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Financial Skeptic Bulletin, August 2009

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[Aug 28, 2009] A US Real Estate Bubble Blog Two Great Bounces!

Last year this guy was 100% right
Paper Economy

The following charts provide a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 42% in just about 120 trading days… a very aggressive run with an obvious note of mania to it… and wholly comparable to yet even notably stronger than the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…

[Aug 1, 2009] Challenging Wall Street's "Innovation" Branding

One of the most remarkable aspects of the success of Wall Street in subordinating the real economy to its wishes and needs is the con job implicit in the application of the word "innovation" to what might more accurately be described as tax evasion, regulatory arbitrage, and chicanery. Martin Mayer once described innovation as "using new technology to do that which was forbidden under the old technology."

Rob Johnson, former economist to the Senate Banking Committee, has a new article that parses how the financial services industry has managed to wrap itself in the mantle of progress, when if anything its new products have been a force for destruction rather than creation. We had a wave of new OTC derivative products sold, starting in the early 1990s, whose high profits for the most part depended on the fact that they allowed investors to game ratings or mask the economic substance of transactions or fob risk off on to people who really did not understand it. The industry managed to co-opt SEC chairman Arthur Levitt and fight a delaying action until the media got bored and went on to other matters, A collateralized debt obligation market blew up in the late 1990s only to be reborn in the new millennium in only slightly modified form to wreak havoc on a much greater scale. Abuses of off-balance-sheet vehicles by Enron did not lead to reforms that affected the financial services industry much, since huge carve outs were made so as to keep mortgage securitization alive. And I will admit to having been unable to keep up on the news as fully as I once did, but I don't recall any of the proposed fixes for the securitization market calling for changes in deal structures and servicer contracts so as to make mortgage mods easier and more attractive.

From Johnson:

Innovation. It is a lovely word that teases the mind with the notion of expansive possibilities... A win-win game. Just as Americans once expanded westward to relieve social tensions, we are now exhorted to have a rather imprecise faith in the notion of technological change to deliver us from our current troubles. Embracing that starship to unlimited possibility and deliverance requires a faith that cannot be easily refuted: Who, after all, is against progress?

David Noble, who has written so powerfully about this in his series of books including America by Design, Religion of Technology and Beyond the Promised Land, has explored this mythology of redemption and salvation through changes in technique and deference to undefined dreams of “possibility.” It is time to apply his perspective to the religion of financial innovation.

We have seen the financial sector, with its massive resources and access to the best minds of public relations, work to create what Stuart Ewen calls “spin.” ....we have been ever-so-persistently encouraged to draw the comparison between developments in financial products and the great leap forward in social uses of computers and the Internet, or advances in biomedical research. Former mathematicians, physicists, and computer scientists redirected their energies and Ph.D. tenacity to the domain of finance. Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future.

Skeptical questioning–”Where are the benefits to be found?”–was frowned upon or ignored. ”Just doesn’t get it,” the whisperers would say. The skeptic was discredited with the insinuation that he or she was either 1) jealous of those who were making money and progress at the same time, or 2) had fallen down like a tired horse and just could not keep up with the new breed of thoroughbreds on Wall Street. After all, what kind of human spirit would get in the way of progress?

The reason I bring forward the notion of “spin” is that I sense that the great benefits of financial innovation were not self-evident, and that some form of intimidation or coercion was needed to keep the genie of doubt in its bottle. If a great Wall Street luminary were actually forcefully questioned, could he really convince grandma and you and me that he was making the world a better place? The point of the exercise, the spin, was to create deference to this process, to deter questioning and create social license, to make what those rocket scientists were doing appear as though their work was not merely profitable but something that would benefit us all. It was presented like a free option to the public: Wall Street pays these guys and “shazam!” They do things that make us all better off. No reason to get in the way of that, or even suggest that your Congressman or friendly bank regulator keep an eye on the proceedings. The subtle message was, “Get out of the way.” Such was the Kool-Aid poured into our glass by the financial press and pundits. That capital avoidance and tax avoidance and regulatory evasion were involved in offshore and off- balance-sheet methods was rarely emphasized, as the notion of innovation was paraded like a badge of valor.

Then we had the crisis. The side effects and spillovers and bailouts reminded us that what we had allowed to unfold was not a free option on progress but something that had a downside, too. It’s funny how a crisis changes your perceptions....

Despite these recent protestations, I am witnessing the lingering hangover of deference to so-called “innovation.” It permeates the debate on regulation. We hear that getting in the way of new technique may cause more problems than it solves. Or that the innovators can always outrun the regulators. Or, and this is my favorite, that nothing you do to stifle these new derivative products like credit default swaps will (ominous music in the background) lead to “systemic risk.” Systemic risk is the new stun-gun phrase to impart dread to those who would tamper with this delicate machine.

Malarky. This is all code for defer to the wishes of those who make money from these techniques.

Financial engineers on Wall Street are employed to make money for Wall Street firms and themselves. There is no hidden code that says they will design their products to align private and social benefits and costs. That is precisely where a healthy role for regulation and laws and enforcement can be envisioned. At the same time, it is important not to be romantic about that vision, though. Regulatory policy often does not live up to the romantic appeal, as theories of collective action and regulatory capture have illuminated.

My takeaway is distinctly unromantic. It is that, devoid of these religious-like connotations, innovation simply implies the use of a new method or technique. It can be harmful or it can be helpful. Let’s keep score. It can benefit us both, or it can harm us both, or it can make you better off and me worse off, or vice versa. That sober reality, and the notion that we are a society, sets the stage for critical thinking about these methods. If credit default swaps serve a purpose and are economically viable when proper capital and margin requirements are in place, then let the proponents bear the burden of proof in convincing us of the benefits to society according to some real social goals, rather than the vague myth of intangible progress. Protecting the profit margins of large investment firms is not a social goal.

We have a serious and real problem right now as a society that employs complex technique. Experts in the financial, nutrition, energy, and health realms have been found wanting when the curtain is pulled back and their behavior examined. Trust, particularly in financial expertise, has been shattered. Early in the 20th century, the so-called Progressive Era was an attempt to bridge the gap between the oligarchs of industry and the populists. Deference to expertise was said to be in the interest of all. Delay gratification and let the experts allocate capital so that in the future we would all be better off was the mantra. It had a religious-like psychic resonance. Experts on economics and social planning were custodians of our future, not unlike the role that priests played in earlier times. Restrain yourself now to achieve the promise of the afterlife. The linchpin was the experts vision and integrity. They were trusted to make sure we all got to economic heaven together.

We just got handed a big bill and the perpetrators that led to the bailouts are back getting large bonuses. If experts cannot be trusted and governments are unwilling to change the rules, then we will once again be heading toward popular reaction. The cooperative game is breaking down. The population showed us a hint of that over the AIG bonuses. A volcano that is still today may yet explode tomorrow.

As I watch the stories of this newest revelation on the wonders of financial innovation, so-called high frequency trading (HFT), I scratch my head and wonder how we got to this place: That most profound mystical deity which we are asked to worship, “the market,” can now be rigged so that a few get to see orders beforehand. As Charles Duhigg wrote last week in the New York Times, “While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.”

This “innovation”–employing monster computing power and the apparent ability to buy your way to the front of the line–looks like old fashioned front-running to me. How can that contribute to the integrity of our marketplace? Bob Kuttner has written an illuminating piece on this subject. For my part, I just hope that our society can demystify (unspin?) this process. It is time to build a financial system that serves the real economy for the next generation. To do so, we may need to sweep aside some of the so-called innovations in financial practice that were born of this foolish era of market fundamentalism and its supervisory and enforcement laxity.

Surely there are techniques that we should adopt. Yet in the aftermath of the crisis the burden of proof is on those who advocate them. Where are the benefits to society? What are the costs? To answer those questions, we must come out from the well spun power cloud of Wall Street and ask real questions. Regarding financial innovation, I am fond of the lyrics of Michael Stipe. It is time we start losing our religion.

attempter said...
 
The facts here are very simple.

There is only one measure of the health of an economy: how many fulfilling, living-wage jobs are created or destroyed. (All other factors can be distilled to this.)

We're now approaching 40 years of financialization and globalization. That's far more than enough time to render judgement.

What has happened to real wages? They've steadily declined since 1973.

What has happened to real jobs? They've been destroyed by outsourcing, offshoring, and technologizing/deskilling.

The financial sector presided over this massacre.

(That's dispositive right there. But we can also add the extreme burgeoning of wealth unequality. And we can add the sickening volatility and moral degradation of a boom-bust binge-purge exponential debt crisis socioeconomy, which is the only kind of socioeconomy globalization can generate. The "Great Moderation" is for the hall of fame of Orwellian totalitarian terminology. The banks facilitated all of this.)

So the verdict is in. The financial sector adds no socioeconomic value, only destroys it.

It should be completely dismantled.

Siggy said...

Wall Street is a place were 'everything old is (perenially) new again'. Since the time when bankers were relieved of personal liability, there has been no incentive to be legal, moral and ethical. For those who would want to bring morality and ethical conduct to the market, they should first look at who benefits from such dodges as term-auction securities, the grandest fee scam I have noted in 50 years. Similarly, few, if any, sellers of CDS have the balance sheet to support the volume of contracts they have written. What should have occurred is that we should have had the catastrophe. Perhaps then, all that theater in the congressional hearings would reduce to something meaningful.

Today we see a stock market intent on advancing in the face of incredibly poor economic reports which while better than earlier data nonetheless stink. Employment is still shrinking and until we see real job growth and some statistical artifice our economy will not be very comforting.

Bill Dudley says that the ability of the Fed to pay interest on excess reserves will thwart the onset of inflation. We will get to see if that is a lovely set of emperors new clothes in the coming months. Look for interest rates to creep up as well as the costs of staples at the supermarket where the 'real' economy shops. What we are ling thru is the grandest economic experiment ever conducted. For now I do not believe that it has a good outcome.

Selected comments

JD:

well said, kudos to Johnson;

As an economist I give a break to those, especially Greenspan and Summers, who in the 1990s spread the word of the benefits in efficient capital allocation enabled by these new instruments. Without digging into and understanding the details we could glimpse the potential, and after all, the Wall Street geniuses surely new how to hedge and diversify. Not!

But now that they have blown up on all of us, its high time to put the burden of proof on those who resist regulation.

craazyman:

Making "money" through leverage.

If GNP = money supply X money velocity, and counterfeting money supply is a criminal offense (Isaac Newton took glee in hanging counterfeiters when he ran the British Mint), then the counterfeiting of good credit that boosts money velocity is algebraically equivalent to counterfeiting currency.

And the call it "innovation". Ha ha ha ahhahah hahah hgahah ROTFLMAO

And yet the counterfeiters get our tax dollars for their bonuses, even AFTER the counterfeit credit implodes like wooden nickels.

Admittedly, that is pretty innovative.

Hugh

Rob Johnson is basically describing the elements of a con. Play upon the ego, greed, and fears of the mark.

You're a smart guy. You can understand how modern day gimfazzlery works. The returns are amazing but I got to have an answer now because I have 5 other guys wanting in on the deal.

Silas Barta

The simplest test of whether financial innovation has benefited society is this:

Can you name a project that was able to be funded because of Wall Street innovation, that would not otherwise have been funded, and thereby produced something profoundly beneficial?

I can't see a case where that's happened. So, it's most likely been all a crock.

Sukh Hayre

ilas,

"Can you name a project that was able to be funded because of Wall Street innovation, that would not otherwise have been funded"

Therein lies the rub.

You see, it is not America that has been conned by Wall Street. It is the rest of the world (to America's benefit).

America now has a huge supply of housing for all of its citizens, that had it not been for this "innovation", would not have existed. Not to mention all the commercial buildings and the road infrastructure put in place to commute to these new developments.

All the paper wealth that has been created over the last 30 years was just one large Ponzi scheme. The paper wealth will be destroyed, but the real assets constructed will remain.

Had it not been for this innovation, people would still be broke today, but we would not have the housing.

This to me seems like the best wealth redistribution plan that could possibly have been implemented in a capitalistic, dog-eat-dog society that America has become. When the poor pick up debts they can never realistically hope to pay, they will eventually default, and therefore will be no worse off. But a house will have been built that they will eventually be able to reside in, at a rent they can afford to pay, based on their minimal income. This will bring down the value of the home, which will now become an investment property. But the loser in all this is the person who had the savings in the first place to lend the money to have this home built.

Therefore, by greed, wealth is eventually redistributed. When the poor can borrow no more, the economy collapses and debt destruction through bankruptcy takes hold. But one man's debt is another man's wealth, so this is destruction of debt is also a destruction of wealth. This is capitalism's reset button.

Sukh Hayre

In regards to how the US benefited on the backs of other nations:

I forgot to mention all the oil and manufactured goods that have been sent our way in exchange for worthless IOU's.

How's this for innovation:

Import manufactured goods and oil in exchange for US dollars. Then, borrow those dollars back to build houses you cannot afford. Then, default on your housing debts.

In the end, you have consumed oil and manufactured goods provided by others, and have built homes for your citizens that they could not afford.

In the end, Americans get oil, manufactured goods, and homes, and those that sent you the oil and the manufactured goods get stiffed.

Also getting stiffed in this process will be anyone who thought they accumulated wealth by being a middle man in the process, as they will see their wealth destroyed as their investments drop in value (as companies will eventually go broke and shareholders will be wiped out - once a large enough company in any industry (ie GM) reorganizes itself by going through the bankruptcy process, do all its competitors not have to evenually follow suit, as the company has a competitive advantage once it comes out of bankruptcy?. This also means that the life savings and pensions of the middle-class are also going to be wiped out.

Only those with so much wealth that they can afford to not chase returns by buying equities (are content with the meager return they get on US Treasuries) will be able to save any semblance (sp??) of their wealth.

You cannot create inflation when debt is being destroyed. Unless you are willing to go Zimbabwe's route and just print money and hand it out. This can only happen if the government decides to do away with double-sided accounting and decides that Plan B is to just actually print US dollars and give its citizens enough of them to wipe out their debts.

Anonymous

One more loophole masquerading as Fin innovation in the news lately is flash trading.

David Shillman, an associate director at the Commission's Division of Trading and Markets, said at the SIFMA conference that flash orders lasting less than 500 milliseconds fall within an exception to the Quote Rule, or Rule 602, in Regulation NMS. The Quote Rule requires all market centers to publicly disseminate their best bids and offers through the securities information processors. The exception is for orders that are immediately executed or canceled.

All the exchanges (even those that protest flash trading) are ready to jump in if the loophole stays. If it's banned the playing field would be leveled for all players, if its not closed the playing field will be leveled when the remaining holdouts jump in.

DRX, to answer your question see Nina Mehta at Trader magazine here
http://www.tradersmagazine.com/news/pipeline-blocks-high-frequency-trading-al-berkeley-104059-1.html?pg=5.

Actually, all her stuff is terrific.

August

[Aug 31, 2009] Recent Concentration of Volume in Financial Stocks Coordinated Capital Infusion

"Ok, let’s try this one … the Fed is printing money and buying shares in the Fantastic Four"
The Big Picture

Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocked to well over 50%.

Recently, however, the volume in these three stocks has hit astronomical levels relative to total NYSE trading, as all three have made phenomenal percentage gains during August. Indeed, the composite volume of these three stocks alone has recently doubled total NYSE volume. If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume. It is not surprising that Brian would notice TRIN flipping up and down as these stocks change direction.

Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.

It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.

My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume?

Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?

  1. skysurfer Says:
    August 31st, 2009 at 3:06 pm

    It may also be interesting to note that C has the largest exposure to off balance sheet entities that may need to come back on the balance sheet due to FAS 140. I am not sure about FRE and FNM, but I believe that C has almost $1,000 billion. Somebody correct me if I am wrong on this as it has been a couple of months since I looked into it. I thought it would matter about 30% ago on the S&P. Silly me.

    As for helping the companies, it helps their capital structure look better, especially if all of these entities go back to the balance sheet.

  2. constantnormal Says:
    August 31st, 2009 at 3:06 pm

    @JohnnyVee 2:53 pm

    It works like this: corporations use shelf-registered stock sales to the Fed/Treasury/designated agent of the Fedreasury to bring money in-house. The use of shelf-registered stock sales means it can occur somewhat quietly. Also, they can sell shares held by the companies involved. Either way, it amounts to shares of worthless stock being exchanged for cash.

    Another way is for the Fedreasury to buy shares on the open market, pumping up the prices of the shares and boosting the balance sheet valuations of any shares held by the companies in question. But that way is a bit indirect and not nearly as efficient as buying the shares directly from the companies.

  3. constantnormal Says:
    August 31st, 2009 at 3:12 pm

    Hot Dog! It’s the Conspiracy Theory World Series! And I’m at bat …

    Ok, let’s try this one … the Fed is printing money and buying shares in the Fantastic Four (nod to Marvel Entertainment, Disney’s newest crown jewel). But but but … you say, why is the government (and regardless of any theoretical nonsense, the Fed IS a part of the government) buying shares in AIG, FRE, FNM, they are already in “government conservatorship”? My answer to that involves how much of their stock and bonds (especially bonds) are held by large parties (China?) that do NOT want to see the companies blown out like candles in a hurricane if the truth about their financial state should become known.

  4. Steenbarger Says:

    @JohnnyVee 2:53 PM

    Legit question; thanks. As I tried to clarify in my follow up to this piece, lifting the shares of these companies would provide capital infusion to the extent that the rally (and story regarding the companies’ viability) enabled the firms to raise additional capital. It’s tough to raise capital as a zombie languishing at two bucks a share, and the political will for additional bailout is nil.

    http://rurl.org/1t0o

    Brett

[Aug 31, 2009] The Savings Rate Has Recovered…if You Ignore the Bottom 99%

nakedcapitalism.com

Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record).

The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data.

I’ve never actually had an after tax income of $22.9 million, so I couldn’t say for sure whether a 50% savings rate is a reasonable assumption, but I’m going to go out on a limb and say that it is, just based on the pure physics of spending money. Buying cars, clothes, and fancy dinners, even at Masa, won’t get you there…the math doesn’t work. Buying a private jet could get you there, but most people, even rich people, don’t buy one of those every year. The only EASY way to spend more than 50% of $22.9 million on an annual basis is to buy lots of houses…but the definition of “personal consumption expenditure” used by the BEA specifically excludes purchases of real estate. They use an imputed rent calculation instead. So I’m going to stick with my 50% number.

If we expand our survey to the top 1% of all households, we find an average income of $1.36 million for 2007. These folks had an average federal tax burden of just under 33%, so their after tax income averaged $916 thousand. If you assume this group had a savings rate of 33%, you get total savings of $452 billion (remember, $171.5 bn of this comes from the top 0.01%, we’re assuming a savings rate of around 25% of after tax income for the “poorer” 99% of the top 1%) This is more than 100% of the personal savings of the entire population, according to the BEA data. It implies that 99% of the US population still has, on average, a negative savings rate of around 1.3%. If you subtract the next nine percent, which likely still has a positive savings rate, the data for the bottom 90% becomes even more depressing, implying a negative savings rate of close to 5%.

[Aug 31, 2009] A Detailed Look At The Stratified U.S. Consumer zero hedge

http://www.zerohedge.com/

The stratified US consumer

One reason why delevering trends in the US consumer base are not equal, and have to be analyzed separately, is due to the dramatic schism within the consumer population, specifically the purchasing capacities, limitations and motivations of various income classes in US society. This is an approach that is all too often missing from traditional analyses of the US consumer. In order to properly analyze some of the major undercurrents within the consumer population, Zero Hedge relied on the most recent Survey of Consumer Finances, as well as an August 6 report by Bank Of America, "The Myth Of The Overlevered Consumer."

Three primary drivers determine one's willingness to spend - credit quality, disposable income, and wealth. Yet as the table below demonstrates, there is a substantial disparity in how these three factors impact the two critical classes of US society - the Middle and the Upper class.

What is immediately obvious is that based on estimates by Bank of America, the 50% of US population which makes up the middle class, is responsible for the same amount of total consumption as the 10% of the upper class. Another observation is that the balance, 40% of population considered Low-Income consumers, is responsible only for 12% of total consumption.

[Aug 31, 2009] Our quarter-century penance is just starting - Telegraph

Mr Blanchard said an IMF study of post-War banking crises led to an unpleasant finding. "Output does not go back to its old trend path, but remains permanently below it."

Then the sting: we are exhausting the limits of fiscal stimulus. "The average ratio of debt to GDP in the G-20 economies was high before the crisis, and is forecast to exceed 100pc in the next few years".

We cannot add debt, so the IMF says we must draw down our future pensions and future health spending to keep today's economy afloat. "A modest cut in the growth rates of entitlements can buy substantial fiscal space for continuing stimulus."

Bill

There will be no sustained recovery, since modern economies are based entirely upon an ever-growing, cheap supply of oil and, according to the folks who track oil production, including 50% of top oil executives, who have decent access to research within their field, the world is pumping the maximum that ever will be pumped right now. Post-peak, actual availability of oil will decline at 3% to 10% a year, for up to a 50% decline in annual supply in 7 years.

This will not support a recovery to pre-peak euphoria, no matter who prints or spends money.

graeme davey
Quantative easing is unfortunately giving the hedge funds more money to burn and creating a commodity price bubble that the the consumer will have to pay for twice.

Once up front to buy their fuel/food and secondly in increased tax to pay for the obscene level of debt. After all the oil price is set in London not Saudi.......

Meanwhile the parasites continue their feast. The only answer is a levy on hedge fund profit I'm afraid -- and exchange controls to stop the fleeing abroad of that profit. When is our money going to stop being poured naively into the mouths of those who don't need it?

Obamanomics
"I think this time Europe will have the soup kitchens and America will have the fascism."

Psst: America is a fascist empire which is collapsing under a mountain of debt, much like Rome, The bought and paid for political whores may be able to kick the can down the road a few more years but the will not be able to stop the collapse of the unsustainable.

mark weekes

Another superb article Ambrose!

We already have soup kitchens in the shape of mass welfare which wasnt there in the thirties. couple that with all the loans quangoes and grants and charities and its much worse than the thirties.

Stevie b.

But Ambrose - isn't it all just too late? Isn't postponing the day of reckoning and hoping for something to turn up, isn't that better than anything else because it's just too late to do anything else?
 

[Aug 31, 2009] Jesse's Café Américain US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers

Next week we move into September, the riskiest month of the year for financial markets, with the federals escalating preparations for a flu pandemic, while Congress considers legislation providing a 'kill switch' on the Internet for President Obama to use in the event of 'an emergency.' There are widespread rumours of a bank holiday lasting one week after a market meltdown begins in the US, during which the banks would be restructured.

Risky times indeed, and those in the best position to know what is happening behind the scenes are hitting the exits in record numbers right now, running to cash, and hard assets and currencies.

... The Obama Economics and Regulatory Team, in conjunction with the Federal Reserve, have accomplished no serious reform of the financial system. They have enabled the type of market inefficiency, soft fraud and price manipulation that is undermining global confidence in the integrity of US markets and financial products. And they have advanced a proposal to consolidate a huge amount of regulatory power under the Federal Reserve, a private banking agency that was at the root of our unfolding financial crisis.

The time has passed when Obama could have pointed to the past mistakes of his predecessors as the fault for our problems. Thanks to Tim Geithner, Barney Frank, and Larry Summers he now owns the financial crisis, and the coverups, policy errors, scandals, conflicts of interest and bailouts that have occurred since he has taken office.

His reappointment of Ben Bernanke as Federal Reserve chairman most surely tied a bow on his ownership package for the crisis, which is in danger of becoming his 'financial New Orleans.'

[Aug 31, 2009]  Where Have You Gone, Bell Labs by  Adrian Slywotzky

BusinessWeek

The U.S. scientific innovation infrastructure has historically consisted of a loose public-private partnership that included legendary institutions such as Bell Labs, RCA Labs, Xerox PARC XRX, the research operations of IBM IBM, DARPA, NASA, and others. In each of these organizations, programs with clear commercial potential were supported alongside efforts at "pure" research, with the two streams often feeding one another. With abundant corporate and venture-capital funding for eventual commercialization, these research labs have made enormous contributions to science, technology, and the economy, including the creation of millions of high-paying jobs. Consider a few of the crown jewels from Bell Labs alone:

... We should not underestimate the magnitude of the job creation challenge. Outsourcing and extended recessions are not the only job destroyers in our system. There is also the constant pressure of value migration (the flow of value from old business models to new), which continues to be the major force reshaping our economy and will eliminate a large number of jobs in the next decade. (Think of all the old business models you know, from newspapers, to printing, to landline telephony, to the mighty, but now vulnerable, PC).

As a consequence of exporting good jobs that are not fully replaced, the U.S. demand engine is broken. Of the roughly 130 million jobs in the U.S., only 20% (26 million) pay more than $60,000 a year. The other 80% pay an average of $33,000. That ratio is not a good foundation for a strong middle class and a prosperous society. Rather than a demand engine, it's a decay curve. As a nation, we have papered over our declining incomes by accepting the need for two incomes per household and by borrowing heavily, often against paper assets inflated by financial bubbles (dot-com and housing). In recent years, personal debt has grown much faster than personal income. In 1985 the ratio of household debt to household income was 0.7 to 1; in 2000 it was 1 to 1; in 2008, it was 1.7 to 1. We earned less, so we borrowed more. In 2007 we reached our limit.

Selected Comments

max

I applaud this article and its desire to stop the downward decent of American technological and economic leadership. But it is too late for us. The question is longer if but when will China eclipse the U.S. as the new leader of economic growth and prosperity. PJL and Eric have correctly identified the problem causes. What is ironic is that one the loudest proponents of outsourcing and H-1Bs has always been BusinessWeek. Many people are now questioning if BusinessWeek is a viable ongoing enterprise. BusinessWeek should following the plays from their playbook. First, outsource all non-core functionally. Second, replace all journalists with H-1Bs who will work twice as hard and for half the pay. That should keep you going for one or two more years...maybe...talk about deserved karma.

crispin

Well they printed too much money and, now that real estate collapsed, judging by this article it seems they want us to be more productive so that they can have another place to store this $ thus preserving at least a little bit of its worth. That will not happen. You can't just print money and expect the rest of us to innovate, build, and do all of the things you can't do just so that you can preserve your position. All you can do now is increase the minimum wage and encourage population growth (birthrates/immigration). Oh yes, and see if you can resist the compulsion to print money. But the innovation is gone, long gone, and all that's left are the copycats and middlemen, and creating national labs and an industrial policy will not work because talented people will very soon no longer be willing to work for dollars.

Cold War fallout

As a previous post noted, the Cold War drove much of this country's innovation -- providing stable, high-paying engineering careers that in turn supported manufacturing jobs that helped build the middle class. I'm surprised the author didn't acknowledge this. My EE degree straddled the formal end of the Cold War, and the contrast in demand for engineers was stark.

Aerospace engineers especially had their careers end before they even started.

Noelle

If Americans want scientific innovation, then they are going to have to start treating their scientists better. A science PhD is expected, after all that education, to work for 30k a year in a job with no security called a post doc, often even when he plans to go into industy. Meanwhile some liberal arts kids straight out of undergrad can go to wall street and become traders for 100s of thousands. Hello? No wonder all of these scientists go into the derivatives field.

Doc

Let's see, Wall Street analysts said my profitable Fortune 500 employer was spending too much on R&D - about 1% of revenue. So we cut 60% of the R&D staff and eliminated outside research support to universities. The institutional investors were pleased and analysts praised management for cutting fixed cost overhead. Let's just say the US has a bit of a culture change in the investment community if we are to survive as an economy that actually produces anything.

Gimme a BREAK!

EVERY religion warns us about the 'Money Lenders Outside the Temple.' NYC, Boston and Greenwich are the money lenders, and the dollar is our god....and Congress appears to be the 'broker.' JC: WHAT (dubious) value would a moon colony contribute? You know that pig of an international space station? It was supposed to cost a $100 Billion - it's WAY OVER that price, we picked up 75-90% of the cost over-runs, and it doesn't DO even 1/2 the things it was supposed to do. So you plan is to blow another 3 trillion dollars while our Nation ROTS FROM WITHIN???? There would be more WASTE and FRAUD than Bush's Wars for Discovering his Manhood.

Jackov

I became an aerospace engineer during the Cold War, when science drove industry. Now, I am a Senior in Finance, and planning to ride out the Great Recession with an online Fraud Risk Mgmt MBA. America has been financialized. Only short-term investments that attract private investment is feasible.

Robert Laughing

Interesting piece, but Mike and Pete are right on! When I do my reading, and shopping, I see thousands of garbage products, of NO REAL value. Look at Detroit and the unrivaled garbage it produced for 30 years! Look at furnaces, a/c, household appliances and you see really more garbage, that has changed very little in 50 years. Then, look at how much Govt spends PAYING BIG business, Colleges/Ivy League Unis, etc, to DO work/research that these BUSINESSES should be doing themselves. All I see is a huge Govt carrot, and NO STICK....our Congress is grossly corrupted by geriatric clowns, serving themselves, to the detriment of our Nation.

Look at the C17; it's been produced, the Pentagon has MORE than enough, but war mongers and two-faced Democrats want MORE, MORE MORE!  And when the C17 continues to roll off the assembly line, a couple hundred WORTHWHILE projects go starving into oblivion.

Commie Stooge

Why has America's lead in Science evaporated? It's no accident that this has occured during the lat 30 years of Conservative ascendency. Just read "The Republican War on Science"; and "Anti-Rationalism in American Life" by Susan Jacoby. A majority of those voting for John McCain believe that the Earth is just 6 thousand years old! Schools in many parts of the US are reluctant to teach science, since school boards are often packed with conservatives & fundamentalists. Better to avoid evolution & the Big Bang entirely, rather than cause a controversy. Dover PA was just the latest battle: there will be many more.

Shantanu

I can't agree more with the author. The "perceived value" placed on fundamental research has declined sharply in the last decade because of misplaced understanding that free economy and private sector is best placed to fill that void. While it is not a USA specific phenomenon, it is most relevant in USA because it was such a power house and thrived on its intelligensia and ability to attract best scientific talent from anywhere in the world. Today's USA is very different. Success is financial, R&D is tactical, leadership is socialist, Innovation is synonymous with likes of Apple (when at best such things are polished incremental innovation). To be really innovative as a country, USA or others like China, need to invest in Fundamental R&D that can lead to new industries. Only way to kick start this sector is via pumping Government money. Both China and USA, have the government to do it. Can the "socialist" administration in USA think big and invest where it needs to, or will the "capitalist" government of modern China take the lead here? We are at a precipice, and this answer will determine the economic superpower of the coming century.

Snoz

Contrary to what Adrian asserts, there is no shortage of science/technology brain power in America. America can and will make more science/technology break-through if capital flow from Wall St speculators and financial sector gamblers to R&D and manufacturing. With the help of government regulators, both speculator and gambler have siphoned capital from R&D and factory formation. America's politicians do not have the courage to abolish wage control so that American manufacturing power can re-emerge. While basic R&D is wonderful, it is the application of the R&D results to the manufacturing of goods that generate jobs and revenue. For too long, Wall St propaganda have persuaded investors that pushing paper investment is sufficient to sustain a modern economy. Recent financial meltdown proved otherwise. It is the "easy money" policy of the Federal Reserve that has encouraged rampant speculation on Wall St instead of channeling investment in business that pursue science/technology break through

Luigi

While the argument presented is reasonable, it fails to consider a significant change in the environment today compared to the grand era of basic science. The era was a direct result of an integrated partnership between government, industry, and academia resulting from Vandevar Bush strategic R&D vision.   Many industries, like AT&T and Xerox had monopoly power and thus could spend lavishly on basic research. The government well funded R&D efforts were driven primarily by the Cold War. All 3 major institutions were supplied by well educated resources that came from a first class and stable educational system. That world was well ordered and relatively stable. Today's environment shares none of the above stable characteristics.  Our school systems are chartered to educate a broad and unstable demographic of students. It is difficult to imagine the next generation of US students to be competitive with world class students from Asia in math and science. Education of the next generation is  one of the most important tasks of government. Without a well educated (especially in math and science) population, a viable future is not assured.

JamesH

This country had a great thing going in Silicon Valley until all of the middlemen moved in and destroyed everything. There's no point in starting up something new because the hustlers will just follow the scent and destroy the innovation.

Printing money at the federal level in the hopes of creating a tech boom failed utterly, as all of the money was funneled directly into worthless garbage such as Google (hilariously listed as a legitimate research company alongside the likes of DuPont, 3M, and IBM) and other such media creations for example the social networking trend.

Innovation can rise again but only if the gatekeepers are forcibly evicted and/or permanently banned.

Otherwise, the US's competitive advantage will deteriorate significantly and irreparably -- to the delight of the glory-hunters, no doubt, who if truly honest with themselves will simply admit that they never actually cared about this place anyway.

[Aug 31, 2009] Survival Of The Biggest

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

[Aug 30, 2009] More On The Two-Track Economy — From The WSJ And Others

The Baseline Scenario

...now it’s all about whether you are a preferred client of Goldman Sachs or another big finance house.

If you’re on the inside track, this is a great time to buy US assets that are being dumped by people without access to cheap credit, or assets overseas (e.g., Asia, where the “carry” or interest rate differential relative to the Federal Reserve is already positive and the exchange rate risk is all upside).

If you’re on the outside track, you are experiencing a version of Naomi Klein’s “Shock Doctrine”.  Some (former) members of the elite are in this category – this is another standard feature of emerging market crises and “recoveries”. But mostly, of course, it’s nonelite on the outside track and a more concentrated, reconfigured version of the elite on the inside.

This can lead to short-term growth – the speed of recovery in many emerging markets surprises many, from about 12 months after the crisis breaks.  But it also leads to repeated crisis, to derailed growth, and to a loss of income, status, and prospects for most of society.

Selected Comments

Russ

How bleak and horrible the prospect is. It sure is the shock treatment. Everything Simon has written on this is correct. The term banana republic, heard more and more especially since Katrina, is no joke. It’s precise.

But Americans are going to insist on their zombie first-world middle-class delusion. They’d rather sink into poverty with only that delusion to keep them warm, than brave the bracing wind of cold reality in order to try to take action to actually recover what’s supposed to be their country.

As for the small banks, the last time that was written here I argued they’re probably worried that any ostensible new regulation would probably end up being hijacked for the benefit of the big banks.

While I still think that’s a plausible outcome with the Congress and “regulators”, it’s also true that they could try to go over the head of the political structure and right to the people. Simon refers to the media, who I suppose might be in play to some extent, though so far they too have mostly shilled for the TBTF ideology.

I guess by now I’m frustrated at how the only sane and angry expression on this subject is limited almost completely to the blogosphere.

Why were there never any of these protests against the bailouts? It seems like, as hostile as so many people are to this (and to so many other things), no one has any will to try to do anything about it. The only action has been from the astroturfs (if I recall correctly, the “teabaggers” first arose not in response to bank bailouts but to proposed mortgage mods). It’s all calibrated to show the masses the semblance of protest and give them plausible-sounding slogans even as the focus in every case is against the public and in favor of the very corporations already plundering the public.

I don’t know what’s more sickening, the evil of the manipulators or the gullibility of the public.

Oh well, they’re being shocked.

CertifiedRez

“I don’t know what’s more sickening, the evil of the manipulators or the gullibility of the public.”

Both equally nauseate, though gullibility troubles more given it’s sound-bite origins that have become more than ever a defining quality of American society. As tea-baggers and town-hallers have evidenced, big media can (and often will) turn logic on its head and supplant reasonable discourse with unbridled passion and fear.

“guess by now I’m frustrated at how the only sane and angry expression on this subject is limited almost completely to the blogosphere”

So am I. But it really doesn’t surprise that the topic being discussed here today exists only (at least for now) in the blogosphere, where matters as important as these are so diffused. But I’m not discouraged. Would HFT have become a headline event had ZeroHedge not been on the issue months before it became Bloomberg, FoxNews, CNBC fodder? Would the alphabet soup of financial instruments and shell corporations having caused the crisis reached the public consciousness had so many experts in the craft not been at the keys with analysis? Probably not.

I believe as difficult an adjustment it will be for all who prefers trust over analysis, or faith over evidence (who, again, usually are the gullible un-empowered by misinformation, left prey for those that benefit from the informational asymmetry), the work Simon and James do here, and others elsewhere, reverberates. And the tenor of our comments do as well. Keep the faith.

anne

We have invested huge amounts of capital to prop up “too big to fail” companies that led us to the brink of catastrophe. ALL of us outside of Wall Street have seen an exceptionally poor return on that investment – but those at the TBTF firms are on track for record bonuses. And the firms have grown even bigger, making government support and federal financing a permanent fixture in our economy.

At my end-of-summer block party last week, in two of ten homes, the primary wage earners have become unemployed this summer (both middle managers dropped from Fortune 500 firms hard hit by the recession.) A family around the corner (not included in this particular small block party) is also experiencing the woes of unemployment.

These are hardworking, college educated people. But not Goldman Sachs clients. So they’re irrelevant to the policy makers. We all know that too. And wonder how our nation will survive the “jobless recovery.”

At some point, policy makers will have to realize that the financial sector is not the economy, and that the money it is sucking up is not a productive use of our national funds.

Teotac

The policy makers will not realize it while the rest of the Treasury-buying world (ie China) continues to loan money to finance our debt-addicted, crack habit spending ways. When the world wakes up to that fact (and here I proscribe to the tipping-point theory), the gig will be up, interest rate control, inflation and dollar collapse will hit us accross the board…. at that point finger pointing will be useless, and The End of The American Century will come to a most startling finish.

Other than that, I think we have things pretty well under control…yay for the greenshoots!!

Paul

Another way of looking at the two track economy- those who are tied to government or have great influence of government have severely tilted the playing field to benefit themselves and have left the rest of us to survive on the leftovers of their feasting. It is just not the financial oligarchs, but the lawyers, the politicians and their staffs, the government employees, particularly the public employee unions, the farmers, the Seniors, the lobbyists, the quasi-public foundations, the Universities, the insurance industry, the defense and other public works contractors and all those who regularly feed at the public trough.

Not only are individuals in these favored sectors substantially overpaid, but many of these industries, particularly the lawyers and the financial services industry have rigged our regulatory system to make their roles almost indispensable in the workings of everyday commercial life.

The problem with a highly regulated economy like ours with our all too often opaque, decision making process, is that those who have undue influence on the regulatory process will over time garner substantially more than their share of our economies’ rewards. That is just how system is working now. Plus, this undue influence is essentially an enormous tax on productive work, which makes the cost to the public of ordinary commercial services and products much more expensive than they ought to be. Real Growth and the true cost of living has declined dramatically as a result. This is what has happened to our economy.

The political influence of the favored interest groups have warped our social welfare state and regulatory structure to produce this two track economy. Until the excesses of the favored interest groups are addressed, the phenomenon of the two track economy will only become more pronounced.

Bond Girl

The increased consolidation within the financial industry makes financial “reform” one big catch-22; this is what your arguments for consumer protection overlook.

What are regulators going to do when these institutions misbehave? Fine them? They can’t fine these insitutions a meaningful amount (read: an amount that makes misbehaving something more than a mere cost of doing business) because that will cut into their profitability. And what is good for the profitability of the institutions that issue 2/3 of the credit cards in the country and 1/2 of the mortgages is good for the country, right?

On the other hand, if they do not find a way to discipline the big players in the system, they are just going to act to increase their share of whatever is left of value in this country.

We’ve basically institutionalized the process of capture.

On the other hand, I’m not sure breaking up the banks will achieve what you think, either. Smaller banks have been very effective at organizing themselves to promote their political interests. And I’m not sure how one would go about breaking up the large banks when government agencies do not even really understand what the banks are doing, mechanically-speaking, not to mention the instability that would create in the meantime. I think we need another alternative here.

Talkingcat

Interesting and good posts, Bond Girl.

I am minded of the Oil Industry, where in the past the small independents were very successful at pressuring the government to beat up on the Majors on many occasions.

Still, perhaps with lots of small and politically effective banks, we would have just regular regulatory capture, not super-regulatory capture like we have now.

The point about the difficulty of un-winding a too-big-to-fail bank emphasizes the importance of these ‘funeral plans’, no?

Bond Girl

Well, it is one thing to say it is a good thing and another thing to actually accomplish it. Is there going to be a grand architect of the financial industry that is going to sort out all the inter-relationships these companies have and decide their smaller form? Who could possibly fill that role?

