expectation that the rally may have run its course, and is heading south.
That seems to be too pat for Mr. Market, who delights in confounding everyone. A more frustrating course of action would be to back and fill — but not collapse –and keep going up (albeit at a slower pace) after some digestion over the summer months. Sucker some more people in, only to retest the lows in September / October period.
That’s just my guess . . .
June 20th, 2009 at 10:26 am “…only to retest the lows in September / October period”
Not in the October-November period? That seems to be more the norm for fall excitement.
Of course, it will happen once the last bear has thrown in the towel and there are no more people to serve as buyers … so it could be September / October … of 2010.
dead hobo Says:
June 20th, 2009 at 10:34 am And exactly who is going to be buying? Computers will continue daytrading with each other and some hedgies will try to live up to the image of their talking head personnas. Rumored Fed backed financial programs might add more liquidity via helpful iBanks in an effort to jump start the economy via the wealth effect. A few risk chasers who prefer the stock market over Vegas will stay at it.
Ma and Pa aren’t coming back. Most people who had money just hope to get more of it back. It would take a special kind of stupid to lose 40% of your life savings and then withdraw from the bank account to replenish the brokerage account.
The pumpers are now probably in a maintenance mode. They likely hope green shoots propaganda will bring out the stupid again. Maybe if some magic charts can be jazzed up, people will think they control the world and wealth is assured if they only buy another ticket.
I’ll buy the next big big dip, but not before. Maybe the pumper can run it past S&P 1000 next time. (I bet they’re too chicken shit to manufacturer some ranges to trade). Meanwhile, I am hearing stories of affluent people taking their cash and paying off major debts.
Pundits who are waiting for the mobs to return are disconnected with reality.
Chief Tomahawk Says:
June 20th, 2009 at 10:40 am EJ over at Itulip believes the Fed will cause a market selloff on their first attempt to remove liquidity from the system. But yet feels the averages will end the year more or less where we are now.
June 20th, 2009 at 10:53 am The bears certainly see excessive valuations in equities at the moment…(and I think the S&P has most likely put in an interim top - or very close to it)…
But when I consider the “nature” of the sell-offs during the ‘08 - early March ‘09 time periods…Much of it was liquidation from over leveraged positions…Which was why the velocity was so high…
Right now, if the system is simply OVERBOUGHT (as opposed to overbought & over levered) - we may not see the severity of declines on pullbacks the way we have in the past year…Although I believe the market will trend lower (and for a long time) from here…
There may be instances where someone gets in trouble (and/or) if there’s an EVENT which prompts a steep selloff, but I see the possibility of opportunistic buying coming in on those events…It’ll most likely be a TRADERS market for the next two years with a downward glidepath…
The other part is going to be the bond market…I see that any time the 10 year gets above 4% (and perhaps on occasion they’ll let it go to 4.5%), then you’ll see money shift there while equities correct, then maybe reverse…
ON PAPER - What I describe above may seem smooth & orderly…The fly in the ointment is going to be how long the economy can actually hang on before a huge crisis in DEFAULTS (on everything - credit cards - CRE - munis - ARM resets) causes the next liquidity squeeze…
So the markets may operate in a fashion that attempts to DENY those problems until they actually start hitting OPERATIONS in the gonads…
June 20th, 2009 at 11:22 am
The market can be expected to fool nearly all of the people nearly all of the time. This is a game where the many losers fund the outsized gains of the few winners.
And the winners have nothing going for them other than dumb, stupid luck.
BR: Gee, that Jim Simons of Renaissance is pretty lucky — 40% returns for 30 years.
call me ahab Says:
June 20th, 2009 at 11:22 am
however- commodities will be dependent on a weakening $ and heavy inflation expectations- when it is realized that it is deflation- the air will blow out of commodities- I don’t foresee Americans being able to continue with their excessive ways- and all the the junk that is made has to be bought by someone-
also- I honestly believe that markets are manipulated by the Fed and market players to create bubbles with approval from the USG- if only for the reason to forestall total implosion
Partnoy is a skilled and often very funny writer, and he sets forth in detail that a layperson can understand how some of the products worked and what the economics to the firm were. But the centerpiece is the lurid, shameless, but prized for its productivity culture.
... ... ...
Even though Partnoy's book is now more than a decade old, I'd assume things have not changed very much. The internal banter may more civil, the predatory imagery less open, but I'd suspect that customers are still viewed as sheep to be sheared. Or worse.
“If another decline in the market is going to bankrupt you or put you out of business or destroy your retirement account, you should not go back into the stock market,” said John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing. “It’s not complicated. The stock market can go up and down a lot and nobody really knows how much and when.”
What’s worked for Mr. Bogle may not work for you, but his method isn’t a bad place to start. “I have this threadbare rule that has worked very well for me,” he said in an interview this week. “Your bond position should equal your age.” Mr. Bogle, by the way, is 80 years old.
... ... ...
As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them to get back in. “But I would take two years to do it,” he said. “Maybe average in over eight quarters, and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally.”
And then? “Don’t touch it,” he said, emphatically. “One of my rules is don’t do something. Just stand there.”
... ... ...
There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a bond ladder, with an equal amount coming due every six months. The ladder can include high-quality corporate bonds, Treasury notes, certificates of deposit or municipal bonds, depending on the retiree’s tax bracket. Mr. Simon takes a similar approach using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder in their 50s, with the first rung coming due the year they retire.
MrM (profile) wrote on Sat, 6/20/2009 - 8:16 am
Thanks for taking a stab at the estimates. Based on your back of the envelope, states will need to raise more $200 Bil in tax to plug holes in their budgets. This is actually quite close to the total amount of 2009-10 tax refunds to individuals in the stimulus package.
Then there is also the shortfall of real estate taxes hitting municipalities.
I think of this as yet another reason why people like Krugman and Roubini view the stimulus packages as inadequate.
Then again - where can the government take all this money short of the printing press?..
Jun 10, 2009 | Asia Times
Productivity growth, the most mysterious of economic statistics, was announced on Thursday for the first quarter of 2009 - revised upwards from 0.8% to 1.6%.
After a quarter century of stellar growth from 1948 to 1973, productivity growth suddenly collapsed and remained low for the next decade.
Then after 1982, it recovered somewhat, accelerating further slightly in the middle 1990s, although still not to its 1948-73 level.
6/20/2009 | CalculatedRisk
From Bloomberg: GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders (ht Comrade de Chaos)shoots group yet,” [General Electric Co. Vice Chairman John] Rice said ... “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”Maybe the cliff diving is over, but no green shoots ....
... ... ...
“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.
“Until that changes I don’t think you will see a significant rebound,” Rice said. “We are preparing for 12 or 18 months of tough sledding.”
Personal income fell in 37 states in the first quarter, according to estimates released today by the U.S. Bureau of Economic Analysis. Most of the states where income rose were in the Southeast.
June 16, 2009 | Sudden Debt
This blog's position has always been that the US economy's performance post-2000 has been due to ever-increasing assumption of debt, particularly by households to finance real estate purchases and personal consumption. I don't think anyone can dispute this any more: just look at the chart below.
Debt kept accelerating while GDP remained "stuck" at around 5% annually (these are nominal figures). In the end, the debt boom created its own bust and dragged down the entire economy. Cement shoes come to mind...
So, now what? What does the future hold? In particular, I am referring to corporate profits, the fundamental driver of stock market performance. We can analyse markets using a multitude of perspectives from astrological to psychological but, when it's all said and done, what matters is profits.
Since 1997, or so, households assumed ever more debt in order to consume and, thus, increase corporate profits. At the top in 2006 it took an additional $1.3 trillion in household debt to generate an additional $300 billion in profits, i.e. a ratio of 4.3 times (see chart below). The debt intensity of corporate profitability was huge, but it weren't corporations themselves that were going into debt; it was their customers.
Annual Increases In Household Debt and Corporate Profits ($ Billion)
We are now deep in a debt-bust crisis and it is the first time since at least 1953 that household debt is decreasing in absolute numbers, year on year. What does this mean for corporate profits? Based on the relationship above, I expect they have quite a bit more to drop, perhaps after a (very) brief period of stabilization due to cost cutting (see chart below).
Corporate Profits After Tax
I would thus not be at all surprised to see after-tax profits go back to around $300 billion/year, where they were in 1992 at the beginning of the debt acceleration cycle. What does this mean for stocks? Look at the chart of S&P 500 below (click to enlarge).
S&P 500 Share Index
In 1992 S&P 500 was around 400, or 57% lower than current levels. Of course, this is a pretty simplistic and one-faceted approach to corporate profits and the market, dealing as it does only with debt. (But then again... KISS has always been pretty good guidance.)
Posted by Hellasious at Tuesday, June 16, 2009
Jun 18, 2009 | The Big Picture
Mish's Global Economic Trend Analysis
Like every bloated bureaucracy, the Fed wants still more power. Secretary of Treasury Tim Geithner, a former Fed Governor, is all too happy to give it to them.
Mish's Global Economic Trend Analysis
The Nelson A. Rockefeller Institute of Government has issued a State Revenue Flash Report discussing an across the board enormous drop in personal income tax revenues.
Total personal income tax collections in January-April 2009 were 26 percent, or about $28.8 billion below the level of a year ago in states for which we have data. In April 2009 alone (April being the month when many states receive the bulk of their balance due or final payments), personal income tax receipts fell by 36.5 percent, or $18.2 billion.
Personal income tax receipts in the first four months of calendar year 2009 were greater than in 2008 in only three states — Alabama, North Dakota, and Utah.
In FY 2008, personal income tax revenue made up over 50 percent of total tax collections in six states — Colorado, Connecticut, Massachusetts, New York, Oregon, and Virginia. Personal income tax revenue declined dramatically in all six of these states for the months of January-April of 2009 compared to the same period of 2008. Among all 37 early-reporting states, the largest decline was in Arizona, where collections declined by nearly 55 percent.
In the month of April alone, 37 early reporting states collected about $18.2 billion less in personal income tax revenues compared to the same month of 2008.
States most dependent on Personal Income Taxes
68.5% of Oregon's Tax Revenue from PIT. Collections off 27.0%
57.2% of Massachusetts' Tax Revenue from PIT. Collections off 28.5%
55.9% of New York's Tax Revenue from PIT. Collections off 31.8%
47.5% of California's' Tax Revenue from PIT. Collections off 33.8%
52.4% of Connecticut's Tax Revenue from PIT. Collections off 25.9%
52.7% of Colorado's Tax Revenue from PIT. Collections off 25.4%
Arizona's collections were down a whopping 54.9% depending 25.3% on Personal Income Taxes. South Carolina, Michigan, Vermont, Rhode Island, New Jersey, Idaho, and Ohio are also in deep trouble.
20 states depending on personal incomes taxes for > 25% of total taxes were down 20% or more on collections.
This is a very grim report on state finances.
Mike "Mish" Shedlock
The problem of “too much money” (read US dollars) will continue to influence financial markets. Any increase in risk appetite will see dollars leaving the US (thus falling) and flowing back to asset markets, and vice versa. An abundance of money will make markets over-react, resulting in big swings. The recent upsurge in asset prices also seems to be an over-reaction helped by liquidity flowing back rather than by a change in the fundamental picture. Several analysts feel that many asset classes, especially commodities, have run too far ahead.
A sharp run-up in commodity prices and a jump in US bond yields have done some damage to reviving sentiments and business activities; this could show up in coming months. Besides, after having re-stocked at record volumes, Chinese appetite for commodities in H2 may remain low key. A revival in economic activities could take a pause here rather than continuing to improve at the same pace as shown in last few months. The combined effect of these may help markets to slide in next 2 quarters, slowly and quietly.
Similar to IMF, several analysts expect recovery to start in H1 2010. Expecting the next bull market to price these probabilities 3-5 months in advance, the new-year could mark the turn at the earliest.
However, at the moment, the world seems to have entered into a twilight zone where most of us are waiting for the first ray of dawn while being worried about the length of night. The sky is black now, but will be blue quite soon.
Simon’s weekend summary included this sentence on the macroeconomic situation: “The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years.”
We are now in that phase of the crisis when there is a lot of arguing about whether things are going well or poorly, and that largely comes down to whether the current slowdown in the rate at which things are getting worse (that’s all it is so far) will be followed by a healthy recovery, a prolonged period of stagnation, or an accelerated contraction brought on by higher oil prices, a new bank panic caused by defaults in credit cards and commercial mortgage-backed securities, or one of any number of other factors. I discussed this topic somewhat impressionistically a month ago; this time I’m going to highlight some analyses done by other people around the Internet.
Last time I cited James Hamilton and Calculated Risk, both of whom thought that a peak in the four-week moving average of new unemployment claims was a good predictor of the end of a recession. Hamilton in particular has been following this closely, and while we may have passed the peak, the number isn’t falling like it should. Here’s Hamilton’s picture from last week’s post:
Not to speak ex cathedra, or (as you put it, ‘impressionistically’) but the US and the Eurozone are in for a prolonged period of decline, anemic recovery and stagnation. I don’t know about the rest of the world.
Part of the problem is that everyone wants to comment on new developments, while the story is found in the continuation of previous developments. Unemployment will continue to rise. Real estate, residential and commercial, will continue to lose value. The insolvency of the financial services sector will become increasingly obvious (thanks to the foregoing, and credit card delinquencies–called by Ms Whitney last fall, as I recall).
None of this is new. If it continues long enough, you’ll get the restructuring of the financial services sector and compensation limits that you’ve called for. But, boy, at what a cost.
Our generation will have to repent.
- strike three
Repent? as in beam me up Scottie? I agree with Bill Maher last night. Obama, get off the TV and start toughening up …..
- The “World Trade: YoY” chart is telling us something
– namely that nothing post-WWII is comparable to what is happening now. Not surprisingly you have to go back to the ’30s to find anything comparable.
Also look at “Investment grade spread” and “BAA spread” that shout the message: this is far from over.
Actually Mr. Swartz buries the lede. The most important chart of all is the last one – “Real Home Price”. How many people realize that the fall in home prices is dramatically worse now than in the ’30s?
I repeat – this is far, far from over.
I can across these charts yestarday – frightening…
…though not unexpected. While the credit/banking crisis may be over (for now), the real economy is still falling pretty fast and at some point that could feed back into the banking system causing another crisis. I think people forget it took the GD 3.5 years or so to become as bad as it was, and the monetary crunch caused by the FED really didn’t happen until 1931 – over a year after the crash. There is still way too much to play out before this can be called over with.
- These Paul Swartz charts are so depressing. It definitely doesn’t compare well historically. The only good to see there is industrial production didn’t collapse as severely as during the Depression, and the percentage of unemployed is not nearly as high as during the Depression. And the spread on debt now really punches you in the face on those charts.
Ya, I definitely don’t see things improving in the next 18 months, that makes a difference in people’s everyday lives. I think the best we can hope for in these next 18 months is stagnation which gives people time to tighten their belts, time to move into growing fields, time for the government to put some controls on excessive risk-taking in the banking sector.
There will be those fools (like our boy Posner) who say there is no need to put in risk-taking controls NOW because the banks will be gun shy, or the banks “have learned their lesson”. But anyone who reads this site knows that’s garbage talk.
We need to put these risk controls (example 1: making credit default swaps illegal, example 2: separating commercial banks from investment banks) as soon as can possibly be done.
Also just the basic step of increasing capital requirements for all banking institutions would be a great move in the right direction. IF YOU LOOK AT CANADA, THEIR BANKS HAVE BEEN MUCH MUCH LESS AFFECTED THAN AMERICAN BANKS. WHY??? This is a question Geithner should be delving into deeply. Here is a link to an NYT blog article which explores some of the differences between Canadian banks regulation, and American banks regulation.
Many answers in here for Geithner and his cohorts.
Jun 12, 2009 | FT.com
In response to my previous blog, “The fiscal black hole in the US”, ‘Peter’ makes the comment that much of the unfunded ‘liabilities’ under social security and Medicare are index-linked and cannot be inflated away. This is an important point.
Inflation reduces the real value of nominal liabilities. If these nominal liabilities are interest-bearing, and have fixed market-determined interest rates that mas or menos reflect the rate of inflation expected at the date of issuance of these liabilities over the maturity of the liability, then only actual inflation higher than the inflation expected at the time of issuance actually reduces the real value servicing that liability.
If longer-maturity nominal debt instruments are floating rate securities, whose variable interest rate is linked to some short-term nominal rate benchmark, it becomes very difficult to inflate the real burden of that liability away.
If the liability is index-linked, it is impossible to inflate its real value away. The same holds if the liability or the commitment is denominated in foreign currency, something that is uncommon in the US, but common elsewhere. Only a change in the real exchange rate can affect the real burden of foreign-currency-denominated liabilities.
"to the extent that any liabilities, whether they are formal contractual obligations or political promises or commitments are de-facto index-linked, they cannot be inflated away."
I think that Governments have one more trick up their sleeves. That is they control the calculation methodology and publication of the inflation index. Governments can inflate away index linked obligations to the extent that the real rate of inflation exceeds the indexed linked rate.
The greater the rate of real inflation the greater the scope for these differences to be significant. I think that this is a real risk for holders of inflation linked US Treasuries.
By way of an example - Shadow Stats has charts comparing the official US CPI rate since 1980 and with the CPI rate as it would have been had the US Govt continued to use the CPI methodology from 1980 (i.e. not continually tinkered with the methodology).
The difference has been increasing and is now over 6%. No surprises for guessing that changes in the methodology for calculating inflation always tend to lead to inflation being less than it would have been under the prior methodology.
I want to echo Post5 (Matlock) about how inflation measures can be "adjusted" to flatter supposedly inflation-indexed government liabilities.
By miscalculating inflation, ie making inflation lower than it should be, government liabilities can too be wriggled out of.
Well spotted, Matlock (Post 5)
- The Goldwatcher
'If' , or perhaps better to say 'when' unfunded social security obligations are acknowledged as a solvency issue the debt burden will probably be reduced by restructuring. This will involve reneging on political obligations as you indicate. But compared to a solvency crisis it will be seen as the lesser of two evils. The effects will be the same as inflating debt away.
