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Financial Skeptic Bulletin, September 2010

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[Oct 8, 2010] Looks like in 2011 banks again will be unsolvent and 2011 can be replay of 2008.

Christopher Whalen makes a remarkably convincing case for why we’ve simply kicked the can down the road and why the banks could be in for a repeat of their 2008 nightmares in 2011.  If Mr. Whalen is right the banking sector is in for a whole new round of government intervention, takeovers, likely nationalizations and general disaster:

The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.

Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.

The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007-2009 period only means that this process is going to occur over next three to five years –- whether we like it or not. The issue is recognizing existing losses -- not if a loss occurred.

Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re-creation of RFC-type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

Selected Comments

MO:

Great stuff. Chris Whalen is primo. Also check out this interview with Meredith Whitney: http://www.planbeconomics.com/2010/09/28/meredith-whitney-the-next-shoe/

Nemesis comment to Econbrowser What Can Sustain GDP Growth Open Economy Version

The US federal gov't borrowed a cumulative 30% of private nominal GDP for fiscal years '09 and '10, and all we got was 3.5% (vs. long-term avg. 6-7% and 5% since the '90s-'00s) nominal yoy "growth" of private sector GDP and -1.9% avg. annualized growth of private GDP since Q2 '08.

At the current debt-deflationary, slow-motion depression rate of gov't borrowing and spending, the US gov't will have borrowed and spent an equivalent of 100% of today's private nominal GDP after '15-'16 and 100% of total nominal GDP by the end of the decade.

Note that since '00 the cumulative loss of real GDP growth from the long-term 3.3% trend has been ~15-16%, which is roughly where Japan was in the late '90s.

At the trend rate of deceleration of post-'00 trend real GDP, the US real GDP will have lost 30% of growth that otherwise would have occurred at the pre-'00 trend rate, a loss equivalent to that of the 1830s-40s, 1890s, 1929-33 and 1938-39, and that of Japan since '90. Adjusted for US population growth, the cumulative per-capita loss of real GDP growth will be around 40%.

consequently, we can expect an equivalent decline in local and state gov't revenues and cuts to social services, infrastructure, public employees salaries and benefits, and pension payouts and retiree benefits.

An increasing share of local and state gov't entities will file bankruptcy, unincorporate, and default on obligations, disbanding fire and police services, transportation infrastructure, and so on.

Peak Oil, falling net energy, peak Boomer demographic drag effects, and fiscal constraints will exacerbate the debt-deflationary slow-motion depression.

http://www.bea.gov/newsreleases/national/pi/2010/xls/pi0710.xls (See table 1.)

Moreover, private wages now make up just 41-42% of US personal income, whereas rentier income, gov't wages, and personal transfers combined make up 45% of personal income and 110% of private wages. Thus, the US economy has become increasingly dependent upon rentier income, gov't salaries and benefits, and public transfers at the expense of proprietors and private workers.

Yet, what we hear most is how much gov't is doing or not doing to "stimulate the economy", or how much this politician or another is proposing to borrow and spend to "get the economy going again".

How much more debt and more gov't spending will it take?

And how much more public and private debt is required as a share of income and GDP to grow gov't wages, benefits, transfers, and public and private interest to the rentier caste?

Are we really that daft?

Keynesianism is an artifact of the reflationary/inflationary peak Oil Age era of growth made possible by abundant supplies of cheap oil and other fossil fuels. The era of cheap oil, and thus that of economic (and uneconomic) growth, is over.

Prepare for the "Greatest Depression" as part of the Great Regression back to Olduvai, friends.

B9K9 in his comment to GMI Describes "The Future Recession In An Ongoing Depression" In This Must Read Report noted:

Look, it doesn't take being a genius or even being a member of a club/group/clan to organize nefarious events to see what is occurring @ a macro level:

  1. Demographics - Older, educated, highly skilled earners (boomers) are being replaced with younger, uneducated, low skills & wages illegal aliens.
  2. Off-shoring - Regardless of demographics, off-shoring destroyed private sector employment.
  3. Resource depletion - When the first Euros arrived, the entire continent was practically empty with easy to access resources literally lying on top of the ground. Today? Not so much - oil anyone? Again, this would have been a problem regardless of off-shoring and/or demographics.
  4. Debt - 70 years worth of debt accumulation has reached the point where the marginal utility of debt has fallen below a 1:1 ratio. This would have been a problem regardless of demographics, off-shoring and/or resource depletion.

Any one of these primary drivers could sink civilizations, and have for thousands of years. The original model of the USA might, **might** have had the flexibility to adapt to these circumstances, but today, not so much.

So, when you step back and evaluate the macro perspective, it just seems really difficult to see how the USA is gonna come out of this in one piece when one considers that all four killer trends are occurring at the same time. That's why all the machinations being taken by the Fed, USG, MSM, et al really smack of the types of desperate actions taken by someone who's drowning.

What do desperate people do? Emotions begin to color their judgment until panic causes them to break & run. In the case of drowning victims, outright terror results in grabbing for anyone/anything to hang onto, regardless of other people's personal safety. (That's why lifeguards use those plastic buoys - they don't want a drowning person anywhere near them.)

So let's relate this to the markets. At this point in the game, the PTB simply do not give a shit about how transparent their bullshit is. Their hair is in their face, they can't see the shore, they're thrashing, and going down for the count. ZIRP, suspension of MTM, Fed printing for MBS/UST/GSE, legalized fraud, manipulated stats, MSM propaganda, SNAP, UI, mortgage forgiveness->retail ramp, and gunning the markets didn't work to improve **confidence** and re-ignite credit expansion. So what are they going to come up with next?

Going forward, each successive action will be increasingly more irrational, more ridiculus, and more dangerous. Losing gamblers who keep doubling down usually end up in the streets, dead or otherwise.

This whole panorama can easily be seen if one chooses to step back and take a look. Once you get the big picture, it's pretty damn easy to divine what the numbskulls are going to try & pull off next.

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[Sep 30, 2010] Meredith Whitney on state budget crisis

CalculatedRisk

From Jeff Cox at CNBC: States Are Poised to Be Next Credit Crisis for US: Whitney

"The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically," [Meredith Whitney] said. "Municipal debt has doubled since 2000, spending has grown way faster than revenues."
...
"You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt at least for the third near-trillion-dollar bailout."
...
[On banks] "We think October, after the banks report, you'll see a really ugly Case-Shiller number, which means the fourth quarter is going to be very tough for banks."
Many states have serious budget and debt issues, but I doubt it will result in a "near-trillion-dollar bailout" (note that Whitney is saying an "attempt" at a bailout). More likely the states will raise some taxes and cut more services - and this will be a drag on growth for some time.

I think Whitney is correct on the timing of the Case-Shiller numbers, but I don't think the numbers will be anywhere near as "ugly" as earlier price declines.

 

Rest

[Sep 30, 2010]  Frank Warnock on Two Myths about the Dollar

CFR  is a nest of wipers (Robert E. Rubin, Charles Krauthammer, etc ;-). While it is possible for some papers be OK, beware Trojans bring you research papers...  It is true that for rich since Reagan the USA "For too long, tax and other incentives have favored too much spending, too little saving, and too little investment.". Large part of middle class outside of those who were working for financial, energy or defense sector since 2000  were on regime of austerity. 
Econbrowser

Frank Warnock, an expert on US capital flows and stocks, has just written a piece for CFR entitled Two Myths About the U.S. Dollar. In it, he examines "two factors that could substantially alter the long-run value of the U.S. dollar: the dollar's reserve status and the sustainability of U.S. international debt."

From the policy conclusion:

On the dollar’s reserve status, the weight of evidence from U.S. data indicates that foreign governments' purchases of U.S. Treasury bonds remain robust, quotes to the contrary notwithstanding. To be sure, IMF data suggest that reserve managers’ views toward the dollar appear to have changed in the past few years. Until 2007, while valuation effects decreased the share of dollar assets in reserve managers’ portfolios, new reserves were overwhelmingly placed in dollar assets. Since then, the euro has become an equal, if not greater, recipient of new reserve flows. How managers will react to the eurozone debt crisis is not clear. What is clear is that even after a decade of declining value and increasing talk of the need for alternatives, Jim Rogers and other investors who acted in the expectation of a near-term tipping point have so far lost money on their call. One reason is the powerful advantage U.S. capital markets have over foreign rivals. U.S. treasuries—for which the market is large, homogenous, and liquid—are still the world’s risk-free asset.13 But in the future there will be rivals in terms of market depth and liquidity. To remain the world’s reserve currency, with all the associated perks and duties, the United States must provide the world with both a stable currency not eroded by inflation and conditions, including deep and transparent markets, in which outsider investors (be they domestic or foreign) are comfortable committing funds. If the United States does this, the longer-term prospects for the U.S. dollar, while uncertain, should be promising.

On the other hand, analysis of the sustainability of the U.S. current account and net international debt position indicates that there is no silver bullet. U.S. investors do not have some exorbitant skill that would make our international budget constraint any less binding. When the United States does run a current account deficit and hence (on net) borrows from abroad, it must expect to have to service that debt—and it cannot meet those payments by generating outsized returns on its foreign portfolio. In consequence, to the extent that the United States continues to borrow, it must consider how it uses those funds. Borrowing to finance consumption (whether public or private) is not sustainable. Borrowing to finance the expansion of the capital stock— improving the economy’s productive capacity—is more benign. This isn’t a statement about the way foreign capital enters the U.S. financial system. Foreigners may choose to buy mortgage bonds or they may choose to buy equities; given the right policy framework, the financial system should be able to move the money such that the extra expenditure financed by foreign capital goes on investment. But it is up to the government to get the policy right. For too long, tax and other incentives have favored too much spending, too little saving, and too little investment. To prevent the U.S. dependence on foreign finance from ending painfully, this imbalance must be corrected. Otherwise investors may lose confidence in the dollar, triggering an unwelcome American version of competitive devaluation.

The paper is chock full of statistics and graphs. I like in particular Figure 3, which provides insights into China's holdins of US Treasury securities, and reminds us of the pitfalls in using TIC data to infer holdings.

sherparick

To the two posters above, all I can say:

"For every complex problem there is an answer that is clear, simple, and wrong."
H. L. Mencken

Admittedly, the track record of the Fed (and the other central banks the last ten years has not been something to brag about. The bubble denial about housing was something to behold and not knowing the  threat the eventual bust posed to both the visible and shadow banking systems given that the safety of the banking system is one of the Fed's prime responsibilities was something to behold and was grossly incompetent.

But is not what you guys are worried about. You are worried that the dollar will fall 50% in value against the Yuan and about 30% against the Euro and Yen, which would make you only half the millionaires you currently are since most of your assets are valued in dollars. But of course, given the chronic current account deficit of the last 30 years it is obvious that the dollar is over valued.

That is why your hero Milton Freidman championed floating exchange rates, so that currency adjustments would would correct trade imbalances without conscious human intervention. You guys worry about inflation when the problem of the moment is the the demand for money is so strong and the demand for goods and labor is so weak.

[Sep 30, 2010]  Money Flows Out of US Stock ETFs, into Emerging Markets

CNBC

For the year-to-date, U.S. stock ETFs lost a net $12.8 billion. Money has flowed instead into ETFs that invest in fixed-income, commodities and emerging markets, Morningstar said.

Investors have been diving into emerging market ETFs with enthusiasm for the last three years, but the momentum is increasing. Over the last three years, 61 percent of all flows into international-stock ETFs were into emerging market funds. In August, that percentage increased to more than 95 percent: of the $4.4 billion that flowed into the international fund sector in August, $4.2 billion went to emerging market ETFs.

[Sep 30, 2010] Meredith Whitney on state budget crisis

CalculatedRisk

From Jeff Cox at CNBC: States Are Poised to Be Next Credit Crisis for US: Whitney

"The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically," [Meredith Whitney] said. "Municipal debt has doubled since 2000, spending has grown way faster than revenues."
...
"You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt at least for the third near-trillion-dollar bailout."
...
[On banks] "We think October, after the banks report, you'll see a really ugly Case-Shiller number, which means the fourth quarter is going to be very tough for banks."
Many states have serious budget and debt issues, but I doubt it will result in a "near-trillion-dollar bailout" (note that Whitney is saying an "attempt" at a bailout). More likely the states will raise some taxes and cut more services - and this will be a drag on growth for some time.

I think Whitney is correct on the timing of the Case-Shiller numbers, but I don't think the numbers will be anywhere near as "ugly" as earlier price declines.

JimPortlandOR:

Anybody see the parallels between US States and the US dollar (and bank manipulations thereof, and debt overflowing because of greed and denial of responsibility), and the EU states in the the Euro.

Both chained to a sovereign (sort of) currency that can't cover the discrepancy in over-borrowing and inability to pay back.

The Euro states and US states both claiming 'sovereign' powers, but dependent (more or less) on a financial regime that exceeds their powers.

creditcriminalslovetarp

Dollar Is `One Step Nearer' to Crisis on Burgeoning Debt Burden, Yu Says - Bloomberg

anyone see this...looking for red hat...

The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank.

Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today.

“Such a huge amount of debt is terrible,” Yu said. “The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.”

the dxy-aud and dxy-euro push up this afternoon to hold stocks up today was first rate criminal like....

token bull

Yup. Total rearview, if anything. Generally, I'm seeing some inordinate seasonal weakness. Perhaps by the end of the current downcycle it will have simply erased the run-up over the last year. But it feels weaker with a total lack of buyers.

Basel Too:

death by a thousand cuts. all the extra income from the rate hikes and salary freezes? straight to debt service...

Charleston water, sewer rates will rise | The Post and Courier, Charleston SC - News, Sports, Entertainment Charleston Water System approved three years of water and sewer rate hikes at a meeting this morning....