Another thing people do not seem to grasp is that we do not actually have large and small financial institutions in this country. We have large financial institutions with large financial institution products and we have small financial institutions with large financial institution products. People who think small institutions are grand are really just being manipulated by some genius marketing.

The size of institutions matters and it doesn’t. I think financial crises occur when the preponderance of market activity is subject to lower standards; it has little to do with the actual players. You can have a financial crisis with a lot of small players that made a lot bad loans and you can have a financial crisis where a few major players made a lot of bad loans. Both tend to end in the government taking responsibility for the system itself. We probably do not see this right now because our small bank failures are really only getting going, and we are only now confronting the problem that we are running out of qualified participants to absorb the bad apples. (Which leads to what? More consolidation?) I don’t know, I might be surprised, but I think being a large institution merely makes it easier to take down the system, but it is not a necessary condition for doing so.

anne

One more idea on how to change behaviors of the bankers – pass a regulation that caps wages at $400,000 for anyone (not just those in the C-Suite) who works in a financial institution that accepts federal aid, bailout money, etc.

So no bonuses or multi-million dollar salaries if you work at a place that profits by relying on federal welfare programs.

I think you’d see a remarkable behavioral transformation almost immediately if bankers realized their high-risk behaviors could hurt their pocketbook. They obviously don’t care about the bank’s bottom line, but I’m sure they care a great deal for their own bank accounts….

CertifiedRez

We can begin with ending the conflict of interest between regulators and those they regulate by discontinuing the way these regulating entities are funded. For instance. I’m an appraiser. I hold a state license and am regulated by the issuing state entity. The state entity is largely funded by licensing fees. What incentive is there for this body to pro-actively regulate its members when uncovering widespread fraud would diminish its funding source. It bears stating these bodies are generally under-funded to begin with and cannot monitor its members effectively. While appraisers are low-hanging fruit in the finance matrix, their impact on the system is undeniable when similar disincentives across the whole credit-creation process places untenable pressure on those charged to maintain good character. This post at ZeroHedge yesterday on the SEC’s conflict of interest brilliantly illustrates my point.

http://www.zerohedge.com/article/why-sec-irreperably-conflicted-issue-high-frequency-trading

[Aug 30, 2009] 1,000 Banks Could Fail In Next Two Years John Kanas (VIDEO)

Up to 1,000 banks could fail in the next two years, private equity chief John Kanas told CNBC in a recent appearance. Kanas' high-powered private equity conglomerate -- which included the buyout titans like the Carlye Group, the Blackstone Group and W.L. Ross -- bought Florida's failed BankUnited in May.

According to Kanas, the second wave of failed institutions will include hundreds of smaller banks. "Many of these [failed] institutions no body has ever heard of," Kanas said. "It augurs poorly for smaller business mangers," he added. "Very small banks tend to lend money to small businesses -- this exacerbates the problem for small companies."

More from Kanas:

"Government money has propped up the very large institutions as a result of the stimulus package," he said. "There's really very little lifeline available for the small institutions that are suffering."

Bernanke and Regulation of the Financial Sector

lavy:

Ben Brenanke is a small town schmuch who has agreed to be the boy. That is the only way that an American youth rises. It surely has not been on the strength of his ideas. Come on, " savings glut". I know that Brad De Long and our host support this idea (at least they used too).

At the end of the day, this man is a tool of the Plantation Capitilst movement that has little or nothing to do with the crap they are teaching at the University.

[Aug 29, 2009]  Report: Mortgage Delinquencies increase in July

August is a peak for Alt-A resets.
2009-08-27 | CalculatedRisk

From Reuters: U.S. mortgage delinquencies up in July: Equifax

Among U.S. homeowners with mortgages, a record 7.32 percent were at least 30 days late on payments in July, up from about 4.5 percent a year earlier and 7.23 percent in June, according to monthly data from the Equifax credit bureau.
There numbers aren't directly comparable to the MBA quarterly numbers, but this shows that delinquencies are still rising.

Doc Holiday :

Whose Rally Is It? - WSJ.com

"It's this recent rally that's troubling many on Wall Street. It's not just a lack of corporate profits and decisive economic data to support such a move; there hasn't been any volume. Since May 7, when the S&P 500 traded 9.132 billion shares, trading volume has been on a long, slow decline. Last week trading barely topped four billion shares on several consecutive days, some of lightest days since the markets all but froze in the days leading up to the Christmas holiday last year.

Meanwhile, on Monday, trading volume in American International Group Inc. was nearly seven-times higher than three months earlier, Citigroup Inc. trading had risen 181%, and volume of another component of the S&P 500, E*Trade Financial Corp., was up 145%, according to Thomson Reuters Datastream."

Doc Holiday:

That is a great quote: "On Monday, 34% of all trading volume on the New York Stock Exchange was concentrated in three stocks: Citigroup, Fannie Mae and Freddie Mac, according to Thomson, and Citigroup alone accounted for 17.8% of all volume. On Tuesday, five stocks: Citi, Bank of America, AIG, Fannie and Freddie accounted for 36% of all volume, according to calculations by The Wall Street Journal's Market Data Group."

ShortCourage:

Yeah Doc, mine was a snark comment. But I am not so sure about when the newest flipper game will blow up.

I'm afraid it might go on longer than we all expect. It all depends on how long the ROTW plays along with this ponzi Treasury game.

Doc Holiday:

I swear the banks are just playing games with their TARP cash and engaging in collusion with HFT, as the SEC cheers them on. I guess it helps some 401K's, but the obvious nature of this bubble will result in a crash, and then what, we reward these assholes for conspiracy? It does seem this is all related to pumping up market prices for mark-to market swaps, and thus with all the new accounting (fraud) rules, maybe this is the next leg-up of the PPT,

I mean the other side of the coin, i.e, now that PPT has saved the crash through synthetic means, now it's time to pump things up into a bubble, where fundamental valuation has no relationship to earnings realities.......

I don't know what's going on, but, it doesn't look or smell right!

the rat catcher:

According to Mike Shedlock in this recent partial post of his shown below and from oh so many others in the financial community, frugality is in vogue with the savings rate up 5% for the peoples. Which peoples? The upper 20% or is it the upper 2%? Thank goodness the gooberment is borrowing and printing to make it all happen, but I do believe they really want us to spend this money as witnessed by their C4C programs popping up for mortgages, houses, cars, appliances, and oh so many things to come.

Advance your borrowing and consume so far into the future that you devour your great grandchildren's savings right now!

"Many people are living paycheck to paycheck, on the edge of disaster as highlighted in a new Monster Poll that reveals 34 Percent of Workers Have One Week or Less of Savings.

Over a one week period beginning July 6 and running through July 13, more than 16,000 visitors to Monster.com participated in the Monster Meter Poll question “If you were laid off without severance, how long would your savings cover your living expenses?”

[Aug 29, 2009] Recession hitting Farms

2009-08-27 | CalculatedRisk

From the WSJ: Recession Finally Hits Down on the Farm (ht Bob_in_MA)

The Agriculture Department forecast Thursday that U.S. farm profits will fall 38% this year, indicating that the slump is taking hold in rural America. ... The Agriculture Department said it expects net farm income -- a widely followed measure of profitability -- to drop to $54 billion in 2009, down $33.2 billion from last year's estimated net farm income of $87.2 billion, which was nearly a record high.
...This will probably mean lower food prices, from the WSJ:
For most Americans, the chill in the farm belt is related to one of the few positives they see in this economy: slowing inflation. Prices farmers are receiving for everything from corn and wheat to hogs are down sharply from last year.

[Aug 29, 2009] Fed's Dual Mandate Is Mission Impossible

Mish's Global Economic Trend Analysis

Although the Fed's "Dual Mandate" is complete nonsense, I do agree with Lockhart on one key point: The US economy will suffer with Structurally High Unemployment For A Decade.

Selected comments

fedwatcher:

“You can lead a conservative corporate treasurer to a low interest loan to buy back shares, but you need a board approved bonus to make him do the deed."

civil-disobedience:

“Of course you can make the horsey drink. You just select the LONG WAY to the water. Horsey will be thirsty. And horsey will drink."

CENTURION:

“Civil Disobedience: From an earlier post, you wondered why BB was allowed to stay. Here is some conspiricy. Maybe HE made Obama president and this is the pay back. OR, BB and Obama both work for the same boses and THEY made them who they are.

Do you really think BB and Obama have any power or control? They are tokens, as in TOKEN, if you get my drift. They are both Affirmative Action babies who got what they have only through others. TOKENS. They are just the high class whores in the whore house and will be replaced when f'ng them gets too boring.

tenbeers:

“This comment copied below from a guest post's commenter at naked capitalism (a post which has a decidedly different viewpoint than many here would probably take) caught my interest. The crux of the article is that Obama is basically throwing away his opportunity for reforming our corrupt system by pandering to the middle and the status quo business elite, while the right will continue to oppose him because it never wanted him, and the left will abandon him because he's been a corporatist compromiser. I'm getting to where I agree with that, and without a course change, his opportunity is fading fast.

Quote:

It's clear that the current economic model is morally and ethically bankrupt. And not because fiat money is inherently unstable, although it is to some extent, but because the sense of civic duty on the part of the power structure became so feeble and the influence of nonsensical ideology so strong that it overwhelmed common sense and prudence, like a virus of thought.

The economy has been looted from the inside out in a giant ponzi finance scheme.

How to make it work across the board for everyone is a fantastically complex question.

One notion that seems clear is that free trade that saves a a dollar on a shirt but sends a million dollars in wages to a third world country has a limit, beyond which it contributes negative economic value. There's an equilibrium in there somewhere. Some free trade is good and some credit is good. But too much, like too much of a drug for a sick person, is destructive. This notion of equilibrium is missing in most economic thought that I'm aware of.

http://www.nakedcapitalism.com/2009/08/guest-post-obamas-teflon-melting-as.html 

fedwatcher:

“BULL! Obama knows that he cannot rock the boat after the annual Jackson Hole Love Fest.

"Perception is reality", and the perseption that is being sold to us is today is "Happy Times Are Here Again".

We are Japan. {So far it has worked for them in the last 20 years, so why should we not give it a try?}

[Aug 29, 2009] Leverage Rising on Wall Street at Fastest Pace Since ‘07 Freeze

Clueless 401K sheeple will be fleeced again "..we already know enough about Ponzi schemes to know that they collapse at some point they all do."

Bloomberg.com

Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.

... Lending to purchase loans rated below investment grade and mortgage bonds is part of this year’s recovery in credit markets. Companies sold $889 billion of corporate bonds in the U.S. this year, a record pace, Bloomberg data show. The Standard & Poor’s 500 Index rose 52 percent since March 9, the best rally since the Great Depression.

... The risk now is that new credit leads to more losses at a time when consumer and corporate default rates are rising. Company defaults may increase to 12.2 percent worldwide in the fourth quarter, from 10.7 percent in July, according to new York-based Moody’s. 

Selected Comments from Naked Capitalism

zeropointfield

The model offers no new insight in my view. The threshold is the moment at which there is more debt in the system than there is an ability to pay it down. That's the point of no return.

However, we already know enough about Ponzi schemes to know that they collapse at some point they all do.

The best way to avoid this is not to participate in one. Also the ability to predict the exact moment of collapse won't help you because everyone else will have the same knowledge. The best move here is not to play.

T.

This confirms the slow train wreck is headed for another disaster, rinse and repeat, with the end game destruction of the currency as Mises predicts.

"The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Voluntary abandonment is out without a violent counter-revolution, not something to wish for. When this corrupt Fed and Wall Street cabal will get us to the end game is unclear, but hard to find a surer bet. But the dollar carry trade is getting crowded, and I'm scared to place big bets since one could get burned with the blowups along the way.

ndk
We clearly have not learned the lessons of the crisis, that leverage increases risk and fragility, period.

We can't afford to learn that lesson in this environment. We can again invoke St. Augustine: "Lord, grant me chastity and continence, but not just yet."

But the American consumer's redeveloping that Puritan spirit. Without endogenous growth in wages and revenues, or any desire to borrow by credit-worthy corporations and consumers who see little opportunity of wage and revenue growth in the future, there is really no way to boost money supply other than to increase leverage and government debt. If we want money supply to increase and inflation to happen, fiscal deficits and the financial markets are about the only hammers we've got. Unsurprisingly, they're happy enough to cooperate.

All of this is exactly what I would expect from an economy with negative equilibrium real interest rates. We're settling very comfortably into Japan's world. Krugman demonstrated in his better days that government spending in that situation is at best just a palliative.

As a result, I still expect to see nominal interest rates and economic activity continue to drift lower as releveraging lowers real interest rates as well. Asset prices, squished between those two forces, will do their thing.

And if it proves valid, relevering will proceed until we hit a trigger point again.

Yep. A guest on some show made the interesting point that poorly stored commodities, like natural gas, are plunging, while those easily stored like gold and oil are surging. Again, exactly what would be expected from an economy with lowering real interest rates and depressed economic activity.

The good news is that releveraging and the associated drop in nominal yields will boost the value of boring securities like Treasury bonds as well, and those are likely to again be the assets of choice when that trigger point is hit. This gives me a very comfortable place to hurry up and wait for awhile.

ndk

Unsurprisingly, they're happy enough to cooperate.

I should elaborate on why I find this unsurprising.

It's not just the moral hazard and implicit backing of the Government, although those are back and bigger than ever.

It's also the selective pressures that have been at work in our financial system since 1982. Time and time again, under the gentle guidance of Greenspan and Bernanke, and Treasuries such as Summers', aggressive risk-seeking has been actively rewarded.

Closing your eyes, pinching your nose, and just buying has been the key to success for years. This has two complimentary effects.

1) Excessively cautious money managers leave the business, as they are unable to match marks with their exuberant competition.

2) Systemwide, capital is gradually allocated towards risk-takers. Their vote becomes more and more important with time.

A full generation is plenty of time to firmly entrench risk-taking in both the institutions and individuals who have the power and influence. We have just extinguished another nascent wildfire.

Until the next, may these brave redwoods grow to the sky: we got the capital where we got it, and we got the managers we got, so I anticipate courage will be the order of the day for a long while yet to come.

PascalMtl

Unreal. We are headed for a brick wall with probability approcaching 1. As I expected, there was still ammunitions left for one last "shot in the arm" and we are all Bonzai on it... and the next downturn will present an impossible wall to pass, because the runner will drop dead.

Change We Can???? RIIIGHT. What FUNDAMENTAL and BINDING change has been made to US or international financial markets and banking? Nill. Way to go, Barack the Saviour! You sure drove the last nail of cynicism into the coffin of hope! Not that the GOP would have done any better, by the way...

Zero, you say "The best move here is not to play"... but we ALL play indirectly via bailouts (future taxes) or pension funds! This Ponzi scheme is strictly impossible to avert for most people.

ronald

The weekly unemployment claims are a reminder that something terrible is wrong with the economy and backstopping the financial sector to increase risk taking does nothing to cure the problem.

kackermann

The model sounds intuitive.

The ideal market has a buyer for every seller instantly - total liquidity. When too many look to trade in the same direction, price either soars, or collapses..

Aggregating and packaging up boxes of debt to sell, I think, has some not-so-obvious negative side effects.

As a commodity, it is decoupled from the normal price signals of whatever the debt is funding. Inwestors just see the coupon and want more and more. They want 3 box of high yield, 10 boxes of AAA (cough) and whatever. The stuff becomes so popular, that in order to manufacture more boxes of debt, they have to actively go out and set traps to snare loans. Free House (assuming prices rise) - no questions asked, no signature required, don't delay, act now.

House prices were rising like crazy, but the price on a box of debt looks like it might even be going down. The more demand, the cheaper it gets.

What's in that box of debt? Don't know, don't care. It's what's on the outside of the boxes that inwestors like. It's covered in coupons. Coupons from Pyramid Investment Corp, and signed by a Mr. Ponzi Scheme. If not completely satisfied, return unused portion to US Government for full redemption. No questions asked.

The debt is impervious to market signals.

[Aug 29, 2009] Who Does Ben Bernanke Really Work For

Seeking Alpha

Who Is This Man’s Boss?

In light of the Bernanke reappointment, now seems a good time to ask a curious question. Who does the Fed Chairman actually work for?

The obvious answers don’t quite jibe. The POTUS and Congress, for example, supposedly work for you and me. In theory, at least, they are held to account by the voting process and beholden to “the American people.”

But the Chairman of the Fed is not exactly elected. He is more or less anointed by way of smoky backroom horse trading, in which there is a lot of whispering and assurance-seeking before the Chief Executive reluctantly agrees to endorse.

Does the Chairman work for the President or Congress then? Not exactly... the Federal Reserve is a proud and unbending institution, fiercely protective of its cherished independence. There is definitely a kabuki dance of forged alliances, cultivated relationships, and so on. But a good Fed Chairman works the aisles up and down the Hill precisely so the Fed can maintain its vaunted independence, not give it up. Keeping Congress’ greasy mitts off the true levers of power is a top priority.

So perhaps the Fed Chairman is like a Supreme Court judge – appointed by the President and vetted by Congress, but hypothetically free of political influence thereafter. That, in turn, would make the Fed a quasi-official “fourth branch” of government, giving us the Executive... the Legislative... the Judicial... and the Financial.

The Supreme Court analogy hits uncomfortably close to home. The Fed no doubt despises any such “fourth branch” references, not because they are unflattering or inaccurate, but because such talk reveals too much. (Better not to give Congress any wild ideas, reining in the Fed’s power.)

Follow the Money

Yet there is something lacking in the Supreme Court analogy too. The black-robed nine spend their days solving thorny legal issues, handling landmark court cases gathered from across the land. To be a Supreme Court judge is clearly to be in thrall to American law, and to be in devoted service to an abstract ideal. The Fed has a far murkier agenda...

If we look not to words but deeds, the picture becomes more clear.

For instance Dennis Lockhart, the head of the Atlanta Fed, admitted in a Chamber of Commerce speech this week that the real unemployment rate is actually 16% (as opposed to the official July jobless rate of 9.4%). Such a number surely implies the Fed is not all that concerned about the working joes of this country.

Yet another Fed head, James Bullard of the St. Louis branch, further admitted last week that the Fed plans to keep interest rates “exceptionally low for an extended period of time,” according to Reuters. “I don’t think markets have really digested what that means,” Bullard added. If anything it means the Fed is more concerned with pumping up paper assets than protecting consumers and businesses from nominal price hikes.

Perhaps the question can be answered with a question. Who was the Federal Reserve meant to regulate? It is a paradox of government that the law-wielding regulators often find themselves kidnapped by the regulated... brain washed in a weird case of bureaucratic Stockholm Syndrome.

From a power and money perspective, regulatory Stockholm Syndrome makes perfect sense, however, because so much of both – power and money, that is – is concentrated in the private sector. The top four banking behemoths all have deposit bases measured in the trillions, for example. Is it any wonder the Fed, Treasury and FDIC merely kowtow?

Meanwhile, top Wall Street bank execs enjoy bonus-laden paydays in the tens to hundreds of millions. In stark contrast, the Federal Reserve Chairman’s 2008 salary of $191,300 is less than half the guaranteed minimum a rookie MLB relief pitcher would get... the Goldman Sachs equivalent of a waiter’s tip.

Ladies and Gentlemen, We Have a Winner...

When one considers the possibility that the Fed Chairman actually works for the banks, all the pieces begin falling into place.

It’s only natural, after all, given that the original mandate of the Fed was to preserve banking stability. It is the Federal Reserve’s job, first and foremost, to make sure that the U.S. financial system (and by extension the executives who stride atop it) perseveres through all economic storms.

In principle, the good of the country and the good of the U.S. financial system are supposed to be one and the same thing. In practice, the two can be at odds, sometimes dramatically so.

The charade of pretending that the two considerations are one and the same, though, is a key aspect of the brilliant bait-and-switch job foisted upon us all. Whenever a Fed (or Treasury) official’s actions can be wrapped in the guise of “saving the system,” it is implied that said action was undertaken for the good of everyone. Ha!

What’s more, not all bankers are created equal... as with seating arrangements in the king’s court, it is always better to be closer to the throne. Given their combination of heft, gravitas and “too big to fail” status, the top four banking institutions probably wield more power and influence than the next 40 combined. And beyond that, no man’s land. One can trace out the priorities of the Fed and Treasury in real time by observing how the giant money center banks get attended to hand and foot. The Bumbershoot Bank of Kalamazoo Kansas, meanwhile, is left to choke on prairie dust.

Banana Republics and Dictatorships

The main trouble with arrangements like this one is the way they tend to be favored by banana republics and dictatorships. When a small, concentrated “elite” class is consistently favored at the expense of everyone else, the long-run result is rarely pretty.

A tendency to endorse “socialism for the rich, capitalism for the rest,” as James Grant and others have put it, is not the best recipe for sustaining and growing a free-market economy. Unfortunately, in granting semi-autonomous power to a “fourth branch” mainly beholden to the banks, that is pretty much what the United States has signed up for.

Simon Johnson summed up the forward-looking concerns nicely in a recent Seeking Alpha piece, “Is a Two-Track Economy Emerging from the Rubble?

The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels, and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis. In fact, if you want to be cynical, you might start to think that the most powerful of the well-to-do actually don’t lose much from a banking sector run amok – providing the government can afford to provide repeated bailouts (paid for presumably through various impositions on people outside the uppermost elite strata).

If we as Americans still have some true fighting spirit left in us – and enough of a grasp on revolutionary history to spark it – then perhaps Fed Chairman Bernanke will get more than he bargained for in the next few years.

What do you think? Does the Fed Chairman work for the people... or the banks... or someone else entirely? Is he doing a good job, or should we listen more to the Ron Pauls of the world and take some kind of action before it’s too late? You can deliver the full force of your opinions here: justice@taipandaily.com.

[Aug 29, 2009] New York Times Runs Yet Another Fawning Story on Health Insurance Industry

nakedcapitalism.com

In the waning days of Lehman, this blog described a particularly avid defender of the beleaguered bank at CNBC as "the favorite outlet of those who aspire to paint the tape." That was not terribly well received, needless to say.

The New York Times seems to be adopting a similar fawning posture towards health insurers. A few weak ago, it ran a story that was an obvious media plant, a flattering, or more accurately, one-sided portrait of a health insurance industry lobbyist, one Karen Ignagni.

The latest salvo in the health care industry charm offensive is another story humanizing the health insurance industry, this one on the front page of the New York Times website, "Dealing With Being the Health Care ‘Villains’"

So what is the story about? The author, Kevin Sack, interviewed a bunch of employees at Humana, the fourth-largest insurance company.

Let's start with the basics. Why is this even a reasonable premise for a story? This is a perverse twist on a type of story the Times runs periodically, of dropping into a particular community, often in the heartland, to get the populace's view on a pressing political or social issue.

Since when is it legitimate, much the less newsworthy, to get a company's perception on its embattled status, at least without introducing either some contrary opinion or better yet, facts, to counter the views of people who will inevitably see what they are doing as right? I hate to draw an extreme comparison to make the point, but staff in Nazi concentration camps also thought they were good people. It is well documented that for all save the depressed, people's assessments of their own behavior is biased in their favor.

Similarly, I don't recall many examples of industries under attack having prominent members get flattering front page pieces. The now-famous AIG Financial Products "I Quit" letter was an op-ed. I will admit I could have missed it, but I did not see any New York Times front page pieces during the auto bailouts featuring GM or Chrysler execs and workers saying they were misunderstood. and were being maligned.

So what do we have here? You have a bunch of people whose livelihood depends on Humana. Of course they are gong to see the industry as benign.

And nowhere in this fawning piece do you see mention made of the ugly fact that as recently as the early 1990s, 95% of every dollar spent on insurance claims went to medical care. It is now only 80%. That is a simply stunning change, and shows how completely fact free the industry's defenses are. The insurers are a major culprit in America's high medical costs.. But no, we are supposed to take the mere opinion of employees who are deeply vested in the current system as views worth considering.

So back to the lame New York Times article. We get a full 11 paragraphs of stuff like this:

“I’m certainly not villainous or immoral in any way, shape or form,” said Mr. Shireman, 40, a project manager for Humana, the country’s fourth-largest health insurer.
Yves here. Not immoral in any way, shape or form? The Ten Commandments list lying as a sin. I would say it is pretty much impossible for form Mr. Shireman to function in commerce in America and have never told a lie, which means his statement to the NYT is an amazing bit of self-delusion.

But we get more in that vein: :They do not save lives. They just pay the bills."

Help me. Insurance companies do not passively "just pay the bills." Not only do they make a great sport of denying routine claims, but if you need a major procedure, you run the risk of having your insurer go over your records to see if they can find a basis for rescinding your policy. The usual grounds is that the patient perpetrated a fraud by failing to report a pre-existing condition, no matter how minor and unrelated to the expense at hand.

So we get 11 paragraphs before we read a peep of dissent, which is immediately undercut:

Such assertions may paper over the industry’s record of double-digit price increases, medical underwriting to exclude applicants from coverage, cancellation of policies for incidental causes, denials of claims, deceptive marketing and generous executive compensation.

But Humana workers and executives said the industry tended to absorb blows that should be directed elsewhere.

And then we get this bit:
The workers said they found the political attacks surprising given the insurance industry’s engagement in this year’s debate. The companies have agreed to stop rejecting applicants with pre-existing health conditions if the government will mandate health coverage, creating vast new markets.

Every Humana employee interviewed, including Mr. McCallister, predicted that a public plan would place private insurers at an impossible disadvantage, without duplicating their efficiencies.

Mr. Obama regularly argues that such a plan is needed to “keep the insurance companies honest.” He has personalized the message by telling of his mother’s struggle with her insurance company as she was dying of ovarian cancer.

Ms. Tidwell observed, “If they don’t have a villain or enemy, how do they sell a story?”

Yves again. Is the only reality in this piece the funhouse mirror world of personal beliefs? We have the employee's self serving opinions versus Obama's story of his grandmother. The story appears crafted to support Tidwell's argument that that all we have are competing narratives. And if you take that perspective, you really ought to take the Humana workers' view as gospels, since lots of them think the same way, and their views are based on tons of day-in, day-out experience, while all we have on the other side is Obama with his story of his grandmother. One tragic story clearly cannot stand up against so much collective experience.

[Aug 29, 2009] Will The Old Consumer "Normal" Come Back

"...the U.S. consumer, who represents some 70% of the nation's economy has, pardon the phrase, left the building. He will not be returning in any kind of force. As such, green shoots are a chimera, The next wave of decline will involve more deflation of assets, but ultimately will result in a third world style repudiation/devaluation of our currency and debt markets. Much of this woeful outcome will be the result of the response of our monetary authorities, which feature Mr. Bernanke as the key figure."
nakedcapitalism.com

Comparing this downturn to past post war busts seems questionable. Those recessions, save our current bust, were the result of imbalances in the real economy. Inventory swings explain more than 100% of the change in GDP. By contrast, this one is the result of a 20 year debt party in the US, with the manic phase starting in 1999. This is a different sort of beast, and expecting old patterns to reassert themselves quickly is a bit of a stretch.

PascalMtl :

I am starting to wonder if we are all in the left field with this. Past downturns were "revived" with monetary and fiscal stimuli.

This downturn is indeed a very different beast, that I agree with. But there was breathing room left for "one last shot", which is obviously being used!

All this unprecedented monetary and fiscal boosting WILL undoubtedly have a real effect and may well revive the consumer one last time, which will confirm the believers in eternal stimulus that contercyclical policies of epic proportions are warranted, no matter the format they take. The problem is that the next one may indeed be the big one, if the private sector doesn't deleverage to sane levels.

We will enter the next downturn in a ZIRP world and stratospheric govt debt to GDP levels around the world.

My concern is about the next downturn more than about this one, no matter when it comes, probably circa 2012, when all the ammo will have been spent on the current battle.

The consumer may well return to past "normal" levels this time, but again on the back of more debt...

gruntled :

The Wall Street "normal" seems to have come back; could the consumer be far behind?

Teacher :

Real wages have declined since 1973. Without credit, I'll need to send my kids to the factory before I can spend in the style to which I used to be accustomed.

Tom Lindmark :

PascalMtl makes a good point. I too wonder if the old habits have been expunged. The frenzy in parts of the housing market seem to imply that we may not have learned the proper lessons yet.

Perhaps of more importance, the political class seems to desperately want a return to the "old normal" and is inclined to pull the necessary levers to make that happen regardless of the risk.

Daniel :

Yeah, and I'm sure Japan expected to get right back to "normal" as well. You'd think, at this point, people would be done saying something can't happen because it never has before.

ScottB :

The big missing piece is the home ATM, which accounted for about 8 percent of disposable income before the bubble burst.

jest :

desire to consume and capacity to consume ain't the same thing.

and the thing about this downturn is that the two are causing a positive feedback loop. as spending capacity falls, even wealthy people are avoiding conspicuous consumption. hell even blankfein told his little GS parasites not to buy crap.

at some point this will change, probably with some new technological innovation (PCs in the early 90's, cellphones in the late 90's, smartphones today)

i guess we are seeing this now with the "green" revolution with cash for clunkers and cash for dishwashers, but the green stuff seems like a fashion statement or fad.

even still, that helps china more than us.

there is so much excess capacity in all things retail (buildings, debt, unemployed people selling their junk on craigslist to pay bills, etc.) i don't think the eventual rebound in discretionary spending will have the same multiplier as in the past.

it's kinda sad this is the only rabbit we have in our hat.

Joe Costello :

This is big question, certainly we know where Bernanke, Paulson, Geithner, Summers et al line up.

If we look at Japan, which is similar, though no way identical, for example, the whole planet didnt go South in the 90s, just Japan.

But say everything done to this point -- all the money, mark-to-happy, etc--leaves economy over next few years at best flat? Grow 2% a quarter here, down 1% there, over time -- flat.

What does that mean for everything?

ComparedToWhat? :

I clicked on the BEA link in the Bloomberg article, and it seems the data this report is based upon is not online.

My question is where medical expenses come in. John Authers of the FT ran a chart not long ago that showed "consumer spending" as percent of GDP rising steadily over the past 20 years or so, but essentially flat after stripping out medical spending.

Business Week's Mike Mandel picked up on this issue recently too, see Consumer Spending is *Not* 70% of GDP.

"... First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats ... "

"... At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP” ..."

Still it's a fascinating chart. I wish someone would annotate some of the peaks and troughs. Is that spike in the early '70s the first oil crisis? The Volker recession in the early 80s really was a bitch. The rise during the Clinton years as the federal budget went into surplus seems unbelievable, as does the sharpness of the drop during the Bush years despite tax cuts and a couple of wars. Maybe coke & hookers aren't considered discretionary south of the 90s?

Diego :

OK, so discretionary spending may grow from 16% GDP to 18%, the historical norm. Meanwhile, non-discretionary spending (50% GDP) will plunge to 30% to get to the historical norm.

End result: total spending makes GDP plunge only by 18%.

How can anybody spin these spending data to make them seem positive?

Ina Pickle :

Non-discretionary spending dropped last quarter, did it not? People are not spending because they don't have the money. Despite the champagne baths apparently going on around CNBC, over a half million people lost jobs again last quarter.

And for the love of Pete, we're clear on the fact that incomes have eroded steadily for the vast majority of the population for the past 30 years or so. Everyone was buying on credit to avoid the inevitable conclusion that they have a much worse life than their parents did, and working two jobs (each) for the privilege. It was never sustainable. And it is not coming back.

Yes, I agree that there is some pent-up demand. But when it reemerges, it won't be going to white-table cloth establishments any more. It will be eating at Denny's. But first it has to pay down the variable interest rate debt, because we're all not so stupid that we can't see inflation coming.

And even if it doesn't come, I think a big part of the country has been disabused of the notion that a rising tide will float all boats.

[Aug 29, 2009]  FSA's Lord Turner Walks into Buzzsaw by Suggesting Finance Industry Needs to Shrink

Candor is clearly not a good quality in a regulator.

Lord Turner, the chairman of the UK's Financial Services Agency, had the temerity to challenge the notion that rule by the Masters of the Universe was a good idea. From the Financial Times:

The head of the City of London watchdog says Britain's "swollen" financial services industry has become too big for the good of the economy and needs to be cut down to size.....

He says parts of the financial services sector - including derivatives, hedging, and aspects of the asset management industry and equity trading - have grown "beyond a socially reasonable size". He also argues that the debate about bankers' bonuses has become a "populist diversion", suggesting that global taxes on capital flows could be a more effective way of taming the over-mighty financial sector....

Lord Turner's suggestion that a "Tobin tax" - named after the economist James Tobin - should be considered for financial transactions is also likely to reverberate in Europe. The proposed tax, championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.

Lord Turner appears worried about a return to "business as usual" in the City, suggesting that new taxes may be necessary to curb excessive profits and pay in the financial sector.

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," he says.

Lord Turner says higher capital requirements will be the FSA's main tool to eliminate excessive activity and profit, but that a tax on transactions on a global level may be an additional option.

"The problem of getting global agreement will be very difficult," he says. "But at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits."

He added: "Insisting that someone 'does something' about bonuses, by contrast, is a populist diversion."

Effectively, Lord Turner offered two remedies. One, the afore-mentioned Tobin tax, would be a small levy on each transaction to discourage speculative churning. It of course counters the modern tendency to excess, that if liquidity is good, more liquidity must be better. Second, he wants higher capital charges against risky activities. But he also sees international coordination as of paramount importance.

[Aug 29, 2009] Fed's Lockhart: "slow recovery" and "protracted period of high unemployment"

That spell big problems for stocks -- profits will be under huge pressure.
8/26/2009 | CalculatedRisk

From Atlanta Fed President Dennis Lockhart: The U.S. Economy and the Employment Challenge

On the economic outlook:

With respect to growth, my forecast envisions a return to positive but subdued gross domestic product (GDP) growth over the medium term weighed down by significant adjustments to our economy. Some of these adjustments are transitional in the sense that they impede the usual forces of recovery. Among these are the rewiring of the financial sector and the need for households to save more to repair their balance sheets.

Some of these adjustments, however, are more "structural" in nature. By this, I mean that the economy that emerges from this recession may not fully resemble the prerecession economy. In my view, it is unlikely that we will see a return of jobs lost in certain sectors, such as manufacturing. In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen—even if not permanent. ...

My forecast for a slow recovery implies a protracted period of high unemployment. And labor market weakness is a concern I hear about often as I travel around the Southeast.

And on Commercial real estate:
I'm concerned that commercial real estate weakness poses a serious potential risk to the economic recovery and to the banking system. Commercial real estate loan exposure is heavily concentrated in banks and commercial mortgage-backed securities. Commercial real estate values—that is, collateral values for loans—are being revised down materially by the potent combination of increased vacancy, rent reductions, and appropriately higher capitalization rates.

Further, there is a clear link between employment trends (positive and negative) and commercial real estate trends.

Selected comments

Rob Dawg:

WestSac_grrl (profile) wrote on Wed, 8/26/2009 - 9:48 am

One of the clerks in my office is buying, FTHB. I asked her why rush and she said she wanted to 'nail down a place" with the tax credit before she she lost her job or had to take a paycut. I tried not to look horrified.

Oh, great. Now we all have to try to not look horrified. Thanks for sharing.

Seriously, this is the same as C4C. IMO a quarter of those vehicles will be in the used wholesale channel in less than a year.

Comrade Coinz:

Lockhart: "the recession has been so deep in construction that a reallocation of workers is likely to happen"

Probably true for finance and possibly state and local government as well.

Reallocation doesn't sound as bad as "start your life over in a new career".

Juvenal Delinquent:

I think many of you discount the role technology has played in perpetuating recent spates of bubble after bubble, all of which have occurred since the advent of the internet, as luck would have it...

I have a piece of 1930's or 1940's technology in front of me right now.

It's a Remington-Rand adding machine (that's all it does, add or subtract)

It weighs in @ around 15 pounds, and is about 15 inches by 10 inches wide, and about 8 inches high. It looks like a 2/3rds scale typewriter.

pavel.chichikov:

"It's a Remington-Rand adding machine (that's all it does, add or subtract)

It weighs in @ around 15 pounds, and is about 15 inches by 10 inches wide, and about 8 inches high. It looks like a 2/3rds scale typewriter. "

Rooms full of ladies working mechanical computation machines computed well enough to accomplish astonishing things in the 40s.

Juvenal Delinquent:

 "Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows."

John Kenneth Galbraith
 

[Aug 29, 2009] Technically Speaking, Market Analysis and Theory Laughing

I remember playing in a baseball game 37 years ago, leading 14-2 in the sixth inning, only to have the starters pulled and the opposition score 17 runs in the sixth. Debt bubbles tend to end the same way, with a lot of good feeling followed by reality. MISH has a presentation on that today.

Selected comments

Glenn Atias:

And end it will, soon. The green Shooters don't like to talk about PEs, which are running > 100. There simply are no earnings to justify the price, it is definitely liquidity.

But liquidity is such a nice tame name. But that name hides a lot of outrage. We go and borrow 2 trillion from future generations to prop up bad paper in the banks while the American consumer bleeds to death. Then the banks launder that money into the market through the back door. This is a Generational Ponzi Scheme.

It will burst, because it's a phony baloney funny-money market run-up, with no fundamentals. I give to 10,500, then the bubble pops.

[Aug 28, 2009] Goldman Trading Huddles Expose Fiction of Level Playing Field Tech Ticker, Yahoo! Finance by Henry Blodget

Aug 27, 2009 | finance.yahoo.com

Massachusetts Secretary of the Commonwealth William Galvin has subpoenaed Goldman Sachs for more information about its "trading huddles"--the internal meetings in which analysts produce near-term trading ideas that are given to the firm's proprietary traders and a select group of clients but not disseminated broadly.

Galvin's concern?  This is selective dissemination that benefits Goldman and its biggest clients and screws everyone else.

Our guest Susanne Craig broke the Goldman story for the Wall Street Journal that led to Galvin's investigation.  She thinks Goldman's "huddle" practice raises several important questions, such as whether the select group of clients are being "tipped" about future ratings changes. 

If that is in fact what is happening--explicitly or implicitly--the practice should be investigated.  But as a former Wall Street analyst, I think there is a much more important lesson here:
 

[Aug 27, 2009] Guest Post- A Plunge in Foreign Net Capital Inflows Preceded the Break in US Financial Markets

August 26, 2009 | naked capitalism

The peak of foreign capital inflows into the US was clearly seen in the second quarter of 2007, just before the crisis in the US that has rocked its banking system and driven it deeply into recession.

Are the two events connected? Had the US become a Ponzi scheme that began to collapse when new investment began to wane, and the growth of returns could not be maintained?

Watch the dollar and the Treasury and Agency Debt auctions for any further signs of capital flight, which is when those net inflows of foreign capital turn negative. And if for some reason the unlikely happens and it gains momentum, the dollar and bonds and stocks can all go lower in unison, and there is no place to hide except perhaps in some foreign currencies and precious metals.

The sad truth is that US collateralized debt packages and their derivatives have become toxic in the minds of the rest of the world, and there is little being done to change that, except an orderly winding down of the bubble, with the remaining assets being divided largely by insiders, and not price discovery and capital allocation mechanisms driven by 'the invisible hand' of the markets.

Unfortunately the Net Inflow Data is quarterly, and subject to revisions. But we have to note that the spectacularly rally off the bottom in the SP 500, not fully depicted above, is not being matched by a return of foreign capital inflows.

If that inflow does not return, if the median wage of Americans does not increase, if the financial system is not reformed, if the economy is not brought back into balance between the service and manufacturing sectors, exports and imports, then there can be no sustained recovery in the real, productive economy.

The rally in the US markets is based on an extreme series of New Deal for Wall Street programs from the Fed and the Treasury, monetization, and the devaluation of the dollar.

DownSouth:

Brad Setser has done some work on this subject too.

This post was from January, and his data he used was from the Treasury International Capital System (TIC), for which he gives a link:

http://blogs.cfr.org/setser/2009/01/21/should-the-us-worry-about-the-drop-in-foreign-demand-for-us-long-term-assets/

If one follows Setser's link to the TIC, it appears their data is current through June 2009.

What I like about Setser's graphs is he breaks the capital flows down into stocks, equities, short-term Treasury bonds, long-term Treasury bonds, short-term agency (Fannie and Freddie) bonds, long-term agency bonds, and private (US corporate) bonds.