- Don the libertarian Democrat
If Structural Imbalances are the problem, as Martin Wolf says, I think, shouldn't the Saver/Export Countries now begin buying from the Spender Countries? Why should it all be a US matter? If these countries won't do that, what's wrong with a bit of default? As Dr.Johnson said:
"Those who made the laws have apparently supposed, that every deficiency of payment is the crime of the debtor. But the truth is, that the creditor always shares the act, and often more than shares the guilt, of improper trust. It seldom happens that any man imprisons another but for debts which he suffered to be contracted in hope of advantage to himself, and for bargains in which proportioned his own profit to his own opinion of the hazard; and there is no reason, why one should punish the other for a contract in which both concurred."
Johnson: Idler #22 (September 16, 1758)
Surely the Saver/Export Countries deserve to pay a penalty for Improper Trust. Don't they?
June 4 2009 | FT.comThe strong rally in US credit over recent months has only driven spreads back to levels seen prior to the collapse of Lehman Brothers, still leaving the market facing a long road back to normality.
“The proper characterisation of the market is that two months ago, credit spreads were distressed, while now they are just stressed,” said Tad Rivelle, chief investment officer at Metropolitan West Asset Management.
As other parts of the financial system normalise, thanks mainly to the Federal Reserve’s efforts to improve liquidity, investors are faced with credit spreads, by many measures, at levels that exceed the wides posted in 2002.
This previous and notable episode of extreme risk aversion was sparked by the bankruptcies and accounting scandals of Enron and Worldcom and the bursting of the technology bubble.
This has investors asking not just how far can credit rally from current levels, but where does fair value exist in a post-credit bubble environment.
“There is a new normal, but it is not near what we saw in 2007,” said Jack Ablin, chief investment officer at Harris Private Bank.
Jim Turner, head of debt capital markets North America at BNP Paribas said: “There are still good returns in the market, but as things ratchet tighter and tighter
Mr Rivelle said investment grade credit spreads were formerly characterised as being normal in a range of 100 to 125 basis points over Treasuries.
Investment grade [bonds] spreads are about 350bps, while in 2002 spreads widened out to 270bps.
“Investment grade credit [spreads] is still far wider than historic levels and also wider than the bottom seen in 2002,” Mr Rivelle said. [ But what are historic levels he is talking about -- Great Depression is probably the only comparable historic period -- NNB]
High yield spreads still trade at what are considered distressed levels at about 1,100 basis points, but they have halved since peaking at 2,200bps last year.
Martin Fridson, chief executive of Fridson Investment Advisors, believes the new normal for high-yield bond spreads should be a risk premium of roughly 600bps.
“It may take a year for that to happen, but it is a realistic target,” Mr Fridson said.
Other investors agree time will heal risk appetite for high yield as the corporate default rate peaks this year.
Scott Minerd, chief investment officer at Guggenheim Partners, said: “The return of corporate credit spreads to their historical averages will take time, 12 to 24 months if things hold together.”
One of the reasons for the much bigger spike in spreads last year, versus what occurred in 2002, was the degree of leverage within the overall financial system.
“The major dislocation we saw in credit spreads was not just about specific economic and company issues, it was also a function of forced selling as investors were forced to deleverage their holdings,” said Ashish Shah, co-head of global credit strategy at Barclays Capital.
Last December, Barclays’ US Credit Index widened to its all-time wide of 545 basis points. The index has subsequently narrowed to 299bps, near the 259bps wide posted in 2002.
From 2002 to 2007, accelerating demand from hedge funds using carry trades also pushed high yield spreads to levels that were narrower than they should have been.
“They would buy the lowest quality and highest yielding paper,” Mr Fridson said. “Spreads weren’t really adequate, but the returns looked good versus their cost of capital.”
For now, financials, which were at the epicentre of the credit bust, still lag the overall rally in credit, but they have started to recover since the passage of the stress tests in May.
Barclays’ US financials index hit a record wide of 792bp in March this year and the index has pulled back to 440bps, whereas in 2002 financials only widened to 242bps.
“Financial spreads are still trading at one of the highest ratios to industrial spreads since the 1930’s,” Mr Shah said.
“There is plenty of room for credit to rally further and the cash is there,” he added. “You can’t have financial paper trading around 440bps, there is further upside.”
Much depends on the path of the eventual recovery in the economy and how the expected rise in corporate bankruptcies plays out in the months ahead.
Mr Rivelle said that since March markets had recognised that the rate of economic decline had moderated, but that should not be confused with a near term recovery.
“We remain in an environment that is tough economically and unemployment is still rising,” he said.
The Fed’s cutting of interest rates close to zero per cent and hefty purchases of mortgages, which has made this asset class overvalued, leaves yield-hungry investors little choice but to focus on corporate bonds.
“Fixed income investing is about relative value, and right now, corporate bonds are the one major asset class that active money managers are over-weighting as yields are still at attractive levels versus Treasuries and mortgages,” Mr Shah said.
The rally over the last few months has taken high-grade spreads to levels seen prior to the Lehman bankruptcy, cutting risk premiums in half.
“We have eliminated the premium associated with the prospect of a total meltdown of the financial system before a recession or a peak in the default rate,” Mr Fridson said.
Mr Minerd said: “High yield spreads on a default adjusted level are still 200 to 400 basis points wide and by the end of the year we expect defaults will have peaked around a rate of 10 to 11 per cent.”
Copyright The Financial Times Limited
June 16 2009
Clinton administration éminence grise James Carville once quipped that he wanted to be reincarnated as the bond market because then he could intimidate everyone. Sometimes it is hard to tell though if it is baring its teeth or just smiling, as highlighted by the recent debate between Paul Krugman and Niall Ferguson. Focusing instead on the limited empirical evidence, it is at least clear that the economy’s most forward-looking economic indicator, the equity market, often gets the message wrong initially.
Taking the unofficial measure of a bear market for equities of a 20 per cent decline and applying it to long bond futures, those most sensitive to interest rate expectations, analysts at Bespoke Investment Group identify seven US bond bear markets since 1977.
On average, by the time the trigger for the definition of a bond bear market had been reached, about two-thirds of the eventual fall had taken place and, time-wise, the bear market was already four-fifths over.
The S&P 500 rallied by 13.9 per cent during the period in which bond prices fell the first 20 per cent, or 11.6 per cent annualised, on average.
But the last fifth of the bond bear markets, time-wise, led to annualised equity losses of 13 per cent.
This bodes poorly for the sustainability of the recent 40 per cent rally in the S&P 500. As higher bond yields make financing more expensive and make earnings yields less attractive by comparison, investors have less reason to buy stocks. In turn, the bond bear then ends when a drop in asset prices encourages economic pessimism and expectations that the Fed will relax monetary policy. Today, though, monetary policy could hardly be looser. If yields are really rising due to fiscal jitters then the bond bear may not be sated unless a horrific equity market swoon prompts a new flight to safety back into bonds. Talk about intimidating.
June 16 2009 | FT
A paper by professors Eichengreen and O’Rourke shows global industrial output tracking the decline in industrial output during the Great Depression horrifyingly closely.
The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere.
First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.
Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.
Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.
At his metal-working plant here in Connecticut, Andrew Nowakowski, president of Tri-Star Industries, says the program is good for employers, workers and the economy.
“It’s a lot better than layoffs,” said Mr. Nowakowski, whose skilled machinery operators make metal parts for products as diverse as cellphones and car engines.
His 29 nonmanagerial employees now work three- or four-day weeks. “The alternative would have been to lay off three to seven workers,” he said, “but that would mean that when things become busier, I’d run the risk of not having the trained people I need.”
The Big Picture
Our quote of the day:
“The panic’s hasty retreat should not be confused with robust recovery. The rather indiscriminate bounce off the bottom — across virtually all assets and geographies — may be more indicative of a one-time reset, which may or may not be complete.”
-Federal Reserve Governor Kevin Warsh, remarks to the Institute of International Bankers annual meeting in New York.
Wall Street Journal
Rising interest rates threaten to dim prospects for a housing recovery and choke off a refinance wave that was a major plank of the Obama administration's economic-stimulus efforts.
June 12, 2009 | Washington Post
The FBI, which is handling about 20 such cases in the Washington region, has almost 500 open Ponzi investigations nationwide -- up from about 300 in 2006, bureau officials said. Law enforcement officials with other agencies have noticed similar trends, and authorities said they expect to turn up many more cases in coming months.
...But their very nature -- the constant solicitation of new investors to pay off old ones -- makes them vulnerable to the harsh economic climate. Federal officials said they also have become more aggressive in trying to uncover schemes before they implode and the assets evaporate.
...As recently as a few decades ago, most Ponzi schemes were relatively small, relying on word of mouth, direct mail and advertisements in magazines. They generally burned out after two or three years. But through the Internet and modern communications, Ponzi schemes have grown in size, scope and sophistication.
"This kind of climate is death on Ponzis," said William K. Black, a law and economics professor at the University of Missouri-Kansas City School of Law and a former executive director of the Institute for Fraud Prevention.
But Black said the same trends that pumped up the Ponzi industry and then tore it apart will eventually lead to new opportunities for scam artists who manage to escape the law and financial carnage. The crooks know that potential investors, some desperate for a quick return, will not always be so wary.
...the world economy had yet to weather the worst of a recession that claimed a record number of European jobs.
The 16-country euro zone lost a record 1.22 million jobs in the first quarter, official data showed. The number of employed fell 1.2 percent year-on-year, the deepest annual drop since measurements started in 1995. [nLF389614]
"Markedly weakening labor markets are a major threat to recovery prospects in the euro zone," said Howard Archer, economist at IHS Global Insight.
... ... ...
Further underlining the fragile state of the global economy, an influential economist said China would not see a rapid rebound and South Korea's finance minister said its economy was still sliding, although the pace had slowed.
Market chatter over green shoots and rising prices has fueled a bear market rally that won't last, despite policymaker 'noise.'
By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.
(Caijing Magazine) A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.
Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.
When the least informed and most credulous get into the market, the market is usually peaking. A rising economy and growing income produces more funds to fuel the market. But the global economy is now stuck with years of slow growth. Strong economic growth won't follow the current stock market surge. This is a bear market rally. People who jump in now will lose big.
Over the past three weeks, the dollar dove while oil and treasury yields surged. These price movements exhibited typical symptoms of inflation fear, which is complicating policymaking around the world. The United States, in particular, could be bottled in. The federal government's fiscal stimulus and liquidity pumping by the Federal Reserve are twin instruments for propping up the bursting U.S. economy. The fiscal deficit could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase by one-third the total stock of federal government debt outstanding. Such a massive amount of federal debt paper needs a buoyant Treasury to absorb. If the Treasury market is a bear market, absorption becomes a huge problem.
U.S. Treasury Secretary Timothy Geithner recently visited China to, among other things, persuade China to buy more Treasuries. According to a Brookings Institution estimate, China holds US$ 1.7 trillion in U.S. Treasuries and GSE paper (about 15 percent of the total stock). If China stops buying, it could plunge the Treasury market into deep bear territory. If China does not buy, the Treasury market will get worse. But China can't prop up the market by buying.
In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.
This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging. It means central banks no longer determine Treasury pricing. American institutions and families are now marginal buyers. This switch in who determines price is shifting Treasury yields significantly higher.
The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels. Future inflation will average more than 3.5 percent, I believe. Some policy thinkers in the United States believe the Fed should target inflation between 5 and 6 percent. The Treasury yield could rise to between 7.5 and 8.5 percent from the current 3.5 percent.
A massive supply of Treasuries would only worsen the market. The Federal Reserve has been trying to prop the Treasury market by buying more than US$ 300 billion – a purchase that's backfired. Treasury investors are terrified by the inflation implication of the Fed action. It is equivalent to monetizing national debt. As the federal deficit will remain sky-high for years to come, the monetization could become much larger, which might lead to hyperinflation. This is why the Treasury yield has surged in the past three weeks.
One possible response is to finance the U.S. budget deficit with short-term financing. As the Fed controls short-term interest rates, such a strategy could avoid the pain of high interest rates. But this strategy could crash the dollar.
The dollar index-DXY has fallen 10 percent from the March level, even though the U.S. trade deficit has declined substantially. It reflects the market's expectations that the Fed's monetary policy will lead to inflation and a dollar crash. The cause of dollar weakness is the outflow of U.S. money, in my view. It is the primary cause of a surge in emerging markets and commodities. Most U.S. analysts think the dollar's weakness is due to foreigners buying less of it. This is probably incorrect.
The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment. The Fed has released and committed US$ 12 trillion (83 percent of GDP) for bailing out the financial system. This massive overhang in money supply could cause hyperinflation if not withdrawn in time. So far, the market is still giving the Fed the benefit of the doubt, believing it will indeed withdraw the money. Dollar weakness reflects the market's wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse and make inflation self-fulfilling.
The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.
Oil prices have doubled since a March low, even though global demand continues to decline. The driving forces again are expectations of inflation and a weaker dollar. As U.S.-based funds flee, some of the money has flowed into oil ETFs. This initially impacted futures prices, creating a huge gap between cash and futures prices. The gap increased inventory demand as investors tried to profit from the gap. Rising inventory demand caused spot prices to reach parity with futures prices. Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.
Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.
Rational expectation theory discredited Keynesian theory and laid the foundation for Paul Volker's tough love policy, which jagged up interest rates and triggered a recession. The recession convinced people that the central bank was serious about cooling inflation, so they adjusted their behavior accordingly. Inflation expectations fell sharply afterward. The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems. As I have argued before, special factors made Greenspan's approach effective at the same. Its byproduct was asset bubbles. As the environment has changed, rational expectation theory will again exert force on the impact of monetary policy.
Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.
While inflation expectations are causing some in the investor community to act, the rest are betting on strong economic recovery. Massive amounts of money have flowed into emerging markets, making it look like a runaway train. Many bystanders can't take it any longer and are jumping in. Markets, after trending up for three months, are gapping up. Unfortunately for the last-minute bulls, current market movements suggest peaking. If you buy now, you have a 90 percent chance of losing money when you try to get out.
Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.
The return of funds flowing into property is even more ridiculous. A property burst usually lasts for more than three years. The current burst is larger than usual. The property market is likely to remain in bear territory for much longer. The bulls are talking about inflation as the bullish factor for property. Unfortunately, property prices have risen already and need to come down even as CPI rises. Then the two can reach parity.
While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.
This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride.
Indeed, most people who invest in the stock market get poorer. Look at Japan, Korea and Taiwan: Even though their per capita incomes have risen enormously over the past three decades, investors in these stock markets lost money. Economic growth is a necessary but not sufficient condition for investors to make money in the stock market. Most countries, unfortunately, don't possess the conditions for stock markets to reflect economic growth. The key is good corporate governance. It requires rule of law and good morality. Neither is apparent in most markets.
It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.
Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn't hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.
China's property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn't possible. Depreciation is, as the end value is zero.
The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.
If you are a speculator and confident you can get out before it crashes, this is your market. If you think this market is for real, you are making a mistake and should get out as soon as possible. If you lost money during your last three market entries, stay away from this one – as far as you can.
June 15, 2009
One of our longstanding themes — that the current environment is a secular Bear market, punctuated by cyclical bulls — gets the full coverage in the WSJ this morning.
“Many investors are now calling the rebound in stocks since early March the start of a new bull market. But it could be only a temporary respite from a longer-term bear market dating back to the beginning of this decade.
If the market is poised for a multiyear run, investors can be more aggressive about diving into stocks. If the bear market will regain its grip on stocks and send prices lower again, investors need to be cautious. Historical data and the still struggling economy seem to point to the latter case, called a cyclical bull market in a secular bear market . . .
In late 2001, Ned Davis Research, a market analysis and money-management firm, raised the idea that stocks had entered a secular bear market, a long period of flat or declining stocks. That idea gained traction last autumn as stocks fell below levels of a decade ago.
Ned Davis considers this the fourth secular bear market since 1900. The last one, from 1966 to 1982, ended when the Federal Reserve moved to aggressively crush inflation. These “secular” cycles run for long periods; secular bull markets have lasted from six to 24 years and bear markets 13 to 16 years. Within those cycles are many more cyclical bulls and bears — nearly three dozen of each since 1900. (Ned Davis uses its own criteria for a cyclical bull or bear market, based largely on 30% moves.)
Is This Bull Cyclical or Secular?
Do you see what I see?
I'm still looking for, and still not seeing, the economic recovery that everybody is talking about.
I was reading some links at FT Alphaville and one of them referenced this interesting piece:
Visually, we can think of demand in this phenomenon as being in a kind of contracting triangle. Every time consumption resumes after a previous demand crash, it hits the ceiling at a lower level. This is the point where, if you find yourself living in the age of biomass and wood, you get rescued by coal. For example. This is also the point where, if you are living in the age of oil, it’s less likely you get rescued.
I am curious Dr. Hamilton of what your views are about this hypothesis. It appears to fit with your hypothesis of oil price shocks triggering recession.
Posted by: Doc at the Radar Station at June 14, 2009 10:41 AMBelow is a post I posted in the discussion section of Slope of Hope ( a trading blog that everyone who is interested in trading should read everyday ). Want to share with readers here.
Where the market goes in the future will mostly depends on where the dollar goes and where the dollar goes will be determined by the policies made in DC. So the Capital Hill and the White house will dictate over any chart reading on the path of the market direction. I don't know how high or how low $spx will go in the next few months or next few years but I am pretty much sure about one thing that is if the current policies (both fiscal and monetary) are not the right cure the prices of all kind of assets will respond accordingly and the market forces eventually will push politicians and American people to make the right decisions no matter they like it or not.