The rate increases are expected to produce more than $4.5 million in additional revenue for Charleston Water System in 2011. The rate changes were approved as part of a $103 million annual budget that also calls for eliminating seven positions at the utility, and for giving no cost-of-living raises or merit pay increases to employees in 2011.

patientrenter

U.S. House Democrats Push to Sustain 15% Capital Gains Tax Rate - Bloomberg

Low capital gains tax is a back door to lowering income taxes for the wealthiest people. That there is a bipartisan push to do this is yet more evidence that this country's financial affairs are run by a permanent elite for their own benefit.

Low tax on dividends is actually somewhat good, or the best we can get now. It offsets the double tax impact of corporate tax that is already paid. And it encourages the company CEOs to pay the results of the company success to the company's owners, not to themselves.

Ideally, all income would be taxed the same. That means capital gains taxes would be levied as earned, on both realized and unrealized capital gains, and all other income would be counted and taxed identically. That would mean zero taxes on corporations, but a higher tax on their wealthiest shareholders. Then dividends could and would be taxed the same as all other income, without any preferential treatment. Income tax rates on the wealthiest should be increased to 50%.

ResistanceIsFeudal:

JimPortlandOR wrote:

The Euro states and US states both claiming 'sovereign' powers, but dependent (more or less) on a financial regime that exceeds their powers.

We traded sovereignty to the private banking cartel decades ago. It's just taken a while for this move to bear its poisoned fruit.

[Sep 27, 2010] Auerback- Where is Huey Long When You Need Him

If you consider the Obama regime is almost one-to-one continuation of Bush II regime the argument about corporatism does make sense.
It’s become patently obvious to anybody with half a brain and a pulse that President Obama’s “progressivism” has more in common with Mussolini’s corporatism than anything remotely connected to a genuinely progressive agenda.

If you think I’m exaggerating, I suggest you read Denis Mack Smith’s excellent accounts of Il Duce’s tenure in Smith’s “Modern Italy: A Political History”, or his biography, “Mussolini”.

Both works describe a country which, while claiming to reduce an inflated bureaucracy, needed to do precisely the opposite in order to reward personal “clients” and followers. Both books also recount that in spite of the efforts of Mussolini’s first Fascist Finance Minister De’Stefani’s efforts to curb tax evasion and limit stock exchange speculation, his efforts were constantly thwarted by other political cronies of Il Duce, as well as Mussolini himself, who soon allowed the majority of his Cabinet to discredit one of the few competent ministers, who was of above average intelligence and competence (Elizabeth Warren, watch out).

[Sep 27, 2010] John Paulson Lecture Bonds Are Wrong, Stocks Are Right zero hedge

Double digit inflation will make mortgages unaffordable, TIPs and long term bonds too costly. Some banks overloaded with long term bonds will go broke.  I think Fed will fight it like there is no tomorrow.

by Tyler Durden on 09/27/2010 13:17 -0500

John Paulson is now 'all in' that for the first time in history bonds are wrong and stocks are right... We'll take the other side of that bet. Of course, this also means that David Tepper is across the table as well. Oh well, we do like to live dangerously. Full notes from Paulson's lecture at the University Club, to a standing audience. Then again, if anyone suspected that JP was actually on the same side of the bet as us, it wouldn't really work now, would it...

Here is today's permabullish elixir from the man who has a $30 billion reflation bet on.

1. What Happened – We all know what happened in 2006, 2007, and 2008. By end of 2008 they had completely covered their mortgage CDS and had started to buy high-yield Corporates into 2009. They averaged in at under 55c on the dollar for most of those bonds and sold most over par. There is not much opportunity in high-yield at this point.

2. Equities – They are now think one of the best places to be is equities, with a strong focus on distressed equities. Paulson’s case for equities in general focused on the discrepancy between equity earnings yields of about 7% to 8% now compared to the 10-year yield at 3.6%. This is one of the highest dislocations since they started tracking these numbers.

As such, some equities he owns offer superior returns to long-dated bonds:

On distressed equities, they look at bankruptcies and major restructurings. The most well known examples are his holdings in financials like C and BAC. They also own STI and RF. They follow every bankruptcy and will buy the debt in interested. As the companies come out of bankruptcy, they’ll convert the debt to common stock. He gave the example of K-Mart, which went into bankruptcy with billions in debt, emerged at $10 a share and debt-free, then eventually went to $190. Paulson thinks he’ll find more of these over the next few years.

3. Bonds – The purchase of long-dated bonds, either treasuries or Corporates, should turn out to be a horrible trade. Rates are at record lows and the economy is turning should continue to churn higher. Paulson expects roughly 2% GDP growth for both 2011 and 2012. Quantitative easing should contribute to significant inflation over the next few years, with inflation possibly hitting low-double digits by 2012. This is bad for the 10- and 30-year and bad for the USD. The USD should fall and the yields on long-dated US Treasuries should rise. Paulson has been buying 5 and 7 year calls on the 30-year bond yield.

4. Homes – This is the best time 50 years to buy a home. This thesis is the exact opposite of his thoughts on bonds. You don’t want to own long-dated debt, you want to issue it. Buying a home (an asset) with a 30-year mortgage (issuing debt) is exactly that. Home prices will rise with a better economy and with inflation. Your debt and interest payments get locked in at record lows. The price of your home will rise.

5. Gold – The price of gold has moved in correlation to the monetary base for as long as they have tracked the two data items. As the Fed prints more money, gold should rise. If the Fed were to increase the monetary base by 100% over the next 3 years, Gold should increase by that same amount. Additionally, as inflation accelerates, investors tend to push gold higher than its correlation, like in 1980 when it increased an additional 100% above the correlation. So if gold is at $1,200 now, it should hit $2,400 on the monetary expansion alone, then $4,000 as investors flee inflation. Additionally, he has offered his investors the ability to hold their investment in his fund in either US Dollars denominated or in gold denominated. Paulson himself has 80% of his assets gold denominated.

Let the debate begin

 ZeroPower

When have bonds ever been wrong? The big boys control F.I.

Dr. Engali

With the markets as distorted as they are now it's hard to tell who is right. I just know it will all blow up in the end.

Tarheel

I was wondering why the market ramped up at 1pm on a non-POMO day

What_Me_Worry

Well, at least he batted 1-for-5. Almost good enough for the majors.

Edit: Take that back, he invests in GLD for a bulk of his gold holdings(I believe).

deliciousirony

well, yeah, if inflation is expected to be in the low double digits (!) then bonds are wrong.

But, I think Ber-spank-me is aiming for more like 3 or 4% inflation.

Clark_Griswold ...

"Paulson himself has 80% of his assets gold denominated."

what does that tell you.

Steaming_Wookie_Doo

He spent 80% of the article talking about 20% of his assets.

I'll go for the gold part. Given a very inflationary environment, I'd also suggest silver, liquor, tampons and weaponry.

HedgeFun

I don't understand how all these hedge fund managers are super long gold due to coming (double digit?) inflation and super long equities. High inflation = higher input costs, lower relative disposable income and ultimately a compression of corporate earnings. Why does noone talk about this?

hack3434

Because he's probably betting that "investors" will pile into equities since the mantra is that stocks outperform inflation. All the 7% blah...blah...sounds like bs from a salesman.

MrTrader

Earnings yield 7 / 8 % ? Buahahahahahahahahahaha. You must be kidding me, John -- Guys, do yourself a favor and get out of the stock market. There is only one interpretation possible for this humbug : Paulson is trying to liquidate his portfolio. STRONG SELL.

Millivanilli

The whole notion of some rich asshole giving a lecture on how to be a fat cat like me is patently stupid. Guys like Soros, Buffet, and Paulson are so full of shit it makes my colon envious. Buy gold, silver. Take delivery. These fuckers are at the end of their ropes.

From the Financial Times: Brazil warns of ‘currency war’

Guido Mantega, Brazil’s finance minister, said on Monday the world was in an “international currency war” ... Mr Mantega, who has made increasingly aggressive comments recently about the need to control Brazil’s currency, said governments around the world were trying to weaken their currencies to promote competitiveness.

"We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he said ... excerpt with permission

It seems everyone wants to devalue to export more.

hedgeless_horseman

bonds are wrong and stocks are right

What was the question? If it is, "Which is broke, the equity markets or the USA?" Then the answer is, "Yes," and both bonds and stocks are wrong.

TheMonetaryRed

"The price of gold has moved in correlation to the monetary base for as long as they have tracked the two data items."

Proof for this? Chart?

RobD

Um, I thought that if interest rates rise, home prices would really tank. What am I missing?

99er

Chart: DX

Stocks or bonds? Let the USD decide.

http://99ercharts.blogspot.com/2010/09/dx.html

truont

"for the first time in history bonds are wrong and stocks are right... We'll take the other side of that bet."

Tyler, we aren't comparing apples to apples here.

Historically, bond and equity pricing were not nearly as manipulated by PPT-HFT-POMO-Shitsorm as it is today.

So, all the market's signals are wrong--we are flying blind since both bonds and equities are artificial constructs of our politburo.

In other words, "ya pays your money, and ya takes your chances." "Step right on up, folks! Take your chances on the market from hell!

Sudden Debt

Right or wrong, the DOW is green and if it holds this week at this rate, we are heading into shortsqueezes all around the board.

MrTrader

Short squeeze ? http://noir.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

RobotTrader

I guess there remains an acute shortage of shopping malls, office buildlings, retail centers, etc.

Yet another new high for Jones Lang LaSalle.

RobotTrader

Gambling Fever is running amok.

No amount of economic distress can keep Joe Six from the gambling dens.

SilverIsKing

Cramer just pumped Gold and Silver...more toward Silver.

Look out below!

truont

Let's hope it is a short mini-correction, then. Corrections are healthy in the context of a long-term bull market.

George Costanza

for billionaires like Paulson, it is PATRIOTIC to be bullish. They already made billions, so want to be good US citizens and pump stocks. It is part of the propaganda machine.

 

[Sep 27, 2010] Why Contrary To Popular Opinion Gridlock Would Be A Catastrophe; Is Obama More Like Clinton Or Bush zero hedge

Shameful:

It's a show. No matter who you vote for the government gets in. At this point we are just shuffling name plates around as the fire rages to the water line. I'll go on record now, this republican revolution will be just like the last one (what a nightmare), they will fiddle in DC while the empire burns. The blues of course are no different, there are no choices except to brace for impact. This theatre is really for the history books, for future generations and to give the people a reason why their standard of living collapsed.

tom :

Currently, Obama has the legislative agenda but has to agree everything with the Senate Rs. After the elections, the Rs will have the legislative agenda but they will have to agree everything with the Senate Ds and Obama. Not much difference. Still looks to me like a recipe for more 10% of GDP deficits.

I blame ordinary Americans who simply refuse to accept that they can't have their cake and eat it too. Maybe the coming default will bring some realignment in politics. I wish I didn't have to choose between the public employees mafia and the creepy televangelist party. But I 'm not holding my breath. I guess I'll be voting against nutcases who want to ban the teaching of evolution in schools until they lay me in my grave.

I don't mean to pick a partisan fight here, but if I could just give some advice to the devoted Rs on here who from time to time feel the need to wage one: Please stop pretending that you're appalled at Clinton's lack of morals. Is there really one, I mean just one of you who is truly morally outraged by a guy married to Hilary playing sex games with his white trash intern in the White House? Don't you realize that it was the wildly exaggerated R posturing that was by far more repugnant to most people? Clinton could have easily won a third term. Everybody sympathized with him, men and women. He's still the most popular living president by a mile. All you're doing by still harping on that more than a decade later is making Rs look weirdly hung up and self-repressed. Just a bit of friendly advice.

More Critical T...:

Shocking tax math

How bad would it be for the economy if all of the Bush tax cuts expired? One scary calculation is to take the tax hike—say $250 bn—annualize it—$1 trillion— and assume a 50 cents on the dollar shock to spending – $500 bn. That would be a 3.3% hit to GDP growth and enough to easily push the economy into recession.

The math in this paragraph is not 'shocking', it's simply dodgy.

Extending the Bush tax cuts for the rich would increase the budget deficit by $500b. Isn't austrian economics teaching you that increasing budget deficits is ... bad?

Or, if you dont accept that austrian view and if you argue that the government should spend an extra $500b (which you seem to be in favor of) - i.e. if you argue in favor of implementing a keynesian stimulus, then extending the Bush tax cuts for the rich is rather bad and ineffective stimulus economics: it has a very low multiplicator as tax cuts for the rich will only strengthen deflationary forces as the rich will hoard the cash (which they dont need), not put it to work.

But you cannot have it both ways.

The rich will 'reinvest it in the economy' is a fairy tale fantasy. The rich are hoarding a trillion dollars already, today, and are not 'reinvesting' it into the economy at all. (they are not reinvesting it because they are savvy businessmen and know that growing corporations while the demand is not there is money thrown out the window.)

Giving the rich half a trillion more wont do any good on that front - unless your goal is to baloon the deficit by another ~4% and if you want the US economy to fail spectacularly.

A better way to spend that $500b would be to cut the taxes of the middle class (those are who bore the brunt of the recession anyway), and/or to stimulate the economy in other ways that increase aggregate demand, to close the ~4% output gap the US has today.

Once the output gap has been closed, companies will start ramping up production again. We have seen it in 2009 that closing about half of the output gap produces rather good growth. (the post-2008 output gap was ~8% and the Obama stimulus was about ~4%)

Closing the output gap fully would cure many of the demand shock problems that today's economy is collectively suffering from.

[Sep 27, 2010] Rating Agencies Ignored Proof of Unsafe Loans

This was not a case of error or bad forecasting or poor execution. This was a reckless pursuit of profit by design. The risks, indeed probabilities of default were well known, and ignored.

If any group of firms deserve the Arthur Anderson fate of corporate execution for bring guilty of murderous behavior, it is the rating agencies. In my opinion, they should be put down like rabid dogs.