None of this detracts from what you have to say, Jesse, but some people might like to see in more detail what the foreigners are buying and what they're not. At the time Setser did his post, private corporate bonds and agency bonds were cold, long-term treasury bonds were cooling off and short-term treasury bonds were heating up.

The fact that foreign investors were opting for short-term instead of long-term Treasury bills may be of some import.

Ina Pickle:

What amazes me is that no matter how many times you rationally, clearly state what must be done to fix the real economy, no one appears to want to do it. It is almost like the oligarchy feel like they can still make it to the lifeboats and have time for just one more dance. . . while those of us down in steerage stand around waiting for the dance floor to clear so that we can get to the deck. Meanwhile, the waterline is up around our ankles.

Mr. S :

I would echo DownSouth's comment.

I seem to recall that the "flight to safety" during the depths of the crisis caused T-bill yields to crater spectacularly and the dollar to jump.

gruntled :

And I echo Ina Pickle's comment.
I think it's clear that "fix" will break's oligarchy's hegemony; thus, it will never be done.

Jesse :

Thanks DownSouth,

I was very familiar with Brad's work, and had been looking at TIC and doing my own analysis from it for many years.

I will miss Brad's work now that he has left the CFR to go work at Treasury.

One word of caution, and as Brad has often said, the TIC data is far from complete or even pristine, and there is a truing up with other sources of data so that the most correct figures lag.

Still, as you say, it takes away nothing from the premise of capital inflows.

Shortening duration is a great concern. Yes, it is part and parcel of the 'flight to quality' but that flight would have been more impressive if it had been accompanied by net inflows.

Shortening duration is what investors do ahead of Capital Flight.

The best thing the US has going for it is that it has the reserve currency, and no clear alternative exists. If it did not, there is little question in my mind at least that the US would be on the ropes in a big way, like Argentina or Russia were when they had their financial crises.

Jesse

Jesse :

"Conversely, the surge in short-term inflows to the US coincided with the dollar’s recent rally. That in some sense is the puzzle. In the past, record demand for US financial assets was strangely enough tied to dollar weakness. And now a deterioration in the quality of the inflows is tied to dollar strength. Go figure."

This is the money quote. It is an anomaly indicating some gap in the data.

I would actually worry about it a lot, because the only buying I have been able to find is 'official' as part of currency manipulation.

The 'underpinnings' of the US financial system are strong for now but narrowing. Narrowing to the point of a collapse should those underpinnings, which are very artificial, continue to weaken.

Until the productive economy of the US is restored to balance, until the financial system is reformed, the dollar and the bond are living on "borrowed" time.

Hugh :

I agree too with Ina Pickle. We could all add items to Jesse's list but the main point remains the same: the fundamental problems which underlie our economic problems are not being fixed or addressed. I think the reason that capital flows are not returning is because of wealth destruction and because in the absence of an imminent crisis there is not a lot here that is that attractive.

selise :

jesse, didn't both captital inflows and outflows collapse at about the same time?

http://blogs.cfr.org/setser/2008/12/29/the-collapse-of-financial-globalization/

p.s. i miss brad's posts too. a lot.
 

[Aug 27, 2009] Levy Economics Institute of Bard College

Financial and Monetary Issues as the Crisis Unfolds

A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.

Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo.

Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

[Aug 27, 2009] The troubling side of Ben Bernanke - Telegraph

Arsonist as a firefighter...

Ben Bernanke has proved himself a heroic fire-fighter, saving world from a calamitous spiral into debt deflation by showering markets with liquidity.

A good thing too. He helped cause the raging fire of 2007-2009 in the first place. As a Princeton professor and then a junior Federal Reserve governor, Mr Bernanke was the intellectual architect of his predecessor Alan Greenspan's policies that so distorted global finance and pushed debt to historic extremes.

Indeed, he was picked to join the Fed because he provided academic cover for Greenspan's view that asset bubbles do not matter. He blamed credit excesses on Asia's "saving glut", arguing that reserve accumulation by export nations suppressed global bond yields. That let the Fed off the hook for its own role in driving the US savings rate to zero – and consumption through the roof – by holding interest rates below "Wicksell's Natural Rate".

It is this twin-sided nature of Bernanke that raises nagging questions about his reappointment as chairman of the Fed. He has admitted errors: it was wrong to think the sub-prime crisis could be contained. But he has yet to acknowledge that his economic ideology is deeply flawed.

Bill White, former chief economist at the Bank for International Settlements, said the error of the central banking fraternity over past 20 years has been to cut real interest rates ever lower to keep the game going. This has lured the world into a debt trap. The effect is to keep drawing prosperity from the future – until the future arrives.

"It does the job for a while but moves in interest rates have to be ever more violent to achieve the same effect. My worry is that we may have reached the point where the policy ceases to work altogether.

"These imbalances come back to haunt you, and that is where the world now is. People have been induced to bring forward purchases by taking on debt and there has been a massive expansion in corporate investment," he said.

Economists call this critique "intertemporal misallocation". It is a favourite of the Austrian School. It plays almost no role in the "New Keynesian" thinking of Bernanke.

His reflex is to see any fall in demand as an outside shock to be corrected by extra stimulus. What he does not accept is that the adrenal glands of the economic system have been depleted by perpetual credit stimulus, giving the world a form of Addison's Disease.

Bernanke made his name studying the "credit channel" causes of depressions, chiefly drawing on the 1930s. He was quick to see the danger when the financial system had its heart attack on August 20, 2007, the day yields on three-month Treasuries collapsed on flight to safety.

He dusted off his manual for fighting slumps – his 2002 speech, Deflation: Making Sure It Doesn't Happen Here – and coolly embarked on monetary revolution. Rates were slashed to zero. The Fed stepped into to prop up the banks, commercial paper, mortgage securities, and finally Treasuries. Nothing like this had been tried before. He did so against fierce resistance from Fed hawks. Only a man so convinced of his mission could have pulled it off.

Given his calmness under fire, and his grasp of credit mechanics, it makes sense for President Barack Obama to give him a second term. We are not out of danger. The markets might have taken fright at a political appointee.

Yet Bernanke's certainty is troubling. The thrust of his academic writings is that the Depression was a "financial event" that could have been avoided if the Fed had flooded the economy with money (by bond purchases) to prevent a banking crash.

This theory – half-Friedmanite – has merits. The Fed made horrible mistakes. But it neglects other causes of the slump: industrial over-capacity created by the 1920s bubble, so like today.

It also led to the Greenspan doctrine that central banks can let stock market and housing booms run their course, stepping in to "clean up afterwards".

Bernanke spelled out the policy bluntly in his 2002 speech. "The US Government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost," he said.

The "no cost" flippancy grates now. Washington says the damage will lift the US federal debt by $9 trillion (£5.5 trillion) over the next decade, pushing the total towards 100pc of GDP. In any case, the Fed cannot use this machinery so easily after all. Foreigners own 40pc of US Treasury debt and have a partial veto on the policy. Overt attempts to "monetise" US debt will cause the policy to short-circuit. Investors will dump US bonds.

Bernanke's theoretical model is clearly wrong – since he was blind-sided two years ago – and must lead him into fresh error. The risk is that he will mismanage the Fed's "exit strategy" by tightening policy too soon on the false assumption that recovery is secure. He knows this was the Fed blunder of 1936-1937, but also seems to think he has basically licked our Great Recession of 2008-2009. Has he really?

As Mark Twain put it: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

[Aug 27, 2009] Analyzing Strange Volume on the NYSE -- Seeking Alpha

"I think Uncle is anxious to get investors back into the game to help absorb some of the printed money."
Oh yes, we have a tremendously positive stock market here. The tenor and tone is good, the volume support is ok, all looks excellent for continued rallying on an improving outlook for the global economy."

You mean like this?

That's a clever little search in which I asked for the highest-volume stocks with prices over ten cents (to exclude the little penny pumper stocks on the OTC market.)

Well gee, let's add this up!

That would be about 2.126 billion shares in total for these four stocks, two of which (Fannie and Freddie) are so far underwater in their equity value (to the government no less!) that there is no chance they're worth anything, yet they remain listed, and the other two are zombie banks with Citibank existing only because of $300 billion in asset guarantees by The Fed and Treasury (which, incidentally, is under investigation, and that assumes that the $300 billion is all there is. There is persistent chatter that the real amount of "back door support" that Citibank (C) has is closer to a cool trillion dollars, although I've never been able to get anyone to speak on the record in that regard.)

But I digress.

Here is the NYSE Volume for Tuesday - for all shares, right off NYSE Euronext's page:

So let me see if I get this right. 2.126 billion shares traded in four stocks, two of which that accounted for some 900 million of those shares are in companies that by any measure of accounting have absolutely zero common equity value whatsoever (and never will under any rational view of the future), yet NYSE Euronext continues to list them.

These four stocks represented thirty seven percent of all shares traded Tuesday.

Tuesday 3,162 different stocks traded on the NYSE. These four represent 0.13% of the total, yet they comprised 37% of the volume. That's an over-representation of nearly 300 times the average.

Now folks, let's be straight here. Do you believe for one second that this is "great liquidity" added by the "high-frequency trading" computers that are almost certainly behind the vast majority of this volume?

This isn't the first day with this sort of abnormal trading and volume pattern either. In fact it has been going on for the last week, with AIG making a frequent appearance on the list as well.

If there was ever an argument to be made for the NYSE having turned into a gigantic "hot potato" parlor game, this is it - in your face in an impossible-to-explain-away fashion.

NYSE Euronext, of course, derives a fee from each share traded, so they have to love this sort of thing. The ordinary investor who has a brain sees it as an amusing sideshow, but the unfortunate fool who gets sucked into the maelstrom is going to get destroyed when the computers move on to some other issue and the price collapses as there is no authentic bid out there for any of this crap.

Beware. This is the sort of cheap parlor game that our capital markets have turned into as a direct and proximate result of our so-called "regulators" turning a willful blind eye while supposed "improvements" in liquidity and "customer access" are put in place by those who have one singular purpose in mind - find a way to steal a fraction of a penny at a time by playing "hot potato" with a handful of issues (sometimes starting a nice juicy rumor to go with it, aka the one last week about BAC allegedly being taken out by Goldman just to prime the pump a bit!) hoping that you will be the bagholder upon whom they can unload.

The wise trader and investor who does not possess a colocated server sitting three feet from the backbone network that runs up and down the NYSE would be well-advised to stay away from this modern version of Three-Card Monte.

Finally, let me remind everyone that the tape does have both red and green arrows in the printing mechanism, and that which can be run up by these games can also be run down with equally-frightful speed. Speaking of which, doesn't anyone remember last fall and this spring during the crashes with all those nasty rumors about various firms that turned out to be not true?

Hmmm

MarvinMBA:

Well we are pulling out of a recession ( I think ) and something has to start moving to get the show on the road. I think Uncle is anxious to get investors back into the game to help absorb some of the printed money. Avoid the market and your financial health will be in danger.....get back in and play the game or you will be left holding green stuff thats going to be worthless..MarvinMBA

 Michael Clark:

Ok, so the rally is fake, like many of us assumed. This seems like the smoking gun.

Is this some back door way of re-funding FNM, FRE, BAC, Citicorp...without having to publicly announce more bailout money going there? Is the money for these purchases coming through Goldman Sachs? Is there any way of determining this?

Great article.

User 477153:

Marvin MBA:

Well, unemployment worldwide is still very high (i.e. Spain, Ireland, Great Britain, U.S.) Governments have applied various stimuli programs; thus, 'creating' demand via works projects, or pulling forward demand (cash for clunkers). Accounting practices have been changed to allow assets to be valued at par at financial institutions (though they are likely worth much less). Rail transports have been very slow (thus, illustrating weak natural demand for metals and lumber). Housing numbers released today had a seasonal adjustment upward adjustment of 45k units (betcha didn't know that they started doing that did you?) We've had about 80 bank failures so far this year, and about another 100 in the queue (if not more). There is a bifurcation in the housing market between conforming and non-conforming loan spaces. Low end is moving (housing credits for first time buyers) while the jumbo loan market is still stagnant (again a pulled forward demand issue). The shadow banking system doesn't exist anymore to do those securitization transactions we became so fond of. Banks still carry assets on their opaque balance sheets that are difficult to value. Our current market has fairly priced in EPS for the entire 2010 year. Last earnings reports were beats on EPS but shy on revenues (thus, illustrating the importance of cost cutting).

I'm certain I could think of more reasons to be bullish, but I think we all know that high beta (i.e. crap) stocks are on the move. And like the 'new paradigm' in the tech bubble, fundamentals don't matter... Just close your eyes and buy.

Moon Kil Woong:

I can't see anyone shedding a tear for losing money betting on CIT, Fannie Mae, BAC, Freddie Mac, or AIG. Thus they are great candidates for pump and dump. No one will listen if anyone cries we were misled about these zombies and didn't know they had a bad business and no equity. Everyone will just laugh at you, call you a greedy ignorant sucker, and walk away.

Don't expect any justice against Goldman or other program traders for getting you amped on false volume. Politically they are very savvy. To those that loose on this roulette wheel, no hard feelings, it's just business (or better yet, gambling).

basehitz:

"The ordinary investor who has a brain sees it as an amusing sideshow, but the unfortunate fool who gets sucked "

Blogs are all over this nonsense. But many are getting sucked in too late, or won’t sell until recovering last year’s losses. Someone actually told that. The unrelenting BS from WS and Cheerleading Central works. I saw a headline from Jim Crammer dismissing the low volume issue. Bull!

I thought the bankster telethon prompted by the (un)stress tests would suffice. Not even close. Months later they're still shoveling while insiders are dumping and retail investors are "afraid to miss the rally" as briefing.com noted yesterday. Greed motivates the BS artists. It also motivates those afraid to miss it.

[Aug 26, 2009] Market Seems Broken After Monster Rally, Lindzon Says

Tech Ticker, Yahoo! Finance

One reason is the big volume in shares of "bankrupt" companies such as Citigroup, Fannie Mae, Freddie Mac, Sirius XM Radio and AIG, which don't seem to be moving on any fundamental growth, says Lindzon, who is also co-founder of Stocktwits. There are "just no underpinnings of real growth," he says. "The markets seem broken." 

How about blaming the alleged "vampire squid" known as Goldman Sachs? From "trading huddles" to high-frequency trading, Goldman has been taking an image-beating as of late. Lindzon argues we should be focusing on our policymakers -- not guys at Goldman, who are doing what bankers should do -- making money. In fact, everyone had the opportunity to buy at the bottom of the market -- not just the Goldman gang.

James

Q2 earnings of S&P 500 stocks are down 80% of where they were two years ago. There are no fundamentals to prop up stock prices to these unrealistically high levels, this has been a sucker's rally all along. Bernanke gave big banks billions at around 0% interest and they used it to play a pump-and-dump scheme in the stock market. Take a look at history: in fall of 1929 the stock market crashed, then we had a rally in Spring of 1930, followed by another crash that zig-zagged lower for over two years. Get out of this market NOW !

[Aug 26, 2009] Reckoning

James Howard Kunstler

The world economy will probably drag around a bit on the bottom...with low, or negative, growth rates in most places...until it finds a new model. The old model is dead. The authorities can put on as much rouge and powder as they want. They could even give the corpse jolts of electricity to make it sit up. But they can't revive it. It's finished. Over. Kaput....

Despite the urging of their government, Americans cannot be expected to take on more debt in order to continue consuming more stuff from China. Nor can the Chinese reasonably expect to work themselves out of an overcapacity problem by creating more of it.

[Aug 26, 2009] Orwellian Madness "Bernanke Saved The World"

Did The Fed Really Save The World?

Even Bernanke admits that "We cannot know for sure what the economic effects of these events would have been ..." thus we still cannot be sure if his policy actions were correct. Indeed some highly respected individuals suggest they were the wrong thing to do.

Elizabeth Warren On The Policy Response

Please listen to that sobering interview, in entirety. It is about 9 minutes long. Elizabeth Warren rips PPIP (the public-private investment plan) to shreds, and questions the policy responses that have still left toxic assets on the balance sheets of banks.

Warren: ".... In addition to what we've got with the toxic assets, we've got a real problem coming on commercial mortgages.... looking ahead to 2010, 2011, 2012 we are potentially looking at 50-60% default rates. This is a very significant problem concentrated with intermediate and smaller banks"

My favorite exchange starts just after the 7 minute mark.

MSNBC: In hindsight was Paulson right? If Congress did not write that $700 billion check would banks have collapsed?

Warren: I have to say I think there would have been some real pain. There are some businesses today that are alive that would have been wiped out. However, I am just not convinced at all that we would have gone into a death spiral"

MSNBC: With the facts he knew at the time, was it the right call?

Warren: (struggling to be polite) "You know, let me say it this way. The question about whether or not the world as we know it has ended, depends on what you think the world is as we know it. If you think the world as we know it, are a handful of huge financial institutions, the dinosaurs that roamed the earth, then you're right. They are not going to exist without huge infusions of government money. On the other hand if what you really believe is that our economy and our world is 115 million American households you start to see it very differently. And you say, you know if the dinosaurs are gone there are still a lot of stuff to be done.

High Praise For Elizabeth Warren

I have high praise for Warren. It takes a lot of courage to say what she did on the record. Moreover, I am certain she is correct about what she hints the real world is: American households and a large consortium of small to mid-sized banks as opposed to a few dinosaurs that ought to be extinct.

Bernanke Saved The Dinosaurs

Bernanke did not "save the world". All Bernanke did was prolong the lives of a few ailing dinosaurs at great expense to US taxpayers.

Elizabeth Warren, not Bernanke should have given a speech at Jackson Hole.

[Aug 26, 2009] Bernanke's Self-Promotional Reappointment Campaign A Stunning Success

Bernanke: Why are we still listening to this guy?

The following video should make people think twice about listening to anything that Chairmen of the Fed Ben Bernanke says. It's a compilation of statements he made from 2005-2007 that will have your head spinning.

Repeating John Hussman: "We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership."
 

[Aug 26, 2009] Obama to Reappoint Bernanke

The triumph of Helicopter Ben as he is now absolved by high priest of change Obama-bama for this Greenspan period sins ;-). The announcement will be made under nice accompaniment of banks failures: Analyst Bove sees 150-200 more U.S. bank failures  As Krugman notes it is incorrect to thing that you can be either in hell, or in heaven. The trouble is we're actually in purgatory (growing unemployment aka jobless recovery)...
Calculated Risk

As Fed Governor Bernanke supported the flawed policies of Alan Greenspan - he never recognized the housing bubble or the lack of oversight - and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I'd prefer someone with better forecasting skills.

However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid).

[Aug 26, 2009] Boom and burst: Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm By Barry Ritholtz

August 24th, 2009 | The Big Picture

Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:

The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.

A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn’t entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.

The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.

I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. “Experts” will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won’t reclaim the high of August 4.

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.

However, US households have lost their love for borrow-and-spend for good. American household demand won’t pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.

China’s A-share market leads all the other markets in this cycle. Even though central banks around the world have kept interest rates low, the financial crisis has kept most banks from lending. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market first, then commodity markets and property market last. Stock markets around the world are now following the A-share market down.

By next spring, another stimulus story, involving even bigger sums, will surface. “Experts” will offer opinions again on its potency. After a month or two, people will be at it again. Such market movements are bear-market bounces. Every bounce will peak lower than the previous one. The reason that such bear-market bounces repeat is the US Federal Reserve’s low interest rate.

The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think that when the Fed does this, the global economy will be strong and, hence, exports would do well and bring in money to keep up asset markets. Unfortunately, this is not how our story will end this time. The growth model of the past two decades - Americans borrow and spend; Chinese lend and export - is broken for good. Policymakers have been busy stimulating, rather than reforming, in desperate attempts to bring growth back. The massive increase in money supplies around the world will spur inflation through commodity-market speculation and inflation expectations in wage setting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bubble. It ends with stagflation.

Hong Kong’s asset markets are most sensitive to the Fed’s policy due to the currency peg to the US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of cash. Today, Hong Kong’s property agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force for Hong Kong’s property market is the Fed’s interest rate policy.

Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this environment, asset prices are about story-telling. This is why, even though Hong Kong’s economy has contracted substantially, its property prices have surged. Of course, the short-term interest rate isn’t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a futile ground for speculation, where asset prices increase more on the way up and decrease more on the way down.

When the Fed raises the interest rate, probably next year, Hong Kong’s property market will collapse. When the Fed’s policy rate reaches 5 per cent, probably in 2011, Hong Kong’s property prices will be 50 per cent lower.

Andy Xie is an independent economist

[Aug 25, 2009] Get Ready for Interest Rate Shocks

There are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t.
Macro and Other Market Musings

One of the important messages coming out of the central banker's annual retreat in Jackson Hole, Wyoming is that once the crisis is over the Federal Reserve's (Fed) tightening of monetary policy may be abrupt. If so, increases in short term interest rates will not be gradual but jarring. The reasoning behind this approach, as I understand it, is that (1) since there could be political pressures to monetize the government debt and (2) given the large amount of existing liquidity that needs to be drained the Fed's exit strategy needs to be unmistakably clear in communicating that it will not tolerate the unanchoring of inflationary expectations. Here is the New York Times:

A growing number of economists and some Fed officials say the shift to tighter monetary policies and higher interest rates, though unlikely to start until at least the middle of next year, may have to be much more abrupt than normal if they are to prevent inflation two or three years from now.

“When you get into a crisis like this, gradualism is not the right strategy,” said Frederic S. Mishkin, an economist at Columbia University who was a Fed governor from 2006 until 2008. “Of course, when things turn around, you have to be aggressive in the other direction.”

And here is the Wall Street Journal on the talk Carl Walsh gave at the retreat:
[O]nce the Fed does start raising the federal-funds rate out of its current record-low range near zero, "it should be increased quickly," Mr. Walsh argued. "There is no support for raising rates at a gradual pace once the zero rate policy is ended."
This rhetoric is sounding so Paul Volker-like. It remains to be seen, though, whether the Fed could actually make such abrupt changes in monetary policy. There are two major obstacles to such an approach. First, now that the global economy has become addicted to a low interest rate policy, any drastic tightening will amount to a painful interest rate shock. Second, tightening policy may make the budget deficits even larger and make it more costly to finance, a point alluded to in the New York Times article:
Indeed, the Federal Reserve’s “exit strategy” could lead to a clash with the Obama administration. The White House plans to release its newest budget estimates next week, and administration officials said that the 10-year deficit will rise to $9 trillion — a big jump from its earlier estimate of $7 trillion.

[...]

In the future, Fed officials could feel more pressure to further tighten monetary policy as a way of countering the government’s deficit spending. The immense amount of borrowing could push up long-term interest rates, if foreign investors balk at buying up United States debt.

Of course, all of this analysis assumes the Fed knows when the time is right to begin its exit strategy. As noted in my previous post, however, even this assumption is questionable. Fed policy over the next few years should be a doozy to watch.

[Aug 25, 2009] Changing the Role from Villain to Hero - Bloomberg

Fixing the Financial System - Interview with Henry Kaufman, Author of "On the Road to Financial Reformation" (Bloomberg News).

Henry Kaufman thinks that the crisis has ended . But that the recovery will be sluggish. He also stressed that Fed should act a parent to the financial institutions, a tough regulator that straiten out naughty behavior of some.  Greenspan Fed was one of the main course of the crisis with its misguided politics of gradualism and complete abandonment of its duties as a regulator of the financial system. So Bernanke has two faces -- a face of the villain as an accomplice of Greenspan and a face of hero who after making so much damage fought to save the ship. Something like firefighter as an arsonist. In this sense a reappointment of Bernanke sends the wrong signal to the markets the signal that Obama administration is abandoning the idea of reregulating the financial markets.

[Aug 25, 2009] Do not fear falling bond prices

FT.com

The crucial credit arteries of the financial system have become slightly less blocked. However, the restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit, and until banks have created the capacity to resume lending to creditworthy borrowers. This is still about capital adequacy, where better signs of organic capital creation are welcome. More importantly now though, it is about poor asset quality, especially as defaults and loan losses rise into 2010 from already elevated levels.

Financial markets need confidence in self-sustaining economic growth, which the deleveraging cycle has compromised. Without credit, demand growth depends on aggregate employment and income, both of which are liable to deteriorate further in the coming year. Household consumption will remain depressed as record household debt ratios are reduced, savings continue to be rebuilt, and many households cope with negative housing equity. Company balance sheets have been under pressure too. In the second quarter, the US enjoyed a 6.4 per cent annualized growth in productivity. But, having virtually exhausted non-labor cost-cutting opportunities, companies have been cutting man-hours faster than output has fallen. This hardly bodes well for household consumption.

Investors should heed the information content of two indicators – the low frequency data on nominal GDP, and the traditionally lagging indicator of unemployment. In the US, UK and eurozone, nominal GDP is about 2 per cent lower than a year ago. Even if central banks can reverse this trend in the next year, nominal demand is unlikely to grow much faster than 2-3 per cent, half the rate of the boom years. Companies will find this a tougher environment, and so will investors, who will have to discriminate carefully between the quality of company securities.

Unemployment is a lagging indicator in a normal cycle. In a deleveraging cycle, the unemployment rate tells us much more about the underlying capacity and willingness of the household sector to spend or save. Moreover, headline unemployment rates should be understood in the context of other data reflecting hidden unemployment and under-employment.

Although US July unemployment slipped to 9.4 per cent, discouraged workers, and those forced to accept part-time work continued to rise to 10 per cent and 16.5 per cent, respectively.

Despite the deafening chorus of warnings about rising public debt and inflation, investors have little cause to fear either for the time being, or maybe for a considerable time. In a deleveraging, low nominal world, most bonds won’t generate high returns, and default rates and refinancing problems will continue to rise, but the much-feared imminent collapse in bond prices is much exaggerated. Equities, on the other hand, could change from purple to red, and back again, quite easily and frequently.

Did someone say Japan?

George Magnus is senior economic adviser, UBS Investment Bank, and author of ‘The Age of Aging’

[Aug 25, 2009] High Frequency Trading Is A Scam - The Market Ticker

The NY Times has blown the cover off the dark art known as "HFT", or "High-Frequency Trading", perhaps without knowing it...

But then the NY Times gets the bottom line wrong:

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

No.  The disadvantage was not speed.  The disadvantage was that the "algos" had engaged in something other than what their claimed purpose is in the marketplace - that is, instead of providing liquidity, they intentionally probed the market with tiny orders that were immediately canceled in a scheme to gain an illegal view into the other side's willingness to pay.

Let me explain.

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40.  That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20.  If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40.  When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices!  This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit.  But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price!  You got screwed, as the fill price is in fact 30 cents a share away from where the market actually is.

A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10.  Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market."  The truth is that you got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.

If you're wondering how this ramp job happened in the last week and a half, you just discovered the answer.  When there are limit orders beyond the market outstanding against a market that is moving higher the presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

Likewise when the market is moving downward with conviction we will see the opposite - the "sell stops" will also be raped, the investor will also get screwed, and again the HFT firms will make an outsize profit.

These programs were put in place and are allowed under the claim that they "improve liquidity."  Hogwash.  They have turned the market into a rigged game where institutional orders (that's you, Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are routinely screwed for the benefit of a few major international banks.

If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know.  And while you may think this latest market move was good for you, the fact of the matter is that you have been severely disadvantaged by these "high-frequency trading" programs and what's worse, the distortion that is presented by these "ultra-fast" moves has a nasty habit of asserting itself in an ugly snapback a few days, weeks or months later - in the opposite direction.

The amount of "slippage" due to these programs sounds small - a few cents per order.  It is.  But such "skimming" is exactly like paying graft to a politician or "protection money" to the Mafia - while the amount per transaction may be small the fact of the matter is that it is not supposed to happen, it does not promote efficient markets, it does not add to market liquidity, the "power" behind moves is dramatically increased by this sort of behavior and market manipulation is supposed to be both a civil and criminal violation of the law.

While the last two weeks have seen this move the market up, the same sort of "acceleration" in market behavior can and will happen to the downside when a downward movement asserts itself, and I guarantee that you won't like what that does to your portfolio.  You saw an example of it last September and October, and then again this spring.  As things stand it will happen again.

This sort of gaming of the system must be stopped.  Trading success should be a matter of being able to actually determine the prospects of a company and its stock price in the future - that is, actually trade.  What we have now is a handful of big banks and funds that have figured out ways around the rules that are supposed to prohibit discovery of the maximum price that someone will pay or the minimum they will sell at by what amounts to a sophisticated bid-rigging scheme.

Since it appears obvious that the exchanges will not police the behavior of their member firms in this regard government must step in and unplug these machines - all of them - irrespective of whether they are moving the market upward or downward.  While many people think they "benefited" from this latest market move, I'm quite certain you won't like it if and when the move is to the downside and the mutual fund holdings in your 401k and IRA get shredded (again) by what should be prohibited and in fact result in indictments, not profits.

PS: Make sure you read Part 2 of this missive, to be found here.

[Aug 25, 2009]Stephen Roach on the economic recovery

The Mess That Greenspan Made

"When markets go up, investors want to then concoct a theory that explains how the rally in the markets is being supported by the underlying economy. So, the 'green shoots' theory is just that - it's sort of a fiction that's been woven around a liquidity driven market. If you want to call those green shoots, blue shoots, or yellow shoots -

News :
Another liquidity bubble that's going to burst.
 
Is anyone else seeing real economic improvements in their businesses? Not yet here.

[Aug 24, 2009] Elizabeth Warren Talks Toxic Assets On MSNBC (VIDEO)

Elizabeth Warren, the chair of the Congressional Oversight Panel charged with monitoring the bank bailout, appeared on MSNBC this morning to talk toxic assets. On Joe Scarborough's Morning Joe, Warren warned of the hard-to-price assets that are still lingering on many bank's balance sheets. "By and large, the toxic assets that brought us to this point are still on the books of the banks," she said.

Warren, who's been leading the call of late to reconcile the shoddy assets weighing down the bank sector, warned of a looming commercial mortgage crisis. And even though Wall Street has steadied itself in recent weeks, smaller banks will likely need more aid, Warren said.

Roughly half of the $700 billion bailout, Warren added, was "don't ask, don't tell money. We didn't ask how they were going to spend it, and they didn't tell how they were going to spend it."

She also took a passing shot at Tim Geithner - at one point, comparing Geithner's handling of the bailout money to a certain style of casino gambling. Geithner, she said, was throwing smaller portions of bailout money at several economic pressure points.

"He's doing the sort of $2 bets all over the table in Vegas," Warren joked.

[Aug 24, 2009] "Why This New Crisis Needs a New Paradigm of Economic Thought"

What new paradigm ? As Denninger says, we are in a timeframe of "pretend and extend."

Economist's View

[More Side of the road blogging - stopped for a moment at the Great Salt Lake.] When I talked to the senate's COP panel, one of many things that I emphasized was the need to develop plans in advance to deal with various contingencies. Without such plans policy actions - even justifiable ones - appear ad hoc and also face resistance that delays their implementation or prevents them from being put into place altogether.

For example, we need a plan on the shelf and ready to go for dismantling large banks that have failed, something that has received a lot of attention. It has received much less attention, but I also think we need a plan for disposing troubled financial assets when the need arises. I still believe that the crisis would have been much less severe if very early, prior to Lehman for sure, the government had moved aggressively to buy bad assets from bank balance sheets. it took far too long, and when they finally decided to do this (i.e. the original Paulson plan), they had no idea how to value the assets, there was considerable political resistance because nobody knew how the program would work (allowing lots of false information to enter the debate), and so on, and this program never really got off the ground. The assets are still there waiting for the miracle of rising asset prices to restore their value.

Having a plan ready in advance that specifies how assets will be valued, how taxpayers will be protected if the government overpays (overpaying can help with recapitalization, but it shouldn't be a gift), and so on, a plan that has been approved in advance by legislators (at least implicitly) so as to reduce political resistance, will overcome many of the technical problems and objections that prevented the bad asset removal programs from being used effectively in this crisis.

Keiichiro Kobayashi believes these toxic assets, many of which are still hidden on bank balance sheets, are still a problem and could result in a Japan style lost decade if the government does not remove them, and he calls for a new macroeconomic paradigm that puts these issues front and center (On his main point about whether financial sector recovery is necessary before the real economy can recover, I think we will recover either way, but agree that recovery would be faster if these assets were removed once and for all - but I should get back on the road...):

Why this new crisis needs a new paradigm of economic thought, by Keiichiro Kobayashi, Commentary, Vox EU: The policies being debated in the US and Europe today are almost identical to those that played out in Japan a decade or so ago. Japan experienced the collapse of its colossal property bubble in 1990 and then a series of crises as major banks and securities companies were overwhelmed by rapidly rising non-performing debts. The conventional wisdom among economists and politicians throughout the 1990s was that massive public expenditure and extraordinary monetary easing would give the necessary boost to market sentiments and prompt an economic recovery. Public opinion in the US and Europe today seems to be the same.

And indeed, throughout the 1990s, Japan did introduce major public works projects and tax cuts, yet the economy failed to stabilise, asset prices continued to fall, and the volume of non-performing debts continued to climb. Far from being dispelled, the sense of insecurity that had permeated the markets actually increased throughout the 1990s, ultimately leading to the collapse of several major financial institutions in 1997 and sparking an outbreak of panic.

Even after this, recovery efforts continued to be channelled through large-scale public expenditure, while the disposal of non-performing debts became bogged down. Only around 2001 did Japanese public opinion finally turn away from the belief that reductions in bad debt and financial system stability would follow an economy recovery. The public came to understand that the financial system had to be stabilised and market insecurity dispelled before any recovery could occur. Special inspections were conducted repeatedly by financial regulators and Japanese megabanks were forced to accept massive capital increases and a new round of mergers. Meanwhile, the Resolution and Collection Corporation and the Industrial Revitalisation Corporation of Japan restructured companies that had collapsed under enormous debt burdens and finally broke the back of the non-performing debt problem. This sparked a recovery of market confidence, and Japan enjoyed a period of economic expansion from 2002 to 2007.

anne :

"Rehabilitating the US financial system through the disposal of non-performing assets is essential for a global economic recovery. Princeton University Professor Paul Krugman commented on my column at his New York Times blog, claiming that the belief that stabilising the financial system is a necessary precondition for economic recovery is questionable."

-- Keiichiro Kobayashi

Looking to the recovery from the commercial banking crisis and recession of 1990-1991, my sense is that Krugman is right and there is no need to absorb bank non-performing assets from here for recovery again. What Alan Greenspan did from 1991 to 1994 was create an ideal climate for bank operating profits by insuring the short term interest rates would be significantly lower than long term rates so that banks could borrow short and lend long allowing for fine and steady profits which in turn allowed for steady bank lending.

There will be continuing failures from here of relatively smaller banks, but relatively larger banks are quickly being strengthened by Ben Bernanke just as from 1991 on. The spread between short and long term interest rates is even larger than after 1991, after all there is a liquidity trap which means short term Treasury rates are near zero, so borrowing short and lending long is what the healthier banks are doing and will do increasingly as banks profits build steadily. Banks will know well in advance when Federal Reserve interest rate policy is to change, as in 1993-1994, but we know now the Fed will not be changing policy soon.

The Greenspan-Bernanke model is actually that of the liquidity trap-New Deal recovery time from 1993 to 1937 and the period following the recession of 1937-1938 to 1942.

Min :

Removal of toxic assets, if necessary, should be accompanied by removal of personnel. (In Japan, they may perhaps be trusted to resign, but not in the U. S.) The loss of a job may temper the moral hazard of bailouts. It was interesting last year to contrast the attitudes of financial CEOs before the U. S. Congress with the attitudes of *former* financial CEOs before the British Parliament. Also, bailouts of corporations may be more politically palatable if they do not mean bailing out corporate managements. :)

anne:

Restoring Japan's Economic Growth
By Adam S. Posen

Fiscal Policy Works When It Is Tried

If the current Japanese stagnation is indeed the result of insufficient aggregate demand, what should be the policy response? Fiscal stimulus would appear to be called for, especially in a period following extended over-investment that has rendered monetary policy extremely weak. Yet the statement is often made that fiscal policy has already been tried and failed in Japan. Claims are made of variously 65 to 75 trillion yen spent in total stimulus efforts since 1991, even before the currently announced package. Both the Japanese experience of the late 1970s of public spending as a ''locomotive'' to little-lasting domestic benefit, and the worldwide praise for government austerity in the 1990s, have predisposed many observers to dismissing deficit spending as ineffective, if not wasteful. Could there really have been this much stimulus effort having so little effect?

The reality of Japanese fiscal policy in the 1990s is less mysterious and, ultimately, more disappointing. The actual amount injected into the economy by the Japanese government—through either public spending or tax reductions—was 23 trillion yen, about a third of the total amount announced. This limited quantity of total fiscal stimulus was disbursed in insufficiently sized and inefficiently administered doses, with the exception of the 1995 stimulus package. That package did result in solid growth in 1996, demonstrating that fiscal policy does work when it is tried. As on earlier occasions in the 1990s, however, the positive response to fiscal stimulus was undercut by fiscal contraction in 1996 and 1997. On net, the Japanese fiscal stance in the 1990s was barely expansionary, and it is the net injection of stimulus into the economy that determines the minimum result. In fact, the repeated reversals of fiscal direction and revelations of gaps between announced and implemented policies make even this near-zero net injection an overstatement....

Bruce Wilder:

I am sick to death of hearing about "toxic assets" and the need to have the government buy (at unspecified prices), or guarantee, these assets off of bank balance sheets. And, plenty of guarantees have been offered -- estimates range up over $20 trillion (with a "t").

Trying to make this into a goo-goo technocratic issue is one reason this never gets resolved. At bottom, is the question of whether losses will be realized now, or later, and who will have to realize them, taxpayers or stock (equity) and bondholders.

Obscuring this basic issue of who pays, and trying to make it a technocratic question, makes it impossible to resolve openly or fairly. At best, it gets resolved in favor of whoever can buy the technocrats, and at the cost of a great deal of completely justified popular paranoia and suspicion.

At worst, "who pays" doesn't get resolved expeditiously, just delayed and postponed, at the cost of prolonged economic stagnation, and considerable risk.

Capital structure is incentive structure. It is dangerous to continue to try to operate for-profit banks with inadequate capital cushions and no limit on executive "compensation" (aka looting).

I see a lot of people adopt the stupid meme that "the" problem was too much emphasis on promoting home ownership, when more working and middle class people "should" rent. Well, capital structure begins at home. When 25% of "owned" homes are "underwater" and up to half those people are likely to walk away or be driven in foreclosure or bankruptcy or some other form of financial ruin, that's pretty damn dangerous for the society, too. When people stop paying off their mortgages to hold onto their usurious credit cards, how long before they stop paying their taxes, as well?

Massive foreclosure is very destructive of real economic assets as properties get trashed, and neighborhoods ruined.

This isn't a technocratic issue of how to "remove" "toxic assets". It is a question of how do we restore a functional capital structure and economic incentives to both the financial and banking sector, and to the household sector, and how do we do it quickly and expeditiously.

We don't do it by keeping the yield curve steep with very cheap short-term money, waiting for the Big Banks to restore their solvency with oligopolistic domination of the marketplace, while the small and medium banks are ushered into oblivioun, and households with no net worth "restore their balance sheets" with savings that drain consumer demand from the economy, which savings is just skimmed by the banks with credit card fees and trick-and-trap.

We don't do it with "cash for clunkers" and first-time home buyer tax credits and no downpayment FHA loans, I am pretty sure of that. We're not going to be able to do it with zombie banks, like Countrywide (still operating as part of BofA), foreclosing ruthlessly, to collect the fee income, at the expense of both security holders and home "owners".

The political will to nationalize the banks, wipe out the stockholders and give bondholders a haircut with a guillotine, just wasn't there. Fannie and Freddie bondholders were never given a haircut. Most bank bondholders are not being given a haircut, after the protests over WaMu. AIG wasn't put into bankruptcy, because no one was willing to give AIG CDS holders a haircut. (But, Goldman was hedged, and didn't "need" the $13 billion gift; really. ;-)

It's not a technocratic question. There's no clever technocratic way to devise a magic auction that "discovers" prices and move the bad stuff out of the banks and out of the economy.

The right thing to do, for the economic health of the country, is a rapid, and expeditious capital restructuring, in which losses are realized, immediately and in the present. A lot of bondholders will get hurt -- very hurt. The banks will end up owned by someone other than their present owners.

A lot of houses will end up owned by someone other than the mortgage-holders or the original "owners".