The fundamental root cause of the current problem as we all agree is overspending in governmental. corporational and personal levels. The correct cure is to control spending within its means. The Consumer is doing it (by foreclosure, default on credit card debt and spending less while saving more) and corporations are doing it accordingly (by layoffs and cutting capital investment) but the government is doing the opposite due to political considerations. The market will respond to the government policies in different stages which could be treated as a scoreboard for the outcome between the forces of government and the forces of the market:
Stage 1. from Oct. 2008 to March 6 2009: The market forces won. Market's primary concern was deflation: therefore we saw equity , commodity drop sharply while bond and dollar rallied even though Fed injected tremendous amount of liquidity into the system and Government is bailing out everybody.
Stage 2: from march 6 to a near future (most likely to Sept. 2009): The Government wins. Market's primary concern is government spending when the financial system is seemingly stabilized ( which is not and we will see the financial system collapses again in stage three) therefore dollar weakened, bond yield jumped, equity rallied. Although the government policies win so far the market is giving warning signals to the government by testing the limit of how weak the dollar can go and how much weak dollar induced inflation the US economy can withstand. The yield of 10 year treasury note and crude oil will keep climb (my guess is 10 year yield around 5 to 5.5% and 30 year mortgage around 7.25 to 7.75%. as for oil little bit hard to project but it could go to 105 to 110 level) until the economy turns into a nose dive mood again. I don't know the exact time frame but I suspect b4 Labor Day we will see oil peaked by then and all the economic indicators pointing to deteriozation in a fast pace.
Stage 3: market forces win again. $SPX down another 50% or so from its peak in stage 2 (probably around 1050 as its peak). Commodities tank again. Dollar and bond rally again. Unemployment rise above 12% and heading to 15%. The second wave of foreclosures(mostly prime loans) and credit card defaults and commercial real estate defaults will hit the banks harder once again. Now what the government will do will once again determines the outcome of next stage.
If by this time the government could adopt the correct policies and let those should fail fail then the healing process will start from here and we will see a start of a bull market pretty soon or at least the market low reached in this stage will be the LOW.
If the government instead does not learn the lessons and increase the magnitude of the wrong polices implemented in the stage 2 (more spending and more bailout), we will see a repeat of stage 2 with hyperinflation this time. The dollar could lose its reserve status and there will be large scale social and political unrests until American people really wake up and decide to take bitter medicines that they should take at the first place. I was so mad at the politicians at DC and their stupid policies that I was too biased to think the American Century is gone and this country will end up falling apart. However I strongly believe we human beings are able to learn from our own mistakes and are adaptive to the new challenges. The American people may not be able to convince themselves now that less government spending and live a simpler life is the best solution but they will realize they have to to do so when they see otherwise their country will be falling apart and they will have no life instead of a simpler life. The market dynamics will force American people to adopt the correct policies in the end and will rebuild the great American experience. It's just too sad to foresee the Americans could go through this tough period with less cost and pain instead the luck of the will of both its citizen and their leaders will cause them to go through much bigger ordeal.
Watch California. What happens in California will indicate what will happen to the whole country.
For short term, just watch dollar, bond yields, commodities and be ready to short the stocks.
Just remember there is no green shoots. Also remember the run on oil, bond yields and commodities will not be sustainable because their own rise will lead to their own free fall. They are used as a pressure by the market dynamics to force government to revert back to correct policy making. Buy them when government issues wrong policies and sell them when the bad outcomes from these policies become obvious to everybody.
I believe a large part of the slopers will share the same view as I described above and hope this could make you feel better about the big picture and will not be confused or frustrated by the daily market fluctuations.The demise of the housing market and tightening of credit card lending have disable the mechanisms through which Asian trade surplus income was recycled back to those US consumers willing to take on ever-higher debt. On top of that, the ranks of those willing to take on ever-higher debt have been greatly thinned, and will continue to be thinned by ongoing job losses, working-hour-cuts, and the collapse of pension funds.
Posted by: frankzhao at June 14, 2009 11:00 AM
The leading edge of the baby boom is nearing retirement (in the case of public-sector employees with their amazing defined-benefit pensions, already retiring) while staring at the realities that they're not going to become "accidental millionaires" by down-sizing out of their current homes, that the Fed's zero-interest-rate policies are going to ensure they never make a penny of real after-tax income on any safe investment of their savings, that if they have a defined-benefit pension (even a public one) its promises may not be kept, and that "buy-and-hold" may not be the sure-fire stock investment strategy they'd been sold on for the last few decades.
The evidence is clear all around that this is leading to a very serious hunkering down and increase in saving.
The conventional economic wisdom is that people will save more if interest rates are high, and less if they're low. But I clearly remember that the high interest rates of the early Volcker years did not increase the savings rate as expected -- because people felt confident that with those high rates (of course assumed to be permanent) they could get the retirement income they'd need with far less saving. And in Japan we can see that when people know they'll get zero income on their savings, they know that means they'll need to save more for retirement.
So the conventional wisdom that the Fed's zero-interest-rate policy is going to revive economic activity -- and in particular that it will revive the housing market -- is utterly wrong. This is especially so because Asia's vendor-financing-fraud mercantilists remain poised to snatch up any manufacturing order that can practically be filled by an overseas source.
The only way to get the economy out of this will be for the government to employ in national projects that component of the labor force that's been put out of work by Asian mercantilism, and -- as in WWII -- to employ it in ways that will create infrastructure that will pay a real economic return in the future, while simultaneously suppressing wasteful luxury consumption. If that's not done, there'll be no recovery.
Posted by: jm at June 14, 2009 12:15 PM
Thinkingoutof the box wrote: June 13, 2009 12:23
ON BANKS PAYING BACK MONEY TO TAXPAYERS
The crisis in the banking system inflicted very heavy damages on the real economy! Thus, before letting banks go back to their normal operations by paying back taxpayers money, they should also pay back the heavy indirect costs that they have caused to the real economy! In such a case the amounts due to the taxpayers are by far higher than the bailing out money giving to them directly.
Furthermore, the collapse of the banking system inflicted even far higher damages by eroding the trust and confidence of the so called the economic agents (all the players in the economic & business system.) For instance, it is suggested that the financial crisis has probably increased the risk premium on doing business all over the world!
If the banks have to pay back the TOTAL damage that they have inflicted on the economy, it will take them years if not decades to pay it back.
So the call of captains of big banks to let them pay back taxpayers money and carry on with their old usual business, should be considered BUT ONLY IF THEY PAY THEIR REAL DAMMAGE TO SOCIETY!
It's not that the risk of the Japan syndrome has receded very much. The risk of a full, all-out Great Depression - utter collapse of everything - has receded a lot in the past few months. But this first year of crisis has been far worse than anything that happened in Japan during the last decade, so in some sense we already have much worse than anything the Japanese went through. The risk for long stagnation is really high
Jun 13, 2009 | naked capitalism
Joe Nocera of the New York Times has a good piece today on the Obama executive pay proposals, such that they are. While I have sometimes been hard on Nocera for taking positions that I have found to be a bit too forgiving to the financial services industry, today he gave an articulate rendition of a fundamental problem:It was another one of those Timothy Geithner moments....Yves here. As much as I support Nocera's second observation, that there are some big companies where "getting compensation right" is essential, he is incorrect in saying that the fact that many of the others pay egregiously for failure, and often still overpay for success, has "little to no effect on the rest of us."
Looking sternly into the cameras, Mr. Geithner read a statement in which he described executive compensation as a “contributing factor” to the crisis. Then he outlined a series of tough-sounding principles, including a “re-examination” of such egregious practices as golden parachutes, a need to align compensation practices with “sound risk management” and the importance of having compensation plans that “properly measure and reward performance.”
But then, as he so often does, he proceeded to follow these tough words with actual proposals that were less than inspiring. The only legislation his department planned to propose — indeed, the only legislation he deemed necessary — were bills that called for compensation committees to be made up of independent directors, along with “say-on-pay” legislation, which would give shareholders the right to vote on a company’s pay plan. That vote, however, would not be binding....
Until the financial crisis, most people, myself included, did not make distinctions between different kinds of companies when it came to executive compensation. It was just one big problem, revolving primarily around the idea that there was something fundamentally wrong about executives taking home giant, multimillion dollar pay packages for mediocre performance or even outright failure — something, alas, that happens with annoying regularity in corporate America.
But if the near collapse of the financial system has taught us anything, it is that there should be a distinction. On the one hand, there are companies whose executives can make awful mistakes, even driving their corporations into bankruptcy, but whose actions have little or no effect on the rest of us. Most companies fall under this category.
And then there are those handful of companies — the too-big-to-fail banks and other large financial institutions that pose systemic risk — whose failure can wreak devastating havoc on the economy. For these latter companies, getting compensation right isn’t just a matter of fairness or improved corporate governance. It turns out to be critically important if we are to prevent a repeat of the calamity that has befallen us. But as difficult as it has been to overhaul executive compensation overall, it is going to be even more difficult to take the tougher measures that need to be taken with the banking system.
The pay practices are part and parcel of a legitimazation of a gaping disparity in incomes, and the promotion of a fantasy that certain people are endowed with skills so rarified that it merits outsized rewards even if the job is botched. Yet the companies profiled in Jim Collins' Good to Great had CEOs who paid themselves modestly, even when they shepherded their businesses through major transformations. The idea that money beyond a certain level is motivating bears far more examination than it has gotten. The evidence is strongly to the contrary, that the companies with the most lavishly paid leaders were stock market laggards.
But the excessive and highly publicized CEO pay also serves to provide a price upbrella for all sorts of other pay and fees, such as consultants, lawyers, lobbyists, even executive coaches. Even if you are a Serious Player in your field, it would be unseemly to charge more than your clients' top executives earn. But the flip side is that if you do not charge a lot for your very top professionals, you send the signal that you think you are not in their league. If you are providing services to a seven figure CEO or his board, fees of, say, $500 an hour are way too low. So high CEO pay has pulled up a lot of boats on its rising tide. Back to Nocera:I think there is a decent chance that the compensation games will come to an end — though it won’t be by doing anything so radical as trying to cap pay, something that simply doesn’t work. (Mr. Geithner was right about that.)I wish I shared their optimism. These changes may keep pay from moving higher, but I doubt these measures will do much other than stop the worst abuses, such as big checks for obvious underperformance.
Instead, it will be because boards have come under renewed pressure, thanks to the financial crisis, to control executive pay. It is also because, with the Democrats in charge, the issue is high on the agenda....
Most important, though, it is because the re-energized S.E.C., under Ms. [Mary] Schapiro, is preparing a handful of new rules that will force companies to do a great deal more to spell out their compensation rationales, while making it easier for shareholders to express their displeasure if they feel boards have been too generous. In particular, the S.E.C. has begun laying the groundwork for a rule that will make it easier for shareholders to nominate directors — something that is tremendously difficult right now. Ms.[Nell] Minow is among those who believe that the ability to replace incumbent directors is likely to have the biggest effect in reforming executive pay.
The reasons are twofold. First, even if shareholders may be able to secure some board seats, it will still take an effort. And why should they bother? As Amar Bhide pointed out in a prescient and ignored (because too offensive to the orthodoxy) Harvard Business Review article, "Efficient Markets, Deficient Governance," the US decision to have highly liquid stock markets inherently leads to lax governance. Why?
In liquid markets, shareholders cannot have sufficient information to make a truly informed decision about what stocks to buy. A company, for competitive reasons, cannot disclose the details of its strategy and market situation that an investor would like to have. It would be give competitors insight that they could use to their advantage. The only way an investor can have good enough knowledge is through a venture capital type relationship, where he is privy to a good deal of internal information and can also assess the caliber of management.
So equity investors are inevitably in a position in which they are always at least a bit, if not a lot, in the dark. That means executives can hide their mistakes for at least a while, and probably reap more in the way of rewards than they should.
If an investor becomes unhappy with how management is paying itself, it is much more sensible to sell the stock than to devote the effort to try to bring management to heel. Even with the SEC lowering the barriers, it will not be cost free for unhappy shareholders to locate and nominate their own board candidates and promote their cause to other shareholders.
The second is that even having a board member or two installed by outsiders does not assure success. It is unlikely, given staggered directors' terms in office, that shareholders could achieve a majority of outside board members and thus gain control of the compensation committee.
The irony of the current arrangement is that these fancy incentives intended to align executive pay with shareholder interests were meant to solve a principal-agent problem. That is, the concern was that CEOs would take advantage of their position and pay themselves well but not work very hard, hence they needed equity based incentives to make sure they did a good job. That view means that the CEOs were presumed to be less than trustworthy.
Yet who was in charge of recommending the compensation packages to the board? Well, outside comp consultants, engaged by the HR department, which of course means the fees are paid by the company. And even if the board hires a comp consultant, the board is nominated by management and the fees of the consultant are still paid by the company. In other words, the people whose possible abuses were supposed to be curtailed are still ultimately in charge of the pay packages. The foxes still are in charge of the henhouse, but with a few intermediaries in between to make it a tad less obvious. So it is any wonder pay skyrocketed?
Jun 13, 2009 | Calculated Risk
Fitch expects "home prices will fall an additional 12.5% nationally and 36% in California" from Q1 2009.
And, oh, you remember subprime?
From HousingWire: Subprime Bloodletting Continues at FitchFitch Ratings today made massive downgrades on various vintage ‘05 through ‘08 subprime residential mortgage-backed securities (RMBS), indicating the extent of the fallout related to subprime defaults has yet to subside.Here is the Fitch statement: Fitch Takes Various Actions on 543 2005-2008 U.S. Subprime RMBS Deals
The rating agency slashed hundreds of RMBS ratings further into junk territory.
On home prices:The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels.In explaining the downgrades, Fitch said the actions reflect updated loss expectations and further economic deterioration:“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”
Credit default swaps are “instruments of destruction” that should be outlawed as the world looks to re-regulate the global financial system in the wake of last year’s credit crisis, the billionaire investor and philanthropist George Soros said on Friday.
Mr Soros, the Hungarian-born US fund manager, said that the swaps were ‘truly toxic’, grossly distorting risk, encouraging speculation and with the potential bring ruin on financial institutions and companies.
Citing the recent bankruptcy of General Motors in America, Mr Soros said that some bondholders had stood to gain more from bankruptcy than re-organisation as a result of their CDS positions.
“It’s like buying life insurance on someone else’s life and owning a licence to kill him,” he said of the swaps, which pay the buyer face value if a borrower defaults, in exchange for the underlying securities or the cash equivalent.
Although warning against the tendency to over-regulate markets in the wake of the crisis, Mr Soros proposed three principles that should guide regulators as they seek to build systems that will prevent a repetition of events.
- Firstly, regulators must overcome their previous tendencies to what Mr Soros called ‘market fundamentalism’ and take responsibility for identifying and correcting asset, credit and equity bubbles before they caused undue damage.
He acknowledged that regulators must accept this assignment “knowing full well that they are bound to get it wrong” but that once engaged in the process they would learn from their mistakes and get better through a ‘process of trial and error’.
- Secondly Mr Soros argued for flexible credit controls that would react to market mood-swings, requiring, for example, requiring mortgage lenders to adjust loan-to-value ratios on residential mortgages in order to forestall property bubbles.
Mr Soros cited the 2001 dotcom equities bubble as an example of where, in his vision for a re-regulated global financial system, regulators would have stepped in to cool the market by freezing new share issues.
- Lastly Mr Soros said that the practice of securitizing bank assets had greatly added to systemic risk and must now come under tighter controls, including requiring banks to limit proprietary trading to their own assets in order to protect depositors.
“Banks must use less leveraging and accept risk on their investments, they should not be allowed to speculate on their own account with other people’s money,” he added.
“This may push proprietary trading out of banks and into hedge funds which is probably where they belong.”
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.
"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.
Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.
Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.
The exodus – particularly of young people – coupled with the consequent collapse in property prices, has left street after street in sections of the city almost entirely abandoned.
In the city centre, the once grand Durant Hotel – named after William Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee. The large building has been empty since 1973, roughly when Flint's decline began.
Regarded as a model city in the motor industry's boom years, Flint may once again be emulated, though for very different reasons.
But Mr Kildee, who has lived there nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that "big is good" and that cities should sprawl – Flint covers 34 square miles.
He said: "The obsession with growth is sadly a very American thing. Across the US, there's an assumption that all development is good, that if communities are growing they are successful. If they're shrinking, they're failing."
But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said.
If the city didn't downsize it will eventually go bankrupt, he added.
Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply.
They could then knock them down or sell them on to owners who will occupy them. The city wants to specialise in health and education services, both areas which cannot easily be relocated abroad.
The local authority has restored the city's attractive but formerly deserted centre but has pulled down 1,100 abandoned homes in outlying areas.
Mr Kildee estimated another 3,000 needed to be demolished, although the city boundaries will remain the same.
Already, some streets peter out into woods or meadows, no trace remaining of the homes that once stood there.
Choosing which areas to knock down will be delicate but many of them were already obvious, he said.
The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee.
"Much of the land will be given back to nature. People will enjoy living near a forest or meadow," he said.
Mr Kildee acknowledged that some fellow Americans considered his solution "defeatist" but he insisted it was "no more defeatist than pruning an overgrown tree so it can bear fruit again".
I continue to hear pundits overstate that “Employment is a lagging indicator.”
Yes, in the aggregate, that is true. But if you drill down into all of the employment data, you can find elements that lead (temp Help, Hours worked) or are Coincidental (Continuing Claims, Wages).
Here are some recent Employment Charts that show the state of the employment market, with an emphasis on the leading aspects.
Verdict: Not very good.
A major leading indicator of future hiring.
BLS via Jeff Frankels Weblog
Its even more dramatic when you just look at only private employers:
Lastly, there are the continuing claims, which shows no signs of abating:
via Calculated Risk
>PERMALINK | COMMENTS (78)
Q1 2009 Flow of Funds results show the housing sector ran a financial surplus or net saving position of $341b in the past quarter, while paying down $155b in household debt. Monthly consumer installment credit points to the same household sector deleveraging with credit cards and non-revolving loans. We believe professional investors may be underestimating the importance of household sector deleveraging this time around. We have never seen households retire debt like this, now in three of the past four quarters, over more than a half century of results reported in the Flow of Funds accounts.