[Sep 27, 2010]  What is Good for Goldman Sachs is Good for America The Origins of the Present Crisis by Brenner, Robert

10-02-2009 | Center for Social Theory and Comparative History, UCLA

The fundamental source of today’s crisis is the steadily declining vitality of the advanced capitalist economies over three decades, business-cycle by business-cycle, right into the present. The long term weakening of capital accumulation and of aggregate demand has been rooted in a profound system-wide decline and failure to recover of the rate of return on capital, resulting largely—though not only--from a persistent tendency to over-capacity, i.e. oversupply, in global manufacturing industries.

From the start of the long downturn in 1973, economic authorities staved off the kind of crises that had historically plagued the capitalist system by resort to ever greater borrowing, public and private, subsidizing demand. But they secured a modicum of stability only at the cost of deepening stagnation, as the ever greater buildup of debt and the failure to disperse overcapacity left the economy ever less responsive to stimulus. In a much-heralded attempt to break beyond the addiction to borrowing, in 1993 the Clinton administration, and later its EU counterparts, committed themselves to balancing the budget, a goal that was more than realized by the end of the decade.

The economy would henceforth be liberated from the dead hand of the state, and driven ever upwards by the all-knowing, market. But, what this dramatic shift actually accomplished was to reveal the persisting stasis of the economy system-wide, no less shackled than before by its profound problem with profitability and capital accumulation. The resulting hit to demand helped push the advanced capitalist world into its worst cyclical downturn of the postwar period between 1991 and 1995, laying bare the system’s lack of an engine and opening the way to a succession of major financial crises--from Japan to England and Scandinavia to Mexico and Brazil.

 

[Sep 27, 2010] Citi sued by Norwegian central bank by Tracy Alloway

Sep 24, 2010 | FT Alphaville

....After the US Securities and Exchange Commission exposed Citi’s super senior subprime slip — in which the bank misled investors over its subprime exposure between July and October 2007 — now come the lawsuits.

The SEC fined Citi $75m for the subprime deception. Norges Bank is suing over $835m worth of losses on Citi shares and bonds incurred between January 2007 and 2009. (For those wondering — in addition to overseeing monetary policy, Norges also looks after the international investments of Norways’ humongous sovereign wealth fund).

But the 221-page complaint goes much further than just the super senior CDO/liquidity put kerfuffle. In fact, it reads like a laundry list of complaints against the US bank — from “unrealistic” CDO models, to Repo 105, GAAP and SEC violations, etc., etc.

It also names Citi CEO Vikram Pandit and former CEO Chuck Prince, personally (along with some 20 other bank execs).

Harry Hero
This is just an example of reputational arbitrage; The Norwegian Central Bank and their fund has nothing to lose whilst Citi risks not only reputational loss, but loss of what probably is an important customer as well.
The Central Bank´s track record was severely hurt by their investments in Citi and Lehman during 2008.

In addition, they know that the Norwegian opinion of Citi is poor (at best) following the scandal with local Norwegian governments investing lent money in leveraged muicipal bond products structured by Citi. Blaming the bad guys for the losses now fits them like a glove. The outcome (which most likely will be a secretive settlement) will boost the central bank´s image as an active investor doing everything necessary to protect their own people´s interest.

Citi, willing to do anything to bury the past, is likely to agree to a settlement that is higher than what the Central Bank could have gotten from a class action pursuit. Especially so because this lawsuit will hinder new business and new investments from the giant fund.

Ando
The fact that it is a central bank speaks volumes and makes this mighty difficult for Citi. I would imagine very senior US figures will have to be dragged in to have words with Norwegian counterparts encouraging acceptance of a settlement. Otherwise

a) the whole matter will be expensively, time consumingly and damagingly dragged through the courts and

b) a loss for Citi would open so many floodgates for litigation that it would effectively require a second bailout.

They literally can't afford to take the risk.

[Sep 27, 2010] zero hedge on a long enough timeline, the survival rate for everyone drops to zero

I missed a big part of the high yield run-up.  I even said there was an implosion eminent in Q2 2010.  Boy was I wrong.

To begin: credit has some nice features.  The price-to-hopefulness ratio is never a part of valuation.  Few have trouble parting with a bond when the price is right.  There is a fuzzy but ever-present upside limit.  There is a downside bounded by the recovery rate.  There are simple opening lines: acquiring higher yield implies taking more risk by 1) lengthening term risk, 2) taking more credit risk, 3) moving down the capital structure or 4) some combination.  In the large, I avoided 2).

[Sep 25, 2010] 4 Recessions (and Recoveries)

September 25th, 2010 | The Big Picture

Petey Wheatstraw:

“In some areas, the data is typical of 1990-91 and 2001 recessions, but worse than the 81-82 recovery: Service employment, Private sector hiring, hours worked. Manufacturing Jobs are better than 2001, and 1991, worse than ’82. Industrial production is better than 91/01, and almost as good as 82.

Where this recovery is much much worse than typical: Unemployment rates, Long Term unemployed, Construction employment, housing starts, financial service employment (duh), state and local government hiring.”

So, the corporatist side of the equation is relatively unscathed, while the individual/governmental components take a kick in the head. I wonder why that is?

Chief Tomahawk:

But near-record earnings due to corporate refi of debt at lower rates. How long can that juice things & how did cheap debt work out for Main St.?

franklin411:

I don’t know anyone–left or right (if you think there’s such a thing as a “center…”)–who disagrees that there is a single fundamental problem with the American economy. Simply put, we import everything and export nothing. This has been going on since Reaganomics began gutting our industrial core, our infrastructure, and our educational system.

So given that this is a 30+ year trend, why would anyone expect anything *but* slow, jobless recoveries? Yes, a little nip and tuck here and there can spur growth slightly and improve the situation, but unless America becomes a manufacturing nation once again, there is no hope for a real recovery.

Obama’s economic plan is a 30 year vision of restoring the United States to its former glory as the industrial leader of the world, through the use of long term investments in education, infrastructure, science, and green energy. Then, and only then, can there be a real recovery.

Anyone who pretends that all America needs to do to create prosperity is to pass another $5 trillion tax cut on the rich is an idiot or working for our Chinese enemies.

[Sep 24, 2010] Inside Job: A Movie Wall Street is Sure to Hate

Tom Adams and I saw an advance screening of the Charles Ferguson film Inside Job, a documentary on the financial crisis, due for theatrical release in New York on October 8. Given how well each of us knows the subject matter, we’re not easily swayed, but I can speak for both of us in giving the picture high marks. It’s is a very smart, well framed indictment.

I’m generally struck by how TV coverage of finance and economics dumbs down their subject matter, which results in annoyingly sanitized, incomplete accounts. This picture demonstrates that the common excuse, that film isn’t well suited to complex material, is merely cover for laziness and low standards.

Inside Job an ambitious picture, clearly aiming to stir public anger and action by showing how criminally corrupt the financial services has become and how it has subverted government and the economics discipline. Despite minor errors and occasional oversimplification, overall Inside Job does an extremely effective job in covering a lot of ground in a compelling manner.

Ferguson got to top figures in government, finance, and academia, which also gives his picture added heft (Full disclosure: I was left on the cutting room floor). And he unearthed some new dirt, such as: Christine Lagarde recounting that Hank Paulson blew off her concerns about the risk of a crisis at a February 2008 G7 meeting, and that she found out about the Lehman bankruptcy only after the fact; Dominique Strauss-Kahn of the IMF saying that at a dinner of bankers, they were actually asking for more regulation because they recognized they couldn’t restrain themselves (this in the brief window when they feared for their own survival). The now infamous Frederick Mishkin clips, which show him squirming about a paid puff piece he did on behalf of the Iceland Chamber of Commerce not long before the country imploded, has as companion pieces Martin Feldstein saying he regretted none of his decisions as a board member of AIG and AIG FP (!) and Glenn Hubbard, Bush’s chief economic adviser and now Dean of Columbia Business School, getting snippy when grilled about conflicts of interest in his paid consulting work.

In addition to highlighting how the financial services industry has bought and paid for not only considerable political influence but academic endorsement of its favorite causes, it also calls to attention an overlooked factoid I’ve long considered damning: that there was no preparation on behalf of the officialdom for a Lehman bankruptcy. And by “no preparation” I mean not the foggiest understanding of what it meant. Andrew Ross Sorkin made it clear that no one in authority had spoken to a bankruptcy lawyer; Ferguson states they were completely unaware of how disruptive a bankruptcy filing would to Lehman’s London operation. Dean of the bankruptcy bar Harvey Miller (BTW who wears a simply gorgeous suit) recounts how as Lehman’s attorney he warned that a rapid filing would result in armageddon.

The story weaves in a large number of threads: some of the major moves forward in deregulation; Wall Street psychopathy; the heads I win, tails you lose deal the industry has managed to concoct, as well as its criminal activities; how growth in consumer credit was a sop to mask the impact of rising income disparity and stagnant worker wages; the extensive ties between Wall Street, particularly Goldman, and key government figures; discussion of how CDOs and credit default swaps contributed to the crisis (our pet bad actors Magnetar and Tricadia won mentions).

Now to the quibbles. Ferguson makes the crisis sound as if it started with Lehman, when it really began in August or even arguably July 2007. He says Bear was purchased for $2 a share. He mentions deregulation leading to bigger and more frequent crises but then discussed only the dot com bust (which destroyed wealth but was not a credit crisis; the 1994-5 derivatives meltdown and the LTCM crisis were far more relevant antecedents). He puts a lot of emphasis on the 2003 liberalization of investment bank capital rules, when the investment banks were as geared in 2007 as they were in 1997 (not that that was good either, but the idea that that rule change was a major culprit in the crisis doesn’t stand up) and major Eurobanks were just as highly geared. He makes it sound as if securitization produced only CDOs and didn’t finesse at all well how much of them came to be rated AAA. He also incorrectly (in a graphic) indicated that AIG sold CDS to speculators. But none of these miscues seriously undermine his account.

I highly recommend Inside Job. Ferguson clearly intends to rouse the public, and I sincerely hope he succeeds.

More on this topic (What's this?) PC World: "The world of portfolio tracking got much simpler with the introduction of a new investment tracking tool from Wikinvest."How The Oxford Club Beat The Financial Crisis… And What We See Now (Investment U, 9/23/10) SHILLER: THERE WILL BE MORE BUBBLES (THE PRAGMATIC CAPITALIST, 9/15/10) To Bailout Lehman or Not Bailout Lehman: Here’s Why It’s the Wrong Question to Ask (Wall St. Cheat Sheet, 9/15/10) Read more on 2008 Financial Crisis at Wikinvest Topics: Banana republic, Banking industry, Credit markets, Derivatives, Federal Reserve, Hedge funds, Income disparity, Investment banks, Politics, Regulations and regulators, moral hazard

Email This Post Posted by Yves Smith at 3:12 am

10 Comments » Links to this post

ndk:

3:50 am Thanks for the review. I haven’t hit the theatres in years, but I guess it’s time. Quibble with your quibble:

“dot com bust (which destroyed wealth but was not a credit crisis; the 1994-5 derivatives meltdown and the LTCM crisis were far more relevant antecedents).”

While these disasters are certainly noteworthy and I would love to have the role of Summers and Geithner in them highlighted, the I think the dot com bust was easily as relevant and perhaps more so. That’s because it can be directly fingered as causative for many possible roots of the current crisis: an overly easy Fed, stagnant median household real wages, especially as the technological foundation for the real growth in outsourcing, a forced reliance on asset price appreciation for economic growth, etc. etc.

But the Greenspan (or, well, Government) Put is more mention-worthy than any of these individual crises. Does that get adequate play?

Which leads to my bigger question, one that I don’t see answered in the synopsis above. Does the film make clear that all of the problems it discusses remain to this day, many of them more egregious than they were in ‘06?

The Bernanke Fed is the biggest, fattest guarantor of speculation that the world has ever known. They seem to view that as either a necessary evil, or as a policy channel through which reflation can happen. Even Greenspan is getting a little nervous about it. I am deeply uncomfortable with current monetary policy, and I wish the film could make clear that for this inaccessible topic in particular, it’s worse than it’s ever been.

Yves Smith:
3:59 am The reason I see the dot com bust as overrated is that the problem was Greenspan’s overreaction, not the unwinding itself (so we may be on the same page, if he had let nature take its course, we would have had moderate to bad recession instead of a mild one). A bubble not fueled by debt does not blow back to the financial system the way a credit stoked one does. The derivatives and LTCM crisis were credit related.

It does not mention the Greenspan put, and Rubin gets off lighter than I like, but he does roast Summers (Timme too, but not as much). He also does say that finreg did pretty much nothing, the Europeans are taking it more seriously than we are, and makes it clear that the banks are bigger and more concentrated than they were pre crisis.

vlade:
7:39 am An aside: .com bust destroyed less value that the M&A spree run at the same time (95-00). Yet the spree was BAU and not commented on (much).
DownSouth:
6:35 am While monetary policy certaily played an important role in precipitating the GFC, “the Greenspan(or, well, Government) Put” is certainly not “more mention-worthy than any of these individual crises.”

The GFC is neoliberlism writ large, and monetary policy is only one factor of many contributing factors that led to the crisis.

Neoliberalism’s workshop can be found in Latin America, and monetary policy is only one small, but significant, part of the witches brew that constitutes neoliberalism. To place so much emphasis on monetary policy gives a highly distorted and simplisitc view of the problem.

Skippy:
7:34 am Neoliberalism should be defined as: Humantic Liquidationisam or a bias market function to finding the fair value of human existence as correlated to profit seeking, by the the people that matter more than most, and in the discharge of their duty as overseers aka Humanities only hope for survival, betterment, ascension, et al.

Skippy…DS how dose it feel to have that metric pointed at you and yours..eh.