But, if we are again to have an economy that works and grows, we have to have a capital structure, where the owners -- whoever they are -- have a real stake in their banks, in the homes, in their communities. It cannot be an economy high-flyin' masters of the universe, taking enormous risk with small amounts of other peoples' money, complemented by massive numbers of 21st century peons, working off their credit card debt.
 

Posted by: Bruce Wilder | Link to comment | Aug 24, 2009 at 01:09 PM

Eric :

As was elocuently pointed out in other comments, there is a ton of baloney about bad or toxic assets. The only thing toxic about these assets is the difference between book value and what it might fetch from a non-coerced buyer. Equity and bondholders gave their money to a bunch of clucks who lost a big fraction of it thinking that $420K loans to borrowers with no money down and $50K incomes was a great business and that AAA securities on the same was even better. Burn equity, give bondholders the razor cut and then let's plan on what to do with assets that won't look anywhere near as bad as they do today.

Bruce Wilder :

Beezer: "revisiting toxic asset valuation is to revisit the issue of solvency. And I'm not sure it would be wise to re-open that debate. With banking on the mend and taking aggressive reserve additions to cover potential derivative loses (as well as other losses), it may not be the most wise course to self-administer a shock."

The price of "banking on the mend" is an impotent Fed, a yield curve steepened by very cheap short-term money, and economic stagnation induced by letting the vampire banking system slowly suck money out.

Did Goldman look at their results and say, "gee, we'd better restrain the bonuses and rebuild our capital cushion"? hell, no.

Even the hopelessly insolvent, like GMAC (aka DiTech and Ally Bank) have been given a free pass to suck blood till they live again.

The price of a "stable" financial system, which is really not all that stable, is economic stagnation, which, in turn, makes it impossible for a healthy banking system to emerge.

We've chosen the long road, the long, hard road. Let's at least be clear about that.

ottnott :

Can we just stop with the "bad asset" and "toxic asset" labels. What we are talking about are stupid loans and fraudulently overrated securities.

People get that, which is why they are displaying a notable lack of confidence in and support for the government's approach to restoring the financial system.

What the public sees is government capitulation to the banksters who got wealthy by making stupid loans and by creating and peddling fraudulently overrated securities.

The banksters are threatening continued financial ruin unless we allow them to now get wealthy by: accepting taxpayer bailouts and government subsidies; not having to share any subsequent profits enabled by taxpayer bailouts and subsidies; not having to accept any responsibility for the disaster they created; and not having to accept any meaningful changes in the way they do business.

We don't need any new economic paradigms. In fact, we need to reverse the last new economic paradigm unleashed on the world and get back to the notion that middlemen (sorry, "financial intermediaries") are of modest value and so should be earning modest amounts for their work and should be watched like hawks to ensure that they are acting in the best interests of the parties they supposedly are serving.

Cynthia :

Bruce Wilder,

I'd like to know if you agree with Elizabeth Warren that there are two black hole lying dormant on the doorstep of our economy, just waiting to put it into a tailspin. According to her, one of these holes is in our commercial mortgage market in the form of an asset bubble, which is due to become active in a year or two, while the other is in our banking system in the form of toxic assets, which is anyone's guess as to when it will become active. So I'd also like to know if you think that these two black holes are powerful enough to cause our economy to fall back into a downward spiral which will be just as deadly as the one which ripped through our economy a little less than a year ago.

http://www.huffingtonpost.com/2009/08/12/elizabeth-warren-talks-to_n_257488.html

I don't know how you view Elizabeth Warren, but I view her as one of the few officials in Washington who's got her hands on the bank bailouts who's not, I repeat, not in bed with Big Banks. So to me, this makes her about the only Washington insider around that we can trust to tell us the honest-to-god truth about which direction our economy is heading.

[Aug 22, 2009] Krugman- Some call it recovery

Aug 22, 2009 |  CalculatedRisk

Excerpt from Paul Krugman: Some call it recovery

The real problem here is that the standard language doesn’t make much allowance for the kind of gray zone we’re now in; that’s because in the pre-1990 era recessions tended to be V-shaped, so that jobs snapped back as soon as GDP turned around. I don’t think what we’re going through is good news — but GDP is almost surely rising, so the recession, as normally defined, is over.
...
But the economy is not recovering in the most crucial area, job creation ...
Excerpt from The Economist: U, V or W for recovery
The world economy has stopped shrinking. That’s the end of the good news

... a rebound based on stock adjustments is necessarily temporary, and one based on government stimulus alone will not last. Beyond those two factors there is little reason for cheer. America’s housing market may yet lurch down again as foreclosures rise, high unemployment takes its toll and a temporary home-buyers’ tax-credit ends (see article). Even if housing stabilizes, consumer spending will stay weak as households pay down debt. In America and other post-bubble economies, a real V-shaped bounce seems fanciful.

It does appear the cliff diving is over, and that the U.S. economy will grow in the 3rd quarter. But there are still more problems ahead for consumer spending and housing (I think housing is still the key - and I'll discuss this soon).

An immaculate recovery seems remote.

[Aug 22, 2009] Wisdom From The Geese

Sudden Debt

I was at the beach yesterday, watching a large flight (gaggle?) of geese aloft a perfectly blue sky circling and weaving, forming and breaking up, apparently preparing for their long trip south. So soon? Is the summer already over? I puzzled. But of course it is, came the answer embroidered in beautiful sky-swirls, at least if you are a cautious migratory bird.

And thus came the thought that, after a spring of economic thaw and a summer full of green shoots and blooms, there may come an autumn chill and a winter of discontent. Why do I think so? In a word, because of "crisis".

Crisis here, crisis there, crises everywhere. The world is awash in "Crisis", the word liberally slathered onto every news item and analysis. In my discussions with shopkeepers and small business owners (I always talk to them to get a sense of the real economy) it invariably pops up: "...it's the crisis, you know..", and they shake their heads. But they always go on to say that they expect things will get back to "normal" next year, next season, next whatever cycle they operate on. When I ask them why, their answer is based on only two items: (a) hope and (b) the recent performance of financial markets, a.k.a. the Dow Jones Industrial Average. (Ain't propaganda grand, in all its modern ticker-tape manifestations?)

Well, I think it is entirely misleading to describe the current state of affairs as a "crisis". The term denotes a sharp, but short-lived condition leaving behind an aural after-taste that everything will be OK pretty soon. Particularly, when combined with talk about massive doses of monetary and fiscal sauce being poured over the cooked goose of the economy.

Instead, we should be using a terms like Stagnation or "The Long Emergency" (note: I am NOT fond of Mr. Kunstler's tirades and expletive-laden tent-revival style. But this book is not half bad).

Let me give you reality from the trenches - well, the sand dunes...

Yet, financial markets are basking in the sun and blue skies of summer...

And that's precisely the contrarian wisdom of the geese: if you know that winter is to come start your trip south when the weather is good, not when the storms are already upon you. Otherwise you are very likely to end up on a rocky coast as a pile of smashed feathers and bone

rise-of-the-super-rich-hits-a-sobering-wall.html

Two decades of stock market bonanza are coming to the bitter end and 401K investors will pay the huge price for their greed and illusions that can play with Wall Street sharks and stay alive...

Yahoo! Finance

“We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth,” said Mohamed A. El-Erian, chief executive of Pimco, one of the country’s largest bond traders, and the former manager of Harvard’s endowment.

Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, Mr. El-Erian said. “You had wealth creation that could not be tied to the underlying economy,” he added, “and the benefits were very skewed: they went to the assets of the rich. It was financial engineering.”

...The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor’s 500-stock index has risen 49 percent.

Yet Wall Street still has a long way to go before reaching its previous peaks. The S.& P. 500 remains 35 percent below its 2007 high. Aggregate compensation for the financial sector fell 14 percent from 2007 to 2008, according to the Securities Industry and Financial Markets Association — far less than profits or revenue fell, but a decline nonetheless.

“The difference this time,” predicted Byron R. Wein, a former chief investment strategist at Morgan Stanley, who started working on Wall Street in 1965, “is that the high-water mark that people reached in 2007 is not going to be exceeded for a very long time.”

Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies — like Goldman Sachs and JPMorgan Chase, which face less competition now and have been helped by the government’s attempts to prop up credit markets — will still hand out enormous paychecks. Over all, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.

Beyond the stock market, government policy may have the biggest effect on top incomes. Mr. Katz, the Harvard economist, argues that without policy changes, top incomes may indeed approach their old highs in the coming years. Historically, government policy, like the New Deal, has had more lasting effects on the rich than financial busts, he said.

One looming policy issue today is what steps Congress and the administration will take to re-regulate financial markets. A second issue is taxes.

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Since 1980, tax rates on the affluent have fallen more than rates on any other group; this year, the top marginal rate is 35 percent. President Obama has proposed raising it to 39 percent and has said he would consider a surtax on families making more than $1 million a year, which could push the top rate above 40 percent.

What any policy changes will mean for the nonwealthy remains unclear. There have certainly been periods when the rich, the middle class and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like the last year). For much of the 1950s, ’60s and ’70s, both the middle class and the wealthy received raises that outpaced inflation.

Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.

In 2007, the top one ten-thousandth of households took home 6 percent of the nation’s income, up from 0.9 percent in 1977. It was the highest such level since at least 1913, the first year for which the I.R.S. has data.

The top 1 percent of earners took home 23.5 percent of income, up from 9 percent three decades earlier.

Blogger naked capitalism - Post a Comment

attempter :
One issue that has perplexed economists on both sides of the political spectrum is how to deal with inequalities in wealth. I am not convinced that the rich are not getting richer, but I will concede that the [asset] deflation scenario will wipe out many fortunes.


The fact is that the poor are hurting much more than the wealthy in a downturn. The affluent should be paying more in taxes and they should count themselves lucky and remember Pete Peterson's wise words on the meaning of enough.

I don't buy it either. It read to me like PR hype when I read it in the NYT yesterday.

What's interesting about McAfee as a character study is that he's clearly one of these wealth totalitarians for whom there is literally no level which would ever be Enough.

There is NO point at which he'd say, it's time to call an end, get off my personal treadmill, and enjoy what I have.

There's no point at which he'd ever stop hearing the fascist siren described by Marx as cooing,
"Go on....Go on...."

Ironically, if he would've been content with less in the first place, he probably would've been able to salvage more than he now can.

It would be one thing if these totalitarians only wasted and risked ruin with their own worthless lives on their own personal death marches.

But they set the pace for society; they set the astronomical asset prices, and from there the price of everything; they are the rabbits, the front-runners who force everyone to sprint until dropping dead of exhaustion.

That's what makes them totalitarians, and that's what gives us the right to constrain them by any means necessary, in self-defense.

Anonymous :
Wrong, wrong and wrong again.....

If anything, wealth, which happens to be a relative factor, is becoming much more concentrated relatively, as it should.

The fly by night wealthy, those who just happened to be in the right spot at the right time, are starting to find themselves crowded out of that "right spot" from above. Wealth, will be much more concentrated in the future, however, nobody will notice.

Real wealth is and should be concentrated amongst the wise and not their agents.

Best regards,

Econolicious

craazyman :
I don't mind this guy at all. He's not asking for a bailout and at least he made his money through entreprenurial inspiration. He's not leveraging beta and then getting my tax money for his bonus when his bets go the wrong way.

I don't mind if folks like Mr. McAfee get rich by making and selling something people want.

He seems kind of cool to me. I'm OK with him.

But I do mind when "the system" gives banksters, private equity parasites, hedge fund vermin and other noxious human trash -- OK, I'm having fun, a little over the top ;) -- free money to play with courtesy of the taxpayer and honest savers who can't get 1% for their money. And then they blow a bubble and screw everyone even more. And the Central Banks end up kow-towing to these vultures night and day. What a way to run a system.

Anonymous :
Agreed on giving credit to the New York Times.

Krugman linked recently to a piece by Emmanuel Saez on income distribution http://krugman.blogs.nytimes.com/2009/08/13/even-more-gilded/

and what caught my attention is the source of the income. "Interestingly, the income composition pattern at the very top has changed considerably over the century. The share of wage and salary income has increased sharply from the 1920's to the present, and especially since the 1970s. Therefore, a significant fraction of the surge in top incomes since 1970 is due to an explosion of top wages and salaries. Indeed, estimates based purely on wages and salaries show that the share of total wages and salaries earned by the top 1 percent wage income earners has jumped from 5.1 percent in 1970 to 12.4% in 2007."

I would think that this source would be far less stable, and much more likely to engender bubbles and risk taking. From his own admission "“History told me that you just keep working, and it is easy to make more money,” he said"

That kind of thinking leads to blowing it on frivolous nonsense, and less investment in productive endeavors.

I'm curious whether or not increases in income tax, with less reliance on estate tax might lead to more stability.

meli

Kievite:

Econolicious: If anything, wealth, which happens to be a relative factor, is becoming much more concentrated relatively, as it should.

An interesting question is whether the extremely unequal income distribution like we have now make the broader society unstable or plebs is satisfied with "Bread and circuses"  (aka house, SUV, boat  and 500 channels on cable)  until loot from the other part of the world is still coming...  What is the upper limit of pay inequality?

I would think that Peter Drucker was right. He thought the top exec shouldn't get more than 25 times the average salary in the company. I would suggest a metric like around a hundred from the average 20% of lowest paying jobs for a particular firm. One of the particular strengths of the idea of a maximum wage is that if senior managers want to increase their own pay, they have to increase that of the lower-paid employees.

The notion of maximum wages is based on the idea that no matter what job a person does and no matter how many hours they work, there is no possible way that an individual's skill, expertise, intelligence or experience can justify the payment of 200, 300 or even 400 times the wages of the lowest-paid 20% workers in the organization at hand. Drucker's views on the subject are probably worth revisiting. Rick Wartzman wrote in his Business Week article 'Put a Cap on CEO Pay" that "those who understand that what comes with their authority is the weight of responsibility, not "the mantle of privilege," as writer and editor Thomas Stewart described Drucker's view. It's their job "to do what is right for the enterprise—not for shareholders alone, and certainly not for themselves alone."

"I'm not talking about the bitter feelings of the people on the plant floor," Drucker told a reporter in 2004. "They're convinced that their bosses are crooks anyway. It's the midlevel management that is incredibly disillusioned" by CEO compensation that seems to have no bounds. " This is especially true, Drucker explained in an earlier interview, when CEOs pocket huge sums while laying off workers. That kind of action, he said, is "morally unforgivable."  There can be exceptions but they should be in middle management not in top management ranks.

Hugh :

I have maintained for a long time that taxing policies are less about revenue gathering and more about social engineering. Since Reagan, there has been a massive transfer of wealth upward while lower and middle income wages have remained stagnant. These are not just numbers on a data sheet. They create a certain kind of society. The number of women entering the workforce grew. At first, this was seen as a positive change, and it was. But then it became simply an economic necessity. Two wage earners were needed to keep up with or improve the household's standard of living. But it also radically altered the dynamics of the nuclear family. I know I am over generalizing like crazy here but it has redefined the nature of childhood, shortening it and treating children as autonomous "little" adults. And, of course, eventually to keep up the standard of living these households took on considerably more debt. Stagnant wages reflected the disempowerment of the middle class and this occurred not just with wages but with pensions, job security, and benefits in general. At the same time, the rich have been able to use their greater wealth to essentially buy the government, to increase and lock in this transfer of wealth. The result has been a system of crony capitalism where government is largely unresponsive to the needs and interests of the lower and middle classes and at the beck and call of the wealthy.

This has not been all peaches and cream for the wealthy because the system is inherently unstable creating a series of larger and larger bubbles. The wealth destruction when these bubbles burst affects even the rich, but not as much and not as many, as the rest of society.

The middle classes have become politically disconnected from their government. This translates as apathy but if economic conditions worsen significantly can turn into revolutionary, often nihilistic, anger. The structure of the family has also been weakened. I do no mean to imply in any way that the improved economic status of women is at fault here. Shared parenting responsibilities are a good thing, but our society does not foster this. Rather what I am trying to say is that a stabler structure has been replaced by a less stable one, and that the primary drivers behind this have been largely economic.

As for the wealthy, their control of the system can be seen in the trillions that went to shore up the financial system where their wealth is held at the same time that millions of middle class Americans are foreclosed upon. It can be seen in the healthcare debate where the actual health of Americans is not discussed at all but only how the interests and profits of insurance and pharmiceutical companies can be best protected is.

The social contract is being withered away. The question is what happens when it is gone.
 

[Aug 22, 2009] The Gathering Storm Stay Defensive

...market is ahead of reality... we could perhaps see historic trading over the next eight weeks...potentially a very exciting period. An interesting question is what will happen with junk...
August 18, 2009 | Jesse's Café Américain

"...market is ahead of reality...worry about things particularly going into Ramadan on the 22nd (of August)...there are things gathering around here (the NYSE) that are kind of esoteric, but we could perhaps see historic trading over the next eight weeks...potentially a very exciting period." Art Cashin, 18 Aug 2009

Larry Summers, Tim Geithner, and Ben Bernanke have managed, once again, to place the economy on the edge of a chasm by pandering to Wall Street, which has a narcissistic short-term obsession with stuffing its pockets at any risk or cost, while the corporate media distracts the public with an outrageous parade of disinformation, delusion, and distraction.

The world markets are entering a period of high risk and volatility. No one knows for certain what will come. Professional traders are preparing for it by managing their risks. We are as well.

[Aug 22, 2009] Made Book Review Bailout Nation

August 20, 2009 | The Mess That Greenspan 

For some time now, I've known that Barry Ritholtz's new book Bailout Nation was definitely not going to be kind to former Federal Reserve Chairman Alan Greenspan, but, had I known that it would offer the most damning critique of his term at the central bank, I certainly wouldn't have let the book sit on my desk for the last few weeks before finally picking it up the other day and polishing it off in record time.

Wall Street and Shook the World Economy, it was natural to think the focus might be more on greed than easy money, but that's really not the case.

Greed is a constant on Wall Street and, for that matter, in most of the rest of the world, but financial systems don't implode unless generously lubricated with easy money, bailouts, and moral hazard - key elements of the Greenspan legacy.

Ironically, Fed economists and assorted hangers-on are meeting in Jackson Hole this week to deliberate on what's changed in the world of finance and monetary policy over the last year.

It was four years ago at that same gathering (i.e., before the housing and credit bubbles met their respective pins) that some were still lauding the former Fed chief as "the greatest central banker of all time" in something of a "going-away" party.

I wonder if his name will come up at this session...

Anyway, the book is not only fun-filled, thanks to the inimitable writing style of Mr. Ritholtz, but it's chock full of interesting little bits of information and perspective that, even to me, cast new light on what will surely be looked back upon as a disastrous period for central banking.

For example, it is common knowledge that Alan Greenspan was much more interested in asset prices than were his predecessors - they didn't coin the term "the Greenspan put" for nothing - but this passage gives the concept a bit more color.

History teaches us that the development of Bailout Nation, Wall Street edition, was not done in secret meetings. Rather, it occurred in the very public functions of the Federal Reserve, and the subsequent results of its policy actions.

The Greenspan Fed created an endemic culture of excessive risk taking. The U.S. central bank created moral hazard not by targeting inflation or the business cycle, but instead by focusing on asset prices. From the squishy focus on psychology, it was a short hop to asset prices. After all, when price go down, it negatively impacts sentiment, right? This was the Fed's fatal flaw under Greenspan's leadership.

... ... ....

The Fed's previous rate cuts had only implied a concern over asset prices; now, the chief explicitly affirmed the fact. The Fed was not concerned just about inflation and employment; asset prices were an "integral part" of its calculus, too.

This was revolutionary. Fed chiefs didn't usually care so much about stock prices; they were more concerned with the bond market. After all, it was the fixed-income traders - known as bond ghouls for their morbid affection for bad economic news - who set interest rates. Worries about deficits, inflation, and trade balances all found a receptive audience among the bond traders.

Once Wall Street figured out Greenspan was concerned about equity prices, it wasn't too long before it learned how to play the Fed like the devil's fiddle. When rate cuts did not materialize, the Street would have itself a hissy fit. It is always ill advised to anthropomorphize markets, but observing the market kick and scream when cuts weren't forthcoming was akin to watching a two-year-old throw a tantrum. It may be illegal to manipulate the markets, but no trader will ever got thrown in jail for manipulating Greenspan.

Unfortunately, the current Fed chairman seems to share this same trait.

Well worth reading...

[Aug 21, 2009]  Nouriel Roubini Was Wrong, Again, and Again and Again... by Eric Tyson

The sad part about hyped articles with hyped predictions is that it causes some individual investors to panic and do the wrong thing - selling good assets like stocks at depressed prices. The media shouldn't irresponsibly publicize hyped predictions, especially without clearly and accurately disclosing the predictor's track record. Don't fall victim to such hype.
Update 5/21/09: Oil has climbed above $60 per barrel so Roubini's January prediction that it would stay below $40 for all of 2009 ain't lookin too sharp just now. And, stocks have been strong since late winter...only time will tell if Roubini's prognostication that this is a sucker's rally is right or wrong but right now, he's not looking so smart. The S&P 500, which he predicted would sag to 600 has surged above 900.
 

Update 3/23/09: Last fall, I kept hearing about economist Nouriel Roubini, who supposedly predicted the financial crisis. He was all over the cable television circuit claiming that he had predicted the myriad horrible things that were happening. I wrote the following piece on October 24th because his prediction that hedge fund selling would force regulators to close world stock markets for one to two weeks was absurd. It was indeed absurd and of course, never happened. Roubini was wrong. In researching his past predictions over preceding years, I was struck by how many were wrong. If the economy continues to improve as the year goes on, it will be interesting to see how Roubini will try to explain the myriad negative predictions he has continued to make in recent weeks and months.

(Here's another recent Roubini prediction: in mid-January, Roubini predicted oil prices would stay below $40 per barrel for all of 2009. Oil has now gone back above $50 per barrel - wrong, again!)

Some additional recent Roubini predictions which are quite likely to be wrong are his early March, 2009 predictions that the recession will last through late 2010 and his other prediction that the S&P 500 Index was highly likely to fall below 600 (at the time he said this in early March, it was at 676 and rallied strongly since). He has been widely quoted as referring to the stock market rally as a sucker's rally.

"Panic over hedge funds could close markets," says the bold headline in The Times, a large London newspaper on Friday October 24, 2008. The article states that Nouriel Roubini, a professor at New York University, told a London investment conference audience that "...hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale of assets...We've reached a situation of sheer panic. Don't be surprised if policymakers need to close down markets for a week or two in coming days." Roubini went on to say, "Things will get much worse before they get better. I fear the worst is ahead of us." Those are pretty bold and scary predictions. Telling investors that the worst is yet to come after global stock markets have been hammered down by about half since late 2007 is pretty amazing.

Roubini has been getting tons of press of late for having supposedly predicted the financial mess that unfolded in 2008. A recent Bloomberg article said, "Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ‘catastrophic' financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ‘sharp drop' in equities."

Before I listen to or follow the advice of anyone making predictions, I want to know that person's track record and background. So I researched Roubini's background and his actual economic forecasts (not his claims) and here's what I found.

Roubini earned his undergraduate degree at Bocconi University in Milan, Italy in 1982. He grew up in Italy after his Iranian parents moved around to Istanbul, Tehran and Tel Aviv.

According to his consulting firm's web site, "Professor Roubini served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department"

That sounds impressive but on the web site for the NYU Stern School of Business (where he teaches) it says, "He was also the Senior Economist for International Affairs at the White House Council of Economic Advisers from 1998-1999; then, the Senior Advisor to the Under Secretary for International Affairs and the Director of the Office of Policy Development and Review at the U.S. Treasury Department from 1999- 2000." That sounds a lot less impressive.

As for Bloomberg crediting Roubini for predicting the current financial meltdown, stock market plunge and recession, some perspective is in order. Back in the summer of 2006, Roubini spoke at an International Monetary Fund event and predicted an imminent U.S. recession according to economist Anirvan Banerji who participated with Roubini in a panel discussion. A transcript of that event shows that Roubini did not predict a market meltdown or any of the other problems he now claims to have predicted as quoted by Bloomberg. Banerji says that Roubini predicted a recession in 2004 caused by U.S. trade deficits, federal reserve interest rate hikes and high oil prices. (His recession calls dating back to at least 2004 is verified by a Business Week article I'll get to in a moment).

In 2005, Roubini saw Hurricane Katrina and high oil prices causing a U.S. economic slowdown. "This is a very delicate moment. The economy is already very imbalanced. On top of that, we've had a massive oil shock and now we have a natural disaster that might be something of a tipping point."

Here's another quote with Roubini's poor predictions from an article on his own business school's web site: "Among those sporting a red face at Christmas dinner was Nouriel Roubini...Roubini was featured in The Enigmatic Greenback, specifically suggesting the US dollar was in an "anti-gravity" phase that was about to reverse. He has kicked off 2006 with a mea culpa, admitting that he had indeed called 2005 incorrectly. Dispirited? No way. Roubini is back and he's not taking a backward step. 2006 will be the year of the US economic slowdown, and thus the global economy will hit slowdown as well."

And, then there's this article from Business Week, which states, "Nouriel Roubini, an economist at New York University who was worried about a global recession in 2004, is now predicting that "the U.S. is heading toward a sharp recession by early 2007."

So there you have it. Roubini predicted a recession in 2004, 2005, 2006, and 2007. He was wrong four years in a row. So, in 2008, his prediction appears to be finally coming true. Well, a stopped clock is correct twice each day and as Banerji says, "Roubini is the Boy Who Cried Wolf."

So, let's now return to the alarming headline in The Times publication which rattled markets on Friday October 24th with Roubini predicting further plunging stock prices from already low levels and panic so bad that regulators would close stock markets for one to two weeks. Let's think about the premise of his prediction that "...hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale of assets..."

Consider who invests in hedge funds and how hedge funds invest money. Hedge fund assets primarily come from institutional investors (e.g. large university endowments, corporate pension plans) and wealthy individuals who typically invest one million dollars or more. Hedge fund investors aren't stupid and aren't going to head for the exits in unison. Also consider the fact that many hedge funds sell stocks and other assets short so that when prices fall, as they have in 2008, they profit.

Are investors pulling money out of some hedge funds with which they are dissatisfied with performance? Of course that's happening as it does with other investment vehicles such as mutual funds or exchange-traded funds. That's not going to lead to a further collapse in already highly depressed stock prices.

Money management is a highly competitive business and chronically poor performing firms get punished with redemptions and better performing companies get rewarded with more money to manage. For sure, some hedge are liquidating assets which adds to the selling pressure in various marketplaces (or buying pressure if they are covering short positions) as particular hedge funds are closing up shop while some others are seeing assets go out the door. All assets have to go somewhere and smart money managers buy sound investments that are selling at favorable valuations.

The sad part about hyped articles with hyped predictions is that it causes some individual investors to panic and do the wrong thing - selling good assets like stocks at depressed prices. The media shouldn't irresponsibly publicize hyped predictions, especially without clearly and accurately disclosing the predictor's track record. Don't fall victim to such hype.

[Aug 21, 2009]61,000. The 4-week moving average was 570,000, an increase of 4,250 from the previous week's revised average of 565,750.

The advance number for seasonally adjusted insured unemployment during the week ending Aug. 8 was 6.24 million.

This graph shows the 4-week moving average of weekly claims since 1971. (removed --NNB)

The four-week average of weekly unemployment claims increased this week by 4,250 to 570,000, and is now 88,750 below the peak of 19 weeks ago. It appears that initial weekly claims have peaked for this cycle - but the average has increased 22,000 from the low of two weeks ago.

The number of initial weekly claims is still very high (at 576,000), indicating significant weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before the total employment stops falling.

It is difficult to calculate the number of workers who have exhausted their extended claims, but that number is expected to rise sharply over the next few months. From the O.C. Register: Estimate doubles for jobless losing benefits Sept. 1 (ht Keith)

An estimated 143,000 unemployed workers in California will exhaust their jobless benefits by Sept. 1, according to new figures released by the state Employment Development Department.

That's more than double the 61,906 state officials estimated a month ago. The number is based on workers who will exhaust the basic 26 weeks of benefits plus the three extensions approved by Congress.

If Congress does not approve a fourth extension in benefits, EDD projects that 264,000 Californians will be kicked off the unemployment rolls by the end of the year.

[Aug 21, 2009] Merrill Lynch Global Fund Manager Survey

By Barry Ritholtz - August 20th, 2009, 10:48AM

Interesting results of Merrill’s Monthly Manager Survey: It see economy will strengthen in the coming 12 months (highest reading since November 2003 and up from 63% in July).

• 70% of the panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.

• Confidence about corporate health is at its highest since January 2004

While I keep hearing about cash on the sidelines,. the professionals seem to be “All In.”

  1. Onlooker from Troy Says:

    Interesting perspective I-Man. It’s what Jeremy Grantham refers to in his letters as “career risk”, I think he calls it. It’s tough to stand in the face of these forces. You can be right, but even if you’re the boss and can’t fired, money is very fickle and will run off elsewhere to chase performance. We’ve all seen that.

    You can hear it in John Hussman’s commentary. I’m sure he’s taken heat because his model and discipline have kept him hedged during this. Even though he kept shareholders from losing money during the huge downdraft. I wonder if he’s had net redemptions over the last few months. I’m sure he has even though now would be the best time to give him money to manage, undoubtedly. Greed takes over. He owns the joint though and even if he loses shareholders he won’t break his discipline.

  2. Transor Z Says:

    @I-Man:
    Because companies of all kinds reward people who mesh with a corporate persona and mindset. The corporate persona is based on the lowest common denominator. Elite organizations just have a higher lowest common denominator. Most organizations, by definition, aren’t elite. :)

  3. Andy T Says:

    @Eric Tyson. Of course it’s a small sample size. You can’t sample everyone! But you should not dismiss it. It’s not like this group of people lives in some alternate universe. They’re probably a decent representation of what many managers are doing.

    Another thing I’ve recently observed with “cash on the sidelines.” I think there’s a lot of cash on the sidelines with grandparents and parents who have seen their grown kids/grandkids run into shit piles of economic problems. This group may be saving their cash in order to subsidize their kids/grandkids lives right now. I’m seeing this first hand with the families we know who are having issues.

  4. ben22 Says:

    There’s likely still money remaining on the sidelines but I guess not that much

    This is not true to my knowledge. On page 6 of Marc Fabers august letter he shows a chart labled as Cash as a Percentage of US Stock Market Capitalization including money market funds and savings deposits. While the amount in cash as a % of US Market Cap has dropped a lot since the early part of this year, it remains at levels, on the chart, that are as high as they were in 1989. Perhaps cash will stay elevated like this for a very long time but this is a major risk right now for people trying to get really short right here right now. This chart was as of the end of July.

    I wondered yesterday if is this cash fueling the speculation in oil as you aren’t being rewarded staying in cash and everyone is so convinced of coming inflation, not, as so many believe the Fed’s provided “liquidity”. In a system made up of $52T in credit and $2T in actual banknotes I find the Fed’s balance sheet growth of $900 bil to $2t insignificant in the face of credit deflation.

    Faber goes on to say:

    I believe that one of th emost negative factors for the longer term is that whereas a serious financial crisis is supposed to clean the system, the current crisis has actually increased dubious financial practices and reduced financial and economic transparency. Therefore, the ultimate financial crisis still lies ahead of us!

  5. ben22 Says:

    To add to my post above, one might argue that the bear market of 2007-2009 will cause people to stay in “cash” for a long period of time and when looking at the chart I reference we could have an extended period of time with higher cash allocation. I do not believe this argument. The United States investor has remained in the mindset that stocks for the long term ALWAYS win out and therefore the longer the countertrend rally lasts, the more people will follow the herd and put the cash back into risk assets. Large brokerage houses, if we didn’t learn from the subprime mess, are part of the herd.

    The countertrend rally has barely met the timing of how long it should last based on how long the initial decline was. Grantham said earlier this year, for the first time in almost 20 years stocks were cheap here, now just several months later, we are over his most recent fair value calculation by roughly 14%. People didn’t see value in March and jump on board. Greed is still rampant from my perch.

    Then next decline will do what is speculated about in my first para above. It will happen sooner than the amount of time spent between last two bear markets.

  6. Mortimus Says:

    Isn’t this part of the market correction process? Investors losing faith in the market?

    I imagine “cash on the sideline” levels will remain elevated for years. Why do we assume that all ‘inwestors’ are morons? Maybe a good majority of them have come to the realization that it’s all a rigged Vegus roulette wheel that isn’t worth their hard earned money throwing down on ‘red’ anymore. Throw in the glorious economic prospects of this country and Andy’s point about family money and this game is more than likely crippled whether the market is willing to acknowledge it or not. “Fool me once, shame on me…..can’t get fooled again”

    The fact that we try to lure them back in to the 0TB with free krispy kreme’s and hot chocolate is F–ckin despicable. Shame on everybody.

  7. How the Common Man Sees It Says:

    @Andy T

    You said a mouthful there. I think it is especially true of the boomers. I’m pretty sure you could safely argue that much of the cash on the sidelines is theirs and they have to be pretty scared to do anything right now. Will they ever put money in the markets again?

[Aug 21, 2009]  The Roubini Backlash Begins

The Big Picture

Roubini is clearly an intelligent fellow who has produced some interesting works. However, just as clearly, he is not a prophet or anything close. More accurately, Roubini has disingenuously promoted himself as nailing the crisis, when truthfully he was wrong until other hard working analysts fixed his broken crystal ball. (Wall St Cheat Street)

[Aug 21, 2009]  Whistling Past The Graveyard-

The Market Ticker
I know, I know, its "a new bull market", and you should buy stocks, right?  We're going to the mooooooon!

Care to re-examine that thesis given that these huge banks, all of whom make a lot of money trading equities (and commodities) are falling all over themselves to park their money with Treasury at zero interest for the next two months?

PS: If that doesn't look like a bunch of guys running away from a big jug that has a lit fuse leading into it you're certifiably insane.  You can bet this won't get mentioned on ToutTV either.

Federal Reserve Recognized Trash

The Market Ticker
How long before our regulators force the banks to?

Notice the changes - and that this was as of 4/27 of this year.

Home equity lines are now worth (for collateral purposes) half of their face value.  Consumer loans, 60% (credit cards, student loans, etc.)  Commercial Real Estate, 65% (!!!) and normal commercial and agricultural (C&I) loans 65%.

Maybe someone can explain to this guy why our regulators allow banks to carry these things on their balnace sheets at values that are in fact above the previous "lendable value" when our very own Federal Reserve is uncomfortable with the possibility of a loss at any collateral valuation above the new value?

The answer, of course, is that there's no justification at all for allowing such "valuations"; they're a (bad) joke.  Yet even the so-called "restatements" in the comment sections of 10Qs posted recently by financial institutions show alleged "values" that are awfully close to 100 cents on the dollar.

If its not good enough for The Fed, how come that passes muster with our so-called "banking regulators"?

Might they be fully bought-and-paid for?

Now you know where the losses are coming from when the FDIC seizes banks - the actual loss rates are awfully close to these haircut values, aren't they?

There's your market validation of The Fed's haircut numbers as valid and appropriate valuation levels, and further evidence that we have massive, systemic, pernicious and pervasive accounting and control fraud throughout our banking system.

STOP THE LOOTING AND START PROSECUTING!

[Aug 20, 2009]  Moody’s: CRE Prices Off 36 Percent from Peak, Off 1% in June

New troubles for banks are  coming this autumn...
8/19/2009 | CalculatedRisk

From Bloomberg: U.S. Commercial Property Values Fall as Rent Declines Forecast

The Moody’s/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody’s Investors Service said in a report today.
...
“It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.

The Moody’s survey found a 4 percent increase in office prices in the second quarter compared with the previous three months ... Industrial properties ... fell 20 percent in the quarter, while apartments fell 16 percent and retail properties 8 percent.

I think the office prices increase was an anomaly. Other CRE prices fell much faster.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller.

Selected Comments

blackhat 10:41 am

and no, jas was not right. Combined, RRE is many times what CRE is. Not the point. It's who is holding the bag. In cre, you get left holding the bag if your a bank really really quickly.

--bh

shill 10:42 am:

A brilliant, must see video clip by Australian socialist John Pilger. It's the best analysis that I have seen of Barack Obama in the context of what current day America is.

The Real News Network - John Pilger Obama Is A Corporate Marketing Creation

scone - 11:06 am:

This market has gone crazy. - mp

And such low volume too. It's like that joke: "The food is terrible here." "Yes, and such small portions."

[Aug 20, 2009] Replay of 1930

Econbrowser

We know the glass is both Great Depression.

[Aug 20, 2009] Steve Keen's Debtwatch

Australian Prime Minister Kevin Rudd has followed up his critique of neoliberalism with a new essay in the Sydney Morning Herald on the causes of the crisis, and the policies needed after recovery.

With one exception, his key explanations for the crisis are the same as those identified by myself and the handful of other economists who predicted this crisis before it happened:

The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom… However, as we later learnt, the global boom was built in large part on a three-layered house of cards.

First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: “For 25 years [the West] has been consuming more than we have been producing … living beyond our means.”

In the United States, in particular, consumers went on a long, debt-fuelled shopping spree. Household debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The commentator Bill Gross summarised the US consumption boom as: “For too long it’s been McHouses, McHummers and McFlatscreens, all financed with excessive amounts of McCredit .. What a colossal McStake.”

Australian consumers also spent up big. Between 1996 and 2007 there was a 460 per cent increase in credit card debt, a 340 per cent increase in household debt, a 450 per cent increase in corporate debt and a 200 per cent increase in net foreign debt.

Second, these debts were racked up on the back of skyrocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts. The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007…

The finance sector, rather than servicing the needs of the real economy, began to primarily service itself.

The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits. From 1999 to 2006 the US current account deficit more than tripled, from $US63.3 billion to $US214.8 billion, balanced by huge surpluses in other countries, especially China.  (the emphases in these and subsequent quotes is my own)

The only element of that with which I disagree is the third point–which I’ll get back to later on.

Rudd also provides some interesting “insider’s” statistics on the size of the collective efforts taken by OECD governments to try to limit the scale of the crisis:

On the fiscal front, governments from the world’s largest 20 economies are expected to collectively pump about $US5 trillion into their economies by the end of next year (or nearly 8 per cent of global GDP since the crisis began). Altogether, the measures are the equivalent of an extraordinary and unprecedented 18 per cent of global GDP.

That’s an extraordinary injection–against which the scale of this crisis should be apparent. Inject an additional 18 per cent of activity into a global economic system over about 3 years, and yet the system still falls by about 6 per cent over that period? Without that intervention, output could have fallen by 25 per cent over 3 years, which is a Depression in anyone’s language.

Where I differ again with the Prime Minister is over whether this government stimulus alone is sufficient to avoid a Depression. Though his case is far more nuanced than most, the “green shoots” phrase nonetheless gets an airing:

We have already begun to see the results. Early signs of “green shoots” have emerged in recent economic data. And this month the International Monetary Fund revised up its forecast for the global recovery, from 1.9 per cent to 2.5 per cent growth next year. An IMF report this month noted “the world economy is stabilising, helped by unprecedented macro-economic and financial policy support”. The truth, however, is the world is still a long way from recovery.

The extent to which Rudd is “levelling” with his audience is also quite welcome:

The average budget deficit for OECD economies increased more than sixfold, from 1.4 per cent of GDP before the crisis in 2007 to 8.8 per cent of GDP in 2010. Public borrowing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.

Australia’s deficit and debt position have inevitably been affected, albeit much less than in other advanced economies. The combined effects of collapses in revenue ($210 billion) and policy interventions to support our economy ($77 billion) are expected to result in a deficit that peaks at 4.9 per cent of GDP in 2009-10. Net public debt is expected to rise to 4.6 per cent of GDP this financial year and peak at 13.8 per cent of GDP in 2013-14. Both are the lowest by an order of magnitude of all major advanced economies.

Clearly, government global action has come at a cost. But as the IMF argued earlier this year: “While the fiscal cost for some countries will be large in the short run, the alternative of providing no fiscal stimulus or financial sector support would be extremely costly in terms of the lost output.”

Without government intervention, global growth, global unemployment and prospects of global financial recovery would be much, much worse.

We never got to see whether Howard or Costello would have provided a reasoned explanation of policies in the light of an economic catastrophe, because they never experienced one–instead, they were amongst the lucky incumbents who held office while the global financial excess that caused this crisis held aloft the illusion of prosperity, and lost office before The Piper called to collect on The Tune.