Household debt can only be reduced by three actions. Households can default on debt, and the debt is written off. Households can sell assets to another sector, and use the proceeds to pay off debt. Or households can save money by spending less than their income flows, and use the saving to retire debt. The rise in household net saving suggests the third method is playing a key role in household debt deleveraging, and this has import implications for the profile of any prospective consumer spending recovery, even one backed by massive fiscal stimulus. We suspect working from the usual business cycle playbook will not be especially rewarding in such an environment.
Furthermore, if banks are sitting on excess reserves, are perceived to now have sufficient capital, and are reporting an increased willingness to lend (which makes sense given the slope of the yield curve and the associated net interest margins), while consumers are intent on net paying down debt, then banks may need to consider a new business model. Loan volumes to households are going nowhere. Alternatively, they can ride the yield curve like they did in 1991-3, but here they will need to buy and hold longer dated Treasuries if they wish to avoid capital losses as Treasury bond yields back up.
Nevertheless, ETF’s on consumer discretionary stocks are up over 50% since the March 6th lows, and the ETF on banks are up over 100%. What do equity investors know that we may be missing?
Our beef with the equity market boils down to this: the widespread perception is that the old global growth model, dependent in no small part on the willingness of US consumers (and other consumers in the developed world) to deepen their deficit spending, can and will be revived. We would merely suggest with the level of household net worth to disposable income back to a level last seen in 1995 (before household deficit spending began), and with households extinguishing debt for the first time in over half a century, this assumption deserves to be questioned. Humpty Dumpty may not be able to be put together again.
Treasury results this week reported a trailing 12 month federal government fiscal deficit of over $1.1tr, well on track to break the CBO $1.8tr forecast by September end. The reality is that without some other sector increasing its deficit spending or reducing its net saving, attempts by some domestic firms and households to save out of their money income flows will simply show up as income shortfalls, and hence unexpected dissaving, by other domestic private firms and households. Call it the tyranny of double entry book keeping.
If the trade deficit is done shrinking (which means foreign net saving is done shrinking) as appears to be the case over the past three months, then the domestic private sector can only increase its net saving if the fiscal deficit increases. Without net saving, the domestic private sector will find it difficult to deleverage without dumping assets or defaulting on even more debt, which begs the Fisher debt deflation dynamics that have been discussed on this blog previously. Few but the Austrian School want to go there, and for good reason: debt deflations introduce instabilities and dislocations that most democracies cannot handle. These conclusions about financial balance flows from simple accounting, not high theory, yet they remain essential points that escapes many professional investors and economists. In a monetary production economy, one sector cannot net save unless another is prepared to deficit spend.
Just the same, even if fiscal deficit spending is the necessary counterpart to private net saving, and so a necessary condition for private sector deleveraging, we have noticed the percent of marketable privately held Treasury debt that comes due in a year or less has surged of late from just above 30% to nearly 45%. Short term debt was last this large a share of outstanding debt in the first Reagan administration.
We believe the dramatic shortening of the maturity privately held marketable federal government debt is very significant for two reasons. First, since the short end of the Treasury curve has been suppressed by the near ZIRP policy of the Fed, the net interest expense outlays on public debt have been suppressed. Since this is a line item on the expenditure side of the federal fiscal balance, Fed policy is also reducing the fiscal deficit from what it would otherwise be if the short end of the Treasury yield curve was closer to historically normal levels.
That means Chairman Bernanke may face more friction from the Administration than usual once he believes the time to lift the fed funds rate has arrived. That may be many quarters away, but questions about the Fed’s independence are already being raised, and would be inflamed by such a confrontation. It also means that if the short end of the Treasury yield curve starts to return to historical norms, interest expense will rise, and this will add to the fiscal deficit at the time. For deficit hawks, this introduces fears of compounding and a runaway public debt/income ratio.
However, it must not be forgotten that that the federal government’s interest expense must become somebody else’s income. The nuance under current conditions is with so much of the marketable federal debt held abroad, the creditors that benefit from bond coupon payments are less likely to be domestic households. With the Treasury issuing at the short end of the curve, and thereby minimizing current interest expense on the public debt, this is no big deal now, but what happens if interest rates return to historical norms?
Such a development not only suggests a larger current account deficit, as interest payments to foreign lenders reduce the trade balance, but it also takes a stream of income out of the range of federal government taxation, so a feedback loop that would otherwise reduce the budget deficit is thereby thwarted. To be clear, we are not fans of the “twin deficits” view since we find it neither holds true empirically nor theoretically, but this interest expense channel is one that could lead to spillover effects on the trade balance.
Looking at the unique aspects of this recession, we find the sharp reversal of household financial balances from a deep deficit position to a net saving position quite important. Households are reducing debt loads, in part with higher saving out of income flows, and this has implications for prospective bank loan volumes and sales revenue growth at consumer discretionary firms. Larger fiscal deficits are supporting the ability of households to net save, yet the shortening of maturity of Treasury debt issued, as well as the reaction of investors to a heavy calendar of issuance this year and beyond, is complicating matters. In addition, the shift of investors toward inflation hedges like oil is draining income from US households to foreign producers that tend to net save. We try not to be stubborn in our portfolio positioning – having learned the hard way that is a very expensive luxury – but we can think of two sectors that have led the US equity market charge, banks and consumer discretionary stocks, that can be questioned if we are correct that household deleveraging is unique to this business cycle recession and still matters.
The old saw on Wall Street is that it is never wise to conclude “this time, it is different”. Yet we believe it is in the early identification of the key differences, and in tracing out their implications, that macro analysis can add value to intelligent investors. Arbitraging the gap between reality and perception eventually tends to pay off – just make sure you can remain solvent as long as the thundering herd remains deluded!
After Marc Faber said he gives a 100% guarantee that we'll have hyperinflation, and many other commentators singing from the runaway inflation songsheet as well, I have been waiting to see Mish's counter-argument for continuing deflation.
Without even using the word, Mish has provided pretty stunning evidence for deflation at least in the short-term. Specifically, here is the first paragraph of an article entitled "Benefit Spending Hits $2 Trillion, Highest Percent Since 1929; One Dollar Out of Every Six From Vouchers":
As economic conditions deteriorate and unemployment continues to soar, one in nine Americans are now on food stamps. Moreover, a staggering one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.
Note: I believe we will eventually have hyperinflation, and even Mish doesn't discount the possibility. Just not yet.
I was going to post something on this CDS trade, but Professor Hamilton did a much better job than I could: How to lose on a sure-fire bet
Read Hamilton's take ...
Here are the details of the trade from the WSJ: A Daring Trade Has Wall Street SeethingThe trade involved credit-default swaps and securities backed by subprime mortgages. The original securities ... were backed by $335 million of subprime mortgages mostly on homes in California made at the housing bubble's peak in 2005 ...
Following a wave of refinancing and defaults, only $29 million of the loans were left outstanding by March 2009, half of which were delinquent or in default...
Believing the securities would become worthless, traders at J.P. Morgan bought credit-default swaps over the past year from Amherst ... Other banks including RBS Securities ... and BofA also bought swaps on the securities from different trading partners.
The banks ... paid as much as 80 to 90 cents for every dollar of insurance, the going rate last fall according to dealer quotes, expecting to receive a dollar back when the securities became worthless ...
At one point, at least $130 million of bets had been made on the performance of around $27 million in securities ...
In late April, traders at some banks were shocked to find out from monthly remittance reports that the bonds they had bet against had been paid off in full. Normally an investor can't pay off loans like that but if the amount of outstanding loans falls to less than 10% of the original pool, the servicer ... can buy them and make bondholders whole.
That's what happened in this case. In April, a servicer called Aurora Loan Services at the behest of Amherst purchased the remaining loans and paid off the bonds.
girlbear (profile) wrote on Thu, 6/11/2009 - 5:37 pmCicero may have said it best in Rome in 55BC
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be
curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." - Cicero - 55 BC
The Fed published its latest Flow of Funds report today. One key takeaway: While total debt is growing more slowly, it is still growing. Since Q3 '08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand.
Even Volcker is talking about a Q4 recovery now. According to my recent poll, you lot don't really believe.
According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.
June 11, 2009 | FT.com
US long-term interest rates continued to test important levels on Thursday as investors worried about the level of national debt and whether the Federal Reserve might have to raise interest rates to combat inflation.
The yield on the 10-year Treasury note, the benchmark rate for US mortgages, briefly traded above 4 per cent, only to attract buyers once more after weekly jobless claims and retail sales data were published in line with expectations.
The 10-year note was recently trading at 3.97 per cent, up 3 basis points, having hit 4 per cent during Wednesday after an auction of $19bn in 10-year government debt came at higher than expected yields.
The next test of the US Treasury’s issuance programme looms later on Thursday with the sale of $11bn in 30-year bonds. An auction of 30-year bonds last month went badly as investors signalled their concerns about the budget deficit.
“That did not go well last time, so there is also some additional concern,” said Dominic Konstam, head of interest rate strategy at Credit Suisse.
The yield on the 30-year bond was up 6 basis points at 4.81 per cent early Thursday. Last week, the yield was trading below 4.50 per cent.
“Once the 30-year is out of the way, the market should have a window to rally,” said analysts at MF Global. “The bull story rests in higher mortgage rates slowing the recovery.”
On Thursday, the 30-year mortgage coupon rose to a peak of 5.12 per cent, having surged from 3.90 per cent over the past month. This week, the latest survey from the Mortgage Bankers Association showed that its mortgage refinancing application index fell 12 per cent to its lowest weekly level since mid-November. That was prior to the Federal Reserve’s announcement of its plan to buy mortgages.
Concerns about the growth of government borrowing on Wednesday forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent – 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley.
Traders said the good news of the day was that buyers entered the market when yields reached 4 per cent. “There should be natural support for the 10-year note around 4 per cent,” said Mr Konstam.
“We are seeing traders draw a line in the sand at 4 per cent” on 10-year notes, said Tom di Galoma, head of US rates trading at Guggenheim Capital Markets.
In recent months, auctions have often been awarded at higher-than-expected yields, with dealers and investors being asked to buy higher amounts of debt as the US Treasury seeks to fund a growing budget deficit.
Treasuries fell, pushing 10-year yields to the highest level since October, as the government sold $19 billion of the securities and Russia said it may switch some reserves from U.S. debt.
June 10, 2009 | Bloomberg
Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg's Carol Massar about the outlook for the U.S. recession.
Posted by Tracy Alloway on Jun 10 14:06.What is going on here?
International Monetary Fund head Dominique Strauss-Kahn issued a rather ominous warning on emerging markets on Monday. Via AFP:
Also worrying, according to Strauss-Kahn, is that foreign capital required by emerging countries such as Mexico, Colombia or Poland has dried up, which could lead to “consequences for the rest of the world.”
Unsurprisingly, the pronouncement sent jitters through the markets. On Tuesday, the peso slid against the dollar, Mexican bond prices fell, the country’s 5-year CDS widened 8bps and speculation that Mexico could face an imminent downgrade of its sovereign rating ran rife. At the moment, the three major ratings agencies have Mexico three notches into investment grade territory — BBB+ at S&P and Fitch, and BAAA1 at Moody’s.
Here’s RBS Latin America economist Benito Berber on the fall-out from Strauss-Kahn’s remarks (emphasis ours):
IMF director Dominique Strauss-Khan said that Mexico, Colombia and Poland face challenging financing deficits that if not corrected soon, could put them at risk of defaulting. The external financing needs of Mexico and Colombia have been met for 2009. In this regard, the comments of Strauss- Khan seem strange and could add noise to the markets. . . .
The comments of IMF’s Strauss- Khan are particularly inopportune but should not be taken seriously. The IMF hasn’t published a formal press release confirming the fund’s view. Mexico is still investment grade and it is very unlikely that any of the three major rating agencies decide to lower it to junk.
Mauro Leos from Moodys said a couple of weeks ago that “it was far fetched to believe that Mexico would lose its invest grade category any time soon”. The view of the rating agencies has been that Mexico needs to pass structural reforms to avoid a downgrade. Shelly Shetty from Fitch commented recently that Mexico would need a plan “B” in case Congress fails to approve a fiscal reform after the July elections in order avoid a downgrade. This amounts to sort of running in order to stand still.
But the prospects for comprehensive fiscal reform are very slim. In fact, the two major political parties: the centre left PAN and centre-left PRI have both said that they are not at all interested in passing a fiscal reform package. While no party is expected to publicly say that it favors increasing taxes particularly before the congressional elections of July, the political climate does not support the passing of any reform.
Mexico will be downgraded by one notch on the back of deteriorating fiscal revenues as the economy contracts to between -5.5% and -7.5% this year. Still the comments of Strauss- Khan add noise to the market. . . .
Small wonder then, that on Tuesday the IMF rushed to backtrack. Via Reuters:
But the Washington-based IMF softened its comments on Tuesday and said in an e-mailed statement that Mexico is “very well positioned to weather the global economic crisis.”
June 10 | Reuters/FT Alphaville
Goldman Sachs CEO Lloyd Blankfein said on Wednesday he believed a current upturn in world markets was probably not a full recovery from crisis and said he expected a further long recession.
“I think it’s going to be a long proctracted recession,” he told an international regulators conference in Tel Aviv.
Addressing a current upturn in markets, he said:
“There is no reason to think this is it … So many things have to be sorted out. Why would this be the recovery?
“The chances are it’s not.
Of course, that doesn’t mean Goldman won’t do well, as investment banking analysts at JPMorgan noted on Wednesday.
We expect Investment & Wholesale Banks to post record revenues in Fixed Income, supported by very favorable market conditions (high volatility, wider margins and strong issuance volumes) and a fundamental change in the competitive landscape. We estimate Fixed Income will be the main earnings driver in 2009E, accounting for 14% to 61% of group revenues in 2009E, and more than offsetting the increase in loan loss provisions.
And who has the biggest FI division of all the IB’s? Goldman obviously.
One of the primary reasons I am not a big believer in the green shoots thesis is due to the fragile financial condition of the Consumer.
Despite spending less time at the mall, throttling back consumption, and increasing their savings rate, the US consumer still finds themselves with too much debt and too little savings. Even worse (at least for the economy), they lack the income or the equity to fund their previous lifestyles.
In my opinion, consumer spending remains an unhealthy ~68% of the economy. While this is down from a peak of ~71%, it is way up from the 63% of the 1950s. The difference over that period has been the massive increase in revolving credit and accessible secure lending (2nd mortgages, HELOCs, etc.).
“Despite recent frugality, consumers have barely dented their debt load. The Federal Reserve will offer a fresh peek at that mountain on Thursday, when it releases its “flow of funds” data for the first quarter.
By the end of 2008, households were on the hook for $13.8 trillion in debt — nearly matching the $14.3 trillion output of the entire U.S. economy, not adjusted for inflation, that year.
Households are shedding debt; they’re just not doing it very quickly. They owed roughly 130% of disposable income at the end of 2008, down only slightly from a record 133% in the first quarter of 2008.”
I am not sure that really puts this into the proper context of indebtedness. Let’s go to David Rosenberg’s recent charts on the same subject:
In Bailout Nation, we discuss the possibility that The TARP was all a giant ruse, a Hank Paulson engineered scam to cover up the simple fact that CitiGroup (C) was teetering on the brink of implosion. A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks.
June 8 | Bloomberg
... It isn’t only GM’s sales that might suffer. Higher energy costs helped trigger a 20 percent rise in a Standard & Poor’s index of 24 commodities during May, the biggest monthly percentage gain since September 1990. The increases threaten a burst of inflation that could sap demand just as the U.S. economy is starting to right itself after the biggest contraction in five decades.
“You could end up with something like a stagflation scenario,” said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. “There’s a risk the economic recovery might be stifled.”
Gasoline was up to an average $2.59 a gallon nationwide last week from $2.05 on May 1, according to AAA. A 50-cent-a- gallon markup removes about $70 billion from consumers’ annual spending power, says James Hamilton, a professor of economics at the University of California, San Diego.
Prices still remain short of the $4.11 record set on July 15, which helped push inflation that month to a 5.6 percent annual rate, the highest in 17 years.
DiGiovanni told Wall Street analysts and reporters June 2 that Detroit-based GM was better positioned to deal with more expensive gasoline this year than last as it introduces several fuel-efficient models, including a Chevrolet Equinox sport utility vehicle that the company says will get 32 miles per gallon on the highway.
At United Technologies Corp., it’s copper that has gotten executives’ attention. The metal has climbed 59 percent this year on the New York Mercantile Exchange to $2.28 a pound as of June 5.
Gregory Hayes, senior vice president and chief financial officer, told a conference on May 14 that Hartford, Connecticut- based UTC is keeping tabs on price movements because its Otis elevator and Carrier air conditioner divisions buy 75 million to 80 million pounds of copper per year.
At that rate, the increase so far this year would cost UTC about $65 million, about triple Carrier’s $22 million operating income for the quarter ended March 31.
The metal is still down more than 40 percent from an all- time high of about $4 last year, and that’s “good news” for UTC, according to Hayes. “We’ll see where that goes,” he said.
The S&P GSCI Total Return index, which tracks metals and agricultural commodities as well as energy, has surged 39 percent since touching an almost seven-year low on Feb. 18.
Concerns about higher inflation are reflected in the widening difference between rates on 10-year notes and Treasury Inflation Protected Securities. The spread on June 5 was close to a nine-month high at 2.01 percentage points after the government reported payrolls declined in May by 345,000, the smallest decrease since September.
Spurring the commodity rally are signs of an economic recovery worldwide, particularly in China, the world’s biggest consumer of iron ore, rubber, copper and zinc; more interest from investors; and an 11 percent drop over the last three months in the dollar, the currency in which most commodities are priced. Stockpiling by China’s government and supply constraints have also played a role.
China’s Ministry of Land and Resources in January announced plans to build emergency supplies of coal and metals to guard against potential shortages. The nation’s imports of Australian coal have soared more than 10-fold from a year ago.