Foppe:
6:52 am There is indeed some ‘good’ coverage of the problems surrounding (most extensively the subprime crisis) by Bremner, Bird and Fortune (BBC). See short clip here: http://www.youtube.com/watch?v=z-oIMJMGd1Q  and on the South-Sea Bubble: http://www.youtube.com/watch?v=QjN8q5rwLoo  (You can find a special they did called ’silly money’ on youtube as well)
Foppe:
6:59 am Great quote: “And then the money is moved onto Wallstreet, and this is extraordinary what happens then: somehow, this package of dogy debts stops being a package of dodgy debts, and starts being a Structured Investment Vehicle.”
vlade:
7:37 am BB&F was the only television programme for a long time that had a clue of what went on. Silly Money was excellent, well worth watching.

BTW, it’s NOT a BBC programme though :)

vlade:
7:23 am On bankers and more regulation – In some areas, I think bankers would still like more regulation, because w/o regulation you cannot afford to do the first step – typical prisoner’s dillema problem. For example, look at CS – the only bank which reduced bonuses in response to the UK’s punitive tax. It was forced to reintroduce them, as the competitors didn’t reduce bonuses and their staff (and now I’m not talking traders, but IT guys, risk managers, back office managers) were leaving.
Raul:
8:24 am I don’t believe it is possible for television or documentaries to cover a story with the complexity of the financial crisis. Those stories are too far from the sweet spot of television.

Try to imagine Tom Paine arguing against monarchy and democracy by using stained glass windows. (I’ve read Alan Kay use this example many times)

[Sep 22, 2010]  Money Flows Out of US Stock ETFs, into Emerging Markets

Sep 17, 2010 | CNBC

The U.S. stock ETF feeling the most pain in August was SPDR S&P 500. In August, $6.6 billion in assets flowed out of the fund, for a year-to-date outflow of $19.1 billion, according to monthly data from Morningstar, the Chicago fund-tracking firm.

SPDR S&P 500 [SPY 113.94 -0.04 (-0.04%) ] is designed to follow the price and yield performance of the S&P 500 Index, which has been trading within a narrow range since mid-May.

For the year-to-date, U.S. stock ETFs lost a net $12.8 billion. Money has flowed instead into ETFs that invest in fixed-income, commodities and emerging markets, Morningstar said.

Investors have been diving into emerging market ETFs with enthusiasm for the last three years, but the momentum is increasing. Over the last three years, 61 percent of all flows into international-stock ETFs were into emerging market funds. In August, that percentage increased to more than 95 percent: of the $4.4 billion that flowed into the international fund sector in August, $4.2 billion went to emerging market ETFs.

Ionprize:

this article is deceptive and inaccurate, it states that $19.1 bill has flowed out of the spy so far this year. then states $12.8 bil flowed out of domestic etf's this year. then ststes $4.2 of $4.4 bil went into emerging market etf's. by my math that leaves anywhere from $14.9 to $27 bil unaccounted for. where did this money go? it flowed out of the markets in cash, bonds, tbills and probably some into gold. but the main point being it is flowing out of equities.

DrHeinzDoofenschmirtz:

in other words the emerging and international positions will soon implode...LOLOLOL don't be a sheep in the herd they always get slaughtered!

digital24:

the world outside of America and Europe is booming. As a US expat in Munich, I see more Fords on the roads, everybody is talking into an iPhone, all the Starbucks are bursting with customers, the top selling jeans brand in Germany is by far Levis and I see Caterpillar heavy equipment being hauled to construction sites all around the city. How American companies will not be booming in 2011 beats me.

Babylon1974:

People are getting their money out of America altogether. It's a dying market, and the Western Empire is a dying civilization.

Anybody with sense realizes this and is getting into commodities, gold, silver and anything else that can be transferred over to the Asian Empire that will replace us.

http://bizcovering.com/investing/arise-the-international-bank/  Report Abuse

DrHeinzDoofenschmirtz:

yeah put all your money in precious metals and watch it go bye bye when a couple of big players pull the rug out from under the gold play, this will be the funniest thing watching the herd run for the exits...LOLOL...."get your popcorn ready"

[Sep 20, 2010] Technology stock picks & industry news

Bond is not a bubble, it is a mania and it is concentrated in high yield area. Gold might also be mania and might be low is several years that it is today. 
Yahoo! Finance

An ominous pattern forming in the stock market may be telling us the DOW is about to plummet to 2000-3000, says Robert R Prechter, Jr.

Prechter, who writes a market letter for Elliott Wave International, is no stranger to apocalyptic forecasts. For the past year or two, he has been steadfast in his prediction that the market is on the verge of a historic collapse. The timing and depth of this crash has varied--earlier this year, Prechter suggested the DOW might fall to 1,000, and more recently, he said we were looking at the worst bear market in 300 years--but he hasn't wavered in his conviction that we're due for major pullback.

One cause of Prechter's concern is a technical pattern called a "head and shoulders top." Historically, Prechter says, this pattern has often preceded extended bear moves. Prechter thinks the left-hand "shoulder" of this pattern was the market peak in early 2000, the "head" the higher market peak in 2007, and the "right shoulder" the recovery we're enjoying now.

If the pattern is followed by the same pullback Prechter has seen in other eras, Prechter says, the DOW could fall to 2000-3000.

Fortunately, Prechter says he is not predicting that kind of crash. He's just warning about an upcoming severe pullback in stocks.

And he also sees similar doom in the forecast for high-yield bonds, gold, and other commodities.

[Sep 20, 2010] Bank Credit - One Month Does Not Make a Trend, But… August, 2010

10% unemployment is in the cards...
Northern Trust

Speaking of unemployment, the monthly state unemployment insurance claims data suggest that the condition of the labor market is, at the very least, improving at a slower pace. Chart 9 shows that the year-over-year percent change in initial unemployment claims has begun to decline at a slower pace. Had it not been for the extraordinary 0.61% decline in the 20-yearold and above civilian labor force in the three months ended July (see Chart 10), it is quite likely that the headline unemployment rate would have risen above its 9.5% level.

Because we believe that there will be some growth in the labor force in the coming months, because there are indications from the state unemployment insurance data that the labor market’s recent improvement is slowing down and because we believe that the growth in real GDP over the second half of this year will be insufficient to generate enough jobs to employ new entrants to the labor force, we are projecting an increase in the headline unemployment rate to a level above 10% in the fourth quarter of this year.

[Sep 20, 2010] Paul Kasriel 'Shoals of Depression Have Been Avoided' by Prieur du Plessis

See also Northern Trust    Paul Kasriel, Which news do you want first, Part 2 Running time is 10:13.    ( Transcript )
September 15, 2009 | Seeking Alpha

As mentioned before, Paul Kasriel, award-winning chief economist of Northern Trust, rates highly on my list of must-read economists. Sharing a review of the economic outlook, Paul has just published a PowerPoint presentation entitled “The shoals of depression have been avoided, but the economy still faces strong headwinds”. I found it useful to flip through the slides, and I am sure you will also enjoy them.

Click here to access the presentation.

Source: Northern Trust, September 2009.

[Sep 20, 2010]   Chances of a Double Dip The Big Picture

Most of the developed worlds are in a fiscal tailspin

The Chances of a Double Dip September 17, 2010 Dr. Gary Shilling

SecondLook :

2:32 pm I think a critical element is being overlooked: the dramatic rise in the cost of oil since 1998.

Here is the annual average price:

1998 $11.91 $15.93 1999 $16.56 $21.62 2000 $27.39 $34.65 2001 $23.00 $28.32 2002 $22.81 $27.62 2003 $27.69 $32.82 2004 $37.66 $43.42 2005 $50.04 $55.80 2006 $58.30 $63.02 2007 $64.20 $67.37 2008 $91.48 $92.31 2009 $53.48 $54.24 2010 Partial $70.67 $70.84

Petroleum is crucial in our economy; affecting everything from the cost of transportation, to agriculture, to manufacturing. The persistent long term rise surely must have debilitating consequences – think of it, for now, a low grade fever that weakens the economic body. (One estimate, used by the EIA is that each 10% increase in the price of oil reduces the potential GDP output by 0.2 percent. One could argue that the tipping point into recession was accented by the parabolic spike in price that started late 2006; at least, the straw that broke the camel’s back.

Given that, for a host of reasons, the price is extremely unlikely to seriously decline (the contrary is more probable), it’s not unreasonable that this will result in a indefinite period of anemic growth, if that.

Ted Kavadas:

10:42 am I found the discussions of past recessions and GDP growth to be particularly interesting.

Also, his comments on whether further economic weakness would be classified as a new or continuing recession is notable.

My interpretation of our current economic situation is that we are in a Depression, and as such the weak growth that we have experienced since roughly summer 2009 is unfortunately unsustainable. During long periods of economic weakness often there are intermittent periods of economic strength. As an example of this, Shilling points out, “Even in the 1929-1933 economic collapse, GDP rose in six quarters.”

Here is a summary of my thoughts on the issue, for those interested:

http://www.economicgreenfield.com/a-special-note-on-our-economic-situation/ 

[Sep 19, 2010] Guest Post: American Businesses and Consumers are NOT Deleveraging … They Are Going On One Last Binge

Washington’s Blog

Everyone knows that the American consumer is deleveraging … living more frugally, and paying down debt.

Right?

Selected Comments

Francois T :

This is going to end up very, very badly.

The failure of leadership and creativity http://bit.ly/a5xjdK  during this crisis has been colossal.

The consequences promise to be colossal too.

Richard Kline:

So Francois, not do disagree strongly with you, but I’m not sure that ‘very badly’ is the phrase that will describe our outcome in, say, fifteen years. Very _differently_ from the set of conditions we came to see as the norm in the 1980-2007 period, yes. The Anglo-American duopoly will look and live smaller, but how much, and with how much disruption is far from certain.

Consider France, 1947-75 or so. Currency collapse with considerable losses for the upper class. End of Great Power-dom (hooray!). Withdrawal from most colonies. Great reduction in the army (though increase in nuclear forces). Implementation of a sociable social policy, practically a socialist one. Very different than before. ‘Less’ than before in the eyes of many. Worse? Hmmm. As another example, consider Argentina 1988 versus Argentina 2008 to present. Is everything fixed? No. Are things better managed (somewhat) and more just (somewhat more).

What is a likely result of the American refusal to deleverage and restructure in a timely way, in the determination to coddle the superrich, is that the US will lose significant competitive advantage relative to other countries which manage this transition better. Those unemployed now and over the next long while will have the financial course of their lives significantly and permanently indexed down in consequence [which I see as a bad thing, though also an opportunity to re-evaluate goals].

If there is a Monster Correction out there, and there may well be, the biggest snap will be born by those with the most to lose, those holding crap mega-assets. But however the wash looks when it comes out of the turbulence, it won’t look as nice as those who had actual growth and development in the interim. Thus to me the big question is, how does the US take _this_ potential/probable outcome? By getting to work sanely? By chucking bombs and scapegoating designated ’social undesirables? by getting a clue? By the coming of the rapture?

We can hit bottom, pick ourselves up, and get on fairly well if we choose. Or start firing off a gun in a crowded phone booth of a world. The latter, for me, constitutes ‘very badly.’ But that outcome isn’t a lock. It’s more probable than it was five years ago, though, and I can’t say I feel too good about that.

Kevin de Bruxelles:

Richard,

I can see two differences between France’s Trente Glorieuses (1947-1975) and the coming era for America, although obviously I’m speculating on what future conditions will be in the US. The first is that, as the name implies, France’s transition took place during a time of economic expansion. I think most would agree this will not be the case for the US. The second is that much of this transition was accomplished under excellent leadership, namely Charles de Gaulle, who was that rarest of geniuses in both the political and military realms. Now of course it is possible that some American political genius could arrive in power but the current US system and its concentration of power into such a small elite make it doubtful that any substantial changes against the interests of this elite are possible.

Perhaps a semi-coup d’etat that introduces a Second American Republic (along the lines of De Gaulle coming to power in 58 and creating the French Fifth Republic) would make it possible to have sound leadership in the US.

But what struck me was your comment about the reduction of military forces in France. In fact, from a long term historic view, this could in fact be the problem. Historically, in broad terms, military technology toggles between the one extreme of being so powerful and expensive that only a small elite can be armed (and therefore dominate the masses), all the way to the other extreme of being so low tech that mass armies are required (where elites are less able to dominate). The former case, expensive, elite arms, tends to coincide with concentrations of power and Dark Ages. The second condition, inexpensive arms for the masses, tend to coincide with Golden Ages and relative equality.

A few examples of this are Greece during its Dark Ages vs. Classical times. During the Greek Dark Ages a very small number of elites mounted on horses were able to overpower and subjugate large numbers of peasants. The arrival of the phalanx (highly trained but relatively inexpensive to equip) meant that numbers now mattered and we saw a spreading of relative equality in many of the Greek City States. The German tribes described by Tacitus were very egalitarian, the adult freemen were always armed in public and during their counsels would signal approval by clashing their spears. In such a situation it was difficult for potential elites to amass enough power to enslave their masses.

But eventually the pendulum swung back, with the power and expense of armour, mounted solders, and moated strongholds, elites were again able to dominate the masses during feudal times. But with the advent of fire arms and artillery, and Napoleon’s mass state-backed armies, equality slowly started spreading out. I would say this process peaked somewhere between just after WW2 up until the end of the sixties. Ironically, perhaps it was the Vietnam war protests, combined with huge leaps in technological potential, and of course nuclear weapons, that convinced American elites to go with smaller, more high-tech professional armies. The masses were no longer required to project strength, a huge manufacturing base was not longer required, and we are just beginning to feel the real results of this shift in power. --[Interesting thought -- conscription army as democratizing mechanism]

With the possibility of robotic weapons this process may have much further to run. One possible countervailing current could be electromagnetic pulse weapons that could eventually make high tech weapons obsolete.