Had they held on to power, I have no doubt that they would have–by force of necessity–been undertaking very similar fiscal policies to those Rudd now is (though the additional expenditure may have gone on the military and border patrols rather than ports and schools). Whether they would have presented as reasoned an explanation for their actions I think would have been less likely.

Rudd also revisits the anti-neoliberalism theme of his previous essay:

As I have argued elsewhere, the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector. The central principles of this extreme form of capitalism are that markets are self-regulating; that government should get out of the road of the market altogether and that the state itself should retreat to its core historical function of security at home and abroad.

As someone who has long argued that the economic theory that underlies neoliberalism (Neoclassical Economics) is intellectual drivel, I of course support this critique.

[Aug 19, 2009] “Just because the conventional economists are drinking the Kool-Aid doesn’t mean you have to” by Stacy-Marie Ishmael

"What if wages are in a secular downtrend in the US and consumers are unable to pay down debt even as they attempt to reduce consumption? This would make David an optimist."
Aug 18 | FT Alphaville

Gluskin Sheff economist David Rosenberg woke up on a particularly bearish side of the bed on Tuesday morning, if his most recent note is any indication.

Some highlights (any emphasis or hyperlinks FT Alphaville’s):

…all we see is more evidence of a revenue-less recovery. Home Depot beat estimates but still posting a deflationary 9.1% sales plunge after Lowe’s announced a 9.5% slide in same-store receipts. And, don’t look now, but three-month dollar Libor rates are back on the rise in the aftermath of the seizure of Colonial BancGroup (bringing the number of failed banks this year to 77 … hello, the credit crisis is not over just because the government bailed out the big boys)…

…the decline in consumer sentiment and the weakness seen in retail sales cannot be readily dismissed. Outside of the bounce in the otherwise moribund automotive area, those green shoots are hardly turning into redwoods.

But by far our favorite bit of the note is Rosenberg’s depiction of the L-shaped recovery (to say nothing of his swipe at “conventional economists” and the herd mentality):

There seems to be quite a lot of confusion over what an “L-shaped” recovery is all about. It’s not that the economy just stagnates after the recession ends — it’s more like the growth rate is choppy, sloppy and toppy. It is below-trend and deflationary. We had this coming out of the last recession when real private sector spending came in at 0.5% (seasonally adjusted at an annual rate) in 2002Q1, 1.4% in 2Q, 2.1% in 3Q, and a mere +0.6% in 4Q. Call it what you will — but it’s more L-like than V.

Even in the early 1990s, we had much the same: real private spending was a tepid 2.5% annual rate in the first quarter of recovery in 1991, 1.5% in the second and 0.0% in the third. So, most economists like to go back to the good old days of the early 80s, mid 70s, early 70s, early 60s, late 50s and early 50s when we did have V-shaped recoveries. But those cycles were completely irrelevant because those recoveries occurred in the context of an expanding secular credit cycle. That is to say that when each of these recessions ended, the consumer came back even stronger and was willing to take on ever-higher debt ratios.

… ... ...

We are now coming off a $14 trillion loss of household net worth, which represents a 20% implosion of the consumer balance sheet coupled with a post-bubble credit collapse, which means that despite the government stimulus, the economy is going to be limping along for a prolonged period of time as savings rates rise and debt ratios decline. To repeat: In the next economic recovery, whenever it comes — and it will not be determined by a one-quarter adjustment in auto assemblies, by the way — we are most likely going to be dealing with the idea that household credit ratios will undergo a secular, intentional and steep downtrend and that is where conventional interpretation on the business cycle is most likely to go awry. Just because the conventional economists are drinking the Kool-Aid doesn’t mean you have to.

We can understand that “leading” financial indicators seem to be pointing towards a recovery, but remember, they also priced in a “depression scenario” late last year and early in 2009 and that never came to fruition, so investors should be aware that we could be seeing a similar head-fake. Relying on the ECRI index, for example, could be folly since the index has done little more than a bungee jump from levels we had never seen before. So keep in mind that even with the bounce, the equity market is still just back to levels prevailing when the U.S. economy was “only” a year into recession. Corporate bonds spreads may have narrowed sharply, but are still at levels that represented peaks during several prior economic downturns. The fact that practically everyone is declaring the recession to be over, from a purely contrary standpoint, should be cause for pause as well because the herd mentality rarely proves to be the correct course.

As for the impending disaster that is commercial real estate:

To be sure, if the economy were on a solid foundation towards a sustainable recovery then we doubt that the Fed would have moved to extend the TALF program. The central bank sees what most economists do not — the implications for the financial sector from the looming wave of commercial real estate defaults. The $83 billion in office, retail, industrial and apartment properties that have defaulted so far this year is the thin edge of the wedge — that represents a 2.25% default rate (up from 1.6% at the start of the year) and most credible estimates we have seen point to a doubling from here by year-end and enough to drain GDP growth by at least a half a percentage point. Property values have gone down more in the commercial space than in residential — by around 40% from the 2007 peaks. The crisis has been prolonged by the fact that lenders have so far foreclosed on fewer than 10% of defaulted loans. In the meantime, what we have on our hands is a debt-rollover nightmare that comes to nearly $1 trillion in terms of the short-term commercial mortgages that are set to mature by the end of 2010. The odds that the Federal Reserve chooses to tighten monetary policy in the midst of this epic rollover calendar is as close to zero as you can ever possibly get, which means that the euro-dollar strips that relentlessly are pricing in rate hikes are currently low-hanging fruit.

Oh dear.

[Aug 19, 2009] Is This the Start of the Big One?

"I agree 100% with every word, Yves. Obama was all about hope. He is now all about deception and cynicism, and he asked for it. We needed resolve and vision. We have more of the same: public-to-private wealth transfers, window dressing, incredible (yet empty in terms of real meat) speeches, etc."
naked capitalism

I don't believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.

In addition, this one has had some troubling features. Most notable has been the almost insistent media cheerleading, particularly from atypical venues for that sort of thing, like Bloomberg. Investors who are not at all the conspiracy-minded sort wonder if there has been an official hand in the "almost nary a bad word will be said" news posture. Tyler Durden has regularly claimed that major trading desks have been actively squeezing shorts. There have been far too many days with suspicious end of session rallies.

The fall in the markets overnight, particularly the 5.8% drop in Shanghai, seems significant in combination with other factors:

More bank woes. We may be two thirds of the way through the losses, but it could also be as little as half. And despite the stress test baloney, the banking system is undercapitalized by a large margin. Even if the remaining writedowns are smaller in absolute terms than what is, past, they dig deeper into depleted equity bases. Colonial Bank, a $25 billion bank taken out last Friday, was deemed well capitalized until recently. We noted its much bigger neighbor, $140 billion Regions Bank, similarly deemed to be well capitalized, has effectively said it is insolvent How many other banks are broke save thanks to overly permissive accounting? And as we have noted before, the IMF in a study of 124 banking crises, found that regulatory forbearance, which is econ speak for letting the halt and lame limp along rather than taking them out, is far more costly, both in terms of lost growth and size of the ultimate bank recapitalization, than earlier action.

Consumers tapped out. The lousy retail sales report was a reminder of a rather central fact most have chosen to forget.

Foreclosures set to rise. We are not having a housing bounce. Some markets may be close to a bottom, but foreclosures grind on. Even if some local markets are at their nadir, there is so much overhang, between continuing mortgage stress and pent up sales, that much appreciation near term is unlikely. The record of past severe financial crises is that real estate takes over five years to bottom.

Fed in a box. Some e-mail chat pointed out a key fact: the term structure of US funding has gotten very short term. We have become in some ways like a massive bank, borrowing short and lending long. This means the idea of allowing rates to rise on the short end, which has to happen unless we stay in Japanese ZIRP land indefinitely, will be more disruptive than the Fed seems to appreciate.

More AIG losses, I am told more AIG losses are in the offing. There is still unused money out of the total alloted to the rescue, so any eruptions here may not require further official action, but it would have a bad impact on the collective mood, and further taint any efforts to shore up the financial system.

Lack of political leadership. The health care fiasco is going to be a defining event for Obama, in a negative way. His inability to respond effectively to simply absurd distortions of his plan and of the record of public supported programs overseas (including that many are government funded but still privately run, for instance) may dispel the illusion that he is or can be an effective leader. His banking policy, which is vital to recovery, became hostage to Geithner and Summer's deep loyalty to the industry, and his lack or interest in rocking any boats. All Team Obama has done on the banking front is write a lot of blank checks, hold some bogus "stress tests" in lieu of doing the real thing, and raise a stink on a few symbolic issues to try to paper over the failure to embark on real and badly needed reforms.

Ed Harrison has called him a black Herbert Hoover. If the economy takes another down leg, it will further confirm his inability to do anything other than compromise and try to spin it as success. The confidence game worked when he was a new President, but nice talk and not much action is already wearing thin. We could use someone at the helm who is willing to plot a course and stick with it, and instead what we have is someone long on charisma and short on resolve.

Anonymous Monetarist:

Sure would seem to be a D-thang...

As Dalio recently said in Barrons' :

'There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn't primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The '30s were very similar to this.

By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.

At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.

In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933. '

The bullisht crowd wants to jump up and down about 1938 fast-forwarding over the earlier part of that decade ... this seems premature.

Even see 'em pulling out 1907.. an analogous event to today if we didn't have the Fed ...

PascalBMontreal:

I agree 100% with every word, Yves. Obama was all about hope. He is now all about deception and cynicism, and he asked for it.

We needed resolve and vision. We have more of the same: public-to-private wealth transfers, window dressing, incredible (yet empty in terms of real meat) speeches, etc.

And Yves: we ARE in ZIRP world. Make no doubt about it. The short end will remain low. The main question is how incredibly deep the Govt Bond market really is, which will indicate wehere the long end is going. Given poor equity and real estate market potential, I guess the demnand for bonds is close to infinity at all horizons, hence very low interest rates are there to stay, with no inflation.

The elepehant in the room is debt burdens at ALL levels - households, govt, etc. As long as the deleveraging process has not run its full course, we will see no viable recovery. My take is for a viable recovery in 2015, since Obama seems to want to stretch the hurting by NOT bringing the deep structural reforms to financial markets (and to many other parts of the economy) that are so badly needed to bring about the long run growth momentum we need (not artifiacially supported by unsustainable steroids).

The US has become a captured democracy, to use Acemoglu's words!

Brick:

I don't think it will be the big drop that many are expecting and the reason will be sentiment amongst a minority of the economy. I see evidence that the upper echelons of society are in recovery with remuneration and even house prices seeing some slight recovery. This will skew statistics, mask many problems and it will take much further hardship on the rest of the economy before this sector declines. Where this segment of the economy goes so will stocks regardless of the building imbalances.

I do think you have missed some important criteria of your list though and it is these that will eventually tell. House prices will not rise significantly until more modest wages rise, despite the average American itching for house prices to start climbing again. The important criteria you missed out was that equity withdrawal which accounted for probably above ten percent of consumer spending is not coming back soon because banks are currently taking huge hits of this kind of debt. We also have those who have not paid their mortgage for over a year finally being foreclosed which will also hit consumer spending. Lastly on the consumer spending side we have discretionary spending being redirected towards the auto industry. Cash for clunkers still requires buyers to get into more debt and the interest rates being charged could well mean further losses down the line.

The elephant in the room for me though is tax receipts which I expect to fall away even more significantly than forecast as middle class families suffer from salary squeezes and redundancy. This is important in relation to container traffic which has shown a marked change over the last month from imports having crashed to both imports and exports having crashed. This suggests to me a greater need for government deficit at a time when GDP might suggest reduced need for foreigners to buy the debt and QE is coming to an end. Eventually once more money will cycle from stocks, to commodities to government debt, taking weaker banks down and painting red ink all over balance sheets.

Lavrenti Beria:
A fine summary!

Perhaps the most telling point is your evaluation of the political aspect. This clown has proven himself in just instance after instance to be the very converse of every hope he encouraged the American people to develope about him. He presented himself as a kind of blank slate on which one could write what ever one wished - Hitler, interestingly, did exactly the same thing during election campaigns in early 1930s Germany - and now all they have for their naivete is the underlying blank slate. And that's all they'll ever have. Barak Obama is a disaster and he's been a disaster from the very outset.

What ought to painfully clear to anyone with half a brain in this country is that our present system, so thoroughly corrupted as it is, simply will not respond to electoral sentiment. The Democratic Party has a veto proof margin in the Congress yet cannot pass a health care bill. The franchise has been reduced to an abstraction. Mass demonstrations and the general strike are now the only devises that remain to a people that have had their democracy stolen from them. If todays's market developments in fact auger a second downleg in both the market and the economy, there will come a point where public will grasp fully what the reality is that faces them. Then, all the emptiness that has been American politics since at least the 1970s will be in for a rude shock.

SocialismSucks:

The die was cast when Obama nominated Geithner in early December. That single action meant that the whole ballgame was going to be a giant fix. Obama is indeed a frontman for the Oligarchy...like the rest of our recent presidents. Apparently a candidate can't get near the Oval Office unless he makes his deal with the Oligarchy first. Isn't that nice?

So, here we are: trapped between the banker-funded Left and the banker-funded Right. Meanwhile Liberty is going up in smoke...just as the Founders warned.

Early America was remarkable for its virulent antipathy to the bankers. The Founders (except for Hamilton) essentially declared themselves to be at war with International Finance. The money coining section of the Constitution was perfectly clear on this matter and that is why it was subverted by the bankers completely...subverted decade after decade right up to this morning's absurd comments by Federal Reserve PR flack Mishkin on CNBC.

In the old days criminal bankers were tarred and feathered. And for good reason: because their crimes can devastate entire societies. But that wisdom was all flushed down the memory hole by the powers that be and now modern America will relearn the lesson the hard way: If you, dear citizen, don't have the courage to hang criminal bankers, then criminal bankers will hang you. And, no, this doesn't mean that the problem is capitalism. The problem is corruption.

Purple :

The bigger question is why people are surprised. Nothing in Obama's past would indicate he is someone to rock the boat. His first major promoter on the national scene was Brzezinski, one of the most unapologetic advocates of American imperialism.

A less educated people is one that is easy to manipulate.

anne:

Actually, the Obama-Hoover analogy is done best by Kevin Baker in Harper's magazine, a few months ago. A recap of that article, and a link to it, here: http://www.newdeal20.org/?p=3027

Yves Smith:

I will take issue with the "black Herbert Hoover" pushback, although it is admittedly not considered a safe topic in charged America. Since I score as slightly biased in favor of blacks in the Harvard Implicit Bias tests, which is reputedly hard to override consciously, I like to think I am not terribly biased, but we all tend to kid ourselves on this topic.

I was disturbed, and said so on this blog, by how much was being made of Obama's race at the time of his inauguration. It demonstrated how little progress we have made, It seems fine to not merely to bring race up, but to go on about it at great lengths in some contexts, and verboten even to make mention of it in others.

Obama is mixed race, He could just have easily chose to position/see himself that way, as Tiger Woods does, but he didn't. I have no idea whether this was a political or personal choice.

The reason this matters in this context is the fact that he is black makes it less likely that his Herbert Hoover qualities will be called out.

The projection based on his race is to see him as being fare more left wing than he is, I can't recall the number of times he has been branded as a socialist, when vastly more aggressive intervention and government action, starting with the Freddie/Fannie conservatorships adn teh non-nationalization nationalization of AIG, plus the large increase in the Federal budget, took place under Bush. True conservatives were very unhappy with Bush on this front, but few others made much of his actual versus perceived positioning.

He and Obama seem to be going down a path of Mussolini-style corpocracy. Yet Obama gets the "socialist" brand, I don't think that is merely the result of his being a Democrat. Any "minority", be it black, Hispanic, female, American Indian, would be more likely to be attacked on that basis. The tacit assumption is they identify with the rainbow coalition as a result of their personal background, and therefore assumed to favor redistributive policies.

It is fair to say that Obama has called for more taxes on the wealthy, but again, his proposals are merely a fairly minor reversal after very large concessions made by Bush to the top income groups. He is attempting to carry the Democratic mantle on some issues, but his stance on Pentagon budgets and the banking industry have a more in common with the Bush position than not.

DownSouth:

LeeAnne :"What's the difference between a 'black Herbert Hoover,' and a Herbert Hoover, or a Lincoln or a Roosevelt for that matter?"

Could it be that, hidden away in the deepest recesses of Edward Harrison's mind, as well as the minds of many others, was the notion, or the hope, that because Obama is black, he would or could somehow redress the intractable social ills that plague our lives? Could it be that he rekindled some of that 60s idealism of the civil rights movement, "it's determination to act, its joy in action, the assurance of being able to change things by one's own efforts," as Hannah Arendt put it? Could it be that there is a backlash now that people are discovering that Obama is merely human, just like you and me?

Given the exaggerated role race has played in America, and continues to play (as the Henry Louis Gates, Jr. embroglio showed), I don't see how any realistic discussion of American history, politics or economics can take place without talking about race. And pretending that it doesn't exist doesn't make it go away. I also don't understand how the need to be sensitive has taken priority over the need to discuss our social problems freely and openly.

Obama is the crowning jewel of the civil rights movement, its fruition beyond anyone's wildest dreams. But he is also becoming emblematic of its failures. As Arendt reminds us, the organizers of the civil rights movement "for a time had a quite extraordinary success, that is, as it was simply a question of changing the climate of opinion--which they definitely succeeded in doing in a short time--and doing away with certain laws and ordinances in the Southern states; in short, so long as it was a question of purely legal and political matters. Then they collided with the enormous social needs of the city ghettos in the North--and there they came to grief, there they could accomplish nothing."

I believe, as Arendt did, that the crises facing America far, far transcend race. However, race is very much part and parcel of those crises, and a study of America's racial past, and especially of the civil rights movement and its successes and failures, offers a tremendous insight into what ails the republic.

That study cannot happen, however, because of what Richard Bernstein calls the "Sensitivity Gestapo." Its moral smugness and self-righteousness adds

yet another coating of mandatory sanctimony to a society that already has trouble talking about things frankly and honestly. It is, quite simply, an attack on freedom and autonomy for people to be pressured, or required, to attend chapel and told what it is proper to think, to feel, and to believe. The whole point of the liberal revolution that gave rise to the 1960s was to free us from somebody else's dogma, but now the very same people who fought for personal liberation a generation ago are striving to impose on others a secularized religion involving a set of values and codes that they believe in...

--Richard Bernstein, Dictatorship of Virtue

Kelli K:

"On a conspiracy level, I got to think the financial oligarchs that are running the US government purposely send Obama out to debate a lame duck health care plan that would keep the public's mind off the financial crisis."

Whoever said that, I am on your wavelength. Get people to vent their spleen on something that hasn't even been written--sheer genius (I credit Axelrod). We are manipulated and sidetracked at the critical moment.

The press is pitching in for Team Obama as well. Yesterday's front page story in the WaPo caused a helluva storm--more than 700 comments on a piece about a divorced mom in Westchester "struggling" to keep the $2.5 million house together, etc. Nevermind that she is a debt slave like everybody else in the country, the hordes were baying for her blood. It got quite ugly.

Meanwhile Bill Gross takes his share of the TARP bailout and buys a $23M mansion, and some jerkoff speculator at Citi is set to walk off with $100M. That's ok. Focus on blond middle-manager. Here's the circus, where's the bread?

Anonymous 3:20:

Wow, just wow.

While I would be the last one to defend Obama, the way that the GOP is completely ignored in many of the tirades here is nothing short of stunning. If you look at the absolutely insane pushback from the loons on the right and their corporate media whores, you get a taste of exactly what Obama is in for on every front. He's supposed to change the banking culture? Jeebus, the fruitcakes are already comparing him to Hitler (even here apparently) over every step their whacked-out perspective sees as 'socialist/fascist'.

What many see as a sell-out, I see as a man held hostage by the reality that the government is still owned by the banks and corporations. The Senate still has a pro-banking, pro-corporate majority, party affiliations be damned. And the so-called liberal media has parroted every damned lie these bastards have uttered, and glossed over every substantive word Obama has spoken as if he was the one talking lies and bullshit, and not his corporatist opponents.

Frankly, it's hard for me to imagine that many here have been paying attention to DC politics for the last two decades. Obama isn't gutsy, that's a given, but even if he was, only a fool would think that he could get much done with the culture of corporate corruption with which he's splattered every day.

Oh, and the sick obsession with whether the economy is (finally!!) about to topple is disgusting. I've been hearing this for nearly 9 months now, and I'm tired of this twisted, almost perverse fascination with calamity. Go ahead, keep hoping for the big fall, but when it doesn't come this time either, consider getting some therapy, or some meds, or both.
/rant off.

Hugh :

You could add job losses, commercial real estate, piddling efforts to pursue the millions of cases of fraud, and the non-removal and reining in of the worst of the banksters and their firms (and yes, I mean Goldman in particular).

As for Obama, healthcare and the economic crisis are only two of many areas where he has failed to change from Bush or show leadership. There is the ongoing lack of reform at Justice, the continuation of many Bush era cases using exactly the same dubious legal rationales, everything from state secrets, Don't ask don't tell, 6th Amendment right to an attorney, fighting well founded habeas petitions (pretty much everything that was going on with Bush litigation), no real pull out from Iraq, escalation in Afghanistan, moving operations from Guantanamo to Bagram, domestic spying, refusal to investigate or prosecute Bush era illegalities. Except for stem cell research and the release of a few OLC memos, there have been no breaks with Bush.

But, of course, it is not just Obama but the Democrats in general who have been backing up his status quo-ism. And this gets to the larger point that Obama and the Democrats aren't really being pushed anywhere they don't already want to go by the Republicans. What we are seeing play out is the Obama/Democratic agenda. The Republican agenda is even crazier but both have failure written all over them.

So despite the greenshoots talk, the country's fundamental problems are being addressed by neither party. We should expect various wasteful, ineffectual efforts that may muddy the waters somewhat but not really change an overall downward trajectory to depression in 2011.

Anonymous:

LeeAnn said:

"Furthermore (pardon the spam) all Obama has to do is propose and promote a public option that would expand Medicare to everyone who wants it."

Really? That's all? And then those blue-dog Dems who refuse to part ways with the wingnut GOPers will just fall into line huh?
If Dick Armey can go on network TV and state that he thinks Social Security and Medicare are "tyranny", and he's not crucified, nor are the GOP/DINOs for agreeing with him, what chance does Obama really have at a public option? Seriously, what are you watching, faux snooze?

Yves Smith:

Anon of 3:20,

People seem to forget the crisis that Obama inherited, and the opportunity he blew. When Roosevelt took office, he announced key elements of his new program in his inauguration speech and started taking action immediately. Instead, we got Turbo Timmy who announces a non plan plan weeks later, with enough of a rough outline of where he is going to give the industry time to mobilize against the few elements not to their liking.

I disagree completely that Obama could not have done more. The economy was clearly issue number one. What were he and his team doing during the transition? Knitting? They certainly weren't doing much planning. He had a tremendous opportunity to take ground early and muffed it. There was a reason Roosevelt had his hundred days. If you are going to be bold, you need to move quickly.

As for the ad hominem attack on the market musings, I find it amusing that calling a manipulated and toppy market what it is (which does not mean it can't go higher, as the dot com era attests), is deemed to be a sign of some sort of mental disorder. If so, as I indicated, a lot of successful professional investors share this pathology. I'd venture to say this could also be projection on the writer's behalf.

Gentlemutt:

Yves, you touched on a key fork in the road selected by our President. His personal choice of marriage partner, especially given Mrs. Obama's own youthful writings on race while a college student, and his numerous early choices about political partners reflect that. Mr. Obama decided not to emphasize his particular version of the widespread muttiness that helps so much to bind this society together.

Injecting himself foolishly into the Harvard yard squabble, and thereby squandering some power of the presidency as well as his own, was just the latest in a string of acts by which Mr. Obama has signaled his viewpoint and intentions on matters of race.

It is a shame, really, since when more relaxed he seems happy to acknowledge the hybrid good fortune visited upon him, as for example when he expressed a personal preference for an old-fashioned mutt for the prospective family dog by making a reference to himself as such.

He is wasting a great asset, even after that asset helped get him elected, and that is important because it leaves him less public goodwill and therefore less time to shed the legacy Rubinesque advisers and make his own administration before the Hoover tag sticks.

Hoover complained bitterly after the fact about his inability to stop the 1929 bubble and crash. One can imagine former President Obama someday lamenting, too late, all the bad advice upon which he acted, especially in the early days of his administration.

Anonymous Jones:

I'm back from vacation. It took me hours and hours to catch up on the postings and comments from just ten days missed! Beautiful stuff from DownSouth on Orwell/Dickens and Arendt.

I can't believe I'm going to say this because I love being anonymous, but the level of the comments has surely deteriorated since the anonymous ban was lifted. What in the world do people think they are accomplishing by labeling Obama a "clown," an "amateur," and a "disaster?" He is none of these things.

I am no fan of many of his policies (or perhaps even most of his policies now), but surely calling this man who is very educated and obviously quite bright a "clown" serves to harm yourself more than it serves to harm Obama's image. I'm telling you this for your own good, commenters...seriously. It makes you look like idiots (and I mean that in the nicest sense of the word). It is difficult to believe that many of the commenters here would exceed Obama on any tests, whether they be based on intelligence or knowledge.

I wish Obama did everything that I think should be done in this world. He clearly will not be doing so. This does not make him a clown.

Sometimes it really makes sense to consider the limitations of your own knowledge (not to mention the vast universe of opinion among people with similar knowledge) before lashing out in anger and with invective because you are *so sure* that you are right about something. Just a suggestion.

[Aug 17, 2009] Roubini Project Syndicate Op-Ed: A Phantom Economic Recovery

Roubini is too big fan of "recession porno" to be able to think critically...
August 16, 2009  | Project Syndicate

Where is the US and global economy headed? Last year, there were two sides to the debate.

Today, 20 months into the US recession—a recession that became global in the summer of 2008 with a massive recoupling—the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.

Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.

Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

  1. The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.
  2. Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.
  3. Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.
  4. Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, UK, Spain, Ireland, Australia and New Zealand, etc.), while not increasing fast enough in over-saving countries (China, other Asian countries, Germany and Japan, etc.) to compensate for the reduction in these countries’ net exports. Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery.

There are also now two reasons to fear a double-dip recession.

So, the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anaemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.

[Aug 17, 2009] Unemployed Workers Starting to Exhaust Extended Benefits

The National Employment Law Project estimates that half a million workers will have exhausted their extended benefits by the end of September, and a total of 1.5 million by the end of the year. These numbers are about to increase sharply.

[Aug 17, 2009] RBS uber-bear issues fresh alert on global stock markets - Telegraph by Ambrose Evans-Pritchard

S&P500 looks 20% overvalued, but Lord Keynes advice still holds ;-)

"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."

The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice.

He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.

Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a "very nasty period is soon to be upon us" as – indeed it was. Lehman Brothers and AIG imploded weeks later.

This time he expects the S&P 500 index of US equities to reach the "mid 500s", almost halving from current levels near 1000. Such a fall would take London's FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1250.

Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September.

While media headlines have played up the short-term bounce of corporate earnings, Mr Janjuah said this is a statistical illusion. Profits were in reality down 20pc in the second quarter from the year before. They cannot rise much as the West slowly purges debt and adjusts to record over-capacity. "Investors are again being sucked back into the game where 'markets make opinions', where 'excess liquidity' is the driving investment rationale.

"The last two Augusts proved to be pivotal turning points: August 2007 being the proverbial 'head-fake' when everyone wanted to believe that policy-makers had seen off the credit disaster at the pass, and August 2008 being the calm before the utter collapse of Sept/Oct/Nov… 3rd time lucky anyone?"

The elephant in the room is the spiralling public debt as private losses are shifted on to the taxpayer, especially in Britain and America. "Ask yourself this: who bails out Government after they have bailed out everyone?"

Mr Janjuah said governments might put off the day of reckoning into the middle of next year if they resort to another shot of stimulus, but that would store yet further problems. "If what I fear plays out then I will have to concede that the lunatics who ran the asylum pretty much into the ground last year are back in control."

[Aug 16, 2009] What was in Larry Summers’ D.E. Shaw Pitchbook? By David Goldman

Hat tip to Barry Ritholtz
February 5th, 2009

White House economic advisor Larry Summers, a former Treasury Secretary and President of Harvard University, had  brief career as a part-time pitchman for a hedge fund. His activities may bear on his ability to serve the country with maximum effectiveness. According to sources who attended meetings with him, Summers traveled to Asia during July 2007 with a pitchbook recommending the AAA-rated tranches of collateralized debt obligations to Asian sovereign funds and financial institutions, in his capacity as a Managing Director of the hedge fund D.E. Shaw.

In July 2007 the AAA-rated tranches of mortgage-backed securities backed by subprime collateral were trading at around 90 cents on the dollar. Now they are trading at less than 40 cents on the dollar.

The AAA-rated tranches of CDO’s, of course, are the “toxic assets” that the US government now is proposing to buy from banks to unclog their balance sheets. D.E. Shaw, ranked fourth by size among hedge funds with about $30 billion in resources, owns an unspecified amount of such structured products. Late in 2008 it suspended some redemptions by investors seeking to cash out, and continues to “gate” redemptions. Although D.E. Shaw’s investments are proprietary, the perception of the investment community is that the firm is stuck with big positions in such “toxic assets” that it cannot sell. The overhang of hedge fund redemptions on the market artificially depresses the price of structured product, which in turn has forced massive writedowns on the part of banks.

According to my sources, Summers enthusiastically urged Asian investors including sovereign funds to purchase such instruments just weeks after the collapse of a Bear, Stearns hedge fund whose failure triggered the collapse of the whole structured market. I do not know precisely what was in Summers’ pitchbook, but if I were a member of a Congressional committee responsible for the oversight of economic policy, I would very much want to know what was in it.

Larry Summers is a highly-honored economist and an honorable man, and I do not believe for a moment that he has done or would do anything dishonest. Nonetheless, perceptions are important. America’s foreign economic relations are of paramount importance to its recovery prospects, and the involvement of foreign governments will only increase. Foreigners already own $4 trillion or so of American debt instruments, and the credibility of American public officials is not a minor issue.

At very least, Dr. Summers should explain what happened.

[Aug 16, 2009] Hoover on the Recovery By Barry Ritholtz

A few good quotes:

“The spring of 1930 marks the end of a period of grave concern…American business is steadily coming back to a normal level of prosperity.”

– Julius Barnes, head of Hoover’s National Business Survey Conference, March 16, 1930

“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”

– Herbert Hoover, May 1, 1930

Weak consumer spending will last for years by Edward Harrison

50% of US consumption is from top 10% of population who is no way is affected by the crysys... Midlle class accounts for 40% and it suffers greatly due to jobs ourtsourcin. Low income people consumption is stable as it cannot be squessed much.

August 16, 2009

It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States.  This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers...

The Balance Sheet Recession

... Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade.  He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts.  And the three D’s come into play:  a downturn leads to debt deflation, deleveraging, and ultimately depression.  The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.

Secular inflation will be non-existent

Therefore, the problem is a lack of demand for loans not a lack of supply. The Federal Reserve can print all the money it wants. But, if there is little demand for more indebtedness, it is not going to have the desired effect of permanently reflating the economy – although it can create bubbles.

The corollary of this is that inflation will be non-existent on a secular basis. For the increase in liquidity to feed into consumer price inflation, people have to actually buy more stuff.  And that’s not what happens in a balance sheet recession because people are concentrated on reducing debt and increasing savings.

Moreover, there is a huge glut of excess capacity globally now that we have had a major fall in consumption. Producers are waiting for demand to catch up with supply – not exactly the sort of situation that makes for inflation. I should point out that capacity is not fixed – it grows obsolete if unused. So, much of the investment in manufacturing capacity in China and property in America is going to have to be liquidated eventually.

But, the economy doesn’t move in a straight line. It courses through cycles. Just as we could be entering a cyclical recovery in the middle of a depression, it is altogether possible that the Federal Reserve can produce high cyclical levels of inflation despite the secular trend toward disinflation. A lot of this is likely to come through commodity prices or destruction of the currency.

... ... ...

Macro Themes

One can only conclude that the asset-based economy of the last quarter century is over. It was based not just on a dubious productivity miracle but also on mountains of debt and over-consumption.  The new normal is debt reduction and savings.

What does this mean for the economy?  Here are a few macro themes:

  1. Retailers are in a world of hurt, not just cyclically, but on a secular basis.  Listen to the Patty Edwards interview.  America has double the amount of retail space per capita that it did a generation ago. This is the definition of over-capacity. When a glut of supply meets a deficit of demand, you have the makings of a very bad outcome for the stocks in that sector... . Investors like George Soros are selling retail (Wal-Mart, Walgreen and Lowe’s).
  2. Commercial Real Estate will feel the pain too. The Patty Edwards interview not only shows huge excess capacity in retail, but it shows that retailers are trying to re-negotiate contracts down.  They have Commercial REITS over a barrel because they can just threaten to close down outlets if they don’t get the contract price concessions they seek.  Back in January, I mentioned the fact that bankrupt anchor tenants like Circuit City  destroy the economics of malls for other tenants and create a domino effect....
  3. Export-oriented economies need to foster internal demand growth. Here I am talking about Germany, Japan, and China amongst the major economies.  The US consumer is out of gas and these countries are too dependent on exporting to US consumers. It is not clear who can replace her...
  4. The new normal is lower US and global growth. This all suggests that we are likely to see lower growth in the US and globally as a result – at least until the American consumer gets out of a hole or someone else picks up the slack.  That will likely mean we will see low-growth, short business cycles punctuated by fits of recession, all complicated by the three D’s (debt deflation, deflation, and depression).
  5. One should fear a 1937-style relapse. If you recall, the Great Depression saw a major economic uptick in the years after 1932. No one would call this a boom (see the section called “recovery does not mean recovery” in my post “Economic recovery and the perverse math of GDP reporting.”) This was only a statistical recovery in the midst of a greater downturn. Eventually, stimulus was withdrawn and the economy tanked again. Richard Koo argues that Japan did not go into a 1929-style depression because it maintained much more stimulus than the US did in the Great Depression. If this stimulus is removed before the deleveraging and balance sheet repair is complete, you get a major relapse. So, beware of deficit hawks telling us that fiscal stimulus must end to eliminate deficits.  If anything, the government’s long-term deficit outlook should be eliminated via reigning in skyrocketing health care costs. {What about military budget? --NNB}
  6. Banks will be in a permanent state of crisis. If we learn anything from Japan, it’s that time does not heal all wounds.  The Japanese tried to recapitalise their banking system by propping up zombie institutions.  That didn’t work.  It didn’t work in Japan in the 1990s and it didn’t work with Savings & Loans in the US in the 1980s. Why should we expect it is going to work now? ...
  7. Liquidate zombies while providing counter-cyclical stimulus. The banking example gives a hint to the correct policy response. ...

When it comes to US consumers, weak spending growth will last for years. Ultimately, debt levels in the US economy must return to a sustainable level. This can happen over time, which would mean a decade-long low-growth, muddle-through economy - not a terrible outcome either for the economy or for asset prices.

Or it could happen overnight through default, bankruptcy, and liquidation – a Great Depression II scenario. The policy response in the US and elsewhere will make the difference.

Right now, we are headed for a statistical recovery at best. If policymakers think we are off to the races and try to normalize policy, they will be making a heinous mistake.

Selected Comments

ronald:

Driving around in American suburbs is a unique experience, RV's, boats, motorcycles, ATV's, 3 auto's abound and we haven't gone through the front door and viewed the various electronic games, TV's and I don't even want to mention the kitchen. Nowhere in the world do you find factory workers, retail workers etc with this kind of toys!

Credit expansion has reached levels that only Americans consider normal, the rest of the world is happy to provide the toys, but the party is over. The fact that economist have finally began to get the idea that this lifestyle is a bit overboard and not sustainable is hard for me to comprehend but I am glad somebody finally is getting the message. Thanks for the post!
 

Guest Post- Frank Veneroso on Mortgage Armageddon

This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.
Frank Veneroso was kind enough to write as a result of seeing a guest post "Debtor's Revolt?" by his colleague Marshall Auerback. Veneroso also provided his latest newsletter and gave us permission to post it. It it pretty long (12 pages), I extracted the executive summary and other key bits. Be sure to read the final section, starting with the boldface heading "Why Resolving The Mortgage Armageddon Problem Will Be So Difficult:." (Enjoy!

From Frank Veneroso:

  1. Deutsche Bank now predicts that 48% of all mortgaged American homeowners will be “under water” by 2011.
  2. One might assume that means that the aggregate loan-to-value ratio of all mortgaged households will be a little less than 100%.
  3. I have been focusing first and foremost on the aggregate loan-to-value ratio of all households with mortgages rather than the number of mortgaged homeowners who will eventually be underwater.
  4. I calculated that, on mean reversion in house prices, this aggregate loan-to-value ratio would rise to 120% to 125% -- a lot worse than what the Deutsche Bank analysis seems to imply. So I studied their analysis to ascertain why I went wrong or why they went wrong.
  5. Though their analysis has a somewhat different objective and employs a different methodology, their analysis in fact comes to almost exactly the same conclusion as I have reached: when one focuses not on the share of all homeowners who will be underwater but the aggregate of mortgaged home values that will be under water, on mean reversion in home prices the aggregate loan-to-value ratio will probably be north of 120%. Here is why.
  6. Deutsche Bank admits that their data on total mortgage debt is incomplete. Using more complete mortgage data the percent of homeowners under water would be higher and the implied aggregate LTV might be closer to 110% than 100%.
  7. Also there is skewing. Those who are underwater have negative equities that exceed in value the positive equities of those who are not underwater
  8. There is skewing on more than one account. Because the highest shares of those underwater are in the regions with the highest home values and the greatest percentage home price declines the overall skewing might be very great. And this skewing increases as home prices fall further to the Case Shiller mean.
  9.  When one factors in this skewing the aggregate loan-to-value ratio of all mortgaged homeowners based on the Deutsche Bank analysis probably rises to 120% or more.

Once Again, Does Debt Matter Any More?

We just received a better than expected employment report in which the unemployment rate surprisingly fell. The stock market rallied. The bond market sold off. The last holdouts who still believe the recession is not over are now few and far between. After the last Case Shiller home price report and several upticks in the various measures of home sales, the crowd believes the worst is behind us as regards housing. There may still be a lot of debt out there, but it doesn’t matter anymore.

So here I am, still concerned about all that private debt and still talking about a Mortgage Armageddon. I know, you think, having predicted the financial crisis before it came and having predicted yet more to come once it began to unfold, Frank just can’t stop forecasting more to come. It was just too much fun while it lasted, even though it is all over now.

Wrong! It isn’t an addiction to former winning ways that keeps me on this Mortgage Armageddon kick. It’s a review of the history of these things plus simple logic and some arithmetic. I don’t want to see Mortgage Armageddon. Now that, thanks to Geithner and Summers, Obama has assumed ownership of a national insolvency he has no responsibility for, Mortgage Armageddon could paralyze his presidency and leave us in political chaos – which I don’t want to see.

In any case, though the ranks of worrywarts like me are now a lot thinner, I still am not alone. A friend of mine who owns a lot of mortgages keeps telling me that the delinquencies on his mortgages keep going up, and quickly. Yet the foreclosures do not. It seems the financial channel has some kind of frightful constipation whereas dying mortgages keep piling up inside and somehow their elimination is obstructed.

Deutsche Bank Thinks Debt Still Matters

A week ago I quoted Josef Ackermann, head of Deutsche Bank.

This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.

[Aug 16, 2009] The Economic Risk of Excess Capacity

"Instead of passing along the gains to labor in the form of leisure time or higher wages, business pushed for higher output chasing hopeful and greater consumption. You reach a point where neither of the later is possible as labor, the bulk of the population driving consumption, being downsized and deprived of wage growth (matching the technological advancement) or other compensatory gains"

Ambrose Evans-Pritchard has a good piece up at the Telegraph on an issue that appears not to have gotten the attention it merits, namely, the level of underutlization of capacity and the risk it poses to anything dimly resembling recovery. Evans-Pritchard brings up a related topic, that deflation is a bigger issue that most commentators are acknowledging. He sees it as a perceptual bias, as a result of inflation being something everyone knows all too well, but not deflation. It may be hard to conceive of deflation being possible after massive central bank liquidity creation. Yet that can happen with banking systems choked with dud credit, as the Japan experience attests.