Macarthur Coal Ltd., the world’s biggest exporter of pulverized coal used in steelmaking, is seeing new demand this year from China, said Shane Stephan, chief development officer in Brisbane, Australia. That is “a major change,” he adds. “We historically have never sold coal into China at all.”
If the advances in raw materials were being driven mainly by U.S. demand, there would be less worry that inflation might stymie growth. That’s not what’s happening this time. Economists surveyed by Bloomberg forecast the economy will contract at a 1.9 percent annual pace this quarter after shrinking 5.7 percent in the first three months of the year.
China, India Growth
What’s pushing up commodities instead is growth elsewhere in the world, particularly in Asia, Hamilton said. India’s economy grew at a 5.8 percent annual pace in the first quarter, topping economists’ projections of 5 percent. Chinese manufacturing picked up for the third straight month in May, according to a purchasing managers’ index published May 31.
Investors have also helped fuel the price surge. More than $6 billion has poured into commodity-industry funds so far this year, swelling assets under management by more than 21 percent, according to Cambridge, Massachusetts-based researcher EPFR Global, which tracks global fund flows. In all of 2008, new investment boosted assets by just 1 percent, EPFR figures show.
“Investors have been strongly attracted to commodity and energy plays this year,” said Brad Durham, managing director at EPFR.
Higher commodity costs are reminiscent of their climb in the 1970s and early 1980s, when a 10-fold jump in oil prices drove both unemployment and inflation above 10 percent. Economists coined the phrase “stagflation” to describe what was then a new phenomenon of accelerating inflation coupled with stagnant demand.
Hensley sees a risk of that happening to a lesser degree in the third quarter, as costlier gasoline lifts annualized inflation to 4 percent from 1.4 percent in the second quarter, depressing consumer demand in the process.
“This is unambiguously bad news for consumers, who are already feeling the squeeze from slowing wage gains and collapsing home prices,” said Ian Shepherdson, chief U.S. economist at Valhalla, New York-based High Frequency Economics.
Consumers’ sensitivity to gas prices is “extraordinarily high,” according to Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport Beach, California.
“You don’t have to go back to record-high fuel prices to see damage to the economy,” he said.
Federal Reserve Chairman Ben S. Bernanke noted the rise in oil and other commodities in testimony to Congress on June 3, while saying excess capacity in the economy would keep a lid on inflation. U.S. factories, mines and utilities operated at a record-low 69.1 percent of capacity in April, according to Fed figures.
The picture is different for some raw materials. Global oil production capacity use is about 95 percent, “and with the cutback in capital expenditures and drilling, future capacity is dropping,” according to a May 8 Goldman Sachs Group Inc. report. Production of copper is at 85 percent of capacity and corn and wheat are above 90 percent, the report said.
Soybean supplies are squeezed by drought in Argentina and tighter credit that curtailed plantings. Argentine farmers may harvest 32 million tons of the crop, down from a record 48 million tons last year, the Buenos Aires Cereals Exchange reported on June 3. Goldman Sachs says output in Brazil will fall as much as 10 percent this year. Soybeans on the Chicago Board of Trade have gained 22 percent in 2009 to $12.26 a bushel, the highest since September.
An example of the religious nature of economics is its promotion of market as god. We are warned:
Don’t try to legislate on the market; it is stronger than our puny laws. It is omnipotent
Don’ try to regulate outcomes, the market with input from all of its participants always knows best. It is omniscient
Do the right things and the market will reward you, the wrong things and you’ll be punished. It is beneficent
Omnipotence, omniscience and beneficence are the attributes of a god, not a mere device for buying, selling and exchanging. - A strange deity that abhors morality and where even the most atheistic libertarians have been suckered into believing in the market’s "invisible hands" like multiple Holy Ghosts.
NYCityBoy says:abprosper says:
I believe I live in what could still be called "The Financial Capital of the World". I work in a field related to money and finance. I often have talked to co-workers, and others in the field, about this mess the past 3 or 4 years. When I speak to these people I feel like we must be living on different planets. I can't figure out how their minds work but it is not pretty.
The saddest part of this mess is to see anybody that isn't a mindless optimist be labeled as Dr. Doom, negative, Chicken Little, gloomy, etc. It shows that speaking the truth and acknowledging reality is taboo. That is terribly frightening. I take every chance to correct people when they call me such things. I tell them that being an empty headed optimist does not qualify them as knowing what they are talking about. I hope you all do the same thing.
I do love to laugh at idiots when their cheery little world collapses around them. It's not my fault they want to act like fools. It's theirs. The consequences should belong to them. The only lesson that gets learned is the hard lesson.
“I suspect that most of todays economists are as concerned about their jobs as the rest of us. Like newspaper people and other news aliens they (for the most part) can't tell the truth even if they want to.
If they do, their add revenue goes down and they get fired
black swan says:“The real U-6 unemployment rate in the US is probably over 20%. I'm not sure how that compares with the unemployment rate during the Great Depression, because I'm not sure they counted unemployed women during the Great Depression.
N.Andrews, who wrote "Historical Unemployment in Relationship to Today", says the peak U-6 unemployment rate in the Great Depression was 37.6%. If that didn't include women, and we know that all they had as far as employment data in the 1930s were guesses, then, at present, we are nowhere near Andrew's best guessed rate.
Robert Shiller doesn't think real estate prices will turn around anytime soon:
Why Home Prices May Keep Falling, by Robert Shiller, Commentary, NY Times: Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. ...
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. ... If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.
But something is definitely different about real estate. Long declines do happen with some regularity. And ... we still appear to be in a continuing price decline. ... Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?
Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers ... have no reason to hurry because they are not really leaving the market.
Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. ... And they don’t like shifting from being owners to renters... Among couples...,... any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.
In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn. This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting...
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
I just read a very good article in Bloomberg about Bernanke's conundrum, i.e. rising long-term rates even as short rates are kept near zero. I particularly liked this comment by Mark MacQueen of Sage Advisory Services: “You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy.”
Very simple and very common sense, indeed. But since the Fed and Treasury can't have it both ways, what's the way out?
I understand (but do not applaud) the current monetary bailout reaction, based as it is on America's deeply ingrained Great Depression phobia. Countless economists and Wall Streeters have spent their professional lifetimes studying and war-gaming the 1930's - Mr. Bernanke most of all. Nevertheless, they are completely and totally, knee-jerk wrong; throwing out more money (i.e. debt) will not resolve a problem that was created by too much debt, in the first place. As this blog's masthead proclaimed a while ago: "We hold this truth to be self-evident: You cannot solve a debt problem by issuing more debt".Like other shortsighted generals in history, our monetary generals are fighting the previous war - furiously building static Maginot lines whilst Guderian is warming up his highly mobile panzers.
Therefore, I strongly recommend that instead of engineering a massive explosion of money supply through quantitative easing, the US should regulate it very tightly. I have proposed The Greenback, i.e. benchmarking money supply on the growth of renewable energy. This scheme will most likely lead to significantly higher short-term rates, at least initially. But, is this so bad? I think not.
For one, higher short rates will promote domestic savings, sorely needed in a period of massive budget deficits and the urgent requirement to invest huge sums in sustainable energy*. For another, such a policy will immediately restore confidence in the dollar and our commitment to service our debt. It is likely, thus, that long rates will drop.
Let's recap: our current expansionary monetary policy is completely at odds with present and future requirements in the real economy, which is challenged by a combination of too much debt, fewer and lower-paying jobs, resource depletion and environmental destruction.
The bond market, those ever-present bond vigilantes, is already warning us that we have got to bring monetary policy in line with reality soon, as opposed to sleep-walking in a rosy dream state.
*Of course, I take it for granted that the borrow-consume-inflate assets Permagrowth economic model is completely and utterly defunct, de facto.
But if one was paying only a teeny bit of attention, it would be hard to miss the persistent, nay insistent efforts of the officialdom to put the best possible spin on matters economic. The very fact that Geithner said not more than once that the stress tests were about restoring confidence was such a brazen admission as to be breathtaking. But on another level, it was spin within spin, since the idea that the authorities would openly talk of the tests as a ruse to restore confidence (which is what predetermining the answers, as Geithner also did) is tantamount to saying the skeptics are all wrong, and all we need to do is drown them out for saner heads to prevail.
While the "nary a bad word will be said", or to the extent it is, it is countermanded by an even more positive take, has gotten some notice in the MSM. But I cannot recall anyone taking issue with it frontally. So an article today in the New York Times, "The Economy Is Still at the Brink" by Sandy Lewis and William Cohan, is a badly needed contirbution:President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible...Yves here. Put more simply, confidence is a necessary but not sufficient condition for recovery. Indeed, many readers have argued that boosterism will backfire when the policy measures come up short. This is, as we have said repeatedly, an effort to restore status quo ante rather than deal with serious, deeply rooted problems. Back to the article:
Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game. (Disclosure: One of us, Mr. Lewis, was convicted on federal charges of stock manipulation in 1989, pardoned by President Bill Clinton in 2001 and had his lifetime trading ban overturned by the Securities and Exchange Commission in 2006; documents relating to the case can be found at sblewis.net.)
The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. At another fund-raising event, for Senator Harry Reid, President Obama said: “We didn’t ask for the challenges that we face. But we are determined to answer the call to meet those challenges, to cast aside the old arguments and overcome the stubborn divisions and move forward as one people and one nation .... It will take time but I promise you, I promise you, I’ll always tell you the truth about the challenges we face.”
Keeping that statement in mind — as well as an abiding faith in the importance of properly functioning capital markets — we have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world.
- Bennett said...
- Who is saying that the status quo "restoration" will be permanent?
This is analogous to Krugman's mistaken fearmongering that Obama and reformers will only get "one chance" to fix things.
Yves, I believe that you fundamentally do not understand the political process, and the long term strategic view that political actors take.
I think Obama and company are keeping their powder dry; it's as simple as that. They know as much as you and Bueler and the commenters here do....they are waiting. "Gambling" if you will.
But any smart student of politics knows that you can only really execute reform when *all options have been exhausted." I am sure Geithner and Obama will cheer the day, believe it or not, when the current course proves unsustainable - only then can the reform that you desire become possible. IT's not possible now. That's why "nothing has changed."
Look at how big bankers now are squealing about the tiny burdens placed on them by the stress tests, or other regulations. You simply cannot revolutionize things at once; it historically is an incremental process. This is NOT 1932, it is not as dire as that. We cannot have the changes on that scale so quickly.
So one should not think that Geithner and Obama are idiots, or have their heads in the sand. That is simply ignorant and naive. Their strategy may or may not be proved wrong - but that cannot be determined now.
Finally, the guy in the above article is a damn felon! End of discussion.
- Tortoise said...
- It is important to keep in mind that the economy is like a complicated clockwork with lots of moving parts, some going up while others are going down. House prices may be dropping and unemployment rates may be going up and yet the overall economy may be improving or about to turn the corner and head up. One thing I have learned is that cycles follow their own internal logic and recoveries start exactly when it seems that things are horrible and many logical and analytical people are overcome by despair.
I am sure you have heard the expression "It is darkest before the dawn". It is a truism and yet ...
Though nobody can PREDICT the economy with certainty, the best predictions (in terms of track record) come from leading indicators. They seem to indicate that the worst is over and the economy is about to turn up. Everything else may be just subjective evaluations shaped by our emotions.
The latest data on insider selling shows little relief in the relentless unloading of company stock by corporate insiders. In the last two weeks insiders sold over $335MM in stock vs listed insider purchases of just over $12MM. As has been the trend over the course of the last few weeks the list of insider selling has been long and the amounts have been staggering. The buy side, on the other hand, is represented by low rated, low priced stocks whose insiders rarely purchase over $500K.
One might think that with all of these “green shoots” the insiders at major U.S. corporations would begin buying up their own shares voraciously. Especially after a nice little run like we’ve seen lately. After all, with stocks still 35% off their highs and a full blown economic recovery (supposedly) on the horizon it would make nothing but sense than to buy your own shares, right?
Although there were signs of life in early May the overall trend in buying remains very low. As we’ve noted before it’s not the mountain of selling that most concerns us, but the total lack of buying. Insiders sell for many reasons, but they only buy their own stock when they are confident that the price will rise. As of now, insider buying remains incredibly weak which is more than likely a vote of (no) confidence in future business operations.
And it also seems likely that the unemployment rate will continue to rise for the next 2 years or so since any recovery will probably be very sluggish.km4 (profile) wrote on Sun, 6/7/2009 - 10:49 am
> And it also seems likely that the unemployment rate will continue to rise for the next 2 years or so since any recovery will probably be very sluggish.
Now couple this with Obamanomics where
1) The government champions funds
2) Funds champion corporations
3) Corporations champion markets and industries
4) The people ( American taxpayers ) get the tab which will fail because America and Americans are swimming in debt and you have the makings of a catastrophe ( like more severe and prolonged recession or depression )
Most Americans had better start making the gradual to a lower standard of living and suggest that most should also be recalibrating their American dreambobn (homepage, profile) wrote (in reply to...) on Sun, 6/7/2009 - 11:04 am We have assumed that the economic policies of the last 25 years - globalization, regulation, free trade etc - have worked but there is an alternative narrative which is that they had nothing to do with it and it was all based on debt creation. Common sense would suggest that if all these policies had in fact worked the amount of indebtedness and debt service as percentage of income should be going down not up.
These policies did exactly what they were designed to do: make rich people richer, and screw everybody else.Econ Watcher (profile) wrote on Sun, 6/7/2009 - 1:16 pm I don’t think what is going on right now is just a recession. I think there is also an economic adjustment taking place. By that I mean an adjustment because of the globalization of the world economies. We are witnessing the rise of the middle class in China and India and the fall of the middle class in America. It has been masked by the credit explosion over the last 15 years but is definitely starting to surface. The GM and Chrysler Bankruptcies are prime examples. No matter how you slice it the wages here and abroad are going to have to be more closely correlated. IBM and other Tech companies will keep shipping jobs to India until we have an American IT workforce that can compete e.g., lower wages.
sportsfan (profile) wrote on Sun, 6/7/2009 - 1:40 pmIf you're unemployed, it's a good idea not to be unemployed for too long.
Sounds pretty basic, doesn't it?
But there seems to be a new twist. Lengthy unemployment can lead to a lower credit score and thus to no job offer.
From the L.A. Times:
Trapped: It's hard to get a job if your credit is bad
Not only is the American middle class shrinking, a new lower class is being created.
yuan (profile) wrote on Sun, 6/7/2009 - 11:37 amRESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
-January 1, 1930
“The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
- June 1930
‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.
-July 6, 1930
BIG BANKERS PUT UP $100,000 SAFEGUARD; House of Morgan Among Those Required to Provide Protection for Investors. -August 3, 1930
“We have hit bottom and are on the upswing.”
James J. Davis, Secretary of Labor.
-September 12, 1930
“30% OF STOCKS SELL UNDER BOOK VALUES; Capital Is Above Market Price.”
-December 14, 1930
“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
- June 9, 1931
sportsfan (profile) wrote on Sun, 6/7/2009 - 12:25 pmWhere the new jobs came from I haven't a clue.
There weren't any new jobs created beyond the jobs that were lost:
Although the often volatile unemployment rate dropped to 11% from March's 11.2%, the Golden State still lost 63,700 jobs during the month.
The former head of the FDIC, William Seidman, figured it all out back in 1993 when he was cleaning up after the S&L fiasco. Here's what he said in his memoirs:
“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.” (Bloomberg)
That's it in a nutshell. The banks never expected the loans would be paid back, which is why they issued them to ninjas; applicants with no income, no collateral, no job, and a bad credit history. It made no sense at all, especially to anyone who's ever sat through a nerve-wracking credit check with a sneering banker.
Trust me, bankers know how to get their money back, if that's their real intention. In this case, it didn't matter. They just wanted to keep their counterfeiting racket zooming ahead at full-throttle for as long as possible. Meanwhile, Maestro Greenspan waved pom-poms from the sidelines, extolling the virtues of the "new economy" and the permanent high plateau of prosperity that had been achieved through laissez faire capitalism.
Jun 4, 2009 | Sudden Debt
The Employment Situation report for May is scheduled for tomorrow. So, the subject is.. jobs.
Every first Friday of the month we look at the headline numbers from the Bureau of Labor Statistics: so many jobs were added or lost last month; thus, we deduce the economy to be growing or declining. But this is less than half of the story; we rarely- if ever- discuss what kind of jobs are involved. I believe this to be superficial analysis and highly misleading.
For example: a skilled auto worker making $30/hr is fired and gets a job tending bar at $7/hr plus tips. Are these two jobs equivalent? Of course not.
About two years ago ago I started looking at the wholesale disappearance of goods-producing jobs in the US versus the creation of lower-to-middle tier service sector jobs (leisure and hospitality, retail, healthcare and education).
I have now updated the chart presented in the original post; I think it speaks for itself (see below).Data: BLS
Good, well-paid jobs involve the addition of high levels of value to their output; some because of the high amount of invested capital in plant and equipment and technology (e.g. jobs in manufacturing) and others because they are knowledge-based (e.g. software). What we did in the US, instead of safeguarding these precious jobs, was (and still is) trully moronic, considering we did it willingly and without any outside pressure.
From powerhouse to fun-house, from manufacturing cutting-edge products to consuming bread and circuses.
This is also the reason I am so upset with the continuing sole emphasis of the administration on financial-sector bailouts. The trillions involved are being wasted in keeping a terminal patient on life support, instead of supporting the radical transformation of our energy and resource sectors. And don't forget that these trillions are borrowed!
Sometimes I feel like our Pax Americana is ablaze and we are all gathered round, poking the fire with our marshmallow sticks and laughing, telling each other camp stories.
Jun 3, 2009 | ft.com
The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration.
The FED indebts the US government (creates the massive mess) to apparently save the system then expects congress to sort it all out.
If the USA cuts back now, it will go into a complete depression death spiral.
Collapsing tax receipts mean that many states are and will be bankrupt, and the job losses are still mounting at an unprecedented rate (just a bit slower than the recent peak).