  [Sep 19, 2010] Bond Market Bulls Thumb Noses at Pimco’s Gross by David Pauly

August 25, 2010 | Bloomberg

Five months ago Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., declared that the 30-year bull market in fixed-income securities was over.

Nobody questioned him. After all, Gross’s Pimco Total Return Fund has been successful enough to attract $239 billion.

No one paid much attention either.

Since Gross uttered his warning, U.S. government and corporate bonds have remained in demand. The yield on the benchmark 10-year U.S. Treasury note has dropped to about 2.5 percent from 3.9 percent in late March.

Rising prices of the government’s debt helped investors in all Treasuries earn a return of 4.7 percent in the second quarter and another half percent in July, according to an index by Bank of America Merrill Lynch.

While Gross may be right for the long run, recent headlines have accelerated the bull run in bonds.

Investors fret that the economy is stalling again and that high unemployment will persist. That might mean another recession and a continued near-zero interest rates, which would bolster bond prices.

U.S. bonds benefit from what seems a contradiction. Investors worry that the massive debts of European governments make their bonds risky. So what do they do? They buy Treasuries, though the U.S. debt burden is no less troublesome. Perhaps it’s the best of the worst.

Battered Stocks

Bonds have become the investment of choice because stock price declines have been so brutal. Investors who lived through the dot-com crash and the credit-crunch debacle now get whiplashed by flash-speed computer trading that dominates today’s market.

The Standard & Poor’s 500 Index has dropped more than 5 percent so far this year.

Bonds are attracting small investors who put money in mutual funds as well as big-timers such as pension funds. In the 30 months ended in June, bond mutual funds received $559 billion in new investments, while mutual funds investing in U.S. stocks lost $209 billion, according to the industry’s trade group, the Investment Company Institute.

Fund managers now encourage their customers to swing the pendulum back toward stocks.

These managers are concerned about their fees: On a dollar- weighted basis, stock funds on average collect 76 cents in fees for each $100 invested compared with 61 cents at bond funds, according to Lipper, a mutual-fund research firm.

Bond Rush

The rush into bonds clearly has gone too far. Prices have little room to gain more with interest rates at historical lows. The Federal Reserve’s key rate for overnight loans among banks is zero to 0.25 percent. The 30-year Treasury bond yield is about 3.6 percent.

Many people who’ve come to bonds only recently may eventually see greater returns from stocks. Sober investors may have second thoughts about the safety of Treasuries if the U.S. can’t curb its appetite for debt.

Gross’s next warning may be that the great bull market in bonds is about to end with a thud.

--Editors: Steven Gittelson, James Greiff

[Sep 19, 2010] Econbrowser Is the U.S. heading toward another recession

"No, the politicians, financial media hotties, academic e-CON-omists, Wall St. parasites, nor corporate plunderers will tell you the truth. Why should they?"

Nemesis

Remove total gov't spending as a share of nominal GDP, and the private sector effectively never recovered, i.e., remains in contraction.

It's like standing on a train track with your back to an oncoming train perceiving that the danger of being hit by a train is unlikely because you are watching the back of the train that just passed moving away in the distance.

A so-called double dip for the housing and associated sectors, along with the onset of the Boomers' phase of life of net drawdown of financial assets and on gov't social transfers, ensures that the private sector will further decelerate hereafter into the implied demographics-induced lows in '16-'18 to as late as the early '20s.

All gov't borrowing and spending can accomplish is to prevent reported nominal GDP from contracting too much, while incrementally keeping the checks perpetually flowing for unemployment, food stamps, Social Security, Medicare/Medicaid, and the imperial war machine.

In the meantime unreal estate and stock prices will continue to decline from high unemployment/underemployment, debt burdens, Boomer drawdowns, causing more mortgage debtors to become underwater, walk away, or squat; defined-contribution plans will become 201(K)'s, then 101(K)'s, and finally NO WAY(OK?!)'s, coinciding with a wholesale exodus from the scam market and mutual frauds by tens of millions of Americans; and pension returns falling to 0% or negative, requiring trillions in benefit cuts over the next two decades.

We will eventually see 5-year ARM rates at 2.25-2.5% (as in Japan), and housing will still be moribund, with half or more of houses with negative equity, and the risk that residential house values will fall to estimated replacement value (fall another 18-20%), effectively removing any incentive for banks to make unreal estate loans hereafter.

No, there will be no double-dip recession, because the private sector never recovered from the onset of the debt-deflationary secular bear market and depression, i.e., the Greater Depression.

Nemesis

don, and the exports are from US supranational firms shipping capital goods to their subsidiaries in China-Asia for intra-Asian market "trade" of components and intermediate and finished goods to be "exported" from Asia back to the US as "imports".

And guess where the bulk of the inventories come from? Right, those same "imports" (US firms' subsidiaries' "exports") from Asia to flood the Dollar Tree and Wally-Mart shelves for the holiday season (which now starts after Labor Day).

And Obummer wants to double "exports" in 5 years, which he perhaps he doesn't realize (or probably does and is paid not to) means providing gov't giveaways so US firms can more cheaply send their capital goods to themselves in Asia.

IOW, our "export policy" is really a stimulus for investment, production, and employment in China by US supranational firms' subsidiaries and their contract producers.

Ain't Anglo-American empire great?!

Nemesis

DS, go to the Fed's FRED and the NBER databases and perform the necessary analysis.

US gov't officials, the rentier Power Elite, and large supranational firms do not want the public to know that we have a neo-imperial/neo-colonial "trade" regime requiring oil imports of 60-65% of consumption and growing (China's net imports of liquid fossil fuel imports recently exceeded 50% of consumption), as well as spending 10-11% of private GDP on imperial wars to secure oil supplies and shipping lanes.

Canada is an energy colony for Anglo-American oil empire. Mexico and Central America are colonial/imperial slave wage colonies for agribusiness, food processing, construction, hoteliers, and restaurateurs; and China, Vietnam, and Malaysia serve a similar purpose for US and Japanese manufacturing firms in Asia.

If we had to rely solely on our own resources and related productive capital accumulation and domestic production, and we will eventually, our economy would be half its size in per-capita terms.

The Anglo-American, militarist-imperialist rentier-capitalist "trade" regime, i.e., "globalization", and thus what we refer to as "capitalism", cannot continue with Peak Oil, falling net energy, and China and India competing with the US and EU for oil at global peak production; most of us just don't know it yet, including e-CON-omists, and our political officials, corporate leaders, and Wall St. do not want us to know it.

flow5

As I've said, contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However the lag for nominal gDp (the FED’s target?), varies widely.

It’s a scientific fact that economic forecasts are mathematically infallible. Nominal (gDp) will cascade in the 4th qtr (down in every month - Oct, Nov, Dec & bottoming in Jan), without fiscal/monetary, countervailing, intervention/stimulus.

The next money flows (MVt), inflection point is a little after the FOMC's Sept. 21st meeting. The FOMC stated it will decide to ease "incrementally" if either: (1) unemployment increases, (2), the economy weakens, or (3), dis-inflation accelerates, i.e., the FOMC will DEFINITELY "ease" monetary policy.

Ivars

I think Q3 2011 will be a recessionary quarter.From there onwards, nothing nice is to be expected , more likely another 4-5 recessionary quarters till Q3 2013.

Nemesis

Anonymous, look at the growth of NOMINAL private GDP (forget the dubious hedonic deflators for real GDP) since the most recent peak, and then compare the average trend rate from '00 and '07 to the long-term pre-'00 rate. We will be lucky by the mid- to late '10s to have 1% average trend nominal private GDP growth.

Moreover, go the the BEA site and look at personal income. Note private wages vs. gov't + personal transfers + rentier income, and look at the growth rates. How can the private sector grow with gov't wages, transfers, and public and private debt service growing at those rates to private wages and proprietors' income?

Also, post-'00 trend nominal private GDP is averaging less than 3%, whereas total nominal gov't at 36% of nominal GDP is growing at 6% (10% monthly annualized as of May-June to date with the fiscal year coming to a close). How long can that continue before we break out the sake and ouzo and toast to our inner Japanese and Greek? Answer: At the differential trend rate of gov't to private nominal GDP since '00, gov't spending to total nominal GDP will reach 50% by '20-'21. Is that worthy of a toast, or what?

Send me your address and I'll buy a case of ouzo and send it to you so you can be ready to party.

Yes, Robert, I am biased . . . by the facts.

Robert, this one's for you (at least $16 trillion of gross public debt baked into the fiscal cake for '13 or no less than 100% of GDP guaranteed, and probably more; and $23-$24 trillion of unserviceable public debt by '20):

David Stockman prescribes the bitter medicine of debt deflation and austerity.

No, the politicians, financial media hotties, academic e-CON-omists, Wall St. parasites, nor corporate plunderers will tell you the truth. Why should they?

Hold your nose, open wide, and prepare to swallow hard.

Nemesis

http://tinyurl.com/28dq4qf

http://www.federalreserve.gov/releases/h41/current/h41.htm

flow5, the Fed has already begun QE II with $13B (give or take) of incremental purchases of Treasuries over the past two weeks, or an annualized growth rate of the SOMA/balance sheet of ~18%; but Bubble Ben Shalom did not include you on the cc: list of the memo, one presumes.

Eventually the Fed will be printing digital fiat debt-money freebucks and buying directly from the Treasury, i.e., overt monetization, albeit via a book-entry conduit at the primary dealers. My guess is that the Fed will double its balance sheet by mid-decade, with the monetary base converging with total bank loans during the period (from ~3.3 today).

Looking at the money supply, all of the net incremental growth of M1 and M2 is attributable to the federal gov't borrowing and spending $1.3 trillion (9% of GDP and 14-15% of private nominal GDP), growing spending 7-8% yoy (1.9% of nominal GDP, 2.9% of private nominal GDP, and 15-16% equivalent of M2).

Along with the contraction in bank lending, had the federal gov't not busted the budget wide open to borrow and spend at 15% of private nominal GDP, money supply and private GDP would be in free fall.

So, yes, QE II is a 100% certainty, because it is already happening, which should give any Keynesian and stock investor nightmares, as the Fed would not be engaging in QE II already if the economy were in "recovery".

 

[Sep 18, 2010] Paul Krugman: The Tax-Cut Racket

The lady doth protest too much... This is a single party with two winds. Are blue dogs that much different from repugs?

Economist's ViewRepublicans are playing a dangerous game with the economy as they attempt to preserve tax cuts for "their wealthy friends":

The Tax-Cut Racket, by Paul Krugman, Commentary, NY Times: “Nice middle class you got here,” said Mitch McConnell, the Senate minority leader. “It would be a shame if something happened to it.”
O.K., he didn’t actually say that. But he might as well have, because that’s what the current confrontation over taxes amounts to. Mr. McConnell, who was self-righteously denouncing the budget deficit just the other day, now wants to blow that deficit up with big tax cuts for the rich. But he doesn’t have the votes. So he’s trying to get what he wants by pointing a gun at the heads of middle-class families, threatening to force a jump in their taxes unless he gets paid off with hugely expensive tax breaks for the wealthy. ... Politics ain’t beanbag, but there’s a difference between playing hardball and engaging in outright extortion...
How did we get to this point? The ... Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions ... by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.
In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.
That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea... So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up.
What kind of political party would engage in that kind of brinksmanship? The ... same kind of party that shut down the federal government in 1995 in an attempt to force President Bill Clinton to accept steep cuts in Medicare, and is actively discussing doing the same to Mr. Obama. So,... the tax-cut fight is ... ultimately about a radicalized Republican Party, which accepts no limits on partisanship.

[Sep 15, 2010] 4 Reasons to Be Long Oil - And Nothing Else

"oil is more “inflation adjusted” than our government’s accounting of inflation"
Oil recently dipped to 3 month lows on fears about global demand and currently hovers around $72 dollars a barrel (as of August 31st). Meanwhile, global economic and geopolitical concerns continue to lend themselves to a higher price per barrel in the coming year. The recent decline in the price of oil presents the investor an opportune speculative and defensive window, especially if oil continue to tracks demand destruction rather than inflationary pressures.

1. Big Oil provides high yields in a low yield deflationary environment.

The 1-yr UST pays .27% interest while the benchmark 10-yr UST recently dipped to an absurdly low 2.5% annual rate. Oil companies’ dividends far surpass these returns:

*subject to foreign taxes

A $1,000 investment today in US Treasuries will profit $288 by 2020 while a similar investment in ConocoPhillips (assuming dividend is not reinvested) will guarantee at least yield a profit of $400. Although this ignores the security of the original capital investment, oil companies are currently “cheap”.

ConocoPhillips is currently trading at an 8.89 P/E ratio while TIPS (inflation adjusted US Treasuries- meanwhile, oil is more “inflation adjusted” than our government’s accounting of inflation) trade at 100x times payout – ratios that resemble the 2000 NASDAQ bubble. Notwithstanding the argument that any major depreciation in the price of Big Oil stocks across a decade-long time span would inherently signify major geopolitical and economic upheaval – meaning, all your other investments have blown up anyway and still makes your shift to commodities prudent.

Thus, switching from the largest entity in the United States by revenue to the third (ExxonMobil earns more dollars than 3+ Californias), you receive an extremely liquid commitment to collect an annual yield about 12x that of a 1 Yr US bill. Factoring that ExxonMobil profited $19 billion in 2009 (and estimates a 25% sales growth in 2010) - and that the United States government plans on losing 1.3 billion in 2010, perhaps a “flee to safety” should be into stakes of our most profitable institutions.