Another point Evans-Pritchard makes late in his piece is that the widely-held assumption, thanks to the weightiness of Milton Friedman's and Anna Schwartz's Monetary History of the United States, is that the Great Depression resulted from bad monetary policy. But other academics, such as Peter Temin, argue that the near-hallowed tome failed to deliver the goods, that extensive detail masked a failure to prove the argument. But the Friedmanite view is driving policy.

... ... ...

From the Telegraph:

The sugar rush of fiscal stimulus in the West will subside within a few months. Those “cash-for-clunkers” schemes that have lifted France and Germany out of recession – just – change nothing. They draw forward spending, leading to a cliff-edge fall later. (This is not a criticism. Governments did the right thing given the emergency). The thaw in trade finance has led to a V-shaped rebound in East Asia as pent up exports are shipped. But again, nothing fundamental has change....People talk too much about “liquidity” – a slippery term – and not enough about concrete demand.

Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.

Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.

I reserve judgment on this thesis, which amounts to an indictment of our economic model. But whether we like it or not, Left or Right, we may have to pay more attention to such thinking if Bernanke’s credit fix fails to do the job. Back to socialism anybody?

Selected comments

bb :

we all live in a fiat currency regime. deflation is such a setting is very difficult to attain. another month to work out the effect last year's record oil prices and the deflationistas will have to look for another subject to clamour about.
a link no one seems to be making as well is that all this now excess capacity was funded during the credit bubble of the last 20 years, and the bulk of china's growth occurred almost exclusively during the past 10 years. this means one thing: all this capacity has not been paid off, it is not owned by the producer, but by the bank. when sales decrease, businesses still have to break even at the very least, so they can service their huge amounts of debt. most of that debt has to be rolled over as well. this will have as well accounting implications regarding amortization allowances. lowering prices beyond what allows companies to make timely debt payments will be suicidal. add unions in most of europe and some sectors in the u.s. and you have an environment where deflation simply cannot occur, because companies do not actually own their means of production, cannot upgrade due to depressed sales, pay higher taxes due to expired amortization allowances.

run75441 ...

Too many steel mills have been built, too many plants making cars, computer chips or solar panels, too many ships, too many houses. They have outstripped the spending power of those supposed to buy the products. This is more or less what happened in the 1920s when electrification and Ford’s assembly line methods lifted output faster than wages. It is a key reason why the Slump proved so intractable, though debt then was far lower than today."

Taking from Sandwichman and Chapman:

"Technology doesn't destroy jobs. What technology does is make possible and make necessary either increased consumption, increased leisure or both. Unemployment results not from a quantity of jobs deficit but from an adjustment deficit. Unemployment results, that is to say, from a failure to establish a new income, consumption and work time regime commensurate with the new production potential offered by the technological advance."

Depicted by Evans-Pritchard is a typical Capacity versus Consumption versus Technology scenario. Instead of passing along the gains to labor in the form of leisure time or higher wages, business pushed for higher output chasing hopeful and greater consumption. You reach a point where neither of the later is possible as labor, the bulk of the population driving consumption, being downsized and deprived of wage growth (matching the technological advancement) or other compensatory gains, can no longer afford the products being manufactured. The gains from the technological advancement and capacity growth are being passed along to capital creationists, business, and stockholders. Didn't Henry Ford teach business the value of adequately compensating labor so as to be able to afford the product being manufactured?

Evans-Pritchard misses this point by laying the bulk of the argument upon capacity outstripping the spending power of labor. As it does not have to be a technological advancement, increased capacity does not necessitate increased wages. Increased capacity can be established to sustain old and new markets dependent upon the ability to consume in the old market and growth of consumption in the new market. Although both are growing, neither the Chinese or India markets are to a similar size as the US. And neither has business raised the wages and living standards of these two countries to a level where the population could afford a sizeable portion of the product produced and exported to the US, the largest global economy and consumer nation.

With regard to US automotive; consistently, they have pursued a push-demand manufacturing and capacity strategy (if we build it, we will sell it) and have failed to recognize the reoccurring energy crisis since the seventies. While the US provided a large percentage of its own oil requirement, automotive could safely pursue a push-demand business strategy. It based its business model and capacity growth upon an uninterruptible cheap supply of oil and a continued demand for big, fast, coupled with old technology.

What triggered today's events wasn't automotive producing old cars as it was in progressing towards a long over due change. Nor was it triggered by too much capacity. The trigger was on on W$ at the Sachs, Lehmans, AIGs, Merrills, Citigroups, etc. (thank you Phil Gramm) and their speculation on the creation of paper wealth with CDO, CDS, etc. Automotive could have limped along and their first request was for help to modernize, not help to prevent bankruptcy. Wasn't over speculation the same issue in the twenties?

With wages being relatively stagnant in the US for 95% of the population, wages in Asia being low and not sufficient enough to buy the product manufactured, and profits and wealth being concentrated to a relative; the environment was set. If W$ and business wishes to continue a consumption based society, it needs to recognize "who" is doing all the consuming and pass along the wealth and profits from technological advances and product manufacture. For sure W$ paper creation can not do such.

Anonymous Monetarist:

The King Report, M. Ramsey King Securities, Inc.
February 11, 2008, Issue 3808

PART1

We want to take a moment and disabuse our readers of the propaganda that has been spewed for years, ‘if only the Fed had pumped more credit after the 1929 Crash, there would not have been depression.’
This is patently wrong. The Fed and NY Fed went Bernanke after the 1929 Crash and pumped as much credit as it legally could until late 1931 when a global gold run handcuffed the Fed. Interest rates then increased, but for only two quarters.

We pulled out an old reference book over the weekend, Economics and Public Welfare - A Financial and Economic History of the United States, 1914-1946, by Benjamin M. Anderson, a professor who taught at Harvard, Columbia and Cal, and was Chase Bank’s economist from 1920-1939. Professor Anderson notes the Fed and NY Fed aggressively expanded credit after the ’29 crash until they exhausted their ability to create credit in Q3, 1931.
By Q3 1931 the Fed had bought as much collateral they could – the US government only had about $3B of debt issued. This was before FDR created the welfare state and budget deficits generated large issuance of US government debt. And at that time, US law forbade Fed repoing of most instruments.

The stuff hit the fan in 1931, when a series of global crises created global depression. First, Kredit Anstalt went bankrupt on May 12, 1931. Austria collapsed on May 29, 1931. A foreign run on Germany commenced just three days later. The runs of Austria and Germany’s gold supply precipitated an international effort to bail them out in July 1931.
After the international bailout effort failed, a run on England commenced on July 13, 1931. On September 20, 1931, England abandoned the gold standard. Sweden abandoned the gold standard on September 27, 1931. The first run on the US’s gold supply commenced after England’s abandonment.
The run on the US gold supply devastated banking reserves and by law sharply reduced Fed reserves and its ability to create credit. Glass-Steagall mandated that Federal Reserve Notes would be backed 40% by ‘free’ gold. All the Fed’s gold was ‘free’ gold.

“Moreover, Federal Reserve notes were not created by the Federal Reserve banks…they were obligations of the government of the United States issued not by but through Federal Reserve banks. They were issued to the Federal Reserve banks by the government.”

Poignantly, Professor Anderson pens a sub-chapter as, Reckless Buying of Government Securities in 1930 Made for Money Market Tension in Winter of 1931-1932.

“The Federal Reserve System was gambling, using dangerous devices to stave off and unpleasant liquidation, and hoping for a return of the prosperity which was “just around the corner. They succeeded in making cheap money. They succeeded in bringing about a further expansion of bank credit against securities. [Sound familiar?]
But the Federal Reserve System also succeeded in bringing the banking system of the United States into and extremely vulnerable position, tragically revealed when the foreign run on our gold came in late 1931, and when depositors, fearful of individual banks, were taking cash out of these banks and hoarding it.” (p. 263)

Foreigners repatriated gold and other securities from US banks. US citizens and businesses hoarded cash,which produced a cataclysmic collapse in system reserves – sound familiar? We are back to the future.

"Stay the Stimulus Course" by Mark Thoma

I'm hesitant to put too optimistic a face on the current economy. The economy is declining slower than before (and policy has played a crucial role in putting on the brakes), but we haven't hit bottom yet. We are still in recession. Once we do hit bottom, there's no reason to believe that we are more likely to bounce back toward full employment immediately than we are to stay stuck at the bottom for awhile as we catch our breath and recalibrate. My view is that we are likely to remain at the trough of the cycle awhile before the economy takes a strong upward turn, but exactly how long we will remain stuck near the bottom of the cycle is hard to gauge. I hope it isn't long at all, but a sustained period of sluggishness is a possibility policymakers have to take seriously.

So we aren't at the bottom yet, when we do get there we could remain at the bottom for some time, and once the recovery phase finally arrives, the upward climb is almost always slower than the fall. I agree that stimulus deserves some of the credit for where we are, things could be much, much worse. But the economy has a long way to go before this is over, and it can still use all the stimulus help it can get.

Paul Krugman and Charlie Stross

CS: My working hypothesis is that we are living in a future shocked civilization in fact the future shocked globe. There is a lot of evidence of it all around. The ascendancy of religious fundamentalism in all sorts of cultures is one particular response. People don’t like rapid change when it’s applied to them against their will, when it’s coercive, and when people don’t like something, an external stimulus, they tend to kick back against it. Religious fundamentalism boils down very largely to one thing: certainty in life. ... And to people who are disoriented and distressed by the way the world around them is changing that’s got to be a source of … a very attractive offer of mental stability.

PK: You know, I think this is where being an American makes a difference. And knowing that we’ve had these crazies with us consistently as a major feature of our political scene. Going back to certainly the 1920’s.

CS: Don’t they seem to be a bit louder now?

PK: They have their ups and downs. But, a lot of what we see now is … read H.L. Menken on the fundamentalists and it’s the same … it sounds very similar. In a lot of ways, I think that the modern world began in the 20’s with radio and the penetration of mass culture into places that previously had been comfortable with their bibles. So this is not so new. They got louder … I’m about to go off onto a discourse on US … it’s not clear that the fundamentalists got any more fundamentalist … what happened was that we had a political shift in the United States at least that empowered them … the break up of the old weird coalition between basically Northern labor unions and Southern segregationists … created a place where the religious right had power again but I don’t think that there’s … I’m about to switch sides here … there has been a rise in religious fundamentalism among unusual groups there are … amazing number of relatives of mine who have ... kids ... have suddenly turned orthodox and that was not something anyone quite envisioned … maybe some kind of future shock.

CS: I’ve noticed in the UK over the past decade there has been an increasing (small “c”) conservatism in the electorate fostered by a feedback loop with some newspapers. Standard headline is, “Threatening entity here going to do something hideous to you.”

Would Saving Lehman Have Saved the Economy-

Ken Rogoff:
The Confidence Game, by Kenneth Rogoff, Commentary, Project Syndicate: Next month marks the one year anniversary of the collapse of ... Lehman Brothers. The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930’s. ...

Asia may be willing to sponsor the west for now, but not in perpetuity. ... Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three. As painful as it may seem, it would be far better to start bringing fundamentals in line now. ...

 

FT.com - Comment - Editorial - The US economy is still struggling

They identified four areas of concern:
  1. unemployment is the key problem. It is still growing. 
  2. The second factor is the number of mortgage foreclosures
  3. Continuing stresses in financial markets
  4. the crash on households’ income

"If things are still getting worse, albeit much more slowly than before, one can hardly argue that the worst is over, only that the rate of decline has moderated."

... ... ...

The US economy is still desperately weak and will most likely continue to struggle for months.

Friday 10 Spot

  1. cvienne Says:

    @OT

    I’ve echoed almost verbatim what you’re saying for sometime now…

    Think of it this way…(not for you because I’m sure you’ve reasoned it out as I have - but for JOE/JANE average)…

    - The median home price is what? I forget these days…$180,000?
    - At 5.5% fixed 30 year (assuming you can qualify), you’re paying $1,022 a month for P&I only (and 5.5% fixed is a ‘cherry’ rate by long term standards…
    - add in PMI, add in impounds (taxes & insurance), add in maintenance costs, add in local water, sewer, trash collection, homeowners association…
    -God help you going forward if you live in an area where you have to heat & cool the damn thing…

    Now pay for your car, your gas…Pay for your food…put the kids thru school…save a little for a rainy day…try to get ENTERTAINED once in awhile…pay your cable TV/internet subscription…

    The suits on Wall St. & in Washington don’t understand MAIN ST. AMERICA…PERIOD…

    At these prices…most would better off being renters and living in boxes…

  2. Moss Says:

    @cv

    The suits on Wall St. & in Washington don’t understand MAIN ST. AMERICA…PERIOD…

    I would beg to differ.. They fully understood how gullible and complacent they are.

  3. Thor Says:

    @cvienne - “The suits on Wall St. & in Washington don’t understand MAIN ST. AMERICA…PERIOD…”

    I would take that further and say that people in this country no longer have the desire to understand each other.

    Wall Street / Main Street is only a small subset of the problem. Red State / Blue State, Minority / White, North / South, Blue Collar / White Collar, etc. We have become an increasingly more polarized society over the last 20 years.

12 Economic Bubbles That May Burst Business Pundit

10 Junk bonds.

In late July, average junk bond yields fell into the single digits for the first time in more than a year, according to the LA Times’ Tom Petruno. The KDP Investment Advisors’ index, which covers 100 junk issues, hit a high of nearly 18% returns last December, Petruno reports. Record bond defaults haven’t deterred investors from loading up on the risky bonds, but they have returns on their sides. Petruno says that “the average junk fund is up 27.2%.”

Those returns out-entice the prospect of massive defaults, which are bound to occur eventually. 42% of junk bond issuers have “highly leveraged balance sheets—much more than in previous years,” according to this CNNMoney article. It’s a good time to be in junk bonds—if you can get out before the bubble bursts.

Ten Unsolved Problems in the Global Economy

There are many celebrating the recovery as if it were already here.  This is a brief post to outline my main remaining concerns for recovery of the global economy.

1)  China is overstimulating its economy, and forcing its banks to make bad loans.  This pushes up commodity prices, and makes it look like China is growing, but little of the investments made are truly needed by the rest of the global economy.

2)  Western European banks have lent too much to Eastern European nations in Euros.  The Eastern Europeans can’t afford it, and widespread defaults are a possibility.

3)  The average maturity of bonds held by foreign investors in US Treasuries is falling.  Runs on currencies happen when countries can no longer roll over their debts easily, which is facilitated by having a lot of debt to refinance at once.

4)  On a mark-to-market basis, market values for commercial real estate have fallen dramatically.  Neither REIT stocks nor carrying values for loans on the books of banks reflect this yet.  Many banks are insolvent at market-clearing prices for commercial real estate.

5)  We still have yet to feel the effects from pay-option ARMs resetting and recasting.  Most of the pain in residential housing is done, but on the high end, there is still more pain to come, and the pay-option ARMs will reinforce that.

6)  The rally in corporate debt and loans was too early and fast.  Conditions are not back to normal for creditworthiness.  There should be a pullback in corporate credit.

7)  We had global overbuilding is cyclical sectors 2002-2007.  We overshot the demand for large boats as an example.  We overdeveloped energy supplies (that will be short-lived), metals, and other commodities.  It will take a while to grow into the extra capacity.

8 )  The US consumer is still over-levered.  It will be a while before he can resume his profligate ways, assuming a new frugality does not overcome the US.  (Not likely by historical standards.)

9)  The Federal Reserve will have a hard time removing their nonstandard policy accommodation.

10)  We still have the pensions/retiree healthcare crisis in front of us globally.

That’s all.  To my readers, if you can think of large unsolved problems in the global economy, forward them on to me here in the comments.  If I agree, I will incorporate them in future articles.

Selected comments

1.IF Says:

2.firsttopanic

David,

As an Indian living in USA. I can tell you, the biggest grindstone around India’s neck going forward will be Drinking Water. And unless India, goes up with a solution, this could be a MASSIVE problem.

In other words, you can add issue of drinking water as one more world’s unresolved problem.

Thanks

3.Bob_in_MA Says:
August 15th, 20098:43 am at
That’s a nice summation.

I would add two points.

First, the effect of length of unemployment on consumer spending. Some of this effect will be caused by extended benefits running out (the NYT had an article on this last week.) But even if benefits are infinitely extended, they generally equal half of previous wages. These people are almost certainly using up savings and credit, at a time when assets are way down and credit is restricted.

The second point, much of the stimulus spending is front-loading demand.

Calculated Risk has a post up on this, “First-time Home Buyer Frenzy.”
http://www.calculatedriskblog.com/2009/08/first-time-home-buyer-frenzy.html

A BusinessWeek article from May on Germany’s cash-for-clunkers program mentioned, “Total unit sales in Germany were up 18% in the four months to April vs. a year earlier…”
http://www.businessweek.com/globalbiz/content/may2009/gb2009056_301566.htm

Even if these programs are extended, it won’t matter. They’ve already moved up future sales because of the announced deadlines.

In a few months we will be heading into the shadow of these programs, demand for cars, housing, etc., will fall. Meanwhile, another wave of foreclosures is building up.

One last point. That frequently reprinted graph from Credit Suisse showing Option ARM resets/recasts is somewhat misleading. Some of these loans won’t recast for a very long time. But more importantly, most of the defaults on these loans have occurred BEFORE they recast. The minimum payments usually rise each year, independent of the resets and recasts. It probably is a combination of the rise in minimums, negative equity and unemployment that’s spiking the defaults now.

Calculated Risk has all sorts of info on this.

Hussman Funds

When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble – as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble – they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.

Weekly Unemployment Claims Increase

The DOL reports weekly unemployment insurance claims increased to 558,000:

In the week ending Aug. 8, the advance figure for seasonally adjusted initial claims was 558,000, an increase of 4,000 from the previous week's revised figure of 554,000. The 4-week moving average was 565,000, an increase of 8,500 from the previous week's revised average of 556,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Aug. 1 was 6,202,000, a decrease of 141,000 from the preceding week's revised level of 6,343,000.

[Aug 13, 2009] Elizabeth Warren We Have A Real Problem Coming zero hedge

It was banks that were at the center of this stocks rally.... It remain to be seen how long it will last from this point.

Elizabeth Warren, head of the Congressional Oversight Panel, which yesterday released quite a sobering report on the true state of the banking industry, explains what is really going on with the increasingly irrelevant balance sheets of the bailout banks (all of them). Once again underscores what a farce the stress test was, the complicity of the accountants in making the transparency initiative a sham, and why the banks are still as underwater as they ever were. Compliments of Shanky's Tech Blog.

[Aug 12, 2009] The Mess That Greenspan Made A few bearish views on the stock market

Mark Mobius, sometimes referred to as a perma-bull, has similar trepidations about share prices and offers some estimates as to what sort of a "correction" might be expected.
Mark Mobius said global stocks will drop as much as 30 percent following their recovery from last year’s rout as companies take advantage of the rebound to sell more shares.

“When you have these rapid increases, almost without correction, you will definitely have a correction at some point, so we can expect a lot of volatility,” Mobius, the executive chairman of Templeton Asset Management Ltd. said in an interview in Kuala Lumpur today. “Increases of 70 percent will be followed by decreases of 20 to 30 percent.”

The so-called correction “can happen anytime, probably this year,” Mobius said. “It may not be all at once, you may not see a decrease of 20 percent suddenly, it could be 10 percent here, and a rise of 5 percent then another 10 percent, you’ll see this kind of volatility in the markets.” He added that he was referring to shares “globally.”
While a 30 percent correction after a run-up of 70 percent may not sound all that bad, it will likely come as a surprise to most investors to learn that these two moves occurring in succession will not leave your holdings up 40 percent when they are done, but, rather, less than 20 percent higher than your starting point.

Food for thought...

[Aug 10, 2009] VIX Signaling Equity Downdraft in September

"Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks..."
naked capitalism

It was mathematician Benoit Mandelbrot who first discovered in 1962, by crunching 100 years of cotton trading data, that markets have "fat tails" or more extreme risks than the standard models predict. A less oft cited finding of Mandelbrot's was that markets have memory, in colloquial terms. Calm days tend to be followed by calm days, volatile ones by volatile ones. That again is not the pattern predicted by standard theories, which hold that day to day changes are random.

But did Mandelbrot think that markets have memory in a more literal fashion? September and October are usually the worst months of the year, and last September will remain in the memory of anyone who had reason to be interested in matters financial (and even those who weren't normally took interest). The VIX appears is anticipating a bit of a re-run of last year's downdraft, at least as far as equities are concerned.

From Bloomberg:

Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September...

Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five week....That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years...

“It’s a danger sign,” said Ronald Egalka, a 36-year options trader who oversees $8 billion as chief executive officer of Rampart Investment Management in Boston. “People expect volatility to pick up in the future, and that implies that there’s going to be a downward movement in the market.”...

The gauge plunged 9.1 percent last September after New York-based Lehman Brothers Holdings Inc. collapsed. The biggest drop occurred in September 1931 during the Great Depression, when the S&P 500 tumbled 30 percent. February is the only other month when stocks fell on average since 1928, losing 0.3 percent...

The index has averaged 20.22 over its 19-year history and surpassed 50 for the first time in October after Lehman filed for the biggest U.S. bankruptcy. Frozen credit markets and bank losses approaching $1 trillion tied to subprime loans pushed the measure to a record 89.53 on Oct. 24. ...

The current reading indicates a 68 percent likelihood the S&P 500 will fluctuate as much as 7.2 percent in the next 30 days, according to data compiled by Bloomberg.

“VIX futures are telling you that investors are willing to pay a premium for protection,” said David Palmer, who helps oversee $300 million as volatility portfolio manager at Hudson Bay Capital Management LLC, a New York-based hedge fund that returned 11 percent last year, according to Absolute Return magazine. “People expect some sort of a break in the market.”....

Options strategists saw the same upward-sloping curve last August, before the S&P 500 tumbled 9.1 percent in September and 17 percent in October. VIX futures two months from expiration were 4.11 points higher than the VIX on Aug. 22, when the index slumped to an 11-week low of 18.81...

Volatility may be increasing for reasons unrelated to stock prices, according to Macro Risk Advisors LLC, a New York-based options brokerage. Traders who sold bullish options when the rally began on expectations the advance would fizzle may be buying them back now, Dean Curnutt, the firm’s president, wrote in a note to clients. That demand could be artificially boosting the VIX.

U.S. companies are also beating analysts’ earnings estimates at an almost record rate, making investors more bullish, according to Rob Morgan, who helps oversee $6 billion as market strategist at Clermont Wealth Strategies in Lancaster, Pennsylvania....

Investors still hold more than $3.6 trillion of their assets in money-market funds, equal to about 30 percent of the total market capitalization of U.S. companies, according to data compiled by the Washington-based Investment Company Institute and Bloomberg.,,,

Paul Tudor Jones, the hedge fund manager whose $8.9 billion Tudor BVI fund gained 10 percent this year through July, said he expects that global stocks may “pause in September” on slower Chinese economic growth. The advance since March is a “bear- market rally,” Jones wrote in a report to clients last week. “We are not inclined to aggressively chase the market here.”...

“There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research, said on Bloomberg Television last month. “We could slide down again in the fourth quarter.”...

“There’s always a real risk that a rally is going to be tested,” said Stephen Wood, New York-based chief market strategist for North America at Russell Investments, which had $151.8 billion in assets under management as of June 30. “Investors are thinking that giving up some upside to hedge the downside is a very reasonable investment profile.”

rob said...
There used to be good historical reason for markets crashing in the Fall (or I should say this theory makes sense to me). Farmers would borrow heavily in the Spring for planting. If the harvest was poor, lenders would panic in Sept/Oct.

Agriculture is now a much smaller portion of the economy, so I don't really know why this pattern would still occur - that is unless market participants react in the Fall because they expect other market players to react at the same time. If so, this "remembered pattern" is quite an amusing example of the simulacra economy.

Trend, Not a Single Data Point

Birth death adj was only 32K.  A more realistic figure might be 247,000+32,000=277,000. See also Unemployment Rate Drop = Decline in Labor Force

Aug 7, 2009 | http://www.ritholtz.com/blog/

Non Farm Payrolls gets released this morning. Some outlets have pointed out an expected”beat” by BLS.

As we have long advocated, investors should be more concerned with the details than the headline, and watch for signs of a change in trend.A plus or minus 100k from the consensus is all but statistically irrelevant.

Be aware of the revisions, and Birth/death adjustment: Watch to see how much this impacts the overall number.

Look at these three leading indicators within the release:

1) Hours worked: Are employers still cutting back hours? That is a sign they lack confidence going forward.

2) Wages and income: Are salaries still falling? It reveals how much demand there is for labor.

3) Temp help:  Are employers starting to hire temporary workers?

These will provide some insight into the state of the Labor market.

Selected comments

Payrolls not so bullish after all, Rosenberg says by Stacy-Marie Ishmael

One time effects clouded picture. Also birth-death adjustment probably added to the fog...
Aug 07, 2008 |  FT Alphaville

Gluskin Sheff’s chief economist David Rosenberg poured cold water over the market’s enthusiastic response to the non-farm payroll data released on Friday.

By his reckoning, “while the numbers represented by far the best jobs performance of the year, much of the better-than-expected tally in nonfarm payrolls reflected the bounce in auto production as well as the distortion from the federal census workers”:

Combined, these two influences effectively “added” 100,000 to the headline number, so net-net, the consensus view of -325,000 was not as far off the mark as the market believed at first glance.

The reduction in the unemployment rate was largely due a sliding labour force, down 422,000, Rosenberg said.

EconomPic Data, in one of a series of posts on the data, produced an excellent chart illustrating the reduction in the labour force:

EconomPic Data chart of US labour force dropouts in July

Moreover, Rosenberg argued, an uptick in employment in the auto industry further clouded the picture:

Yes, the income number was also firm; average weekly earnings popped 0.5%, but again, this reflected the bounce in the auto sector as well as the 10.7% increase in the minimum wage to $7.25 an hour.

Again, this is a non-recurring item and does not at all reflect an improvement in underlying income fundamentals in the personal sector. We had a similar bounce in the summer of 2008 when the minimum wage was last boosted.

Green shoots, whacked again.

Related links:
The employment report and the birth/death adjustment - A Dash of Insight

[Aug 8, 2009] Comstock Partners on Delleveraging (Not for the Fainthearted)

Comstock Partners has a new newsletter out, and it makes a cogent case that there is no pretty way out of our over-leverage mess. The disheartening bit is not only the narrative but a series of charts. One, on debt to GDP, show that is has risen in the last year (debt was roughly $49 trillion as of last year, it is not $52 trillion this year). So we have had a lot of economic pain with NO reduction in aggregate indebtedness. This isn't simply shifting private debt onto the public balance sheet (in effect); this is actually an increase in the underlying pathology.

That debt to GDP chart is controversial, because the comparability of older data to current figures is debatable. But the key message is that debt to GDP shot up after the stock market fall in the Great Depression due to the collapse in GDP. And while large scale deficit spending did help pull the economy out of the rubble, it was also accompanied by large scale debt reduction, via bankruptcies and bank failures (not pretty, mind you) and restructurings. But in this time around, there is perilously little in the way (yet) of restructurings of underlying debt. That does not bode well for recovery.

From Comstock Partners (hat tip DoctoRx):

We are in the process of deleveraging the most leveraged economy in history....this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years. It is true that Japan didn't act as quickly as we did but our debt ratio presently is much worse than Japan's debt ratios throughout their deleveraging process...

This seems to us to be a "mini bubble" of stocks reacting to an abundance of "money printing" by governments all over the world since stocks are rising worldwide. Of course, if the U.S. doesn't recover there will be no worldwide recovery since the rest of the world is still dependent upon the U.S. consumers' appetite for their goods and services (despite the so called growth of domestic consumption in China and India). We, however, don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world....

Most investors believe the bailouts, stimulus plans, and quantitative easing will lead to inflation. In fact, almost all of the bearish prognosticators are negative because of the fear that interest rates will rise once the inflation starts to work its way into the economy. They point to the doubling of the monetary base which they believe will soon lead to rising prices as more dollars are created chasing the same amount of goods. We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.

Yves here. This point echoes a Gillian Tett piece today. Back to the newsletter"
Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).

We wrote a special report in January of this year titled "Substituting Debt for Savings and Productive Investment" in which we explained why the U.S. economy historically prospered because of hard working Americans saving a substantial amount of their income which was used for productive investment. Unfortunately, all of this changed over the past few decades and got worse over the past decade. In fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. Over the past two decades, while most investors thought this trend could continue indefinitely, we have been warning them of the catastrophic problems associated with this ballooning debt....

We expect the total debt in the U.S. to decline during the deleveraging period directly ahead, with the government debt exploding while the private debt collapses. The private debt in Japan was almost the reverse of the U.S. where most of our excess debt was in the household sector and most of the excess debt in Japan was in the corporate sector. The debt to GDP figures in Japan were not easy to come by from the typical sources until the mid 1990s and had to be estimated, but should be pretty close to the numbers used above. Our sources on the above Japanese debt figures came from Ned Davis Research and the Federal Reserve Bank of San Francisco. NDR's report, "Japan's Lost Decade-- Is the U.S. Next?" have great statistics and information and the Fed's report "U.S. Household Deleveraging and Future Consumption Growth" is well worth reading.

The Fed study charted the peak of the debt related bubble of the stock and real estate assets in Japan in 1991 (1989 for stocks and 1991 for real estate) and overlaid it with the peak of U.S. debt associated with the same assets in 2008. They concluded that if we are able to liquidate our debt at the same rate as Japan we would have to increase our savings rate from the present 6% (artificially high due to the recent stimulus paid to households) today to around 10% in 2018. If U.S. households were to undertake a similar deleveraging, the collective debt-to-income ratio which peaked in 2008 at 133% (H/H debt vs. Disposable Personal Income) would need to drop to around 100% by 2018, returning to the level that prevailed in 2002.

If the savings rate in the U.S. were to rise to the 10% level by 2018 (following the Japanese experience), the SF Fed economists calculate that it would subtract ¾ of 1% from annual consumption growth each year. We did a weekly comment about this very subject on June 25 of this year and came to a similar conclusion. In that same report we showed that from 1955 to 1985 that consumption accounted for around 62% of GDP. Because of the debt driven consumption over the past few years at the end of March 2009 consumption accounted for over 70% of GDP. If the percentage dropped to the normal low 60% area of GDP it would subtract about $1 trillion off of consumption (or from $10 trillion to $9 trillion)....

We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.

The newsletter also has some charts (not in the text, you need to click on them.....I figured I'd send the curious over there).
 
Richard Kline said...
I'm broadly in agreement with the Comstockers on their major contentions here. To me, the metastisization of $ denominated debt over the last generation has been the great destabilizing force in the world economy. Yes, there are other major problems; this is the driver against which other forces are guaged and engaged. And as these analysts do, one must look at both public and private debt and the composition of each to get the real picture; any single data point can mislead. There were noises last Fall and the year before when this issue was broached that because 'the public debt was so low' in relation to GDP expanding it substantially was no cause for alarm. As if that private debt didn't weigh in or would mystically sublimate itself into divine ichor. Well as we see now, more public debt is leading to more total debt; some surprise, what?

The Comstockers also make a good point when the speak of the disabled multipliers for the mass of Fedbucks put in motion leading to low velocity, and consequently to no demand pressure on prices. It will be very difficult for prices to rise when consumer spending as a whole continues to decline at a significant pace, which is presently the case in the US. Wages appear to be showing declines, and that, too, constitutes a major brake on inflationary accelerators. While I am much concerned about the inflationary consequences of more debt issuance and strategies of quantitative easing, I don't expect a typical inflationary spiral to get much traction.

The pressure of all this extra lolly from the queasig strategy is more likely to go sideways in some fashion, which makes one worry about systemic events. For example, I consider the rise in equities more nearly pathological than normal market function. Money has to go somewhere so even while there is no recovery to be seen, nor likely to be had, money pushing equities up for the sake of momentum plays is a not unlikely outcome of too much funny-money looking to materialize itself in come asset class. The sick part in all this is that the money being used to chase equities is significantly the result of public debt issuance shunted back to the big financials as guarantees and swaps: we borrowed this money, and took it to the casino for another go round. In the worst case, one gets a bubble, as is the likely result in China from a similar process. What one does _not_ get is any of investment, growth, profit, or employment. That is, the debt-created bumpf for the queasing strategy largel goes sideways in speculation rather than pumps the real economy in some fashion.

---And the thing to really fear is simply that the Powers That Be in the US have no strategy for even reining in that debt, none whatsoever. What cannot be built to the sky either crumbles or turns turtle. That is the future the present course guarantees for us, and it is likely much nearer than one would think. To speak of deleveraging we have to start to reduce debt, and that has not yet even begun; in fact, the reverse. We are rearranging the loading of a listing trawler with a sieve-like hull---so we can load more on. As I said, a systemic reordering of such an arrangement seems likely, and such would be sudden, dramatic, unpleasant, and exceeding difficult to recover from.

August 7, 2009 7:20 AM

 
Blogger Andreas said...
Yves,

thanks for the interesting blog.

But I have problems to find the charts in the newsletter you mentioned. Your link to the curious links only to the article. And no links there.

Andreas

August 7, 2009 7:29 AM

 
MarcoPolo said...
“We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.” - Comstock

This bull about money multipliers – subterfuge. Inflation is not prices! We have had inflation for the past 15 years. Bringing on supply gangbusters while wages and demand were stagnant kept prices (CPI) low and masked that inflation as growth. Deflation is not contraction either. Or, change the terminology if you choose, but be consistent. Hate to appear such a Friedmanite, but he did as least have this much right.

The dangerous part of creating all this money is that it may eventually come back here to be spent sending asset prices, commodities and interest rates to the moon. Then you will see contraction.

Crude oil is already tightly & inversely correlated to $ exchange rates. Expect to see more of that in other commodities. Andy Xie had an article earlier this week in which he worried about China’s exposure to a rising $. (Did I see it here?) Not in our future.

The danger is a falling dollar. A falling dollar endangers all of our business models. Global trade will fall still further. There will be inflation & shortages of even the silliest things as with the 70’s wage/price controls.

The only solution is to deleverage. Take our medicine. Unlike Comstock I don’t see that in our future either. You can’t deleverage by transferring private debt to the public. The Keynesian instinct is to inflate. To repudiate is not to deleverage. So…look out! We’re fighting the last war.

The one in which we didn’t have the world’s reserve currency and in which we benefited (or would have benefited) from a weaker dollar. “Over the past decade when the secular bear market started” - in what? Not t’s. But it’s coming.

August 7, 2009 7:40 AM

 
Anonymous Anonymous said...
Know anywhere where I can read Gillian Tett w/o a subscription?

August 7, 2009 7:45 AM

 
Blogger Richard said...
The only thing I would disagree with is the comment about "bailing out" homeowners" as I think that program is essentially a political cosmetic, a courtesy bow by Democrats to their left.

Calculated Risk has a great chart showing that the great wave of foreclosures is still going up to peak and is not breaking. To the extent the program has any purpose at all, it is to provide another tax subsidy to the banks (my Dad told me to be banker and I should have listened to him. It takes a real skill to run an institution into the ground when the Gubmint lends you money at 0% (or simply gives it to you outright) and you can lend it out at 6%.

I think I could do that and collect a $50,000,000 bonus for my genius. But I digress.

Barry Ritholz, I believe quoting David Rosenberg, calls the modification program "extend and pretend." I don't know if you do favors for folks keeping them in homes where they must pay monthly mortgages along with other costs of ownership that are almost twice the rental cost for the same house where they have no equity and no prospect for having any equity in those homes for decades.

Capitalism, to steal from Churchill's aphorism on Democracy, is a terrible, wasteful system, except when compared to the others. In the U.S. today we look at trillions of dollars of wasted investment (I could say showing that when it comes to waste, Government can't hold a candle to the private sector, but many Government policies over the last generation have interacted with private decisions to create this mess).

The wasted investment of dead malls, empty offices, and now vacant homes built to excess over the last thirty years will make David Byrnes's song remarkably prescient "Nothing But Flowers."

The groupthink in the business elite over the last 30 years was that the way for a company to prosper was to outsource as much production to low cost labor countries and reimport and market to the wealthy U.S. consumer mass market. Beginning this decade business realized that the internet and fall in communications costs by a 1000% in a generation would allow them to shift back office functions to labor low cost countries.

Even where jobs were not shipped overseas, or where low cost illegals were not used to substitute for labor in the U.S., the threat they could be has kept the lid on U.S. wages in this decade which even before the current Great Recession had grown less then inflation during the period from 2000 to 2007. With the recession the decline in income has accelerated, cushion only by Government transfer payments.

According to the most recent statistics on income in June income fell by 4.7. The wage deflation feeds the asset price deflation since folks have less income to service their debt. The business model falls apart as the wealthy mass market ceases to exist as U.S. median incomes descend to the median levels of developing countries with good educational systems, or at least good enough to turn out millions of English fluent graduates.

August 7, 2009 8:00 AM

 
Blogger Leo Kolivakis said...
"If the savings rate in the U.S. were to rise to the 10% level by 2018."

>>This would spell disaster for the U.S. economy. I do not see it happening because people simply cannot save when they have bills to pay and debt to pay off.

 
Deleveraging will mean weak growth for many years, but people have to remember that savings are also influenced by the stock market and housing market. If the latter finally recovers and the former grinds higher, then they will save less and consume more (wealth effect). The risk of debt deflation comes from the employment outlook. If unemployment keeps rising, then the risks becomes all too evident. However, even though I expect unemployment will continue to rise, I see the pace of deterioration abating considerably as the US economy slowly recovers.

[Aug 7, 2009] Hurricane season not over  by John Browne

"A jobless recovery in an economy based on 72% consumer spending is an oxymoron. "

Asia Times

Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand. With unemployment increasing at over 500,000 workers a month, wages dropping, and hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.

Meanwhile, US Treasury debt is exploding, the US dollar is falling, and unemployment is rising. In such circumstances, how can the stock market rise be trusted? What is the reality?

Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks' earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed - at considerable profit - without risk?

With the consumer still in shock and denied credit, why do some indicators appear positive?

The short answer for this is massive deficit and stimulus spending by the federal government. More than US$3 trillion alone this year. That's nearly $10,000 for every citizen in the country. Little wonder that some consumers have "handout" money to spend. And it's no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers' Index to rise. Likewise, now the threat of a banking collapse has passed, albeit temporarily, the rate of job cuts can be expected to fall.

Looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the banks in September. This most sobering prospect, combined with the various pressures on consumers, would appear to indicate that the American economy is in the eye of an economic hurricane. When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.

Any investor in US stocks and bonds should be extremely wary, particularly as autumn may well herald a rise in interest rates and, as a result, another round of collapses. The ride up may have been fun. But remember last year before you dare to hold on for more.

John Browne is senior market strategist, Euro Pacific Capital.

Five Reasons the Market Could Crash This Fall -- Seeking Alpha

"Indeed, assuming the market is trading based on earnings, the S&P 500 is currently discounting earnings growth of 40-50% for 2010. The odds of that happening are about one in one million."

  1. High Frequency Trading Programs account for 70% of market volume
  2. Even counting HFTP volume, market volume has contracted the most since 1989
  3. This Latest Market Rally is a Short-Squeeze and Nothing More
  4. 13 Million Americans Exhaust Unemployment by 12/09
  5. The $1 QUADRILLION Derivatives Time Bomb

[Aug 6, 2009] Nine Roadblocks to a Bull Rally -- Seeking Alpha

Before the bulls break out the champagne here, I would warn them not to get too far ahead of themselves.

After all, euphoria is a dangerous emotion that can lead to big losses — in this market, or in any other, for that matter.

And as for Dennis Kneale's breathless prediction that the "recession is now over," the picture on that score is about as clear as mud. . . the U.S. Economic Outlook is murky, to say the least.

What is crystal clear, however, is that our problems are actually getting worse, not better. Fundamentally, is as bad as it has ever been — even though the bulls have broken out the party hats, insisting that somehow the markets really can grow to the sky.

Of course, we know otherwise. If only it were so. . .

Instead, I'm firmly in the camp that believes a "new normal" has begun, and it's based more upon frugality more than frivolity.

That's because as unemployment surges, home prices continue to drop, and more wealth evaporates, consumers are more likely to try a least to live within their means. . . no matter how hard that may be.