There is no way fiscal sustainability can be achieved after the events of recent months, not in a mans lifetime anyway.
6/06/2009 | CalculatedRisk
From the American Bankruptcy Institute: Consumer Bankruptcy Filings up 37 Percent in MayU.S. consumer bankruptcy filings rose 37 percent nationwide in May from the same period a year ago, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The overall May consumer filing total of 124,838 was roughly level from the April total of 125,618. Chapter 13 filings constituted 27 percent of all consumer cases in May, slightly above the April rate.
“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” said ABI Executive Director Samuel J. Gerdano. “We predict more than 1.4 million new bankruptcies by year end.”
NervousRex (profile) wrote on Sat, 6/6/2009 - 6:03 amDuke of Con Dao (profile) wrote on Sat, 6/6/2009 - 5:51 am
what explains the 2003 high? I know a change in the law in '06 was the cause of that spike....
aren't we comparing apples to oranges a bit, let's say we walk back the cat to the previous BK law,
wonder what the numbers would look like then, guesses?
Two things, it seems the personal BK peak generally would lag a recession by a year or two (no link -- no data! but looking). Just due to the inertia of the components.
If you cut 'n paste the new bankruptcy curve on the old one (skipping discontinuous segments) we'd be something like 2x higher than now (the Big Thumb method of interpolation). I know it's not comparable but that would be 600k or 700k per quarter.
I know someone now teetering on the edge now. There are often serious family and personal issues (like where to live) that go along with bankruptcy. The idea of 700,000 people *entering* that state every quarter gives me chills.curious (profile) wrote on Sat, 6/6/2009 - 6:36 am Saw an interesting chart yesterday.
Everything in blue was created by Obama's economic team.
For me, that chat is a wonderful summary of the Obama administration's economic policy. Lots of optimistic predictions with little attention to reality.
typo edited--need some coffee
Even if DMOs cancel their holidays it'll be tough to schedule all the looming sales, says Gillian Tett...
June 4 2009 FT.com
A few decades ago, when global financial markets rocked to a more gentlemanly tune, many western governments took an informal break from the business of selling their bonds during the summer.
For back then, it was presumed pension fund managers – or anyone else with a penchant for government bonds – would spend August on the beach. And the media-shy bureaucrats who typically work at government debt management offices usually presumed they would have plenty of time during the rest of the year to go about selling bonds.
As I have previously pointed out, two top IMF officials and the former Vice President of the Dallas Federal Reserve have all warned that the U.S. has been taken over by an oligarchy.Wednesday, the head of the Federal Reserve Bank of Kansas City, Thomas Hoenig, agreed:If we hesitate to make needed changes, we will perpetuate an oligarchy of interests that will fail to serve the best interests of business, the consumer and the U.S. economy...
In discussing any aspect of financial reform, one of the most significant changes that must be accomplished is the end of "Too Big to Fail" . . . Institutions must be allowed to fail, no matter their size or political influence...The effect is to lower the costs to these firms and significantly raise costs to the taxpayer and, ultimately, to fundamentally weaken our financial system.
June 5th, 2009
While many view the decelerating job losses as signaling the end of the recession, they appear to me as signaling the end of the panic period of the credit crisis. We are now in an ordinary, as opposed to historic, recession.
- Stuart Says:
600K new filings each week and records levels of continuing claims, 9.4% unemployment rate, a U-6 of over 16.4% and they post 345K lost. Who the hell is running the show at the BLS? Baghdad Bob? They just nuked their last shred of credibility with even bozo the clown.
Utterly worthless their releases are now.
- The Curmudgeon Says: While your eyes were averted to the “green shoot” of less bad unemployment numbers, the little ol’ US Treasury market is doing its own shooting. Ten Year @ 3.82%, according to latest Bloomberg. And mortgage rates at their highest this year (about 5.5% for 30 year fixed). Now we just need some fertilizer to spread on the shoots…but that would be expensive, since ag commodities are also shooting…my isn’t “reflation” a wonderful thing? Green shoots everywhere.
- jqui Says:
More good news. Employers trimmed only 345,000 jobs and the unemployment rate is only 9.4%, the highest since 1983. Time to buy stocks. I hate to be a wet blanket (actually, I love to be a wet blanket. It’s my thing). Please look at the old birth/death adjustment chart. According to the BLS model, small businesses added 220,000 jobs in May after adding 226,000 jobs in April.
Isn’t that precious. In the midst of the worst recession since 1930 our beloved government agency is telling us that small businesses are hiring like crazy. In two years they will adjust this data when no one is paying attention, because it is WRONG!!!!!!
Small businesses are going out of business in record numbers. I can guarantee you that small business subtracted at least 220,000 jobs in May.
Therefore, the REAL TRUTHFUL losses are 345,000 + 220,000 + 220,000 = 785,000. Do you think the market would be rallying if that number was reported?
- Mike in Nola Says:
Keeping perspective: Graphs in this post.
- TrembleTheDevil Says:
Didn’t you write a book about this or something? Why would anyone want to buy your work if you’re not even going to examine what the real numbers are?
All that’s going on is what technically counts for “unemployment” is incredibly disconnected from reality, an article about April’s number explains it:
-The 8.9 percent April unemployment rate was based on 13.7 million Americans out of work. But that number doesn’t include discouraged workers or people who gave up looking for work after four weeks. Add those 700,000 people, and the unemployment rate would be 9.3 percent.
- The official rate also doesn’t include “marginally attached workers,” or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.1 percent.
- The official rate also doesn’t include “involuntary part-time workers,” or the 2 million people like Noel who took a part-time job because that’s all they could get, plus those whose work hours dropped below the full-time level. Once those 9 million workers are added to the unemployment mix, the rate would be 15.8 percent.
BR: Also, Kennedy was shot.
Dude, you are 3 years late to this party.
I’m the guy who advocated using the U6 over U3 in this report, as well as mercilessly mocking the B/D report.
- jc Says:
From Big Picture almost 2 years ago
B/D is why we are smelling fish!
The Accelerating BLS Birth/Death Adjustment
Tuesday, July 10, 2007 | 07:20 AM
in Data Analysis | Economy | Employment | Real Estate
I’ve mentioned the B/D adjustment over the years, and how its become an increasingly large portion of the reported BLS new jobs.
What I haven’t previously mentioned is that over the past year, it is accelerating: the Birth/Death Adjustment has become an ever-large portion of the reported NFP payrolls.
How much larger? Well, consider the following data points: Over the five month period ending in June, BLS B/D adds was a total of 922,000 new jobs. During the same period, the actually head counted Non-farm Payrolls (NFP) job creation was 709,000.
That’s right, fictional Birth/Death job adds have been outpacing actually measured job creation by some 30%.
As they do every year, BLS Net Business Birth/Death Model deleted jobs in January — in 2007, it was 175k. That means that year-to-date, the net fabricated BLS new jobs was 747k — versus NFP growth of 871k — that’s 85.58% of NFP job growth.
Example of the absurdity of the new Birth/Death model — in place since 2001 — can be found in the specific employment sub-sectors. Construction jobs are an obvious error (housebuilders added 12,000 workers), big jumps in education while school is out for summer is another, ‘Leisure & Hospitality’ B/D jobs are a multiple of the net category jobs created.
Prior to 2001, the B/D adds were less than 20k per month. Now, they dominate the Non Farm Payroll report.
Beneath the headlines, we see a far different reality. The FT noted:
“Wall Street economists, meanwhile, were surprised by continued hiring in the construction sector seen in Friday’s figures as despite a prolonged housing market slump…The bulk of the hiring was in the service industries, as employers such as banks, insurance companies, restaurants, added 135,000 workers last month after hiring 199,000 workers in May. But they also pointed to signs of potential economic weakness, as the retail sector cut 24,000 positions.”
Economists also said an unwelcome percentage of last month’s hiring was attributable to state and local governments, which added 40,000 staff and are not viewed as good indicators of economic activity.”
I mentioned my incredulity over the fawning WSJ page 1 headline this past weekend (How Good Was NFP Really?). That is the soft prejudice of low expectations in action.
My favorite skeptic on BLS data is Bill King; Bill is even more incredulous over the reaction to what was by all measures a mediocre jobs report:
“And once again, The Street and their fin media stooges bray about how bullish 132,000 NFP jobs are (CSFB’s chief economist called the report ‘excellent.’) even though just a few years ago Street Conventional Wisdom held that the economy must generate about 175,000 jobs each month just to absorb demographic growth.
Lehman’s economist said, “The labor market is one of the stronger parts of the economy right now.” This is a Clintonesque, qualified statement. It could imply that the rest of the economy really sucks.”
Here’s Bills’s chart of the past few decades NFP growth:
NFP with 1-year (12 month), 10-year and 40 year (480-month) moving averagesNfp_20_years
Source: M.Ramsey King Securities
As the above chart clearly shows, the June NFP number is hardly ‘excellent’ or indicative of economic strength. With NFP yearly average of 167,333, how can a release ~35,000 or > 20% less than the yearly average be ‘excellent’?
The 40-year average NFP growth is 150,600 — and that is with a national population considerably less than 300 million people. Anyone asserting a NFP number ~15% below the 40-year average as ‘excellent’ or a sign of strength is a shill who has failed to do the math . . .
UPDATE 3 July 11, 2007 8:20am
- I-Man Says:
OH I love it…
Not the fact that our labor conditions are still disgusting… I dont like that.
But I LOVE that the bond market is finally calling out the bullshit this morning. Just love it.
They can only spin and shine the data for so long, and then the clear coat is gone.
06/04/09 | The Daily Reckoning
Junk bonds have come back from the dead — and then some. Of all the asset classes, you’d think the market for debt from financially fragile companies wouldn’t fare well during a “credit crisis.” In fact, we’d suspect it would be one of the last asset classes to recover. But no, anything is possible in 2009… Check the chart of HYG, an ETF that tracks the “distressed debt” market.
“I think that high-yield bonds have moved up way too far, way too fast,” says Strategic Short Report’s Dan Amoss. “Like low-quality stocks, many of these bonds are pricing in a return to the bubble economy, when that is clearly not going to happen. I agree with NYU professor Ed Altman — creator of the Z-Score and an expert in distressed debt investing — that the high-yield bond market will not bottom until defaults peak. Defaults will probably not peak before late 2009 at the earliest. The recent rally in junk stocks and bonds was primarily a function of the Fed’s hyperinflationary policies, which have served as rocket fuel powering any risky asset class with momentum, regardless of fundamentals.”
The Bond War, by Daniel Gross, Slate:
In a nutshell, Ferguson and his allies believe that the rising bond yields prove that markets are worried about the inflation that will inevitably result from the fiscal policies of the Obama administration and the Fed. ... Ferguson's fears have been echoed by the planet's leading inflation-phobe German Chancellor Angela Merkel and by influential Stanford economist John Taylor. Turn on CNBC, and you're likely to hear talk about bond-market vigilantes, the mass of traders who sell bonds and push interest rates up in order to warn governments not to spend freely.
Krugman and his fellow travelers couldn't disagree more. Far from being a sign of failure and impending disaster, they say, the rising bond yields actually signal success and impending improvement. ... Clear-headed as always, Martin Wolf of the Financial Times notes: "The jump in bond rates is a desirable normalisation after a panic. Investors rushed into the dollar and government bonds. Now they are rushing out again. Welcome to the giddy world of financial markets." This line of argument makes sense...
In ... this instance, the Fergusonians lack credibility. H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance. ... Their solution to the problem of large deficits always seems to be to cut entitlements and never to raise taxes.
As for the bond vigilantes, have you noticed that they seem to surface only when a Democrat is in the White House? Stanford's John Taylor didn't write many articles about the inflationary aspects of rapidly expanding deficits when the Bush administration and Congress were turning surpluses into huge deficits, massively increasing government spending, and creating a new Medicare prescription drug entitlement. He was working in the Bush Treasury Department. ...
Federal Reserve Chairman Ben Bernanke, seemed to split the difference yesterday. "However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," he told Congress. "These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings."
To the extent that we believe the yield curve is too steep, then we believe that long term rates will drop or short term rates will rise.
Is the yield curve too steep?Bruce Wilder says...
The bond market isn't telling us anything.
Niall Ferguson and John B Taylor, like Barro, Cochrane, Mulligan, et alia, are telling us, loudly and clearly, that they are not to be trusted -- that they are conservative partisans, eager to tout their preferences, or the preferences of their plutocratic patrons -- and are perfectly willing to sow doubt and confusion for their cause.bakho says...
"bedeviled by the haunting fear that someone, somewhere may be getting social insurance. ... Their solution to the problem of large deficits always seems to be to cut entitlements and never to raise taxes."
Indeed.Bruce Wilder says...
And, yes, Krugman is a partisan, too, with all that implies about the blindspots inevitable to having a point-of-view.
Having a point-of-view entails blindspots and the distortion of perspective -- the metaphor is informative that way -- but the symmetry ends there. The difference, aside from the different point of view, is that Krugman actually tries to be honest about both his preferences and the evidence.
Much of what comes from the Right is bluster and confusion -- intended to obfuscate and mislead.
In the end, the politics is about the distribution of power and income. Krugman is willing to say clearly that he wishes for greater egalitarianism. When the Right is willing to clearly state its preference for richer rich people, we might get more light than heat, from political debate.OhNoNotAgain says...
"When the Right is willing to clearly state its preference for richer rich people, we might get more light than heat, from political debate."
Exactly. I'd have half-an-ounce more respect for those on the right if they wer explicit about their allegiances. Instead, they confuse people into thinking that it's in their interest to cut the taxes of millionaires and above, and fund a huge military-industrial complex, and then blame the social safety net when the (expected) huge holes start showing up in our budget.mmckinl says...
Could be the over~supply coming to market to pay for the massive deficits ...
The answer is of course " Greenbacks" ...
Money printed, not borrowed, underwritten by higher taxes on high income, capital gains, dividends, estates, carbon and financial transactions ...
For the health of the country taxes on sugar, carbonation and trans fats would be great too.
Lincoln used the "Greenback" to pay for the Civil War when confronting usurious interest rates that would have bankrupted the country were demanded by American and British Banks ...roger says...
RE Bruce W.'s points on the real interest of right wing economists.
There's a wonderful example of that butter-won't-melt-in-my-mouth hypocrisy on the Freakonomics blog today. Gary Becker was asked by Steve Levitt what he thought the goal of economics is. According to Levitt, this son of the freshwater school, who never saw a CEO salary that couldn 't be made higher, a union that should n't be broken, or a regulation that didn't interfere with the "market", claims his fifty years of economics work is “to understand and alleviate poverty.”
As Leavitt points out, Becker is a lifelong republican. And as he doesn't point out, the American poor vote heavily democratic. From which I conclude that either Becker is right, and the poor are deluded about their self interest in voting Democratic, which means that the model of rational self interest upon which Becker has based his career is wrong - or Becker is wrong, and he is either individually deluded, or hypocritical in the extreme.
But of course, the way around this is to always point to some other poor group. He must be working for the poor in China, or in India, or in Africa. Of course, if he was, he'd be questioning the business practices of Monsanto in India, he'd be looking at the Jacqueries in the countryside of China and the pollution in the cities and calling for a number of programs by the state to buffer increasing costs to the Chinese workers and poor. But this is to take bad faith naively, like the Right's love affair with unions - as long as they were Solidarity, in Poland - in the 1980s. The man works to make the predator class richer. That is that. End of story.Fred says...
Bonds aren't rising so much as returning to normality after a panic-driven dip. Back in December, the TIPS to nominal spread was predicting zero inflation or deflation for the next decade, which was absurd. Now the spread is predicting something like 2% inflation, which is far more reasonable.
The real news with regards to bonds is that Mankiw is now openly urging 6% inflation, at least for a few years. I suspect all the hoopla about inflation is to provide some cover for the Fed to permit such inflation without spooking the long-term (30 year) market.
A steep yield curve combined with 6% inflation is a great way to:
a) recapitalize the banks
b) screw the elderly (fixed pensions, savings accounts, annuities, etc)
c) screw the foreign bondholders
d) take some pressure off corporations facing huge pension fund shortfalls
e) push down the dollar to help American competitiveness
I know the view of some on this forum is that deflation is benefitting the plutocracy. Maybe that used to be true, but I think they are now running scared of what the alt-A resets might bring. Mild inflation together with a steep yield curve is a lot more positive for most stocks than deflation and widespread bankruptcies (the private student loan lenders are the exception, since they need not fear bankruptcy). What the banks lose on their holdings of long bonds, they'll recoup in spades via the wide interest rate spread.
Also, I think the plutocrats are starting to realize that screwing the workers is less important from here on out than screwing the elderly. Who cares if you have to pay workers 6% more to keep up with 6% inflation? The main thing is to wipe out the pension liabilities as much as possible.
A steep yield curve means adjustable rates won't follow the fixed rates up, so housing affordability remains the same.
The second phase of the housing bloodbath can thus be postponed until the economy is stronger and the Fed finally releases the front end of the curve.James Benjamin says...
Forget about partisan paradigms. Sheesh! It's like arguing if the deckhands deserve double or triple time on the last night of the Titanic.
Bond markets are totally saturated globally. Central banks are stuffed full of them as some kind of reserve for their currency. How can one country's certificate of consumption - which after all is what the US has been using the bond market for for the past 20 odd years - is beyond me.
With out some kind of limit to the amount of credit that can be issued by a sovereign state, bond markets are simply in limbo waiting for oblivion.
Keynes was right after all, now it remains to be seen if Marx was too.anne says...
Good Grief, when short term Treasuries have near zero interest rates, there is no way down and only up eventually. On June 3, 2009 almost all classes of investment-grade bonds were at important highs in price for the year. Bondholders 2 years and 10 years ago and 1 year ago have done wildly well, while understanding the nature of duration makes losses on bonds temporary and only short term.
Bond specialists are not the least worried about this market, having long ago learned how to use relatively constant duration to protect themselves against interest rate increase of inflation.anne says...