2. Big Oil provides safety and profit in an inflationary environment.

Yes, not only Harvey Dent’s coin lands “heads” no matter which way you flip it, so does investing in major oil companies. It is no secret that the United States currently runs record budget deficits, maintains record national debt, and holds a major negative balance of trade that is currently widening (ignoring the $5 trillion in Fannie/Freddie debt (likely), the $2 trillion in states’ debt (less likely), another $3 trillion for government pension shortfalls (not likely), and $106 trillion in Medicare, Medicaid, and Social Security shortfalls (ha!)). In the unlikely event we cannot grow the economy out of debt (under current conditions, 10% annual growth, larger than China’s, would be needed to pay the national debt by 2020), or the United States government is unwilling to double taxes or cut its revenues in half, the investor should consider the possibility (or the likelihood in Niall Ferguson’s, the guy who literally wrote the book on money, opinion).

Although an investor can continue to allocate his or her funds based on the deflationary argument, despite a commitment by US Fed Chairman Ben Bernanke to “strongly resist deviations from price stability in the downward direction”, similar commitments to quantitative easing in other industrialized (read: debtor) nations, and double digit inflation in developing countries, paper currencies have the general feel of becoming more bountiful in the coming years. Like gold, the price of oil should reflect these inflationary pressures but meanwhile contain a critical, essential, and practical utility and demand outside of speculation (though it can do that too).

In either case, there is hardly a situation in which I can imagine that the United States dollar, struggling against unprecedented inflationary pressures, will buy the same amount of oil in 2011 as currently in 2010. Even if the currency argument is ignored, the maintenance of the status quo on currency valuations will only add towards oil’s upward movement.

3. The geopolitical concerns surrounding the price of oil are, if anything, becoming more acute.

Even if we decide to roll our coin down the hall rather than flip, we should still expect a rise in oil prices. Have we so soon forgotten peak oil, global demand growth, and the geopolitical concerns that drove oil to $147 a barrel in July 2008? These pressures have only increased in 2010 as the world stumbles out of recession. Statistics from the US Energy Information Administration show that oil demand have edged to pre-crash 2008 levels while supplies remain relatively lower. Global demand continues to increase – I would link to refer to two astute articles published recently by Kevin Grewal and Tom Lydon on the matter. A recent report by the International Energy Agency reports that oil demand crew nearly 4x the rate of oil supplies in July, reminding peak oil fears. In fact, a report this month by Goldman Sachs indicates that “global crude oil demand may have exceeded supply in the past two months”.

Geopolitical concerns have only become more acute since 2008. China has recently begun (?) to dump US Treasurys to the tune of $24 billion in June and off nearly a hundred billion dollars since last year. Is China using this cash to buy US goods and services (I’m guessing no) and continuing its penchant (plan?) for purchasing foreign commodity assets? Remember, the country sitting on the world’s largest cash reserves is now the world’s largest consumer of energy.

Oil is still increasingly becoming more difficult and dangerous to obtain. The BP oil spill demonstrates the risks associated with deep-sea oil drilling. At the very least, the spill delays aggressive plans to expand drilling in the Gulf of Mexico and the Alaskan coast while requiring a shuffling of the composition of energy players in the area (read: higher costs). Oil production from the Gulf of Mexico consists of more than a third of domestic oil production, the dangers of which we most nervously watched this entire summer.

Meanwhile, 62% of the oil consumed in the United States continues to be imported.

[Sep 15, 2010] Is the Bond Market Changing Direction -- Seeking Alpha

Whether you call it a bubble or not, investors’ love affair with bonds may be ending. Longer-term bond losses in the last three weeks have been about one-half year’s interest income.

It may not seem possible. After all, corporate bond yields rose only 0.22% from their 3.74% historic low on August 24 to 3.96% last Friday (see Bloomberg article below). Such is the “magic” of long-term bond arithmetic: Small interest rate changes produce large price moves.

Take a look at a couple of the examples listed by Bloomberg in Bond Buyers Getting Burned by Going Long as Yields Climb

Corporate bonds due in 15 years or more have lost 3.15 percent since Aug. 31….

Longer-dated bonds of drugmaker Abbott Laboratories (ABT) … declined 4.43 percent, while debt from … International Business Machines Corp. (IBM) fell 4.08 percent.

... ... ...

The cycle of buy-buy (because waiting only means a lower yield) looks to be broken. New buyers will probably be more price-conscious, not wanting to pay top dollar (i.e., getting the lowest yield) on their bond purchases.

Moreover, indications are that the fear of deflation is diminishing. The loss of that driver means today’s historically low yields really stand out. A shift from a deflationary to even a low inflationary outlook would mean the current expectation of a purchasing power increase would flip to a decrease. Therefore, from the expectation of a gain bolstering the historically low interest rates to a loss shrinking them further. Investors would be back to their prior understanding that part of the interest payments received, after taxes, must be saved to cover the purchasing power loss.

 

[Sep 15, 2010] Lehman’s Bankruptcy 2 Year Anniversary

"Make that Bailout Extorters their threat may be a fiction and a bluff… but everybody buys it, specifically Chairman Bozo..ke in his recent testimony crying over how he wished he could have done more " Was Lehman failure was initiated as an ingenious way to milk public to save failing banks at the expence of Joe taxpayer and brick-and mortal industries ?
September 15, 2010 | The Big Picture

AHodge:

Good judgement for downplaying those “commemorating” like it was THE thing— are celebrating the two year anniversary of their own ignorance.

Here is a tedious but exhaustive proof that lehman was more an effect. And small. Not THE cause. We were already going over the falls by August

Proofs Lehman’s Sept. 14 bankruptcy was not prime cause of the late 2008 great recession.

1.Other drivers fully explain the faster US downturn in 4Q 2008

a.Housing collapse: prices, starts and foreclosures and lagged effect.

b.Energy shock through July with $100+ bbl oil prices
c.State and Local govt shrinkage related to tax revenue loss and March 2008 shutdown of auction rate market for project finance
d.Securitization credit collapse: unguaranteed market was shrinking since March.
e.Global export collapse. US exports down a real -3.6% and -19.5% in 3Q 4Q, far larger than the real GDP Decline. Trade finance dries up.
f.CAPEX contraction. This had already started in 3Q with Business fixed down 6.1%.
g.Income loss. Jobs had shrunk slightly all year
h.Stimulus unwound: Stimulus package #1 was small and temporary: It worked 2Q, outweighed the jobs related income losses: then unwound in the third and fourth quarter.

2.Other problems besides Lehman pressured the financial sector in September.

a WAMU bonds also default in Sept.
b. Fannie and Freddie faced default risk threatening $5.2 trillion of paper and guarantees.
c.Mortgage insurers and pool insurers faced insolvency threat. Insurance for mortgages and CDS were realized to be fake and unreserved.
d.Good commercial paper started to dry up before Lehman. Confidence had been poisoned by earlier Asset Backed Commercial Paper (ABCP) losses

3.Lehman bankruptcy stressed the financial sector further, but banking had, in many respects, shut down supplying credit already. Securitization dried up by June

a.Lets stipulate that commercial paper, money market mutual funds, the stock market, bank funding and CDS markets showed further stress in September, partly Lehman related
b.Only the first two directly supply credit.
c.The Treasury formally announced blanket money market guarantees Sept 19, printed regs Sep 28.
d.The treasury also ramped up the CP guarantee program to $130 bio in Sept/Oct. Nonfinancial CP outstandings ROSE over $1 trillion in 4Q
e.Securitization and shadow banking, already having collapsed by the summer, SLOWED its rate of decline after Lehman

4.The real economy data showed an accelerating rate of decline in August-September. Lehman was SEPT 14

a.A Lehman caused credit crunch would take at least 1-2 months to affect real activity
b.Initial unemployment claims breached 400 thousand in early august.
c.Exports and capex data showed declines larger than the overall -2.5% 3Q GDP trend
d.Commodity prices, after spiking to a peak in late July, had collapsed by Sep 14.
e.Industrial production fell a disastrous 4.0% in Sept, far worse than any other month.
f.Auto sales falling all year. July alone down about 10%. Real consumer spending fell -0.5% in September, the recession’s largest monthly decline.

No statistical proof has been offered by anyone that further credit withdrawals beginning late September drove down activity further in credit starved sectors. There was clearly credit starving going on. That began a year earlier, completely dried up by summer in most areas Were there some sentiment effects from stock market and CP and wall st wetting their pants? No doubt. But how much of even that is reasonably Lehman, much less provably Lehman? If someone says that Lehman was 10% of total negative drivers, I would not quarrel. Otherwise the only “proofs” of this largely mythic Tale of Lehman are thousands of self serving Wall St types intoning it to each other.

Barry Ritholtz:

 Yah, good list — I discussed the word “precipitate” here:

“Precipitating” the Credit Crisis http://www.ritholtz.com/blog/2010/01/precipitating-the-credit-crisis/

AHodge:

Right, even the P word a little strong. The Myth of Lehman of course is the perfect vehicle for 1) forecast losers who did not see it coming even dimly. and need an explanation 2) bailout beggers who like the narrative of everybody bailed “no more Lehmans” “dont dare take away that govt guarantee for everybody big”

i note wall st did not get on this bandwagon for at least 2 months. At the start it was only the europeans, big holders of LEH paper, that claimed it would be a disaster.

Make that Bailout Extorters their threat may be a fiction and a bluff… but everybody buys it, specifically Chairman Bozo..ke in his recent testimony crying over how he wished he could have done more

hammerandtong2001:

Outstanding post there by AHodge.

I would add that the collapse of BSC — 6 MONTHS BEFORE LEH’s BK — signaled pretty clearly that there was deep trouble afoot in the credit markets. And if JPM hadn’t been holding $10 Bil of bad Bear paper, making the “merger” necessary, then Bear probably would have BK’d then.

In March of 2008 when Bear collapsed — the S&P 500 Index was trading around 1300, and during that summer, it traded up to well over 1400. After the crash, the index bottomed in the 600′s — vaporizing value and wealth.

But there was really plenty of time to exit longs.

AHodge:

Thanks. You are right about BEAR, and the fed still holds 30 bio of their paper. they were broke too..

stage 1 of this tragedy was actually the seizing up of banking on Aug 9 2007. Because many of them were broke (CITI, Merrill) etc etc , The banks did not trust to lend to anyone even overnight. They did not know which were broke.

 

[Sep 14, 2010] Albert Edwards Market Still Deluding Itself That It Can Escape The Inevitable Denouement

September 14, 2010 | naked capitalism

Normally, I don’t reproduce or excerpt from John Mauldin’s popular e-newsletters, but today he features a writer I particularly like, uber bear Albert Edwards of Societe Generale.

To repurpose an old saw about pessimists, bears are bulls who have all the facts. Some of Edwards’ arguments, while well documented, aren’t new: employment stinks, the forward-looking manufacturing indicators say more deterioration is in store. But he has some interesting comments on the nature of bear markets, and why investors who believe that QE will keep equity values aloft are likely to be disappointed.

From Edwards:

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can’t remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% – the steepest fall since Q3 2006.Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts’ optimism confirms we are right on the cusp of falling forward earnings (see chart below).

I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August’s 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS, why can’t the market? Because it is bad news, that’s why.

August’s rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators – new orders, unfilled orders and vender deliveries – all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).

The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish (see chart above). These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.

I am often asked by investors with a similar view of the world to my own (yes, there are some),whether the equity market will ever reach my 450 S&P target because of the likelihood that further Quantitative Easing will prevent asset prices from falling back to cheap levels.

Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a “portfolio balance channel”, but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes – (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? – link).

The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below). The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.

In the absence of a cyclical recovery I cannot see how QE is any different in its ability to revive asset prices than lower rates in anything other than a temporary fashion. (Interestingly many of our clients think QE2 might give a temporary fillip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.)

If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week “let them keep pressing their buttons.” Ultimately they cannot fool all of the investors, all of the time.

Francois T

Ben Bernanke in a recent Jackson Hole speech dressed this up as a “portfolio balance channel”, but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity.

Once one ask: Cui bono? it becomes obvious who the Fed is working for...

It’s not us, that is for sure.

Tao Jonesing
To be fair to the Fed (and its Wall Street masters), the Fed is no working solely on behalf of the Wall Street.

The lesson that should be learned from the Pecora Commission is that industrial entrepeneurs, true capitalists, will turn on the financial speculators if it becomes clear that the speculators prey not only upon labor but upon capital.

Propping up the secondary bond and equity markets is essential to keeping the dumb (stupid) money dumb (silent).

Maju
“… industrial entrepeneurs, true capitalists, will turn on the financial speculators if it becomes clear that the speculators prey not only upon labor but upon capital”.

It won’t become clear until too late. There’s some degenerate consensus of “predate while you can”, “become bigger and richer at any cost”. This is nothing new (at least since Reagan) but it’s been degenerating more and more and there’s no replacement system, nobody is taking action (such as regulate massively or dislodge the too-big-to-fail applying anti-trust laws) because nobody seems to hold the power anymore.

Presidents are just powerless products, even the Fed is weak. Such action would need a political consensus but this is forged nowadays not by “statesmen”, which don’t seem to exist anymore, but the media. And the media is owned by the speculators, the too big-to-fail.

This is what you get when you let “market” rule society instead of using some market as tool for society’s needs.

The only ones benefiting to some extent of this are those states that have some sort of “old fashioned” protected (regulated, state intervened with quality planning) economy like China, Singapore, Sweden…

Brian
If wisdom were common…

I worry that worrying over who fixes what isn’t what we should bellyache about. Yes, there’s horror in this crash. Yes, we’re timid with the culprits. Yes, thumbscrews ache. It seems 1,000 Feds might be helpless or wrong. That’s becoming tiresome.

What are we? How do we slog ahead? Months and months go by, you know. Unless strong narrative stretches these old numbers, we have no future.

Yo! Stop culling me. You see where I’m going. Bitching isn’t leading. Better effort will affect us all. More politely: Every tiny bit of advice makes tomorrow. It’s time for that.

Tao Jonesing
You want advice?

Things are going to get a whole lot worse. Then they will get better gradually.