As a result, without an uptick in jobs and a boost in income, a repeat of the debt-financed binge we just lived through simply isn't going to happen.

It can't be recreated either — even though the Fed is trying its best to do just that.

So, what we're essentially left with is a classic case of a reluctance to borrow or consume: a big problem, since that is what the lion share of the U.S. Economy has been based on since 1982.

As a result, we have too many cars, we have too many houses, and we have too many debt holders teetering on the brink.

What we don't have — or what we have a lot less of — are people with the cash flow to support it all. Sure, money still exists and there is lots of it, but it has very little velocity when a nation of "Good Time Charlies" suddenly turns frugal.

That being said, I thought we would play a game of connect the dots today as we view the current rally not only with awe, but also a deep-seeded suspicion.

Here are nine reasons why the champagne will have to stay on ice for the time being. . .

9 Hurdles to the U.S. Economic Outlook

1. The Wealth Effect in Reverse

During the heydays, rising asset prices were all it took to get consumers to spend themselves into deeper into debt. However, these days the reverse is actually true.

Because according to the Federal Reserve, U.S. household net worth fell by $1.3 trillion in the first quarter, proving that green shoots are something of a fairy tale — at least for the American consumer.

In fact, since its peak in the third quarter of 2007, household wealth has decreased by 21.6%, or more than a fifth. That is the most dramatic fall in the series since reporting began more than 50 years ago.

Yet somehow, the bulls keep pounding the table, saying there is light at the end of the tunnel, even though consumer spending is over 70% of the U.S. GDP. The truth is when taking huge losses, belts usually get tightened, not loosened.

2. The Heavy Chains of Debt

Meanwhile, consumer debt is still off the charts. In fact, household debt as a proportion of disposable income hit 133% as the recession began. Since then it has eased a bit to 128%, but its still way too high — not to mention unsustainable. At minimum, consumer debt should be 100%, and even that is a slippery slope.

By comparison, the consumer debt level coming off of the tech bubble in 2003 was around 85%, which tells you where all that "growth" came from: Households levered up. This time that's impossible — for a whole host of reasons. So the while the FED has cut this rate to zero, it hasn't done much to get people to the mall this go-round. . .

So just looking at it from a balance sheet perspective, either wages have rise quite a bit or debts have to be reduced dramatically. Otherwise the numbers for the average consumer just won't add up.

3. Rising Unemployment

On a day when the stock market shot up by more than 250 points two weeks ago, the Fed minutes from June were quite a bit more sobering. Unemployment, according to the Fed, will top 10% this year. . . while most Fed policy makers said it could take "five or six years" for the economy and the labor market to get back on a path of full health in the long term.

So it looks like 2015 will be the year to look forward to. At best, the recovery will be jobless — which makes you wonder how it could be called a recovery at all.

Here's betting unemployment tops 11%.

Meanwhile, 7.2 million people have lost their jobs since December 2008, making this the only recession since the Great Depression to wipe out all of the job growth from prior periods of expansion:

unemployment

By the way, the real unemployment rate, or U-6, is 16.5% It accounts for those poor folks who are unemployed but are so discouraged that they have stopped looking.

4. Tax Revenues are Plummeting

California's fiscal woes are only the tip of the iceberg. Falling tax revenues in 45 of the 50 states have left all of them facing fresh budget shortfalls.

In fact, according to a recent report from the Rockefeller Institute of Government, tax collections dropped by 11.7 % the first quarter — the largest fall on record. Meanwhile, early figures for April and May show an overall decline of nearly 20 per cent for total taxes. That will undoubtedly reduce demand and slow down the recovery, since government spending accounts for 18% of U.S. GDP:

state taxes

As for the Federal government, there has been a 22% drop in individual tax receipts so far this year, along with a 57% drop in corporate taxes.

In short, while the government is always out of money, it has never been close to this bad. Without the printing presses, we would already be bankrupt.

5. Rising Prime Mortgage Defaults

Remember when subprime mortgages began to blow up? Of course you do. . . that's old hat at this point. Today, those defaults have moved right on up the value chain.

Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier, as prime mortgages 60 days or more past due climbed to 2.9 percent through March. Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier. Meanwhile, mortgages 60 days or more past due rose 88 percent from last year.

The good news is this is the last of the mortgage dominoes. After prime mortgages, there's nothing left to fail. Unfortunately, this is the biggest domino of them all.

6. Oh, but Wait. . . I Forgot about Option ARMs

As my pal Ian Copper has been writing for some time now, Option ARM resets will be tougher for the economy to handle than subprime and we will see greater numbers of bank failures, foreclosures, delinquencies, and economic hardships because of it.

What should concern you is that about $750 billion worth of option ARMs were issued between 2004 and 2007 and will begin resetting shortly. Worse, as of December 2008, about 28% of option ARMs were either delinquent or in foreclosure, according to reports.

But here's the kicker: nearly 61% of option ARMs originated in 2007 will eventually default, according to a Goldman Sachs report. And due to the way these mortgage nightmares are structured, the rest of them won't fare much better.

61%??? That's enough to make a banker take a leap.

7. Next Up: The Credit Card Debacle

According to reports earlier this month, credit card losses are continuing to accelerate with Capital One reporting that write-offs have reached 9.4%. . . with no end in sight. Meanwhile, American Express Co. (AXP), the largest U.S. credit card company by purchases, wrote off 10 percent of its own loans.

Simultaneously, revolving credit totaled $939.6 billion in March and the Federal Reserve reported that 6.5 percent of it was at least 30 days past due. That is the highest percentage since the Fed began tracking this number back in 1991.

What has evolved is an environment where banks are much less eager to hand out the plastic, since the business isn't exactly what it used to be. And as a result, banks sent out only about 500 million credions in the first quarter. That is fewer than in any year since 2000, as overall available credit shrinks.

And when the credit card swamp finally gets drained, a "new normal" will be here to stay.

8. The Commercial Real Estate Crash

At this point in the cycle, most people recognize that commercial real estate is following the same exact path as the housing bubble — the exact same path!

And we all know how that one turned out.

In fact, losses on commercial loans could reach as high as $30 billion by the end of the year as property values plummet, rents decline, and defaults reach record levels. All of this is a recipe for disaster. . . and industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will shut their doors over the next year.

ThatU.S. Industrial capacity that shows almost one third of US industry is now sitting idle:

cap utilization

Enough said.

Now if there is a pony somewhere in all of that mess, I just can't find it. And I haven't even brought up the prospect of higher taxes through cap and trade, or what a massive health care package will do to small businesses.

Meanwhile, I think we are going to find out this fall that the government doesn't have any of the answers after all.

Besides, violent bear market rallies are entirely commonplace. In fact, some of strongest occurred after Black Monday in 1929.

Take a look:

bear market rallies

So while the bulls have had their way here lately, the bigger picture lurks in the background.But to see it, you have to have the courage to connect the dots.

That means that now, more than ever, it's a stock picker's market — especially if you have a taste for champagne.

[Aug 6, 2009] The Russians Are Coming! The Russians Are Coming! Tech Ticker,  Finance

Henry Blodget is so incompetent as for this region that with his cheap sensationist bent he should better avoid posting about it ;-)
Yahoo!

Selected comments

Anthony

The West is truly responsible for the demise of Russia. I wouldn't be a happy camper if I was Putin. Good to see the Russian people were smart -- you didn't see thousands of Russian lemmings out there googoo and gaga over Obama. The uneducated Western populace and the writer of this article should take a look at this: It shows how the historic opportunity given the U.S. to help transform Russia into a free, peaceful, pro-Western country was squandered in the form of a bruising economic rape carried out by corrupt Russian politicians and businessmen, assisted by Bush and (especially) Clinton administrations engaged in political payoffs to Wall Street bankers and others, and by ineptitude and greed on the part of the U.S. Treasury and the Harvard Institute for International Development, assisted by fellow travelers and manipulators at Nordex, the IMF, the World Bank, and the Federal Reserve. http://www.russians.org/williamson_testimony.htm

Joshua - Thursday August 06, 2009 01:04PM EDT

The amount of ignorant people willing to say anything to make deranged points is stunning... Let me assure you, if the United States ever does fall, it will not be the fault of President Obama, that unfortunate blame will be shared by the millions of ignorant Americans. To clarify, anyone that refers to Obama as a "puppet president" or actually believes that Russia wouldn't "flex their muscle" if McCain was the president, or middle class Americans that continue to vote for a party interested only in lining the pockets of the wealthy, or people that cannot seem to understand that the public option is a choice (haha perhaps thats why its called an option).

These are the people that I will blame, that history will blame, for any future "demise" of the United States. Ignorance is the greatest threat to our country.

Please, simply google something prior to running your mouth. Recognize that we live in a globalized world. Above all else, do not blindly follow. Every news network, every anchor, every journalist, every organization, and individual has an agenda; see through it... The only way to do so is through constant self education and analysis on the issues of the day.

[Aug 6, 2009] Mish's Global Economic Trend Analysis

Recovery? What Recovery?

Before we can address the question "is the bottom in?" we must answer the question: "the bottom of what?" Moreover, we must also state a timeframe. The latter is critical.

Now, assuming "the bottom is in" for the GDP and the recession will soon be over, the next question is "for how long?"

Most know that I am in favor of an "L shaped recession", but that definition includes a "WW" or even a "WWW" where the economy slips in and out of recession for a decade, as happened in Japan.

There is no reason to think that consumers are going on huge, sustainable shopping sprees soon. However consumer spending needs to to be balanced with the government throwing money around like crazy, not just in the US, but also the Eurozone, the UK, and especially China. Moreover, an inventory rebuilding process will occur at some point. It may have already started.

However, given that unemployment is likely to rise for another year, this is likely to be a "Job Loss Recovery" or as "Michael" commented on my blog a "Recoveryless Recovery". Indeed, if one is waiting for a recovery in jobs then a recover is a year away at least. However, the NBER will focus on improving GDP and various other factors and not just jobs when deciding the end of the recession.

Whether or not the stock market has bottomed depends on the US dollar. If the US dollar sinks to new lows, the bottom in the stock market is likely in. If the US dollar manages a major new high, I surmise the bottom is not in.

No one really knows. What we do know is currency debasement is not just a US phenomenon. Global currency debasement by central bankers everywhere is underway. And since things are relative, one should NOT be surprised to see the US dollar make new highs. However, my favored scenario is the US dollar will fluctuate in a wide trading range which makes it touch and go as to whether the stock market bottom is in.

At this point, the market has priced in a strong recovery, something that is not going to happen. And even IF the bottom is in, the market is likely to do nothing from here (at best), for quite some time.

This is also the "pain trade" in many ways for many people. For example, pension plans still have lofty as well as unreasonable market expectations going forward, jobs will remain difficult to find, and boomers headed into retirement hoping for a return to new market highs to "get even" will be frustrated time and time again. Things are shaping up as that have in Japan, with "two lost decades".

In short, the bottom may be in, but lock up those party hats because most will not see it in terms of jobs, wages, home prices, and the stock market. From many angles, the most likely scenario is a "Recoveryless Recovery".

[Aug 5, 2009] Deutsche Bank: Construction Loan Defaults Coming By Barry Ritholtz

August 5th, 2009 | The Big Picture I

nteresting piece from Deutsche Bank on rapidly deteriorating Construction loans. DB predicts that “construction loans will be the epicenter of bank loan problems”

• By far the riskiest type of loan product in bank portfolios;
• Substantial portion represents loans to homebuilders;
• Market currently penalizing properties with vacancy issues extremely severely;
• Newly constructed (or only partially constructed) properties are the poster children for vacancy problems in CRE;
• Values of most newly constructed properties are down massively;
• Expect extremely high default rates and extremely high loss severity rates, both likely to be in excess of 50%;
• Total expected losses of 25% or more.

In a reversal of the Residential Real Estate market, the exposure for large money center banks is low — smaller regional and community banks have the highest construction loan exposure.>

Construction loan exposure for smaller banks has nearly doubled since 2004
construction-loans

Construction loans are structured with upfront reserves — meaning that it takes much longer for CRE defaults to occur.  Low short-term interest rates also means reserves can last longer — BUT, as DB notes, Once reserves are exhausted, defaults will skyrocket.>

The current delinquency rate is 15%, but may head much higher
cre-defaults

Source:
The Outlook for CRE and Its Impact on Banks
Richard Parkus
Deutsche Bank, 30 July 2009
http://gm.db.com/IndependentResearch

Selected comments:

Russell Abravanel

There is the construction loan problem but the tsunami to hit the beach will be the commercial loans that are going to default next. Do not worry we can fire up the printing press to pay for that one too!

call me ahab

then these banks will fall like dominoes- they have no clout w/ the Treasury and the Fed as we found with the TBTF banks - they had a win/win plan- and friends in the right places-

you must be a massivley bloated enterprise to get the USG on your side- think C, BAC & GM

jpm

In a reversal of the Residential Real Estate market, the exposure for large money center banks is low — smaller regional and community banks have the highest construction loan exposure.

Sounds like DB saying: Really, it’s not us this time!

drey

CR has been all over the number of new bank failures each week, but maintains (if I’m recalling this correctly) that the number will ultimately fall far short of the failures which occurred during the S & L crisis of the late ’80s.

Is this a widely held conclusion, or is there a case to be made that the number of contemporaneous bank failures will rival or surpass that of the S & L crisis when it’s all said and done?

The Curmudgeon

“Construction loans are structured with upfront reserves”

The way construction loans are structured always makes me think of the protagonist in Tom Wolfe’s “A Man in Full”, a real estate developer, that named his $2 million racehorse “First Draw”.

Even better is the mechanism whereby interest charges on the loan are paid by advances against the loan. It could take awhile before these dogs start howling. In the meantime, you can bet the developer’s new Mercedes came off the “upfront reserves”.

heditor

I work for a commercial RE developer in the NW. We have been hired by several banks (mostly local, one large national one) to help sort out failed projects (construction stalled, cost overruns, construction defects, no foreseeable market, unable to secure bridge/perm loans, etc.) they have provided construction loans on. Based upon our experience, I wholeheartedly agree with this post. There is a wave of doom coming in commercial real estate and it begins with these types of loans. Projects now defaulting were started at the peak of easy finance, developed to low low yields and suffered from high and increasing construction costs.

As Rikky says above, the banks are absolutely kicking the can down the road.

I’d add a few items to the list above:

heditor

Also add that construction loans are IO, while perm financing is now an amortizing world. Increase in debt service is a shock, if they can even get permanent financing.

drey,

CR has pointed out the number of bank failure will be much less, but has also pointed out that banks today are also much larger in size and have more branches than in earlier days:

“Of course the number of banks isn’t the only measure. Many banks today have more branches, and far more assets and deposits. ”

http://www.calculatedriskblog.com/2009/07/fdic-bank-failures-update.html

call me ahab

jdamon-

the problem is that you are up against a money printing machine and tacit agreement between the the Fed/Treasury and the market makers to reflate asset prices-

tough odds- SKF is now $29- ( a 2X finance inverse)- its high was over $300- tough to compete agsinst the program trading and the creation of money at will

JustinTheSkeptic

There is only one way for this market to go and that is up, up and up! Who cares about CRE, just another reason to crash the dollar…and we all know that a weak dollar is great for the stock market. Don’t we? Sell your bonds jump into the stock market where nominal gains can be made hand over fist.
 

[Aug 4, 2009] "Mr. Bailout"

I think that calling his a clown is underestimation of his vast abilities. My God, is there any nonsense that a crooked  market fundamentalists can't say or do ?  As for WaMu bondholders I agree with Ann: "Speculators who buy junk hoping to be part of a company recovery or bankruptcy asset distribution would have been the losers, but that is the risk such speculators decidedly take." Speculators were wiped out and that's only fair... For bond fund holders that would be a less than 1% loss (if we assume on average 300 bonds in the portfolio).

Selected comments:

anne says...
"Sheila Bair -----."

Warren Buffett who knows a little about banking, being a prime and sucessful bank owner for decades, has expressly praised Sheila Bair who as far as I can tell is conduacting us through a critical period for commerical banks with remarkable quickness and smoothness, but even if Bair is doing poorly there is a peculiar way in which women must be referred to when they are criticized, as Paul Krugman pointed out a few days ago about Secretary of State Clinton.

Why are criticized women so repeatedly dealt with in such demeaning terms?

Posted by: anne | Link to comment | Aug 05, 2009 at 08:08 AM

slumber says...
Barry Ritholtz linked to this positive assessment of Bair posted in Slate on the weekend. I haven't really been following the controversy around her, but it sounds like she's misunderstood, at the very least.

Posted by: slumber | Link to comment | Aug 05, 2009 at 08:28 AM

slumber says...
Hyperlink missing?

http://www.thebigmoney.com/articles/hey-big-gender/2009/08/02/loaded-bair?page=0,0

Let's try again...

Posted by: slumber | Link to comment | Aug 05, 2009 at 08:29 AM

anne says...
Slumber:

http://www.thebigmoney.com/articles/hey-big-gender/2009/08/02/loaded-bair?page=0,0

August 2, 2009

Loaded for Bair: Why sexism is behind the attacks on the FDIC chief.
By Maureen Tkacik

I recently heard that Vogue was desperate to find women prominent in the colossal effort to fix the financial crisis to profile. Um, hello! FDIC Chairwoman Sheila Bair is arguably the most powerful woman in the world right now, a fact for which we should all be grateful. Universally regarded as the sole member of the Bush administration's crisis rescue team to have recognized early both the magnitude of the fraudulence in the mortgage business and the magnitude of the risk that fraud posed to the financial system, Bair has distinguished herself as not only our most populist regulator but, if a recent New Yorker profile * is to be believed, our most intellectually curious and competent regulator as well....

* http://www.newyorker.com/reporting/2009/07/06/090706fa_fact_lizza?currentPage=all

Posted by: anne | Link to comment | Aug 05, 2009 at 08:40 AM

Bruce Wilder says...
"She sought to undermine Bernanke, Geithner, and Paulson's efforts to save the financial system whenever she got a chance."

"forcing WaMu's bondholders to take huge losses"

Sheila Bair demonstrated great competence and a sense of realism, in preparing her agency to handle the increased rate of bank failures.

As for WaMu, the truth is that WaMu was so huge, that its eventual and inevitable failure could have bankrupted the FDIC, endangering confidence in the whole FDIC system of deposit guarantees. It was a brilliant stroke, and, again, showed realism and foresight, when Bernanke and Paulson were, apparently surprised at every turn, by developments six months to a year in the making. The truth is that Fannie and Freddie bondholders should have been given a haircut, too. And, AIG CDS should have been discounted.

The failure to share out the pain of an insolvency crisis to those, who had contracted to bear the losses, will be a major factor in the crisis-next-time. Bernanke-Paulson-Geithner will look like goats ten years from now. Bair will still look like someone, who did her job.

Posted by: Bruce Wilder | Link to comment | Aug 05, 2009 at 08:41 AM

Beezer says...
So our original Sheila gave WAMU bondholders haircuts?

Bad Sheila. Bad.

I hope she keeps her trimmers nice and sharp.

Posted by: Beezer | Link to comment | Aug 05, 2009 at 08:50 AM

anne says...
http://www.nytimes.com/2008/09/26/business/26wamu.html

September 26, 2008

Government Seizes WaMu and Sells Some Assets
By ERIC DASH and ANDREW ROSS SORKIN

Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night, in what is by far the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation's largest savings and loan, to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution.

The move came as lawmakers reached a stalemate over the passage of a $700 billion bailout fund designed to help ailing banks, and removed one of America's most troubled banks from the financial landscape.

Customers of WaMu, based in Seattle, are unlikely to be affected, although shareholders and some bondholders will be wiped out. WaMu account holders are guaranteed by the Federal Deposit Insurance Corporation up to $100,000, and additional deposits will be backed by JPMorgan Chase.

By taking on all of WaMu's troubled mortgages and credit card loans, JPMorgan Chase will absorb at least $31 billion in losses that would normally have fallen to the F.D.I.C.

JPMorgan Chase, which acquired Bear Stearns only six months ago in another shotgun deal brokered by the government, is to take control Friday of all of WaMu's deposits and bank branches, creating a nationwide retail franchise that rivals only Bank of America. But JPMorgan will also take on Washington Mutual's big portfolio of troubled assets, and plans to shut down at least 10 percent of the combined company's 5,400 branches in markets like New York and Chicago, where they compete. The bank also plans to raise an additional $8 billion by issuing common stock on Friday to pay for the deal.

Washington Mutual, with $307 billion in assets, is by far the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crisis. IndyMac, which was seized by regulators in July, was one-tenth the size of WaMu.

But fears of the fallout from the government takeover of a big bank were balanced with the removal of one of the largest remaining clouds looming over the banking industry.

"This institution was a big question mark about the health of the deposit fund," Sheila C. Bair, the chairwoman of the F.D.I.C., said on a conference call Thursday. "It was unique in its size and exposure to higher risk mortgages and the distressed housing market. This is the big one that everybody was worried about." She said that the bank's rapidly deteriorating condition prompted regulators to seize it Thursday, and not on a Friday as is typical for bank closures.

For weeks, the Federal Reserve and the Treasury Department were nervous about the fate of WaMu, among the worst-hit by the housing crisis, and pressed hard for the bank to sell itself. Washington Mutual publicly insisted that it could remain independent, but the giant thrift had quietly hired Goldman Sachs about two weeks ago to identify potential bidders. But nobody could make the numbers work and several deadlines passed without anyone submitting a bid.

But as panic gripped financial markets last week after the collapse of Lehman Brothers, WaMu customers started withdrawing their deposits....

Posted by: anne | Link to comment | Aug 05, 2009 at 08:56 AM

kharris says...
Did WaMu share holders get to keep anything? Cause if they didn't, then next in line is bond holders. Why are we asked to think that shielding bond holders from the consequences of their own actions is good for the rest of us? Why are we to think that opposing some parts of the Bernanke/Paulson/Geithner program is bad? It is simply not true that Bair has opposed all of it, as the blogger claims.

I don't know one way or another about sexism in this case, but the point on Blair reads quite differently than the other three bullets. Paulson is allowed to speak for himself. Reid is allowed to speak for himself. Feldstein is characterized, as Bair is, but only after being allowed to vote for himself as a board member. Only Bair is delivered entirely through characterization, rather than evidence. This is not good.

Posted by: kharris | Link to comment | Aug 05, 2009 at 09:05 AM

baileyman says...
If anyone stood up for the time-worn and proven process of bankruptcy if was Blair, while the others improvised gigantic subsidies to the top 1/2%.

For the dough they shelled out we could have reinvented the whole system, pretty quickly and painlessly, too.

Posted by: baileyman | Link to comment | Aug 05, 2009 at 09:08 AM

baileyman says...
If anyone stood up for the time-worn and proven bankruptcy process it was Blair. The others improvised gigantic subsidies to the top 1/2%.

For the dough they shelled out we could have reinvented the entire financial system, painlessly and quickly, too.

Posted by: baileyman | Link to comment | Aug 05, 2009 at 09:10 AM

Rebunga says...
Im not so sure that the government bailout was really in AIG shareholder's best interest. AIG lost 99% of its market cap. Opposing this makes one a "clown" ?

Maybe you meant he should have had Goldman Sachs' shareholders best interest in mind?

Posted by: Rebunga | Link to comment | Aug 05, 2009 at 09:15 AM

Not Mark T says...
Bair also upset bankers and other financial regulators in 2006 when she argued for leverage ratio limits in Basel II. "It is decidedly a blunt instrument, but it is also fairly transparent, easy to monitor and hard to manipulate," said Dan Tarullo then Georgetown Professor of Law (Financial Times, 10-9-06). Sometimes, you've got to be judged by your enemies.

Posted by: Not Mark T | Link to comment | Aug 05, 2009 at 09:22 AM

SS says...
SHEILA BAER DOES WHAT?

Not an insider but I usually have good instincts and a very positive opinion of what I have seen so far of Sheia Baer. She is not a typical governmental hack, thinking that they are all knowing. I draw this from the fact that she has not been shy about coming on TV, doing open forums with the public on CNBC with Erin and Cramer and explaining what her Agency does and why, at the height of the crisis. Who else did that? Additionally her explanations were good and that is something I can judge myself. So when the others attack her I am skeptical

Especially skeptical as there are no facts about her in the accusation only the "establishment's" disdain. - (Why would WaMu's bond losses necessarily be such a colossal mistake when Krugman, Stigltz et all were arguing against bailouts of the bigger banks. I recall that I was one of the few anywhere to advance the issue of the timing of bankruptcies). - Mark you know better than to give an ad hominen (feminine) attack without the shred of evidence. It's almost as if the King pronounces someone's ban when the establishment speaks. I believe even the King's of yore gave reasons though. At least she hasn't screamed like Howard Dean.

SS

SS


Posted by: SS | Link to comment | Aug 05, 2009 at 09:24 AM

a says...
Apocryphying Anne: "Why are criticized women so repeatedly dealt with in such demeaning terms?"

If you think someone is incompetent, probably the best way to criticize them is in demeaning terms... I think, by the way, that "clown" (for Feldstein) is more demeaning than "atrocious" (for Blair).

"Hank Paulson, to Geithner and Bernanke, on the possibility of bailing out Lehman: "I'm being called Mr. Bailout. I can't do it again." ... "

Yep, that's why the smart money was thinking the gov would let Lehman go. Washington was going to have to let *someone* go bankrupt or they would just look plain foolish.

Posted by: a | Link to comment | Aug 05, 2009 at 09:34 AM

ottnott says...
"the colossal mistake she made in forcing WaMu's bondholders to take huge losses at the absolute height of the panic"

Umm, the panic was the combination of the realization that there were a whole bunch of financial assets that were worth far less than people hoped they were worth, and the uncertainty about just how much less they were worth.

Sheila Bair's move acknowledged reality about the value, removed the uncertainty about the value of WaMu bonds, and properly assigned the losses to the people who put the capital at risk.

Sounds to me like she was doing her job in the face of colossal pressure to perpetuate the fraud and to shovel the losses onto taxpayers.

Wessel can kiss my taxpaying bottom.

Posted by: ottnott | Link to comment | Aug 05, 2009 at 09:48 AM

a says...
"Feldstein is characterized, as Bair is, but only after being allowed to vote for himself as a board member."

I haven't read the book and I don't know the details so well so I could be wrong, but Feldstein was a board memmber of AIG Financial Products, the part of the biz that lost all the money. But I'm not sure that was the board that voted on the rescue - I thought that was AIG. In which case Feldstein *didn't* vote.

Have I got this wrong?

Posted by: a | Link to comment | Aug 05, 2009 at 09:56 AM

Julio says...
Well, Bair sounds like she's not one of the boys.
Which, in the financial world, is a high compliment indeed.

Posted by: Julio | Link to comment | Aug 05, 2009 at 09:57 AM

SS says...
@ a says..

It's really hard to take you seriously when you post a whole paragraph comparing how Blair's criticism compares to that of males and ignore the vulgar sexual innuendo with which the paragraph on her begins.

It is either that you are totally insincere or live in a "fresh water" bubble where people speak in "iambic pentameter" and don't know the vulgate. LOL

SS

Posted by: SS | Link to comment | Aug 05, 2009 at 10:13 AM

Min says...
"Sheila Bair sucks."

I suppose that it would be in poor taste to echo Abraham Lincoln's quote about Grant: Send a barrel of what she has been sucking to the other regulators.

"This is in addition to the colossal mistake she made in forcing WaMu's bondholders to take huge losses at the absolute height of the panic."

A regulator with cojones!

"No wonder the other regulators were so eager to avoid including her in any rescue policies."

She doesn't suck up to the right people.

"She has a grand total of 0 years of experience in banking,"

These days, that's a big plus. :)

Posted by: Min | Link to comment | Aug 05, 2009 at 10:15 AM

Dirk van Dijk says...
I agree with the majority or the commentators here that Shelia has been by far the best of the bank regulators, perhaps that is damming with small praise, but still. Making WAMU bondholder take a haircut was EXACTLY what needed to be done, and should ahve been done to several of the other TBTF firms. Would have brought the costs to the taxpayers down significantly. We need to keep Bair in place, not Dugan on the other hand should be shown the door ASAP, especially with his insubordination in opposing the Consumer Protection Agnecy

Posted by: Dirk van Dijk | Link to comment | Aug 05, 2009 at 10:31 AM

Ben says...
I suspect the reason Congresspeople can't be rushed into voting is that they need to contact their owners who have bought them to find out what to do.

Posted by: Ben | Link to comment | Aug 05, 2009 at 10:32 AM

a says...
"vulgar sexual innuendo"

Oh right, and you can't say "he sucks" any more because it's a claim that the guy is gay? Just because you have a dirty mind doesn't mean that was the intention of the speaker.

Posted by: a | Link to comment | Aug 05, 2009 at 11:02 AM

anne says...
How investment-grade bond holding generally works, or works for investors as opposed to speculators. A typical portfolio will contain 300 to more than 1000 different bonds. A given bond in a portfolio will lose value when the prospects of the company that has sold the bond become relatively less secure. For a bank such as Washington Mutual which was understood to be threatened well before being sold to Morgan, bonds would have lost value for months and been easily below investment-grade by the time the bank was sold. So approaching the certain end Washington Mutual bonds would have been worth pennies on dollars, and depending on the market for bonds investment-grade portfolio managers would have already taken the pennies in selling to speculators in junk.

The losses were already there in investment-grade portfolios, for a loss on a bond when 300 to 1000 bonds are in a portfolio is easily taken and simply part of the risk even quite conservative investors take. The losses were of little consequence to investors, then.

Who may have lost more than a little, however? Speculators who buy junk hoping to be part of a company recovery or bankruptcy asset distribution would have been the losers, but that is the risk such speculators decidedly take.

Posted by: anne | Link to comment | Aug 05, 2009 at 11:05 AM

roger says...
Actually, if sucking is being done, I think it is being done by the Economics of Contempt, for which I have a maximum level of contempt. I'm not sure, though, what we are supposed to make of these quotations. Is this a sort of stream of association of how the oligarchy thinks these days? That entrenched privilege that can't imagine a "haircut" in a "crisis"? The notion that the government, which should never ever be involved in healthcare (as Arthur Laffer just said, imagine if the government were involved with medicare or medicaid! a remark that should be framed along with his curve), should always backstop the richest and most powerful dealers in junk.

Sheila Blair is perhaps the only one in the party I think has come out of this crash looking like an honest person.

As for the other Mr. Bailouts that Mr. Contempt obviously thinks of as superheros, dashing about and making so sure that shareholders don't get hurt - the horror! - well, he has caused me to raise my sense of Feldstein's honor a bit. Feldstein was actually clown enough to not think moneymaking is the be all and end all of the corporation - my God! A clown indeed, and not a blood sucking squid. Which is obviously Contempt's favorite animal.

Posted by: roger | Link to comment | Aug 05, 2009 at 11:14 AM

anne says...
Do not be taken in by nonsense about Grandmother losing on Washington Mutual bonds by holding a Vanguard investment-grade bond fund. The loss would have been minimal, and easily made up, and more, by the general bond market gains through this liquidity trap bond market period we are experiencing. Professional speculators buy distressed assets and had better know just what the risks are, but there were the complaints about Washington bonds and Grandmother.

No company would have given more than a token for Washington bank by the end, and recovery otherwise was impossible unless the bank were expressly rescued at Treasury expense. So the bank was sold for a token, and speculating bondholders lost and Grandmother should have been well pleased.

Posted by: anne | Link to comment | Aug 05, 2009 at 11:17 AM

anne says...
Washington Mutual, by the way, lost $17 billion in deposits between September 15 and September 25, 2008. Real money, there. *

* http://www.nytimes.com/2008/10/07/business/media/07advertising.html

Posted by: anne | Link to comment | Aug 05, 2009 at 11:19 AM

wally says...
I don't get it. Does Thoma endorse the E of C remarks or is he pointing out the nonsense that the swingin' you-know-whats are saying to each other when they stand at the bar and talk about screwing the taxpayers.

Mish's Global Economic Trend Analysis

Global GDP Rebound Is Underway, But Who's The Buyer? Many are cheering the "recovery". Unfortunately, the recovery is nothing more than unsustainable government spending, not just in the US but globally.

David Rosenberg talks about the GDP in Tuesday's Breakfast With Dave.

The reason why we remain skeptical over the sustainability — the operative word for investors — is because the U.S. economy (or the global economy for that matter) has yet to show any ability that it can stand on its own two feet without the constant use of government steroids. At a time when the U.S. government is running a 13% fiscal deficit-to-GDP ratio, it somehow has enough in the coffers to try and perpetuate a cycle of spending by inducing a populace in which 20% are already three-car families, to go out and buy a new car to support a shrinking industry at future taxpayer (or bondholder) expense.

Look at what happened in that first quarter GDP number — total GDP contracted around $30 billion at an annual rate, but when you strip out all the government activity, ranging from spending, to tax reductions, to benefit payouts, the decline exceeded $300 billion. In other words, without all the government intervention, the decline in GDP in 1Q would have been closer to an 8% annual rate, not 1%.

Motor vehicle sales surged to a 10-month high in July — an annualized 11.2 million units compared with 9.7 million in June. The results largely reflect the “Cash for Clunkers” $1 billion program that ran out of money in barely more than a week.

THIS IS SO REMINISCENT OF WHAT HAPPENED IN LATE 2001/EARLY 2002

In the aftermath of 9-11, the Big Three unveiled 0% financing to rejuvenate auto sales, which were moribund at the time. So what happened was that motor vehicle sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October — a 3,643% surge at an annual rate! Retail sales skyrocketed 6.6% that month (+116% at an annual rate), a record that holds today. We never came close to seeing 20.0 million units on auto sales again.

But what all these gimmicks do is bring forward consumption — they don’t “create” anything more than a brief spending splurge at the expense of future performance — the pattern gets distorted as opposed to there being any real permanent change in the trend.

Even as economists start to pen in 3.0%+ GDP growth for 3Q, we remain of the view that we could end up with something closer to 1.0% growth or a touch better.

As for 4Q, the key will be the consumer, and without more government support, either in the form of stepped-up spending incentives or extension of jobless benefits, the odds of a relapse towards 0% growth is non-trivial. This is beyond the limited time horizon of the equity market, but come Labour Day, attention will turn away from the recession ending (assuming it has — one quarter does not make the difference) towards the contours of the recovery (assuming we have one).

And in Japan, wages (wages, including overtime pay and bonuses) slid 7.1% from a year earlier in June, the 13th consecutive decline but the biggest since the data series started in 1990. The U.S. is suffering from a similar deflation in the labor market, with wages and salaries sliding at a record 4.3% over the year to Q2 (have a look at what is happening to boomers coming back into the workforce on the front page of today’s NYT — Years After Layoffs, Many Still Struggle To Match Old Salaries.

To think we have people concerned about inflation because of what the price of copper is doing.

Indeed, a crack up boom in China, driving commodity prices higher does not constitute inflation or a recovery everywhere else. China is on a solid path to overheat unless global consumption miraculously picks up, which it won't, at least sustainably.

Rosenberg also points out that the 46% rally in 101 days is unmatched dating back to 1933. I suppose the rally could continue given the 1933 rally lasted 249 days taking the stock market up 172%. However, I would not recommend playing for it.

Meanwhile aside from wasting another $2 billion on "cash for clunkers", bickering in Congress over throwing money at problems is starting to heat up. "Blue Dogs" scaled back the health care plan considerably and the fight in the senate is far from certain.

And with an all but certain rebound in GDP of some sort in the third quarter, Congress and the Fed will want to see if the stimulus takes hold. We know the answer already: It won't, because the jobs picture is bleak, consumers are too deep in debt, and boomers headed for retirement are scared to death over lack of savings.

Of course, many claim "jobs are a lagging indicator". In this case, expect jobs to lag, and lag and lag some more, limiting growth to a few quarters max of inventory replenishment for a "Recoverlyless Recovery" that won't get off the ground.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
 
 

Comparing the Current Recession and the 1980-82 Recession by Menzie Chinn

August 3, 2009 | Econbrowser

Comparing the Current Recession and the "1980-82 Recession"
At least one observer has argued that the current recession is not as bad as that of the 1980-82 recession, when those two separate recessions (1980Q1-1980Q3; 1981Q3-1982Q4) are considered as one (see [1] [2]). Here is my interpretation of this assertion, updated to use the latest GDP data, and normalizing (log) GDP on the recession start dates.

Figure 1: Log GDP relative to 2007Q4 (blue), log forecasted GDP relate to 2007Q4 (teal), and log GDP relative to 1980Q1 (red). Source: BEA GDP 2009Q2 advance (July 2009), WSJ survey of forecasters (July 2009), NBER, and author's calculations.

Notice that, using the WSJ mean survey forecast from early July, the current downturn will exact a bigger (percentage) output loss than the 1980Q1-1982Q4 recession; if we assume the current recession trough ends up being 2009Q2, then the cumulative loss relative to previous peak will be 9.6 percentage points, while that for the "1980-82 recession" will be 2.5 percentage points.

Comments

JR

The 1980 - 1982 recession was very different in so many respects, fiscal policy, monetary policy, commodities, structural characteristics. I wouldn't know where to start to compare the two but how about doing some real analysis instead of just posting GDP charts? That's too facile.

jturner

While it may be difficult to say as of now which recession is worse, with the benefit of hindsight in a few years I think this recession will end up being considerably worse due to the deflationary impact of the bursting of the largest credit bubble in the postwar period.

I also think that the entire economic situation has gotten so out of control now that the Fed is like an addict who realizes his actions are wrong, but he continues to do them nonetheless because he is so used to it and has never learned to do the opposite. The Fed is trying to prevent deflation (defined as the contraction in credit), when deflation is what is needed to eventually put the country on a healthy and sustainable path in the long run. Consumers should be spending less, saving more, and learning to live within their means without excess borrowing.

Bill C

Combining the '80 and '81-82 recessions seems more reasonable if you look at it in terms of the unemployment rate. While output did recover in between the two recessions, as your graph shows, the unemployment rate only improved slightly, and never got back to its pre-recession level before the second recession began. So 1980-82 could be thought of as a long period of mostly rising unemployment, interrupted by a leveling off from mid-80 through mid-81.

Michael

How about unemployment? I consider it the more important measure because, frankly, we are plenty rich on average and living on 90 percent of last year's income (or even 80 percent, given the savings increase) is not such a big deal. It doesn't seem improbable that we could wind up with more unemployment than in the 1980s, but from the last data I saw we aren't there yet. Does this picture change with consideration of the broader unemployment and underemployment measures? Or with the difference in pre-recesion income distribution?

ppcm

Is comparison, reason if not all economic parameters are covered throughout the contemplated periods?
As a sample Total US debt rose from 163 % of GDP in 1980 to 370 % in 2009.

Whereas for the 10 years yields and Fed fund yield:

The rebound elasticity is predicated upon the soundness of the public,private household finance

Steve Kopits

The current recession was really more of a 19th century panic (see Gorton). The effects were both financial and energy-linked. The financial effects--a partial meltdown of the financial system--did not occur in 1979. Rather, the US had a number of structural problems then--high taxes, high regulation, combined with a loss in Vietnam and a feeling that free markets were doomed--which made it more of a grinding recession as Volcker's tight money policy slowly squeezed inflation out of the economy. So this recession felt to me more acute (like a knife wound); the 1979-1983 recession felt more like a marathon or a 15 round boxing match.

Another important distinction is the role of oil. In both 1974 and 1979, OPEC raised the price of oil by hefty amounts--and left it there. Much of the grinding of the 1979-1983 period is the US and global economy shedding oil consumption, about 5% of GDP during the period.

In the current recession, oil prices fell quickly; therefore the impact was transitory (and if you look at Jim Hamilton's model (AR4), it does indeed suggest a May trough).

However, we are by no means out of the woods. On a pro forma basis, I project that this period ends with a lock-out of OECD oil consumption; that is, OECD oil consumption never recovers to its pre-recession levels. So peak oil--because that's what we are talking about--will bring the 'grinding' aspect back to the recovery, probably from next year.

You can see more on the history of the oil and recession here:

http://www.dw-1.com/files/files/438-06-09_-_Research_Note_-_Oil_-_What_Price_can_America_Afford_-_DWL_website_version.pdf

Mark A. Sadowski

Casey Mulligan made his case by focusing on output and then normalized to the end date (which we don't really know yet). Normalizing to start date is an improvement but because time, and consequently growth in potential output, is always a factor, it still doesn't get to the heart of the problem.