The Vanguard government insured mortgage fund, GMNA, has a yield of 4.13% and a duration of 1.8 years. An increase in short term interest rates of 3 percentage point would lower the price of the portfolio by 5.4%, but the interest income for the fund would increase to 7.13%. Over the course of the duration of 1.8 years, the investor would have a return of about 4.13%.SavvyGuy says...
The bond market is responding to "dilution" of existing holders, caused by an over-issuance of Treasuries to fund all the deficits. This is the real cause of the recent bond-market crash, plain and simple.
Jun 05, 2009 | FT AlphavilleFreight volumes are still trending lower. The year-on-year deficit has widened from minus 14 per cent at beginning of March to minus 18 per cent at the beginning of Apr, minus 21.6 per cent at the beginning of May and and then minus 23.5 per cent at the start of June.
Markets and commentators alike are prone to lurching from one extreme to another, notes Kemp, moving from over-optimism to doom-laden pessimism. Reality is almost always more prosaic - economic history is about “muddling through”.
Financial history is about the highs and lows, exuberance and panic. Social and economic history is about the middle ground, continuity as much as change. At the moment, markets are seized by the excitement of “green shoots” of recovery. Not for the first time, participants are in danger of losing perspective.
While the pace of decline has slowed in North America, Western Europe and Japan after the free-fall contraction of Q4 and Q1, manufacturing activity is activity is still shrinking. Even if the economy hits the trough in the next 1-4 months, as expected, and a recovery begins, it is likely to be fitful and uneven.
- Carlomagno Jun 5 15:36
@praxis: I haven't seen updated data for the last month, but the US inventory to sales ratio has been quite elevated (about 1.4) by historical standards up to very recently. So unless sales pickup substantially, I would question the claim that "inventory has been sold off". My underlying point is that this recession is not a normal inventory correction cycle.
- Stony Jun 5 13:49
Obviously the cup is half full if you are a green shooter and empty if you are a bear. But one cannot help but see that whereas 07 and 08 data exhibit a generally flat trendline for the months from Jan to May, that fro 2009 seems to be pointing down. The green shooters should also note that a similar trend is exhibited by air cargo data from UPS. Green shooters of course can argue that air cargo is a much smaller part of the industrial production. But I am sure green shooters would have a different interpretation anyway.
- Brick Jun 5 11:13
The most significnt fall looks to be in metal ores which reflects construction and car production coming to a halt. Perhaps an opportunity to short US steel producers. What is worrying is the continued fall in coal and coke movements as I think this more closely reflects the US economy. What would be interesting to see is the rail traffic into Canada and Mexico as I suspect this is still falling off a cliff. What I did expect to see was grain continuing to fall due to credit problems, so there is some good news in there.
PIMCO’s founder Bill Gross is out with his latest monthly missive.
Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations
... ... ...
In the end, one can only conclude that the U.S. is indeed likely to deficit spend for a considerable period and that this is going to have negative effects on its credit rating and relative standing in the global economy. A diminished future for America is an inevitability of having lived beyond its means for far too long. Accepting this fact is likely to provide a better outcome than resisting it as the U.K. did when its tenure as king of the hill came to an end.Source
Staying Rich in the New Normal - Bill Gross, PIMCO
- Selected Comments:
- frances snoot said...
- "You are aware that a question has arisen as to the right of the warden to the income which has been allotted to the wardenship. It has seemed to me that this 'right is not well made out', and I hesitate to incur the risk of taking an income to which my legal claim appear doubtful."-Septimus Harding, The Warden,1855 (Anthony Trollop)
"It was only with the advent of capitalism and annual productivity gains that entrepeneurs, investors, and risk-takers with luck or pinpoint-timing could jump to the head of the pack and accumulate what came to be recognized as a fortune. Still, the negative connotions persist."-Bill Gross, 2009
Negative connotations usually cling to amoral actions.
- Stevie b. said...
- "A diminished future for America is an inevitability of having lived beyond its means for far too long."
Exactly!! And not just for America, but the whole of the developed world. And just as well, cos were it even remotely possible, the world could not take another coordinated global boom at this juncture, so the developed world needs a meaningful pause anyway.
- And maybe "diminished" is a bit harsh. Most of us will still be a helluva lot better off than most in the developing world, so it wont be a diminished future - just a more realistic one. And after all, happiness is really just having a good sense of perspective.
- DownSouth said...
- You gotta give Bill Gross credit for one thing. He is one slick-talking dude, a master of sophistry. Surely no more self-serving argument has been made since Nero insisted that the Christians enjoyed being thrown to the lions because it permitted them to become martyrs.
The ancient regime was a system where kings and popes wielded both political and economic power. Gross would have us believe that we now live in a “free, capitalistic” society where those who wield great economic power--people like him--have no more political power than someone, say, like me. It is only by “luck or pinpoint-timing,” he tells us, that someone like him can “jump to the head of the pack and accumulate what came to be recognized as a fortune.” Those armies of lobbyists, those untold millions of dollars in campaign contributions, those exorbitant salaries and bonuses lavished on ex-regulators, those public relations campaigns designed to misinform and confuse the public, none of those exist in Gross’s make-believe world. Nor do they have anything to do with his or his breed’s success.
The ideology becomes manifest in his argument that "the U.S. is declining relative to the rest of the world and this spells trouble for the megarich as much as it does for the average American." This, at its very best, is a half-truth. For the plight of the megarich relative to average Americans will not depend so much on macroeconomics. Instead, it will depend upon who has political power. Under the right power distribution, the rich prosper even in an economy that stinks, while everybody else sinks into the abyss of povery. Take the case of Latin America for instance:
Taking Latin America as a whole, between 1947 and 1973--the heyday of state developmentalism--per capita income rose 73 percent in real wages. In contrast, between 1980 and 1998--the heyday of free-market fundamentalism--median per capita income stagnated at 0 percent. By the end of the 1960s, 11 percent of Latin Americans were destitute, defined as those who live on today's equivalent of two dollars a day. By 1996, the total number of destitute grew a to a full third of the populaton. That's 165 million people...
[Much of the wealth] passed into the hands of either multinational corporations or Latin America's "superbillionaires," a new class that had taken advantage of the dismantling of the state to grow spectacularly rich.
In Mexico, even as the average real minimum wage plummeted, the number of billionaires, according to Forbes, increased from one in 1987 to thirteen in 1994 and then nearly doubled the next year to twenty-four.
--Greg Grandin, Empire's Workshop
- Gross opines that the "obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured." But why wait? Why not now? There's a quite simple way to relieve much of the budgetary stress, and that is to make the megarich pay their fair share of the taxes. And the sooner we stop digging this deficit hole, the quicker we get out of it.
- Hugh said...
- For me, the whole upper echelons of the financial industry are quite simply financial terrorists. Now no doubt many would find this extreme. To them, I would say look at what Osama bin Laden and al Qaeda have managed to do in the way of damage to our country and then look what the Bill Grosses (fill in your own list of culprits here) have done. Yet look at the difference in response between the two.
For the one, we start (or use as cover to start) expensive, senseless wars. For the others, we give them trillions, allow them to walk free, refuse to investigate them, and let them peddle their self-serving bombast from the 16th hole of whatever where they measure the state of the country only in how many billionaires have or have not joined their feudal ranks.
- asphaltjesus said...
But, as he suggests, trillion-dollar deficits ARE the new normal indeed.
This is where the deficit hawks chime in and offer your observation as living proof there is no consequences to running deficits. It's very difficult to argue with them.
Switching gears, running deficits is clearly beneficial in every political process. Debt accelerates consolidating power.
Whatever Bill observes as 'troubling' has been happening for over a decade at the level of mere American mortal. He's going to come to the rude awakening that he's running out of American customers to sell his book to when it is much too late.
That's my crackpot rant of the day.
A more useful question remains, what is a safe basket of currencies to convert my dollars?
- Tortoise said...
- Edward Harrison: "A diminished future for America is an inevitability of having lived beyond its means for far too long."
Please rephrase to read:
"A diminished future for America is an inevitability of having exercised imperial hegemony for far too long."
- jerrydenim said...
- Maybe Bill Gross sees something coming down the pipe more long term ("decades") that I can not
extrapolate based on observations of current trends, but where does he get off saying :
"Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400."
Now maybe I can see a situation where the whole of America outside of a tiny class of oligarchs is impoverished, employers stop offering retirement benefits and everyone's 401k has been seized by the government so the vast pools of capital the financial class has been feasting on drys up. The financial class is really no different from any other parasite that feeds on the blood of its host and if the dog runs out of blood the ticks will die. Ok maybe, but given the current economic environment it seems the only people who can get rich ARE STILL the one's playing with other people's money but now with the added benefit of a government guarantee. Socialized risk, privatized gains. I definitely consider taxpayer money "other people's money" and I would also consider free money from the Fed to fall in this category as well.
Even more puzzling is Gross's prediction concerning government regulation and taxation. What f*#king regulation? The only thing I have witnessed over the last nine months is layers of consumer protections and regulatory controls being stripped away as Washington colludes with Wall Street criminals in an attempt to keep the dirty casino open. (i.e. FASB rule changes, PPIP, bailout conditions, no high profile prosecutions, etc.) As far as excessive taxation keeping people off of the
Forbes 400? In what parallel dimension? I make about $75,000 a year and barely get to take home half of my pay check. If I were a hedge fund manager or leveraged buyout shark I could make billions of dollars a year by dismantling the real economy for personal gain and keep 85% of my earnings/plunder thanks to a tax loophole that Democrats haven't got the balls or the inclination to close in the three and a half years since they took control of Congress.
Sure I agree the middle class is going to get taxed out of existence (If you think a single man living in a major US metropolitan area making $150,000 a year is the 'super-rich' I've got some real estate in Iraq I'd like to tell you about.) but Bill Gross thinks a 15% tax bracket for people like Steve Swartzman threatens America's presence on the Forbes 400?
Some months back with all of the AIG bonus fervor raging you would have thought that a gesture like closing this loophole would have been a nice concession to the angry mobs, but no. If not this past winter when will the public outcry against the excesses of the financial classes be met with a modest demonstration of fairness and common decency? My answer: never, or least not under our current system of governance.
- Otherwise his observations appear to be right on, but then again if you're reading financial blogs like this one, you already know Mr. Gross has hardly done anything besides regurgitate the conventional wisdom of the day.
- The bit about the changing nature of wealth and the wealthy was surprisingly candid for a person benefiting so handsomely from government largess.
Columbia Business School and the University of Pennsylvania's Wharton are basically satellites of Wall Street. Half the students have memorized the partnership roster at the Blackstone Group the way I once knew the lineup of 1970s-era Cincinnati Reds. An MBA from Columbia or Harvard or Wharton is basically a leveraged bet on a student's ability to make it in finance.
You pay a ton of money, most of it borrowed, so that you can land a really high-paying job with one of the big investment banks or private-equity firms that visit campus.
By their second year, most MBA students at Wharton are already scoping out the Hamptons for the second homes they know they'll be able to buy in a few years.
But with the gilded pipeline to Wall Street temporarily shut down, the rising MBAs are suffering the kind of existential crisis more generally associated with comparative literature majors. The New York Times last month ran an article about students at Wharton who were suddenly at sea. Some were considering working for nonprofits!
Jun 01, 2009 | guardian.co.uk
... ... ...
The media have obviously abandoned economic reporting and instead have adopted the role of cheerleader, touting whatever good news it can find and inventing good news when none can be found. This leaves the responsibility of reporting on the economy to others.
Any serious examination of the data shows that recovery is nowhere in sight. The basic story of the downturn is painfully simple. We have seen a collapse of a housing bubble which has devastated the construction sector and also caused consumption to plunge.
The construction sector is suffering from the enormous overbuilding during the bubble years. Measured in months of sales, the inventories of both new and existing homes are close to double their normal levels. This inventory will ensure that construction remains badly depressed at least through 2010, if not much longer.
The plunge in house prices has sent consumption plummeting. The problem is not consumer attitudes, as many commentators seem to believe. Rather, the reason that most homeowners aren't buying a lot right now is the same reason that homeless people don't buy a lot of things: they don't have the money.
The decline in house prices since the peak in 2006 has cost homeowners close to $6tn in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2tn in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.
Housing is weak and falling. Consumption is weak and falling. New orders for capital goods in April, the main measure for investment demand, is down 35.6% from its level a year ago. And, state and local governments across the country, led by California, are laying off workers and cutting back services.
If there is evidence of a recovery in this story, it is very hard to find. The more obvious story is one of a downward spiral, as more layoffs and further cuts in hours continue to reduce workers' purchasing power. Furthermore, the weakness in the labour market is putting downward pressure on wages, reducing workers' purchasing power through a second channel.
01 Jun 09, 10:52pm As a resident of the USA, it is far worse than what the article above suggests. The mainstream USA news media are horrid at best, in collusion with the Government and financial banksters... or knowingly twisting data wrongfully at worst. The average American is not educated and, as such, are like sheep to slaughter. If you have USD holdings now is as good a time as any to bring your money back to your country (or buy gold).
Geithner was literally laughed at by Chinese students today when he claimed that Chinese investments within the USA are safe. Need i say more?
- BrasilMercosul 02 Jun 09, 12:05am
Very interesting piece and comments, as usual the best on country "x" is always another country "y" with presumably less vested interests. The poor and the decadent in the USA have become invisible and that seems to be official policy by those in power . Until those poor become too many and then, what next ? "Change, they can believe in!.." The paradox is that the economy was what turned the tide for Obama to win that "election" - Obama had obviously been well chosen and promoted by the world media of WMD in Iraq - and lose the economy and his face. Nice republican gift .
Unless something happens, like a new 9/11 , false-flag or not . I would not be surprised . The press lords and thier masters have serious plans, that is obvious .
The stolen first Bush "election", 9/11, anthrax scare, Iraq, afghanistan, WMD, axis of evil, nukes, MIC, Fed , Obama , "change" .... oh dear ... Plus ça change... , really .
- Beckovsky 02 Jun 09, 12:20am
Good article. But what is missing from Baker's article is exactly what Ellis says:
"Too much of society's wealth is funnelled off into esoteric savings, foreign investments and luxurious consumption.
Workers can no longer afford to buy their own products and services the demand for which is therefore, rapidly declining with the result that their products and services are no longer required and they can, therefore, afford to buy nothing.
This downward cycle is not in the slightest way interrupted by bank bailouts and only marginally slowed by most 'stimulus' spending."
Stimulus and all the tax credits are just a bandaid. They will not fix the economy. The stimulus will probably not do much of anything (a bit more debt, a few jobs, some new bridges).
We have an economy that is out of balance. Starting with the early 80's property class offensive (known in silly circles as Reagan-Thatcher "revolution"), most of the society has been empoverished by lower incomes and mad global competition of all against all. The real consumption has been temporarily substituted by consumption on credit. Mathematically that can only go so far. We seem to be at the end of the credit safety valve.
What our societies need is higher incomes to support what people actually need to consume. No more credit bandaids, no more "stimulus" one-time injections, no more hoping that the credit fever will somehow re-start. The only way incomes for consumers can go up is if the balance of power shifts. That means restrictions on trade with super-cheap mercantilist economies (I am looking at you Red China), restrictions on unlimited immigration.
Until that happens we are just re-painting the chairs on the Titanic. If we don't have the clarity of mind to take back the power, we would be better off just getting drunk in the bar...
- endnote 2 Jun 09, 8:20am (about 19 hours ago)
Basically, since the 1970s we have had managed stagnation. Policy makers have been either unwilling or unable to allow a widespread devaluation of capital sufficient enough to pave the way for a new boom. Because the overall rate of growth in terms of per-capita GDP in the US has declined in the 1973-2003 period (compared to 1950-1973) with only temporary cyclical upswings the world's economy never recovered from the 1970s in the way it did after the Great Depression.
As a result we have had a general inertia in the economy punctuated by debt-fuelled asset bubbles. These have been brief and unsustainable (e.g., dotcom).
It seems like policy makers are responding to this crisis with more of the same, keeping the previous regime of accumulation intact. But we are stuck between the Scylla of widespread capital devaluation (massive unemployment, social unrest, international tension) and the Charybdis of more debt (an unsustainable boom leading to another crisis).
- endnote 02 Jun 09, 2:14pm (about 13 hours ago)
It is wrong to look at the stock markets for clues to economy recovery - not in the short-term at least. Stock markets are examples of fictitious capital. They don't produce wealth themselves, but represent a claim on income produced by something else. However, they are bought and sold as if the former were the case. In this way, gains can be made but only speculatively.
We are seeing a minor rally in stocks at the moment, but as long as there is an underlying crisis in profits - ie so long as the actual means of production of goods and services, income from which stocks are a legal title, aren't making any money - as long as this is not happening we are just looking at a new bubble.
Profitability will only return once there has been sufficient devaluation of capital to lead to a new boom.
Policy makers have some leeway but ultimately the problem resides in the instability of capital itself.NB, the stock rally is only coming about because short -term profits cannot be made through the usual channels, eg the commercial paper money market mutual funds.
- Whitt 02 Jun 09, 5:45pm (about 10 hours ago)
For most of us here in the US, the signs of recovery ("green shoots" seems to be the current buzz phrase of choice) are much like the Emperor's new clothes -- everyone's talking about them so they must be real, right? But when you actually look close, instead of green shoots all I see are brown patches.
The stock market is booming, but it seems utterly divorced from reality. Take yesterday for example. GM, the flagship of the US auto industry and one of the largest employers in the country, files for bankruptcy. At least 20K jobs will be lost directly from the shutdown of various plants and up to another 100K jobs will be lost indirectly at parts suppliers, dealerships and such around the country. Tens of billions of dollars in bail-out money is now gone, not to mention that shareholders and bondholders have been all but wiped out. The stock market's response. It _soars_.
There will be a real recovery at some point, but what no one in the government or business or in the workforce wants to face is that recovery will not mean a return to the way things were a few years ago. We were living in a spend-free credit-fueled frenzy where the bills would never come due because of ever rising real-estate and stock values. But those days are gone and will not return. We've hit the wall, debt-wise, and the rest of the world is no longer willing or able to continue to give us the credit we previously enjoyed. The recovery, when it comes, will mean living with less and we'd better start getting used to that.