I’d argue that criticism is much more important right now because people still do not properly understand what the problem is. Seriously, you have people who believe that the CRA caused all this, in spite of the fact that household writedowns in the aggregate are around $150B in the aggregate since peak credit, while financial debt (e.g., to buy derivatives) is around $1.5T.

We shouldn’t be jumping to solution space until we understand what the problem is.

Brian
“We shouldn’t be jumping to solution space until…”

Yes yes yes. That’s true.

Tao Jonesing
“As my colleague, Dylan Grice, said last week ‘let them keep pressing their buttons.’ Ultimately they cannot fool all of the investors, all of the time.”

Nobody is fooled. We’re all just betting on whether the buttons they are pressing will continue to work. That’s life in the casino.

purple
If things get worse again they will get much worse, because global geopolitics will become unglued. We are very close to the precipice now, much closer than anyone in power will say out loud. Michael Pettis, much clued into the international diplomatic front, has been sounding the alarm bells.

Just look how fast the China-Japan naval dispute blew up, from a rather small incident.

Unfortunately, Faber sounds all too reasonable we he says we are all doomed.

john bougearel
“The notion that the equity market predicts anything has always struck me as ludicrous.”

No, Albert, the just grins and says in Alfred E Newman fashion, “What, me worry” and leaves the worrying to others. It’s capacity to ignore (filter out) bad news, whether coincident or leading is under-appreciated by many mkt participants. That is why, as it rolls merrily along, it is so shocked and reactive when a bomb is dropped on its “What me worry” attitude. But it takes a shitload of contradictory evidence (bombs) for the mkt to implode, and by that time, it will have overestimated the strength of the economic cycle, be it anemic or robust….

[Sep 14, 2010] How Ideological Subversion of the Retail Investor Enables Financial Fraud The Underground Investor

Banksters ripped off 401K investors not alone but with the ample help of government and brokerage firms. The whole 401K program was a scam to replace normal "defined benefit" pensions and enrich Wall Street.
Below is a 3-part video series in which I discuss how bankers have used the concept of ideological subversion to brainwash hundreds of millions of retail investors into accepting harmful propaganda that allows them to build their bottom line at the expense of the investors while simultaneously convincing investors to ignore alternate behavior that would be beneficial to their financial welfare. Ex-KGB agent Yuri Bezmenov explained the process of ideological subversion as a four stage process utilized by the Soviet Union to brainwash its citizens during the cold war: (1) Demoralization; (2) Destabilization; (3) Crisis; and (4) Normalization.

I have slightly modified the time frames of the four above stages explained by Bezmenov to fit the model that bankers have cleverly executed against the people over the past several decades. The process of ideological subversion ensures that billions of people are unable to change their behavior and take sensible tactics to defend the welfare of their families despite being presented with an abundance of evidence that challenges and refutes their current harmful belief system.

Stelios Theoharidis:

Although I think that this has been discussed before, it should probably be set as a disclaimer every time we discuss consumer debt deleveraging.

If we broke the debt deleveraging of say the US population down into quintiles I suspect that it would be considerably skewed with most of the deleveraging going on at the top of the heap. I don’t presently have any evidence to back this claim up, but we do know that job losses and unemployment are skewed towards the bottom four quintiles. They have considerably less resources to deleverage with as well as little or no wage growth over the past 20 years.

If that is the case and a significant portion of the population is only servicing their debt payments or defaulting rather than deleveraging it is unlikely that any desire for debt will resume amongst the general population and mostly deleveraging will occur in the top quintile.

Furthermore due to the veritable dirth of returns that most people will have on investments amongst the wage group within the top 20% say 80%-95%. Since they lack of access to the high return investments that come to high net worth individuals. That group is likely to chose paying off high interest credit cards and other debts as an alternative to making investments.

For those that can although most cannot, the incentive appears to be in deleveraging.

Nathanael:

Bankruptcy is technically a form of deleveraging.

Hugh:

The problem with bank regulation/reform remains the same as it ever was. It would expose the banks’ real insolvency. Whether A is not lending or B is not borrowing is irrelevant to this.

[Sep 14, 2010] William White Getting Tough on Banks May Not Hurt Economy « naked capitalism

A less polite way to say this is putting the banks at the top of the priority list might not have been the best decision.

White also does not subscribe to the “better policy responses mean recovery is just around the corner” thesis:

….one crucial fact that emerges from the Reinharts’ work, and that of others. It is that the deep slumps after financial crises all look very much the same. Are we to believe that there was policy error [after the crisis] in every case?

Finally, White contends that more should be done to restructure borrowers’ debts:

….we need to put more effort into debt restructuring, recognizing that half a loaf is always better than no loaf. This applies to household debt, corporate debt and the debt of financial institutions.

White is apparently quite busy in his supposed retirement. but his sensible remarks don’t seen to get much coverage in the US. probably because he’s shown himself not to be terribly taken with received wisdom

Sauron:

“One of White’s astute comments is that weak credit growth may not be due as much to bank reluctance to lend as overextended borrowers getting religion and paying down debt.”

That comments like this are regarded as “astute” and not generally accepted no-brainers drains any optimism I feel about the future.

The elites and their megaphonic minions deliberately, continually, cynically, and successfully get things bassackwards as a manner of policy. Trickle down economics, the idea that there are no jobs because “the economy” is bad and if we fix “the economy” then the jobs will return rather than the reverse. This is just the latest, financial version, of trickle down economics–if only the creditor class had more money, the debtors would be ok. Sigh.

Oh, I just wanted to add that now we are reaping the whirlwind of a generational commitment to supply side economics. We have all been running harder to maintain our increasingly tenuous middle-class lifestyle.

The disaster of supply side economics for the middle-class has been masked by the growth of the dual income caused by women entering the workforce, the growth of credit and debt, and lastly, the slow, fitful return of the extended family living under one roof (generally 20-somethings). Now we have run out of masks and our expectations (as evinced by reduced spending)are being down-graded.

Next up: the intensification of the extended family trend, the end of retirement, and possibly even an “end to childhood”; a return to child labour as the crushed middle class falls from being the “rich poor” (i.e. those who still have the option to downgrade their spending and survive) to the simply poor that live hand-to-mouth.

[Sep 13, 2010] Primary Dealers Prepare To Invest $27 Billion In Fed Money, Levered 30x Over The Next Month, To Buy High Beta Names

zero hedge

Every Third Word:

I will tell you where the retail went with their cash, it's not rocket science but I have not seen this anywhere else...

They took their cash to:

  1. Pay down certain debts
  2. Buy ShitPads
  3. Pay operating expenses.

Consumers are exactly like businesses: They overlever they either place capital or sell assets for liquidity. And the consumer has sold equity to raise liquidity.

Think about it: If the consumer used the equity in their home to pay bills, take vacations, pump up GDP, they still need funding from somewhere even if the homes can't provide it... so they raid 401ks etc....

A certain segment of the consumer is pay check to pay check, more than anyone suspects. And when they are forced to retire by choice or circumstance, they will have two choices since they have NO savings to support their lifestyles nor social security to support their lifestyles: These people either move in with kids -OR- they get in to government housing and the government imputes rent, utilities, etc so we fix the long term cash needs of Social Security cause Uncle Sam takes out the imputed rent, utilities, health care, food etc once you live under "his roof"... Plus with govt health care we can medicate them so they can't understand the next step... Which thanks to A-Cup Burnett's rants, is clearly laid out: Uncle Sam will limit medical expenses in the last year of life to make way for the next round of retiring Boomers cause what is the real RoI of keeping you alive that lasy year before death, or 18 months, or 3 year, or 5 years before death? ... Great endings the Boomers will live: Live in communal housing, smoke dope courtesy of Uncle Sam so you're docile to the end.... Nice job Boomers.

unwashedmass

and by the grace of god and 30x leverage, they will rebuild their balance sheets over the next nine years of no civil unrest, no terrorist attacks, no counterparty defaults and a population looking at the resulting hyperinflation and docilely still buying bonds....

yup. that's gonna happen.

SpeakerFTD:

This is the fundamental problem, imo. The market is so unstable at the moment, that should a true black swan occur, the resulting market violence may rival anything we have ever witnessed in modern times.

In the absence of such an event, the Fed can keep this going for the foreseeable future.

My hope, which I actually think has a delta larger than most might believe, is that when the Fed is finally dragged in front of the Supreme Court next year, they flex their power of judicial review and declare the wholly criminal edifice unconstitutional.

Pez:

If we could some how off-shore The FED to India we may have a chance of recovery. (and save money)

[Sep 13, 2010] What Can Sustain GDP Growth Open Economy Version

August 31, 2010 | Econbrowser

spencer

Simple solution to fix aggregate demand:

(1) Set policy to extract $300 billion/year from the wealthiest 2% (note: start with aggressive enforcement of existing securities laws, with punitive damages and clawbacks; next-best choices will be taxes on stock/bond trades, dividends outside 401k-type plans, capital gains; also reinstate reasonable estate taxes -- wealth should be earned and not too easily inherited). The rich don't spend their marginal dollar as rapidly as the poor, so to boost aggregate demand they are "where the money is". Useful byproduct: this will level the playing field for the middle class.

(2) Import 3 million well-to-do skilled people. Pay them $100,000/year using funds from above, to work on overdue infrastructure projects. These workers will need housing, and this will sponge up the surplus housing and stabilize home prices.

Not perfect, but for a quick fix, this is a decent start...

Wisdom Seeker:

Comparison of historical events are slippery unless the beginning of the period is a part of the picture. Today, in the U.S., we have households under water on their mortgages because they and their neighbors paid too much years ago. We also find that credit card usage is being restricted by lenders but the % of people with delinquent balances is higher than ever.

Our problem is not just unemployment - it is under employment plaster on top of credit problems. What happened in the past is a poor guide today.

The best solution is a carefully designed way to restrict imports which will avoid creating a trade war.

Bill

The key to economic growth is investment. The key to funneling savings into investment is to minimize the size of the commercial banking system. You minimize the size of the banking system by first eliminating IORs.

Then you begin to reverse the errors of the past. I.e., you reinstate REG Q ceilings for the commercial banks & drive the savings held in the CBs to the non-banks. I.e., you reverse the contraction in the Shadow Banking system and do whatever to encourage its growth. You see, the CBs never experienced disintermediation when REG Q ceilings were eliminated, only the thrifts did.

I.e., you match savings with investment. CB's don't loan out savings. They create new money when they loan & invest. The CBs pay for what they already own. You can't take money out of the CB system by giving it to the non-banks. It just results in a transfer in the ownership of those deposits.

And size isn't synonymous with profitiablity. The CB system would be smaller, but it would be more profitable. The entire economy benefits as the supply of loan funds increases, and the cost of loan funds decreases.

If you think these statements are in error, then you can't say you understand money & central banking.

The proof, out of the entire realm of economic debate, exists in only two papers. Read them before ignoring the truth & opening your mouths:

1. The Commercial & Financial Chronicle Thursday, April 6, 1967 �MONETARY POLICY BLUNDER CAUSED HOUSING CRISIS�

2. The commercial & Financial Chronicle, Thursday, June 6, 1968 �REPEAT OF 1966-TYPE CREDIT CRUNCH UNLIKELY DESPITE TIGHT MONEY�
See: Dr. Leland James Pritchard, PhD, Economics, Chicago, 1933, MS, Statistics, Syracuse

By then maybe you can say you know something.

2slugbaits:

Menzie I hope you're right about the possibility of a silver lining in exports, but to be honest relying on error correction models has never given me a warm and fuzzy level of comfort. Yes, I know that's standard practice, but somehow the idea relying on a technique that derives its inspiration from the image of a dog dragging a drunk towards home has always left me a little anxious.

Steve Kopits You're forgetting that without large deficit spending we would have an immediate loss in output at least equal to the size of the deficit. Deficit financing simply smooths out the pain over time. Sometimes I get the impression that you see the deficit as some kind of luxury that we can't afford. The truth is that it's something we cannot afford to not do.

Bryce Why do you refer to government spending during a deep recession as a "burden?" The burden is too much savings and not enough demand for that savings. If it weren't for government spending the burden of excess savings and excess capacity would be a lot worse than it already is. Government spending is only a drag on the private sector if private sector resources are fully employed and government spending crowds out private investment. That's not the case today. In fact, it's just the opposite. Government spending actually crowds in private sector investment, which is a good thing. But there's hope for you yet. Look at me...just because I learned my econ at a freshwater school doesn't mean I'm incapable of learning good macroeconomics.

CoRev What can I say my friend? You never disappoint. Ask yourself what would happen if the government didn't borrow. The government should borrow because no one else wants to. There's too much savings right now and not enough private sector demand. The fact that the government can borrow long term at 2.48% (today's closing price) ought to tell you that people are lining up to buy government debt. And that fact alone answers every one of your questions.

2slugbaits:

The US federal gov't borrowed a cumulative 30% of private nominal GDP for fiscal years '09 and '10, and all we got was 3.5% (vs. long-term avg. 6-7% and 5% since the '90s-'00s) nominal yoy "growth" of private sector GDP and -1.9% avg. annualized growth of private GDP since Q2 '08.

At the current debt-deflationary, slow-motion depression rate of gov't borrowing and spending, the US gov't will have borrowed and spent an equivalent of 100% of today's private nominal GDP after '15-'16 and 100% of total nominal GDP by the end of the decade.

Note that since '00 the cumulative loss of real GDP growth from the long-term 3.3% trend has been ~15-16%, which is roughly where Japan was in the late '90s.

At the trend rate of deceleration of post-'00 trend real GDP, the US real GDP will have lost 30% of growth that otherwise would have occurred at the pre-'00 trend rate, a loss equivalent to that of the 1830s-40s, 1890s, 1929-33 and 1938-39, and that of Japan since '90. Adjusted for US population growth, the cumulative per-capita loss of real GDP growth will be around 40%.

consequently, we can expect an equivalent decline in local and state gov't revenues and cuts to social services, infrastructure, public employees salaries and benefits, and pension payouts and retiree benefits.