A better measurement of intensity would be output gap or, as a proxy, the difference between peak unemployment and NAIRU. Since NAIRU was 6.0% in 1982 and peak unemployment was 10.8% the difference is 4.8%. Similarly since NAIRU is currently 4.8% and unemployment was 9.5% in June the difference is 4.7%. The current difference is smaller so far but I suspect by the end of the week (when July's figure is released) we will know better.

P.S. One might go still further and consider the duration of the output gap. In other words one could calculate percentage-output-gap-years, or the area between actual output and potential with potential normalized to unity. To my knowledge, nobody has attempted that so far.

GK

The 1980-82 recession (which is correctly regarded as one big recession - it should not be split due to that most minimal of recoveries in between), was not so bad for either GDP or the stock market. Only employment was heavily hit.

In this recession, ALL measures are heavily hit.

There is some chance of a second, smaller recession starting in late 2010 as the tax cuts expire and higher interest rates much housing prices down another leg.

 DR

The big difference is demographics. In the early 80s recession the boomers were just starting their adult life with plenty of years ahead to increase their income levels. In this recession, boomers are getting laid off at peak earning years and aren't finding jobs to replace these earnings. They won't be increasing but decreasing their earnings output in the future. The X Generation is lower in numbers and also are far more in debt than the Boomers were at the same phrase in the earnings life cycle. The Y generation is of equivalent size to the boomers but will take a couple of decades before their income will be significant levels. The US might be facing a slow growth decade.

Steve

To the extent that it represents a weak period in sum, I can understand why some would think of the two early 80s recessions as one. But from an economic perspective, these were two distinct recessions. People often forget that the second recession was deliberately induced by Volcker to stem inflation. The second recession didn't occur because the economy was weak; it happened because it was choked to death. Correctly, I should add.

Fed Watch: Is a Jobless Recovery Your Best Friend?

Gross private domestic investment is -20.4%; Government consumption expenditures and gross investment is +5.6%; Net export of good and services is -7.0%; Imports -15.1%.
Tim Duy on how the Fed is likely to respond to "the cyclical turn in the US economy":

Is a Jobless Recovery Your Best Friend?, by Tim Duy: Never underestimate the power of money. Especially lots of money coming on top of a cyclical recovery that is almost textbook at least as far as the timing is concerned. To be sure, you can question the sustainability of the recovery, the breadth or health of the recovery, and the nature of job growth. I have questioned all repeatedly and fail to see that the conditions that have dominated the US economic story for the past 25 years - primarily, a continued reliance on consumer spending to propel growth - can continue in the face of massive household debt burdens and stiffer (or, more accurately, realistic) underwriting conditions. But regardless of these concerns, evidence is clearly pointing to a shift in economic conditions for the better. Moreover, I suspect it will take at least two more quarters at a minimum - and maybe closer to two more years - before the more pessimistic or optimistic visions of the future will come into clear view. Until then, it seems likely the appetite for risk will continue to climb, and all the liquidity - liquidity fueled by new guarantees that massive financial institutions are too big too fail - has to go somewhere.

Which is to say that no matter how pessimistic you are in the medium and longer term, you need to recognize the potential for massive moves in markets as risk taking perpetuates more risk taking. And as long as that risk taking flows in directions that do not fundamentally change the US jobs and, by extension, wage picture, it is difficult to imagine the Federal Reserve will do anything but let the party roll on.

The second quarter GDP report (Jim Hamilton and Menzie Chinn at Econbrowser discuss the details) confirmed what was already well known - the pace of deterioration slowed markedly, setting the stage for a growth rebound in the second half of this year. The game now is upping near term growth forecasts accordingly - not a fool's errand at all, considering the inventory correction is running its course and new residential construction is mostly likely at the bottom (seriously, we were never moving to an economy where zero houses would be built). Moreover, as Calculated Risk reports, it looks like we hit the bottom of car sales, with no small boost being provided by the Cash for Clunkers program.  Say what you like about the economic wisdom of this program or its potential to magnify a double-dip by borrowing from future growth, it will goose the third quarter numbers and advance the pace of inventory correction in the auto industry. And, let's be honest, buying new cars is a whole bunch more fun than just writing massive checks to keep the industry afloat.

The July ISM manufacturing report only adds to the cyclical rebound story. The headline number is flirting with the all important 50 mark, while the new orders component surged into expansion territory. Production, export, and import components all gained. Even the employment reading rose higher, although it continues to signal ongoing job declines. All in all, a report that is predicting recovery in a time frame consistent with the deep cyclical plunges of late last year.

On a more somber note, labor market weakness continues to weigh on paychecks, a phenomenon confirmed by the employment cost index for the second quarter. Wages and salaries for private workers climbed a scant 0.2%. To be sure, this raises concerns about the durability of consumer spending going forward, especially when combined with fears of a jobless recovery. Indeed, I have argued that most if not all of the jobs in the manufacturing sector simply are not coming back. My suspicion is that firms will use the recession to expand overseas supply chains wherever possible. Moreover, firms will not be in a rush to hire back without a clear resurgence of growth, which seems unlikely to occur given precarious household debt burdens.

Now comes the tricky part - what does the evolving economic dynamic imply for financial markets? I am increasingly of the mind that although a jobless recovery will be a dreary fate for the American people, it offers the best outcome for financial markets for one simple reason: The jobless recovery offers the greatest probability that the Fed remains on the sidelines. The jobless recovery is what keeps the Fed goose laying the golden eggs.

True, one should be cautious about reading too much into near-term market action. Macro man puts it succinctly:

The problem that some so-called perma-bears have is is recognizing the temporary importance of such asset flow, and how far it can push asset prices. By the same token, the problem that some of the flow-of-funds, risk-on crowd have is is failing to recognize that buying something just because other people do is nothing more than an exercise in greater fool theory. And while the market may well be a voting machine in the short run, as Benjamin Graham observed it is a weighing machine in the long run.

With the Armageddon trade off the table, market participants need to move the mass of money provided by the Fed somewhere, and it is showing up in all the predictable places. US equities, commodities, oil, and foreign exchange. Indeed, without the Fed threatening to raise rates, there is no rush to exit Treasuries, which could explain the failure of the ten year bond to retake the 4% mark even as equities sure higher.

To be sure, these trades might collapse under their own weight, but the probability of finding a self-sustaining move, like the US housing boom earlier this decade, is higher the longer the Fed keeps rates at a rock bottom level. And the farther that money flows from the US the better for financial market participants; too much money close to home would raise the prospect of stronger growth and tighter monetary policy. Andy Xie (hat tip to Big Picture) believes he has found one such place in China:

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

When will that bubble burst? Possibly 2012, after the Fed can no longer keep interest rates low:

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.

It is difficult to tell when the dollar will turn around. The dollar went into a bear market in 1985 after the Plaza Accord and bottomed ten years later in 1995. It then went into a bull market for seven years. The current dollar bear market began in 2002. The dollar index (‘DXY’) has lost about 35% value since. If the last bear market is of useful guidance, the current one could last until 2012. But, there is no guarantee. The IT revolution began the last dollar bull market. The odds are that another technological revolution is needed for the dollar to enter a sustainable bull market.

However, monetary policy could start a short but powerful bull market for the dollar. In the early 1980s Paul Volker, the Fed Chairman then, increased interest rate to double digit rate to contain inflation. The dollar rallied very hard afterwards. Latin American crisis had a lot to do with that.

The current situation resembles then. Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy. China’s asset markets and the economy would almost surely go into a hard landing.

Bottom Line: Incoming data continue to confirm the cyclical turn in the US economy. But that cyclical turn is supported by a massive amount of government intervention, in and of itself a testament to the fragility of the recovery. The Fed will be in no rush to withdraw that liquidity - especially if a jobless recovery emerges. Indeed, it is easy to tell a story where the Fed holds rates near zero into 2011. That also means the Fed will not rock any boats. Thus, the jobless recovery is almost a dream come true for those trades dependent on easy Fed policy - which seem to be virtually all trades at the moment.

Although there has been talk of the Fed acting preemptively to curtail bubbles, I am skeptical that any such action would be taken with US unemployment staring at double-digits. And there certainly would be no rush to react if low US interest rates fueled bubbles outside US borders; that, after all, would be the responsibility of foreign policymakers.

Beezer says...

A reasonable viewpoint expressed well.

America is too dependent on its financial industries and that remains the case today. With the low interest rates, until liquidity reaches other industries, the financial ones will continue to take outside risks if they can.

Bringing some balance back is going to take a few years, at minimum. And that's going to require that investment risk spreads out of pure trading in commodities, forex and the rest.

It's a chicken and egg type of situation. The government is going to have to lead and seed the movement away from the current risk concentration in paper assets to ones in productive assets. The private market can't do this.

Obama has outlined the areas where he wants to use a policy of government support to lead and seed private market involvement. It's the correct idea. But it's success depends entirely on a cohesive Democrat party because the Republican party ideology keeps them from participating in any beneficial way.

Anne from Chicago says...

"Jobless recovery" may be a dream come true for some - but a living nightmare for all those millions unemployed.

If our recovery is truly "jobless" - it is not a recovery. I wish people would stop talking as if "jobless recovery" is something real - and not just econo-speak babble.

bakho says...

"Is a Jobless Recovery Your Best Friend?" Turn up the SNARK.

My conclusion from the Duy piece is that even upon recovery, the private sector is NOT going to be investing in enough job creation

"the mass of money ... is showing up in all the predictable places. US equities, commodities, oil, and foreign exchange." Most of this is worthless for job creation.

Better to nationalize the whole lot as tax revenue and use the money to pay labor.

ECONOMISTA NON GRATA says...

Anne from Chicago:

"If our recovery is truly "jobless" - it is not a recovery. I wish people would stop talking as if "jobless recovery" is something real - and not just econo-speak babble."

I second that thought, "jobless recovery...?" That's like taking a shower with your raincoat on...

Exactly what recovery are they talking about....? A dead cat bounce....? That's a recovery....?

There are way too many open pips to define this as a recovery. Take a look at this......

http://1.bp.blogspot.com/_2fuk3iGxQxM/SnMYRwx4OgI/AAAAAAAAClw/hmgRwYkkxy4/s1600-h/gdp.JPG

One bad move and it's all over, the dollar, long treasuries, equities, R&CRS.... No...! I'm not buying that nonsense.

Ciao,

Econolicious
 

[Aug 4, 2009] Further On GDP - And Stocks

Aug 3, 2009Sudden Debt

Delving deeper into the GDP numbers just released it becomes quite easy to discern a pattern and possibly make a prediction about the direction of corporate profits.

The following figures are in current dollars, at seasonally adjusted annual rates.

During the first two quarters of 2009..

=> Businesses slashed their investment far faster than consumers reduced their spending. Corporate profits (finance excluded) benefited from cost-cutting, not growth in sales.

Furthermore, in the same period..

=> Businesses sold a lot out of inventory already in stock, as opposed to making new items. That's another short-term boost to the bottom line.

Both of the above positive effects cannot, and will not, last long. Therefore, the crucial question is what happens with consumer spending. My thinking is not to expect a turnaround any time soon; indeed, I think things are going to get significantly worse in the next several quarters. Jobs are being lost in the hundreds of thousands each month and hours worked for those still employed are at the lowest level (33 hours/week) since at least 1964.

Bottom line: corporations can "save" earnings for a few months by slashing spending but in the end the consumer's behavior will determine the top line (sales). And that's where it all plays out..

[Aug 4, 2009] It's the Second Leg of the 'V' That Makes It a 'W' -- Seeking Alpha

The American consumer is the tireless engine of the world's greatest economy.

That's the justification for most analysts growth stories: it's the conventional trend; Americans just don't know when to say "when."

From NYT:

Up to 1.5 million unemployed workers are set to lose their jobless benefits by the end of the year, according to a media report Sunday.
As many as 500,000 unemployed are estimated to use up their benefits by the end of September.

In early June, I was talking one-on-one with JPMorgan's Chief Economist, who makes a case for a return to sustainable, YoY, real growth starting 4Q09.

I challenged his foundation [of assumptions], and lo-and-behold, he kept arriving at the same reasoning,

the American consumer doesn't know when to stop; that's how it's always been, and that's how it will continue to be.

He wasn't talking trends, he was talking convention, and that's not an acceptable crux for a highly-qualified analyst - especially when you consider the environment here, where the consumer has just landed from a trip into negative savings land, and the economy is still lost in quantitative easing hell.

The relevant trend here is the Great Depression.

I see the fantasy that's swept in again; another bout with irrational exuberance that coaxes the economy to overreach itself again. Growth won't explode, but eventually it will stuff the US until it busts at the seams.

We're a mature economy, period. We need growth bubbles to be anything but a mature economy. We need to embrace those bubbles with great caution.

Regardless, a perfect storm (Pensions, demographics, etc.) will unravel the great American Ponzi scheme, and with monetary policy shooting blanks, there's limited escape.

In this return to 1000 on the S&P, there's been no growth and no bubbles--just 5.6% growth in government spending and quantitative easing.

It'd be interesting to see if the loss of jobless benefits by boatloads of unemployed consumers pushed the "V" shaped recovery into a second leg "W." Can anyone in the blogosphere find a correlation between the occurrence of jobless benefit expiration and the second dip of the Great Depression?

What happens when those that haven't found jobs end up with no inflows?

Selected comments

Likbez

Thiazole: They definitely missed the rally. But the warned about last year slump and as far as I know this rally did not fully compensated the losses.

The question of sustainability of the rally remains and September-October period might be interesting as the main trend of the market is to reward the smallest number of people possible (as far as I can tell you are not working for GS ;-). People with long stocks positions might be caught without pants anytime.

As for indicators they have such a margin of error that using them requires real Delphic Oracle skills. Especially if you have rising unemployment and real expansion is observable only in weaponry producers.

Most of us does not have the skills to decipher indicators leading or otherwise.

Anyway, my point is that this game is not about return on the capital it's about return of the capital ;-) BTW bond market rally might indicate that many 401K investors came to the same conclusion. End of casino capitalism spells troubles for stocks.

romeo fayette

I actually challenged Yves Smith from nakedcapitalism.com on that issue. Being a Broker myself, I think you've got to realize two things:

1. What should happen

2. What will happen.

Fundamentally, there's no LT, sustainable growth argument, but day-to-day there are profits to be made in this market. Anyone irrational enough to think that bear market rallys wouldn't occur has missed--and will continue to miss--huge opportunities.

Bloggers like Yves and Tyler Durden are geniuses, but they're blue in the face because they're frustrated with our economy's obstinance. All due respect, that's why they don't make calls about market movements: there's a detachment from reality and fundamentals.

Every uptick casts us deeper into Ponzi purgatory, and they're trying to sound that alarm. Amen.

This market's so far detached that it's UNHINGED, and that's troubling to me & the bearish bloggers.

> Medium term, I'm pessimistic on the outlook for the economy, no doubt.
> But all these geniuses on SA predicting our downfall also missed
> out on potentially the best investing opportunity in our lifetime
> over the past few months. So did I for the most part but at least
> I have the guts to admit it - this was a big miss for most SA bloggers,
> you guys need to come clean and understand how that happened!

[Aug 4, 2009] More Exhaustees Coming

August 2nd, 2009

The details on exhaustees — the people have used up their total Unemployment benefits — are pretty daunting. I mentioned this to Doug Kass last week, who referred to our prior post in one of his recent missives.

Now, the Sunday NYT looks at the same issue prospectively, to guesstimate how many more exhaustees there will be in the next few months.

Short answer: 1.5 million.

Longer answer:

“Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.

Because of emergency extensions already enacted by Congress, laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.

Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.”

Optimistic Investors Stretching It by Paul Vigna

July 28, 2009  | Market Talk

Are we just tired, or are we overstretched?

Stocks are pulling back this morning, and while some tape-painting in the last half-hour of the session can cover up a lot of warts - witness yesterday’s action - we’re going to go out on a limb here and start questioning how much upside is left in this rally.

It occurred to us over the weekend that stocks were overbought. Look at it broadly: the S&P 500 is down about 37% from its 2007 highs, right? But earnings are down nearly 66%. They topped out at $24.06 for the index as a whole in the 2Q07. They were already on the way down when the index topped out around 1560 in October of ‘07.

Now, earnings for the current 2Q are expected to clock in around $6.17, and by the end of 2010 are expected to hit $8.33. That is a far, far cry from the heights of 2Q07, yet stocks are down only about 37% from the ‘07 highs.

That illustrates one optimistic group of investors.

As Gluskin Sheff’s David Rosenberg writes:

A momentum-driven market will always be driven by just that — momentum; and there’s no doubt that investor risk appetite is being whetted. But after paying for the end of the recession in May, the market is now pricing in 40-50% earnings growth for next year, and while costs have aggressively been taken out of the system, this sort of unprecedented profits revival can only occur in the context of a V-shaped recovery, which we give 1-in-50 odds of occurring.

So that gets us back to the original point: are stocks overbought, and can this rally keep going? We’re not fortune tellers, but there’s reason to be cautious, we’ll tell you that.

“The lackluster session (yesterday) technically extended the rally buy there were some signs of wheezing,” UBS’ Art Cashin writes in his daily commentary.

He warns a “big day” could be coming, possibly by Thursday. “We’ll watch closely.”

Tags: , , , ,

[Aug 1, 2009] Can August match a big July for stocks

MSN Money

...the second quarter was the fourth in a row that showed a contraction in GDP -- the longest streak since records began in 1947. Gross domestic product was down 3.9% from the second quarter in 2008, also the biggest year-over-year drop since data were first tracked 62 years ago.

The economy shrank by 6.4% in the first quarter.

Business spending dropped by 8.9% in the second quarter, after a 39.2% plunge in the first quarter of the year. Investment in structures fell 8.9%, and equipment and software slid by 9%. Residential investment fell at a 29.3% rate after sinking 38.2% in the first quarter.

Consumer spending, which makes up the biggest piece of GDP, fell by 1.2% in the second quarter, which many analysts found disappointing. Especially after rising 0.6% in the first quarter and falling 3.1% in the last quarter of 2008.

GDP in the fourth quarter of 2008 and first quarter of 2009 were both revised lower, to 5.4% and 6.4%, respectively.

Selected Comments

me2159

There's a problem with all this good news. None of the companies actually INCREASED SALES. All of the "profits" were directly, or indirectly, from cuts in employees or cut backs in products. Despite the rosy outlook, don't be fooled. Companies are still very much leveraged (in debt) and short term credit markets (loans) are not available. Evidence: CIT hasn't been rescued by any of the big banks that should be salivating over this niche market. We have a very long way to go, and any misstep could throw the whole market into a selling frenzy. As the article notes "Obama has said the country is broke"

The Bottom is In

The BEA report was an advanced estimate, and another 2nd quarter BEA estimate will be released at the end of August.

70% of the GDP is consumer spending. It fell 1.2%. The fact is the GDP estimate of -1 would be much lower if the federal government hadn’t upped its spending by 10.9% and state and local governments hadn’t spent 2.4%.

The third quarter GDP estimate will certainly show more stimulus money and the Cash for Clunker Program money.

A recovery isn’t in the works when the government is propping up the economy.

Obama has said the country is broke…The federal government won’t be able to prop up the economy indefinitely.

SteveJJ

I hope to God the worst is priced into the market! My fear is the baby boomers are now so broke and gun shy that they'll sit on the sidelines for the rest of their investment years. It's not just the shock of retirement losses, it's the debt and the government spending that should keep many away for good! I predict a scenario similar to Japan in the 90s(not quite as bad)! I hope emerging countries will purchase goods from us like we did to keep international capitalism alive!

Big government will end up costing us dearly and moral decline is behind most of the problems! Most European economies are in real trouble-let's not model ours after failure! We need to keep the profit motive alive, improve morals and downsize government big time! Long live the Protestant work ethic and Christian morals! Your Uncle Sammy

Bronxguy

We have to remember w all these Dow gains that although well meaning-if a company like Motorola-has to ax employees to make a profit-then that does not bode well for lowering our disastrous unemployment. Only till we see jobs being created and the unemployment figures start radically decreasing-will be getting out of economic turmoil. The current Presidential administration needs to be having more "economic development summits'' as opposed to "beer" summits.

[Aug 1, 2009] Today versus March 9 Lows

 Markets

Rosie via Abelson:

“DAVE ROSENBERG IS AMONG the vanishing breed of die-hards (we confess, in case you haven’t guessed, to being another) who still cling to the notion that stocks’ explosive rise since March is perhaps the mother of all bear-market rallies, but nonetheless still a bear-market rally. The essence of his skepticism — which we happily second — is simply that the economy, contrary to Wall Street’s jubilant insistence, has yet to turn the corner.

He wonders, moreover, whether the March 6 lows in the stock market were the real McCoy. Although, in contrast to us, Dave persists in keeping an open mind, he’s doubtful that they were. On March 6, he recounts, the market was trading at two times book, with a 13 times multiple on forward earnings and a P/E of 18 on trailing earnings, and a 3% dividend yield. Pretty rich valuations by all three measures of earnings, but pretty skimpy on yield, to rate as a true market low.

And today, after a 45% rise, the metrics, to dip into the Street cliché, are positively mind-boggling. The dividend yield on the S&P 500, Dave notes, is a meager 2¾%, and payouts so far this year have lagged some 32% behind last year’s not-exactly-torrid pace.

In a like astounding vein, he observes, the trailing P/E on operating earnings (adjusted, he explains, “to take out everything that is bad”) is now at 24 times, while — and if you have a queasy stomach you can skip this number — on trailing reported earnings, the multiple is a mere 760-plus!

“Something tells us,” Dave sighs, “that the marginal buyer of equities today at that price may well be the same person who was loading up on real estate during the summer of ‘06.”

Selected Comments

Michael Rottersman wrote:

Dave Rosenberg will be the Nouriel Roubini of 2010. He has stated that the market will spend the second half of 09 giving back what it gained in the first. His timing may not be exact, but in the end it will be close enough for anyone keeping score.

Gilda St. John wrote:

The common adage has almost every rally, whether in a bull or bear market, climbing a wall of worry. “If I buy now, I might get crushed for the fifth, sixth or seventh time in the past 10 years… but if I wait, the market might run on me, and I won’t see a generational low entry price like this for years to come, if ever…”

The market is climbing a wall, all right. But what about those spikes on the other side of sugar mountain? This is not a wall of worry, this is a wall of death. Let's have a beer and forget I ever said this shall we?

Robert Kiggins wrote:

Has this man ever had a bullish outlook on the markets in his entire life?

[Aug 1, 2009] Challenging Wall Street's "Innovation" Branding

One of the most remarkable aspects of the success of Wall Street in subordinating the real economy to its wishes and needs is the con job implicit in the application of the word "innovation" to what might more accurately be described as tax evasion, regulatory arbitrage, and chicanery. Martin Mayer once described innovation as "using new technology to do that which was forbidden under the old technology."

Rob Johnson, former economist to the Senate Banking Committee, has a new article that parses how the financial services industry has managed to wrap itself in the mantle of progress, when if anything its new products have been a force for destruction rather than creation. We had a wave of new OTC derivative products sold, starting in the early 1990s, whose high profits for the most part depended on the fact that they allowed investors to game ratings or mask the economic substance of transactions or fob risk off on to people who really did not understand it. The industry managed to co-opt SEC chairman Arthur Levitt and fight a delaying action until the media got bored and went on to other matters, A collateralized debt obligation market blew up in the late 1990s only to be reborn in the new millennium in only slightly modified form to wreak havoc on a much greater scale. Abuses of off-balance-sheet vehicles by Enron did not lead to reforms that affected the financial services industry much, since huge carve outs were made so as to keep mortgage securitization alive. And I will admit to having been unable to keep up on the news as fully as I once did, but I don't recall any of the proposed fixes for the securitization market calling for changes in deal structures and servicer contracts so as to make mortgage mods easier and more attractive.

From Johnson:

Innovation. It is a lovely word that teases the mind with the notion of expansive possibilities... A win-win game. Just as Americans once expanded westward to relieve social tensions, we are now exhorted to have a rather imprecise faith in the notion of technological change to deliver us from our current troubles. Embracing that starship to unlimited possibility and deliverance requires a faith that cannot be easily refuted: Who, after all, is against progress?

David Noble, who has written so powerfully about this in his series of books including America by Design, Religion of Technology and Beyond the Promised Land, has explored this mythology of redemption and salvation through changes in technique and deference to undefined dreams of “possibility.” It is time to apply his perspective to the religion of financial innovation.

We have seen the financial sector, with its massive resources and access to the best minds of public relations, work to create what Stuart Ewen calls “spin.” ....we have been ever-so-persistently encouraged to draw the comparison between developments in financial products and the great leap forward in social uses of computers and the Internet, or advances in biomedical research. Former mathematicians, physicists, and computer scientists redirected their energies and Ph.D. tenacity to the domain of finance. Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future.

Skeptical questioning–”Where are the benefits to be found?”–was frowned upon or ignored. ”Just doesn’t get it,” the whisperers would say. The skeptic was discredited with the insinuation that he or she was either 1) jealous of those who were making money and progress at the same time, or 2) had fallen down like a tired horse and just could not keep up with the new breed of thoroughbreds on Wall Street. After all, what kind of human spirit would get in the way of progress?

The reason I bring forward the notion of “spin” is that I sense that the great benefits of financial innovation were not self-evident, and that some form of intimidation or coercion was needed to keep the genie of doubt in its bottle. If a great Wall Street luminary were actually forcefully questioned, could he really convince grandma and you and me that he was making the world a better place? The point of the exercise, the spin, was to create deference to this process, to deter questioning and create social license, to make what those rocket scientists were doing appear as though their work was not merely profitable but something that would benefit us all. It was presented like a free option to the public: Wall Street pays these guys and “shazam!” They do things that make us all better off. No reason to get in the way of that, or even suggest that your Congressman or friendly bank regulator keep an eye on the proceedings. The subtle message was, “Get out of the way.” Such was the Kool-Aid poured into our glass by the financial press and pundits. That capital avoidance and tax avoidance and regulatory evasion were involved in offshore and off- balance-sheet methods was rarely emphasized, as the notion of innovation was paraded like a badge of valor.

Then we had the crisis. The side effects and spillovers and bailouts reminded us that what we had allowed to unfold was not a free option on progress but something that had a downside, too. It’s funny how a crisis changes your perceptions....

Despite these recent protestations, I am witnessing the lingering hangover of deference to so-called “innovation.” It permeates the debate on regulation. We hear that getting in the way of new technique may cause more problems than it solves. Or that the innovators can always outrun the regulators. Or, and this is my favorite, that nothing you do to stifle these new derivative products like credit default swaps will (ominous music in the background) lead to “systemic risk.” Systemic risk is the new stun-gun phrase to impart dread to those who would tamper with this delicate machine.

Malarky. This is all code for defer to the wishes of those who make money from these techniques.

Financial engineers on Wall Street are employed to make money for Wall Street firms and themselves. There is no hidden code that says they will design their products to align private and social benefits and costs. That is precisely where a healthy role for regulation and laws and enforcement can be envisioned. At the same time, it is important not to be romantic about that vision, though. Regulatory policy often does not live up to the romantic appeal, as theories of collective action and regulatory capture have illuminated.

My takeaway is distinctly unromantic. It is that, devoid of these religious-like connotations, innovation simply implies the use of a new method or technique. It can be harmful or it can be helpful. Let’s keep score. It can benefit us both, or it can harm us both, or it can make you better off and me worse off, or vice versa. That sober reality, and the notion that we are a society, sets the stage for critical thinking about these methods. If credit default swaps serve a purpose and are economically viable when proper capital and margin requirements are in place, then let the proponents bear the burden of proof in convincing us of the benefits to society according to some real social goals, rather than the vague myth of intangible progress. Protecting the profit margins of large investment firms is not a social goal.

We have a serious and real problem right now as a society that employs complex technique. Experts in the financial, nutrition, energy, and health realms have been found wanting when the curtain is pulled back and their behavior examined. Trust, particularly in financial expertise, has been shattered. Early in the 20th century, the so-called Progressive Era was an attempt to bridge the gap between the oligarchs of industry and the populists. Deference to expertise was said to be in the interest of all. Delay gratification and let the experts allocate capital so that in the future we would all be better off was the mantra. It had a religious-like psychic resonance. Experts on economics and social planning were custodians of our future, not unlike the role that priests played in earlier times. Restrain yourself now to achieve the promise of the afterlife. The linchpin was the experts vision and integrity. They were trusted to make sure we all got to economic heaven together.

We just got handed a big bill and the perpetrators that led to the bailouts are back getting large bonuses. If experts cannot be trusted and governments are unwilling to change the rules, then we will once again be heading toward popular reaction. The cooperative game is breaking down. The population showed us a hint of that over the AIG bonuses. A volcano that is still today may yet explode tomorrow.

As I watch the stories of this newest revelation on the wonders of financial innovation, so-called high frequency trading (HFT), I scratch my head and wonder how we got to this place: That most profound mystical deity which we are asked to worship, “the market,” can now be rigged so that a few get to see orders beforehand. As Charles Duhigg wrote last week in the New York Times, “While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.”

This “innovation”–employing monster computing power and the apparent ability to buy your way to the front of the line–looks like old fashioned front-running to me. How can that contribute to the integrity of our marketplace? Bob Kuttner has written an illuminating piece on this subject. For my part, I just hope that our society can demystify (unspin?) this process. It is time to build a financial system that serves the real economy for the next generation. To do so, we may need to sweep aside some of the so-called innovations in financial practice that were born of this foolish era of market fundamentalism and its supervisory and enforcement laxity.

Surely there are techniques that we should adopt. Yet in the aftermath of the crisis the burden of proof is on those who advocate them. Where are the benefits to society? What are the costs? To answer those questions, we must come out from the well spun power cloud of Wall Street and ask real questions. Regarding financial innovation, I am fond of the lyrics of Michael Stipe. It is time we start losing our religion.

attempter said...
 
The facts here are very simple.

There is only one measure of the health of an economy: how many fulfilling, living-wage jobs are created or destroyed. (All other factors can be distilled to this.)

We're now approaching 40 years of financialization and globalization. That's far more than enough time to render judgement.

What has happened to real wages? They've steadily declined since 1973.

What has happened to real jobs? They've been destroyed by outsourcing, offshoring, and technologizing/deskilling.

The financial sector presided over this massacre.

(That's dispositive right there. But we can also add the extreme burgeoning of wealth unequality. And we can add the sickening volatility and moral degradation of a boom-bust binge-purge exponential debt crisis socioeconomy, which is the only kind of socioeconomy globalization can generate. The "Great Moderation" is for the hall of fame of Orwellian totalitarian terminology. The banks facilitated all of this.)

So the verdict is in. The financial sector adds no socioeconomic value, only destroys it.

It should be completely dismantled.

Siggy said...

Wall Street is a place were 'everything old is (perenially) new again'. Since the time when bankers were relieved of personal liability, there has been no incentive to be legal, moral and ethical. For those who would want to bring morality and ethical conduct to the market, they should first look at who benefits from such dodges as term-auction securities, the grandest fee scam I have noted in 50 years. Similarly, few, if any, sellers of CDS have the balance sheet to support the volume of contracts they have written. What should have occurred is that we should have had the catastrophe. Perhaps then, all that theater in the congressional hearings would reduce to something meaningful.

Today we see a stock market intent on advancing in the face of incredibly poor economic reports which while better than earlier data nonetheless stink. Employment is still shrinking and until we see real job growth and some statistical artifice our economy will not be very comforting.

Bill Dudley says that the ability of the Fed to pay interest on excess reserves will thwart the onset of inflation. We will get to see if that is a lovely set of emperors new clothes in the coming months. Look for interest rates to creep up as well as the costs of staples at the supermarket where the 'real' economy shops. What we are ling thru is the grandest economic experiment ever conducted. For now I do not believe that it has a good outcome.


JD said...

well said, kudos to Johnson;

As an economist I give a break to those, especially Greenspan and Summers, who in the 1990s spread the word of the benefits in efficient capital allocation enabled by these new instruments. Without digging into and understanding the details we could glimpse the potential, and after all, the Wall Street geniuses surely new how to hedge and diversify. Not!

But now that they have blown up on all of us, its high time to put the burden of proof on those who resist regulation.

August 1, 2009 1:59 PM
craazyman said...
Making "money" through leverage.

If GNP = money supply X money velocity, and counterfeting money supply is a criminal offense (Isaac Newton took glee in hanging counterfeiters when he ran the British Mint), then the counterfeiting of good credit that boosts money velocity is algebraically equivalent to counterfeiting currency.

And the call it "innovation". Ha ha ha ahhahah hahah hgahah ROTFLMAO

And yet the counterfeiters get our tax dollars for their bonuses, even AFTER the counterfeit credit implodes like wooden nickels.

Admittedly, that is pretty innovative.

August 1, 2009 2:00 PM
Hugh said...
Rob Johnson is basically describing the elements of a con. Play upon the ego, greed, and fears of the mark.

You're a smart guy. You can understand how modern day gimfazzlery works. The returns are amazing but I got to have an answer now because I have 5 other guys wanting in on the deal.

August 1, 2009 2:49 PM
Silas Barta said...
The simplest test of whether financial innovation has benefited society is this:

Can you name a project that was able to be funded because of Wall Street innovation, that would not otherwise have been funded, and thereby produced something profoundly beneficial?

I can't see a case where that's happened. So, it's most likely been all a crock.

August 1, 2009 2:56 PM
Sukh Hayre said...
Silas,

"Can you name a project that was able to be funded because of Wall Street innovation, that would not otherwise have been funded"

Therein lies the rub.

You see, it is not America that has been conned by Wall Street. It is the rest of the world (to America's benefit).

America now has a huge supply of housing for all of its citizens, that had it not been for this "innovation", would not have existed. Not to mention all the commercial buildings and the road infrastructure put in place to commute to these new developments.

All the paper wealth that has been created over the last 30 years was just one large Ponzi scheme. The paper wealth will be destroyed, but the real assets constructed will remain.

Had it not been for this innovation, people would still be broke today, but we would not have the housing.

This to me seems like the best wealth redistribution plan that could possibly have been implemented in a capitalistic, dog-eat-dog society that America has become. When the poor pick up debts they can never realistically hope to pay, they will eventually default, and therefore will be no worse off. But a house will have been built that they will eventually be able to reside in, at a rent they can afford to pay, based on their minimal income. This will bring down the value of the home, which will now become an investment property. But the loser in all this is the person who had the savings in the first place to lend the money to have this home built.

Therefore, by greed, wealth is eventually redistributed. When the poor can borrow no more, the economy collapses and debt destruction through bankruptcy takes hold. But one man's debt is another man's wealth, so this is destruction of debt is also a destruction of wealth. This is capitalism's reset button.

Sukh

August 1, 2009 3:27 PM

Sukh Hayre said...

In regards to how the US benefited on the backs of other nations:

I forgot to mention all the oil and manufactured goods that have been sent our way in exchange for worthless IOU's.

How's this for innovation:

Import manufactured goods and oil in exchange for US dollars. Then, borrow those dollars back to build houses you cannot afford. Then, default on your housing debts.

In the end, you have consumed oil and manufactured goods provided by others, and have built homes for your citizens that they could not afford.

In the end, Americans get oil, manufactured goods, and homes, and those that sent you the oil and the manufactured goods get stiffed.

Also getting stiffed in this process will be anyone who thought they accumulated wealth by being a middle man in the process, as they will see their wealth destroyed as their investments drop in value (as companies will eventually go broke and shareholders will be wiped out - once a large enough company in any industry (ie GM) reorganizes itself by going through the bankruptcy process, do all its competitors not have to evenually follow suit, as the company has a competitive advantage once it comes out of bankruptcy?. This also means that the life savings and pensions of the middle-class are also going to be wiped out.

Only those with so much wealth that they can afford to not chase returns by buying equities (are content with the meager return they get on US Treasuries) will be able to save any semblance (sp??) of their wealth.

You cannot create inflation when debt is being destroyed. Unless you are willing to go Zimbabwe's route and just print money and hand it out. This can only happen if the government decides to do away with double-sided accounting and decides that Plan B is to just actually print US dollars and give its citizens enough of them to wipe out their debts.

August 1, 2009 4:19 PM
Anonymous said...
One more loophole masquerading as Fin innovation in the news lately is flash trading.

David Shillman, an associate director at the Commission's Division of Trading and Markets, said at the SIFMA conference that flash orders lasting less than 500 milliseconds fall within an exception to the Quote Rule, or Rule 602, in Regulation NMS. The Quote Rule requires all market centers to publicly disseminate their best bids and offers through the securities information processors. The exception is for orders that are immediately executed or canceled.

All the exchanges (even those that protest flash trading) are ready to jump in if the loophole stays. If it's banned the playing field would be leveled for all players, if its not closed the playing field will be leveled when the remaining holdouts jump in.

DRX, to answer your question see Nina Mehta at Trader magazine here
http://www.tradersmagazine.com/news/pipeline-blocks-high-frequency-trading-al-berkeley-104059-1.html?pg=5.

Actually, all her stuff is terrific.
 

[Aug 1, 2009] Michael Pettis- Falling US Consumption to Lower Chinese Growth to 5-7%

Emerging markets investors beware...

naked capitalism

In a Financial Times comment. Michael Pettis gives a well-reasoned and glum forecast for Chinese growth, namely, that it is unlikely to exceed 5% to 7% over the next few years. The reason he sets forth is that China was able to show growth rates in excess of domestic consumption growth thanks to US exports. But US consumers will be consuming at lower levels for the next few years, As Pettis explains, the implication for China is that its overall growth rate will fall below its domestic consumption growth rate.

Now 5% to 7% growth may not sound shabby at all to American, but things look very different from China. Anything below 8% will be inadequate to absorb expected increases in the workforce. The government's authority has rested upon its ability to deliver rapid enough growth, and that has also helped to paper over tensions between coastal cities, which have seen great gains, and the hinterlands, where progress has been much slower.

Marc Faber has said that the economic reports coming out of China are greatly exaggerated and he pegs growth now at a mere 2%.
 

[Aug 1, 2009] Tell Me Lies, Tell Me Sweet Little Lies (

MacroMan

Misrepresentation in corporate earnings statements is rife; according to S&P, of the 197 SPX companies to report this quarter, only a quarter have actually earned the number reported in the headlines. Fully 63.5% stuffed “one-off” or “extraordinary” items in their income statements, while only 24 of the 197 had reported earnings that were higher than headline operating earnings.

So in valuing equities moving forward, what concept of earnings should we use? Pick a number, any number. Looking at 2010 earnings estimates yield an incredibly broad range of forecasts. If you believe the crack-smoking bottom-up guys who strip out everything that could be construed as a "loss", you get a resounding $74 pr share. Not bad!

Taking the same approach (stripping out the quarterly "one offs"), but from a top-down framework, yields a substantially less rosy result: earnings of just $46 per share. And actually counting all the turds for what they are on a top-down basis yields 2010 EPS of just $37 per share.

...This little exercise yields a range of values for the SPX from 300 to 1480. So regardless of where you fit on the bull/bear continuum, there's probably a forecast here that fits your view. (Macro Man cannot help but observe, however, that all of the top-down valuations are well below current levels.) It's also a pretty good indication that if someone tells you that they "know" what fair value is for the SPX or equities generally, they're almost certainly lying.

Anonymous said...

There are a number of commentaries emerging, primarily from those away from the market hothouse and who manage portfolios, who regard the equity rally as all fizz that will pop. The burden of these discussions is that (a) it is going to be a long "L" experience, and (b) that as far as exit strategies are concerned central banks don't have any - not any that add up. Their panties are in a twist.

Macro Man said...

ok, so one way of looking at it is that fair value then is (300 + 1480) / 2 = 890 which fwiw is pretty close to jeremy grantham's recent estimate of fair value at 880.

So, just wondering... keeping it simple, do I buy equities as long as we are above 880-890 for now?

btw, what are the chances that the relentless rally has been fueled by short covering by hedge funds? Similar to the liquidation of late last year/early this year?

God, I hate yield chasing, inflation, etc - why can't we have some deflation for a while so I don't have to worry about my investing and can go about living instead! I want to be shorting FXI soon.

Macro Man said...

1:07 PM
If the S&P does fall back to around 900 and treads water throughout August then we are again set up with that nice head & shoulder formation going into September.

Post-Labour Day is always hairy, and thereafter the notoriously fickle October is on the horizon.

Just a thought.

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