"When a fellow says it ain't about the money but the principle of the thing, it's the money." —Kin Hubbard
Yesterday, I lamented that “So far, the Obama administration approach to bailouts has been to keep running Bush Economic term III.” The reference was to the continuation of the Bush policies, and many of the people involved in the prior ruinous approaches to the many bailouts.
Now, we find out if Team Obama is “Change we can believe in,” or business as usual. In mid-June, the administration is set to release a series of regulatory overhauls — call it “Re-Regulation” — of the entire financial system:
“All that — and more — is on the table as the Obama administration prepares to overhaul the regulatory apparatus that failed to prevent the gravest economic crisis since the Depression. Under consideration is a new agency to regulate mortgages and credit cards, as well as tighter federal oversight of hedge funds and insurance.” (NYT)
As you might have surmised, I have a few questions:
• Will WH advisors Summers and Geithner convince President Obama to cave in to the banking industry lobbying efforts?
• Are Derivatives going to be properly regulated, mandated as exchange traded products, and required to have reserve requirements?
• Will Investment banks and Commercial (depository) banks be separated?
• Will non-depository loan originators be brought under full Federal Reserve banking supervision?
• Will iBank leverage be forced to return to historical norms?
• The excessive deposit concentration, with the majority of US checking and savings accounts held by just a few mega-banks be allowed to continue?
• Is “Too big to fail” going to remain the operative policy? when will too big to succeed be recognized as a major problem?
• Can the Fed continue its unprecedented power grab?
• The FDIC is the regulator with the best track record in this crisis — will they expand their authority?
• Is the SEC ever going to receive adequate funding and staffing to do their jobs? an we reverse a decade of regulatory neglect at the agency?
Here’s where the rubber meets the road . . .
The Baseline Scenario
If I wanted to take the economistic approach, I could say something about moral hazard at this point. But I don’t want to take that path. The idea that people can commit egregious misdeeds at the expense of other people, yet cannot be criticized by our own government – the body that is supposed to represent our interests – violates a simple, common sense notion of justice. At least the one that I hold.
It strikes me that a utilitarian non-moralistic approach to economics works for a long time, but not forever. This goes to the idea of a rationalist approach to economics versus one that involves the emotional reactions people inevitably bring to economic decision making.
In the end, as more and more people reach the same conclusion James has reached here (I have spoken with many others in the same position recently), the bottom-line variable that has clearly been affected is trust.
Behind every transaction at all levels of our economy is trust. With that severely damaged, we are supposed to just move forward and forget how these people screwed us over? I don’t think so.
- James Twiner
Boris, trust is a quality that is created when people hew to an established social order with set rules. In our social order, “fairness” and “honesty” are important constituent parts. What the Chicago boys with their non-moralistic approaches have taught us, is that we NEED morals.
Without a moral framework, there can be no trust. Without trust, there can be no lending. Without lending, our entire system collapses under the weight of its own “on-time delivery / short term operating capital loan” necessities (which aren’t really necessary, just convenient, but that’s a topic for another day). Ironically, the thing this economic catastrophe teaches us about Capitalism is the same thing that the collapse of the State Economy behind the Iron Curtain taught us about Communism: without honest, honorable brokers and fair, evenly observed rules, NO financial system can function effectively.
The more that the banksters have stacked the deck, the faster they have brought about the collapse of the very system they are profiting from.
- D. Christopher Leonard
While generally agreeing with the thrust of your remarks, I think you need to keep in mind that ‘trust’ like ‘authority’ and political ‘legitimacy’ are remarkably ineffable qualities in societies. They appear to be the product of longer term institutional development. The norms, values, and socio-cultural practices. Avner Greif has examined this sort of development comparatively (trecento Genovese merchants contrasted with their Maghrebi contemporaries). What is dificult is that when trust, authority, or legitimacy are damaged they are not readily ‘repaired’ by setting new rules.
A decade or so ago there was a flurry of interest in ‘low trust’ versus ‘high trust’ societies: Francis Fukuyama weighed-in in the wake of Robert Putnam’s “Making Democracy Work” which in turn, was indebted to the older work of R. Banfield (Moral Basis of a Backward Society -good reading if you want to understand executive compensation).
These authors ( in explaining Italian under-development as a classic ‘low trust’ society [at least in the mezzogiorno] ) took note of endemic suspicion of other’s motives as a hall mark of lack of trust. Americans have always (since the Framers) been hostile to centralized political power but generally trusting of private action (i.e. in the market).
The Great Depression brought into question trust in the market, even its legitimacy, and certainly the authority of business leaders. I think the same has happened again in this crisis and a resurection of Benthemite ideology ( a propos Posner) is unlikely to rectify a dramatic loss of trust and legitimacy, much less authority.
I don't have it at hand to quote but I recommend Ian Shapiro’s critique of Posner (in Flight from reality in the human sciences).
Obviously, we have to now expect greed from the players. I blame Greenspan for three reasons: Low rates for too long, encouraging alternative financing options in 2004, and most importantly, believing these guys would “self-regulate” because it was in their best interest to do so.
Wrong, wrong, wrong.
But the bigger culprits, for me, are still in the picture How are these inept legislators still in office? Our legislators failed miserably on the regulation front. From discrediting Brooksley Born to failing to rein in Freddie and Fannie.
As Elizabeth Warren has pointed out, the fabric meant to protect the taxpayer/consumer was systematically dismantled thread by thread.
By Posner’s logic, the govt. should seek out all areas where the law fails to reinforce actions that the general population considers ethical.
And regulate them.
The misconception that legality ==> morality, along with hundreds of millions of US citizens watching this morality play in grotesque detail, will end up dissolving the very glue that keeps Posner’s system intact. No market system can operate without this glue, due to transaction costs, information asymmetries, and incomplete contracting. The glue may not need formal authority to function continuously, but it dissolves when it is not reinforced by formal authority.
A number of behavioralist economic studies have shown that in the short term, people behave “fairly” even when its against those incentives. However, if people repeatedly observe other individuals gaining by behaving unfairly, and they have no opportunity to punish those individuals, they stop behaving fairly themselves.
The pure rationalist-economic philosophy of Posner is rapidly going the way of the dinosaur. Hybrid behavioral/rationalist theories that pragmatically explain real-world phenomena are quickly replacing it.
The conservatives have run the “blame the government” habitrail for decades now – and it’s old! Old as Reagan, actually.
It’s time to wake up, smell the coffee and point the finger of blame not just at government, whose policy decisions over the years (deregulating the thrifts back in the 1980s and Greenspan’s money dump in recent years and yes, even Paulson’s TARP) have contributed to the terrible economy of today.
Let’s also acknowledge the stupidity and blindness of the executives leading the charge to turn business into a glorified casino. Let’s hold those highly compensated, highly educated people accountable for having so much debt on their books it froze up the system and required a massive federal bailout.
Strange how defensive people like Posner get when their dreams of an unfettered free market turn into a nightmare.
June 1, 2009 | FT Alphaville
The majority of the world’s leading investors do not believe the recent strong performance of stocks and other risky assets is sustainable, according to a report by Barclays Capital released on Monday. The report shows that just 17.5 per cent of the 605 investors interviewed for BarCap’s quarterly FX investor sentiment survey - including central banks, asset managers, hedge funds and international corporate customers - think risky assets have further to rise, the FT said.
It's fair to call Wall Street, as Robert Kuttner does, the Democratic Party's most powerful interest group.
Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe. -- Dean Baker
Obama has essentially brought in the same crowd of people or ideological fellow travelers who helped hatch the Clinton era manic finance fest that the Bush administration made worse.
Selected CommentsNot necessarily...
Not giving money to Wall Street does not preclude many things.
It would not exclude doing due diligence on Citigroup's books. Nor would it exclude Galbraith's demand that they examine the loan tapes to get a better overview of the big four's solvency. This type of examination to determine their true state and determining a course of action in regard to them that is not just throwing them cash would be something a diligent and non ideological Treasury Secretary might want to undertake - no?
Reestablishing Glass/Steagall and the repeal of Rubin and Summers' masterwork Financial Services Modernization Act is not precluded by not giving Wall Street money. And the fact that such actions are not on the agenda is troubling.
Plus there is the recognition that Wall Street is not real small business and doesn't necessary help those closest to the ground, so to speak.
It would not exclude the government forming partnerships with smaller local and regional banks to extend credit to local businesses, small and midsize, and to help ease local personal credit. That would help the liquidity problem in America faster then the current system.
Nor does it stop the development of new governmental grants and loans for technological R&D for educational institutions and small business. That is not giving money to Wall Street.
It does not mean doing nothing. It means stop throwing money at the people who caused the problem and now refuse to change and live by their own standards (if you can't afford to lose don't invest your money in Wall Street for instance). For me it is like watering the lawn with the broken sprinkler that sputters and doesn't move, so that most of the lawn withers and dies. Which is something we have been doing for long before the sprinkler started losing its parts. Instead you remove that sprinkler and use your hand to make the water spray while moving your arm back and forth. Then you keep doing that until you can get the sprinkler cleaned, repaired and refurbished. IOW, you make sure the lawn actually gets watered.
by borregopass on Sun Mar 22, 2009 at 11:53:12 AM PDT
Larry Summers appears to have a less than operational moral compass.
The former Treasury Secretary, now head of the National Economic Council (and presumed Fed chairman if Obama decides against recommending Bernanke for another term) was in the employ of hedge fund DE Shaw to the tune of $5 million for sixteen months while working with actively on Democratic economic policy, with the clear expectation that he would have a policy role. In other words, Summers is already way too cozy with the financial services industry.
And now we have the latest, from Mark Amos (hat tip reader Marshall). I’ve put up some excerpts, and strongly recommend you read the entire piece.
Amos points out that a number of very big Wall Street firms made an unusual investment in a start-up, one Revolution Money, a “PayPal meets Mastercard” in the Steve Case “Revolution” sphere. Weirdly, the company says Summers was on the board, and Summers certainly was talking up to the media, but filings suggest otherwise. But while the exact nature of Summers’ relationship is unclear, he was certainly promoting the venture.
While Summers did terminate his relationship with the Revolution Money before the big players invested, fundraising and getting to closing documents is generally a lengthy process, so it is reasonable to surmise that Summers’ salesmanship and relationship with the company played a meaningful role in these banks’ decision to invest in a company with lousy performance, dubious prospects, and no obvious synergies. Amos notes the investees got off better in the stress tests than their brethren did. That may be happenstance, but it was reported that the stress tests were tougher on loans than on trading portfolios, and the investors in Revolution Money all had big capital markets operations.
The Amos piece is provocative, but it’s certain no explicit payoff was made. But the flip side is it is highly likely the banks invested to curry favor with Summers. Even if the only payoff was privileged access to him, that alone would be troubling,
Is Larry Summers taking kickbacks from the banks he’s bailing out?
Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks.
A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected — thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)
The fact that the banks invested in the company just a few months after Summers resigned suggests the appearance of corruption, because it suggests to other firms that if you hire Larry Summers onto your board, large banks will want to invest as a favor to a politically-connected director…
According to filings obtained for this story, Summers first joined the board of directors of Revolution Money back in 2006 (when it was called “GratisCard…Revolution Money/GratisCard was a startup headed by former AOL chief Steve Case. Revolution Money billed itself as the Next Big Thing in online payment,…
In September 2007, Revolution Money announced that it had raised $50 million from a group of investors including Citigroup, Morgan Stanley and Deutsche Bank. Some found the investment strange even then, because normally big banks don’t get involved in seeding small startups — that’s the domain of venture capitalists, not mega-banks. Especially not in September, 2007, when these same megabanks were Chernobyling their way into full-fledged balance-sheet meltdown.
What seems clear is that at least part of Revolution Money’s success in raising funds is due to their star-studded board of directors — which included not only Larry Summers, but also the notorious Frank Raines, the former Fannie Mae chief whom Time Magazine named to its “25 People To Blame For The Financial Crisis” list. Raines is still a board member.
Over the next year and a half, Revolution Money didn’t quite live up to its promise of competing with PayPal or Visa/Mastercard. At least some of this could be attributed to the difficulty of starting up an online credit card company in the middle of a triple-cluster credit crunch, banking crisis and recession. But there is also evidence that the company wasn’t run well. Another one of Steve Case’s “Revolution” brand startups, “Revolution Health,” (which also features a star-studded board of directors including Carly Fiorina, Colin Powell, and several future-Obama Administration officials) essentially folded last autumn when it was sold to Everyday Health last September and merged into that company’s operations.
In spite of all of this, on April 6, 2009, Revolution Money announced the happy news: it had just successfully raised $42 million dollars in the most difficult market since the 1930s. The investors? Goldman Sachs, Citigroup and Morgan Stanley — bankrupt institutions that Larry Summers was transferring billions in bailout funds to.
At the very same time that these three megabanks were pouring millions into Summers’ former company, Obama’s economic team, starring Larry Summers, was subjecting these same banks to a “stress test” to decide how deep in shit these same banks really were. The banks wanted the government to fudge the results for obvious reasons — who wants the world to know how deep of a hole you’ve dug for yourself?
When the stress test results were finally released, the banks all came out with glowing reports that beat expectations and caused plenty of skepticism.
In an interview for this article, William Black, a former bank regulator who exposed the $160 billion Savings & Loan scandal and its ties to powerful U.S. Senators, remarked, “Summers wasn’t hired [by Revolution Money] for his expertise because he doesn’t have relevant expertise in this kind of credit card operation.”
“He’s not a techie. He doesn’t have business expertise,” Black said. “So this is solely someone hired for the name and contacts because he’s politically active and politically connected. And that’s made all the more clear by the fact that Frank Raines was put on the board at a time when he was pushed out in disgrace from Fannie Mae. Why? Because of his political connections.”
And it worked, as the recent investment shows.
“That’s the pattern of this entity,” said Black, “Which hasn’t been doing well financially and desperately needs to get money from others, and has been able to get money from banks at a time when [these same banks] largely stopped lending to productive enterprises. But with this politically-connected entity [Revolution Money], they’re happy to dump money.”
According to a company spokesperson, Summers resigned from the board of directors at Revolution Money this January, just three months before the banks invested. On one of Revolution Money’s main websites, Revolution Money Exchange, you could still see Summers’ name still listed as a director when this story was filed…
Whatever the case, Summers was pushing Revolution Money as recently as last September, in an interview with Portfolio magazine:
“I’ve enjoyed being involved with a number of smaller companies such as the Revolution Money venture….”..
His involvement wasn’t just incidental—if you look at the press releases, Larry Summers’ name is always touted as part of its selling point — one press release in 2007 refers to Summers as “Legendary.”
Moreover, Summers’ longtime chief of staff, Marne Levine, who also served as Summers’ chief of staff when he was in Treasury under Clinton and again at Harvard, joined Summers at Revolution Money, serving as “Director of Product Management.”
Black pointed out another sleazy aspect of Revolution Money’s pitch: it proudly boasted in late 2007 that it would make it easier than ever for people with low credit ratings to find access to lines of credit. In other words, Revolution Money billed itself as the ultimate ghetto loan shark.
According to a 2007 press release, the same one boasting of “Legendary” Larry Summers, “Unlike most bank credit card issuers who are limited to a narrow scope of credit approval guidelines specific to their bank, RevolutionCard seamlessly utilizes multiple partners to achieve unparalleled consumer approval rates.”
Nineteen months later, Larry Summers, now in control of the economy, told Meet The Press, “We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth.”
So once again, Larry Summers creates a problem that the rich profit from, then is put in charge of “fixing” it after vulnerable Americans have been picked clean.
Whether or not the three bailed-out banks’ investment in Revolution Money last month represents some kind of bribe or kickback or even the appearance of corruption is almost secondary, because the shameless cronyism is the problem, and this is the reason why America is in the horrible mess today.
“Polite society was supposed to impose social pressures to make sure this wasn’t tolerated,” Black said. “Like the old phrase about hogs being slaughtered. But now the hogs get even wealthier, even fatter.”
Similar conflicts arise when individual rewards depend on relative performance. This payoff structure, common in financial markets, helps explain why those markets sometimes fail catastrophically. Wealth managers' salaries depend primarily on how well their investments perform in relative terms. Funds offering higher returns immediately attract cash from rival funds. If the invisible hand functioned as Alan Greenspan and other modern disciples of Adam Smith imagined, there would be no problem. Investors would be fully compensated for any additional risk they took in search of higher returns. But human brains forged by natural selection don't work as assumed in economics textbooks.
As our brains were evolving, immediate threats to survival loomed everywhere. Natural selection thus favoured a nervous system keenly sensitive to immediate relative payoffs, much less so to distant ones. Anyone disinclined to seize immediate gains at the risk of having to incur costs in the future would experience low relative rewards in the short run. And when competition was intense and immediate, such individuals often didn't survive to see the long run.
In market settings, a nervous system biased in favour of short-term relative reward is a recipe for disaster. When the price of an asset like housing is rising steadily, unregulated wealth managers can create leveraged investments that generate enormous rates of return. Even in the early years of this decade, many experienced analysts were warning that several mortgage-backed securities were poised to tumble. But investors faced a tough choice: they could earn high returns by continuing to invest in them, or they could move their money elsewhere. Many rejected the latter strategy because it would have required watching friends and neighbours pass them by.
Wealth managers felt compelled to offer the risky investments, since many customers would otherwise desert them. Managers also knew there would be safety in numbers when things soured, since almost everyone had been following the same strategy. The resulting collapse was inevitable.
Adam Smith's invisible hand is a truly extraordinary insight. But when rewards depend on relative performance, it doesn't always deliver.
Selectionism is an excellent metaphor for any theoretician interested in how population traits of just about any kind -- from genes to neurons to memes as it were -- become favored but it is unfit (and I use the word advisedly) as a metaphor for human society, for imagining our own coming into being and for imagining the ways we could work together.
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