An increasing share of local and state gov't entities will file bankruptcy, unincorporate, and default on obligations, disbanding fire and police services, transportation infrastructure, and so on.

Peak Oil, falling net energy, peak Boomer demographic drag effects, and fiscal constraints will exacerbate the debt-deflationary slow-motion depression.

http://www.bea.gov/newsreleases/national/pi/2010/xls/pi0710.xls (See table 1.)

Moreover, private wages now make up just 41-42% of US personal income, whereas rentier income, gov't wages, and personal transfers combined make up 45% of personal income and 110% of private wages. Thus, the US economy has become increasingly dependent upon rentier income, gov't salaries and benefits, and public transfers at the expense of proprietors and private workers.

Yet, what we hear most is how much gov't is doing or not doing to "stimulate the economy", or how much this politician or another is proposing to borrow and spend to "get the economy going again".

How much more debt and more gov't spending will it take?

And how much more public and private debt is required as a share of income and GDP to grow gov't wages, benefits, transfers, and public and private interest to the rentier caste?

Are we really that daft?

Keynesianism is an artifact of the reflationary/inflationary peak Oil Age era of growth made possible by abundant supplies of cheap oil and other fossil fuels. The era of cheap oil, and thus that of economic (and uneconomic) growth, is over.

Prepare for the "Greatest Depression" as part of the Great Regression back to Olduvai, friends.

[Sep 10, 2010] Tom Ferguson The Invisible Hand Is Waving Goodbye

Great interview !
September 10, 2010 | naked capitalism

aet:

You ought to have raised taxes in the good times, not cut them…and you ought not to cut spending ion the bads times, but increase it.

Tax increases and austerity only when the economy is booming: never when the econ0omy is tanked, as it is now.

Traderjoe has it 180 degrees wrong, on its head. Now is precisely the time to pile on the debt: and pay it off in the boom…what did Bush do when times were yet good? Slashed taxes….what a bonehead!

Chris:

The debt card is being played right now because the elites want to slash social spending and do away with FDR. That’s what we’re seeing. This is classic disaster capitalism.

How come raising taxes on the rich are off the table? Billionaires should be paying 70 percent on their income. If they wanna flee for another country, we pursue them.

As along as neo-liberal economists are in charge, the right thing ain’t gonna happen.

NOTaREALmerican:

The only thing the Red and Blue Team agree on is when their own sociopaths are the winners that’s good, and when the other Team’s sociopaths win that’s bad.

Doug Terpstra:

It’s inexcusable to see such sturdy and elegant buildings fall into dereliction when people need shelter. It’s time for a new homestead act—grants and equity for sweat.

Ferguson is right about Obama’s perverse and utterly ineffectual crisis response, saying “They should’ve…done what they did in the New Deal. You should’ve seen cranes and construction stuff everywhere…”

It’s a good point you hear often, but beyond the economists’ sound-bites, it’s also critical to note that the New Deal exemplar, while experimental, was far from a hurry-up and make-work frenzy. It first included the intelligent mobilization of engineers and scientists, urban planners, landscape architects, architects, ecologists, educators, artists, etc. in commissions and study groups, to think, study, and design worthy projects as wealth-creating investments and resource development. This was followed by well-organized labor to yield major durable works that we still use and enjoy today.

The same can be done NOW for the next-generation green economy—sustainable energy and agriculture, and new urbanism, but it’s important to approach good government as an enterprise with a mission, to marshal and organize talent, and plan these as strategic investments, just as private syndicates do, but in this case with the larger public as shareholders.

Alas, Obama and his old-school cronies clearly don’t have the imagination or vision to even begin such an endeavor. Their only sustained employment prospect seems to be endless war.

[Sep 09, 2010] Guest Post Strip Mining the U.S. Economy By Jack Sparrow

August 10, 2010 | naked capitalism

By Jack Sparrow, who writes at Mercenary Trader

The employment picture constitutes yet another headwind and a significant one to the already-faltering U.S. recovery. It will undermine future spending, company earnings and profitability. Indeed, the poorer the employment picture, the greater the likelihood that households will become more cautious and that the corporate sector will further increase its self-insurance

Mohamed El-Erian, Why the Payrolls Report Matters

Strip mining is a nasty, dirty business.

Basically you rip up the land, haul away tons of rock, and then use noxious chemicals to separate out a small quantity of targeted material. What’s left behind resembles a vast denuded moonscape, or perhaps a giant open wound.

Most rich-world inhabitants don’ give a second thought to this process, for a very simple reason: we don’t have to see it. There is no reason for the man in the street to feel concern, except when resource prices rise or environmental tragedy unfolds.

The focus of this missive is not environmental, though, but economic. Because now it is the U.S. economy that is being ’strip mined.’

In the same way that mining companies will descend on a region with heavy equipment and chemicals, brutalizing the land until nothing is left, corporations large and small are doing the same thing with the goal of extracting profits rather than minerals, to the long term cost of the U.S. economy itself.

A recent Economist chart tells the story:

“Corporate profits are back within a whisker of the all-time highs achieved before the downturn in late 2008″ The Economist writes. “American profits are already back to 11% of GDP. Corporate America is reaping the rewards from cutting costs, especially in capital investment and labour, through an unpleasant mix of redundancies, reduced hours and lower pay. The great squeeze cannot go on forever, of course, but it shows no sign of slackening.”

It is this corporate “strip mining” process, along with a failure of stimulus funds to actually stimulate, that is responsible for the great top down / bottom up disconnect we have pounded the table on repeatedly (see ìSunny With a Chance of Earthquakesî as recent example).

The logic chain goes something like this:

Wall Street then cheers the numbers as three self-reinforcing trends are sustained:

In the medium term, the “strip mining” model is a recipe for continued strength in equities. It is very hard to resist a combination of robust profits and cheaply available credit (for the right borrowers) in a zero interest rate environment.

In the longer term, though, this cycle is yet another example of glaring short-termism on Wall Street, of precisely the sort that portends ultimate disaster for the U.S. economy (and for slow-footed investors who fail to cash out before the guillotine drops).

The trouble with the whole strip mining model, after all, is that the practice is not sustainable. Once you have taken what can be taken, there is nothing to be done but abandon the area and leave the land for dead – perhaps to start up another mine elsewhere.

Similarly, the notion that corporations can strip mineî for profit indefinitely, even as they hoard rainy day cash in the same manner as the banks, is not remotely feasible.

And for those unaware of what’s happening, by the way, here is a little light reading:

Stripped of High Hopes

Stripped of High Hopes

Last but not least: Given that the working metaphor here is “strip mining,” at least one bad pun cannot be resisted. Consider this doozy of an anecdote:

Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs Group Inc. Her bachelorís degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered.

These days, Howard, 26, makes her living in a way that doesn’t require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Florida. “I didn’t know what else to do,î she says. “Ií’e got a worthless degree. It’s like I didn’t attend school at all.”

- Bloomberg, Stripper Regrets Art Degree Profitable for Goldman

How many Americans now feel like Carrianne Howard, one wonders, having spent anywhere from $30,000 to $300,000 on a higher education certificate, its value now reduced to little more than something fancy to hang on the wall.

What should be done about this? Should U.S. companies somehow be forced to give up their “strip mining” ways and start hiring again? No. Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.

Companies practicing slash and burn tactics on their own workforce – engaging in the euphemistic process of “right sizing” (rather than down sizing) as they prepare for an uncertain and bleak future – are at least attempting to do right by their shareholders.

What would be nice, really – although it will probably never happen – would be recognition from on high that current economic policies are an utter failure, and have not met their aims in the slightest (except to the degree such aims were secretly focused on bailing out the connected).

The diagnosis is not exceptionally complicated. Attempts to reinvigorate the U.S. economy have failed because the torrent of cheap money provided by the Federal Reserve has consistently flowed to privileged channels, rather than into the parched cracks and crevices that need it most. A simple proximity formula applies: Those who drink most deeply from the oasis are those most closely connected to the Fed.

Meanwhile, consumers and small businesses, which represent 70% of US GDP and roughly half of all U.S. economic activity respectively, have been left to die in the desert.

Ironic, that. As China makes strides to become more like the United States, the United States is at the same time doing its seeming best to become more like ChinaÖ an economically lopsided hybrid with no true middle class, just pockets of privilege surrounded by vast swathes of increasingly resentful impoverishment.

Killing the Goose

There is at least one positive trend to come out of all this. As the average American finds his retirement prospects diminished, his bank account drained, and his food and energy bills increased, he (or she) is also in position to hit upon an important truth: You don’t need to gorge on “stuff” in order to be happy.

Consider the following, via the NYT:

Amid weak job and housing markets, consumers are saving more and spending less than they have in decades, and industry professionals expect that trend to continue. Consumers saved 6.4 percent of their after-tax income in June, according to a new government report. Before the recession, the rate was 1 to 2 percent for many years. In June, consumer spending and personal incomes were essentially flat compared with May, suggesting that the American economy, as dependent as it is on shoppers opening their wallets and purses, isn’t likely to rebound anytime soon.

On the bright side, the practices that consumers have adopted in response to the economic crisis ultimately could, as a raft of new research suggests, make them happier. New studies of consumption and happiness show, for instance, that people are happier when they spend money on experiences instead of material objects, when they relish what they plan to buy long before they buy it, and when they stop trying to outdo the Joneses.

- New York Times, But Will it Make You Happy?

What does that sound like to you? To yours truly, it sounds like America’s infamously gluttonous, reliably idiotic “shop til you drop” consumer culture, in which bigger is always better and more is better still, is at long last on the ropes.

The only way to kill a truly strong addiction is through forced withdrawal. America’s addiction to sport utility vehicles (SUVs), for example, was likely broken only by the forced withdrawal of punitively high gas prices for an extended period of time. And now we (the collective American”ìwe”) are learning, again through forced withdrawal born of harsh economic circumstance, that “Hey! I don’t really need all that crap bought on credit after all!”

This withdrawal – assuming we doní’ revert to our gluttonous, spendthrift, zero down ways at the first opportunity – is good news for the long run psychological and emotional health of the average American family. But it is very bad news for an economy 70% dependent on consumer spending, and worse news still for the ravenous corporate marketing machines aimed at getting Americans to spend, spend, spend, rather than save and live simply.

To wit: By downsizing Joe and Jane Sixpack, wedging them into a hole so tight they have been forced to give up their endless bought-on-credit fix, Wall Street may well have killed the shopaholic goose that laid the golden eggs.

This could ultimately be a good thing, but the painful macroeconomic reality of it means we must go through an adjustment period in which consumer spending becomes a significantly smaller component of the overall U.S. GDP mix (vs historic 70% levels), and that adjustment is going to HURT. How much and how soon it will hurt, we shall see.

Eat, Drink and Be Merry!

The trading implications for all the above can perhaps be summed up with the old exhortation: ìEat, drink and be merry, for tomorrow we die.î

In other words, Wall Street will have the means to ìeat, drink and be merryî as long as public companies are able to effectively continue their ìstrip miningî process against the backdrop of a fiscally cooperative ZIRP environment — and as long as macroeconomic headwinds donít become too strong.

But when the waves of turmoil return – most likely in the form of renewed sovereign debt fears, or perhaps keying off some modest geopolitical flare-up or global growth pause – then all bets are off.

The current economic path is not in the least sustainable, and when the U.S. economy mine has been well and truly “stripped,” the next phase of massively painful adjustment will begin.

JS

eightnine2718281828mu5:

Now that the strip miners have hauled off the US worker’s credit-worthiness, the only thing left is to strip their retirement accounts and Social Security/Medicare benefits.

Thank God our working class isn’t as sensitive to uncertainty and risk as their CEO betters.

Anonymous Jones says: August 10, 2010 at 4:32 pm “the only thing left is to strip their retirement accounts and Social Security/Medicare benefits”

…and the pied pipers in the media are leading the mostly shorn sheep right to the trough.

Mmmmm, like some tea with the feces they’re serving you?

[Won't matter much, the blunt instrument to the back of the head is coming soon enough...try to learn to enjoy eating the sh*t while you're still around.]

[Ha. It's a trick to convince someone to do something against his self-interest, but to make him enraged that he's not able to f*ck himself fast enough, well that's just genius.]

Francois T says: August 10, 2010 at 4:05 pm Most rich-world inhabitants don’t give a second thought to this process, for a very simple reason – we don’t have to see it. There is no reason for the man in the street to feel concern

Until there is a toxic spill engulfing the streets. Wonder what form it’ll take; 5 million March on Washington? Right wing militias? Booting every incumbent out of office at the polls?

Jim says: August 10, 2010 at 4:09 pm Expect to see increased use of the term “state capitalism” in future. China is basically there and Russia has a more thugist version. The US seems to be converging on a similar system from the right instead of the left (corporations taking over the government instead of socialism allowing some free enterprise). IMO we are one election away from a single party government of concentrated wealth. Maybe that is the way it is supposed to be based on it’s prevalence (my local city and county government is completely controlled by land owners and developers).

Jim

giggity says: August 10, 2010 at 4:16 pm Jim, I agree. This seems to be the case with most localities. Local politics are decided by the land owners, developers, and a smattering of “big” business types, even in the smallest of towns.

The 2012 election will see the electorate fall for the Republican idiocy once again (not that I’m saying the Democrats are doing a good job, but we know it’ll be time for some hardcore, proper fascism once the Republicans are in full power again), and a new chapter in American history will begin. The new struggle. I just hope we have enough folks with their heads on straight to help fight it.

NOTaREALmerican says: August 10, 2010 at 5:58 pm It’s been this way for a long time.

Perhaps there is no other system possible. The worship of wealth is natural.

I live in limousine liberal CaLi college town and it’s very difficult to hold off the developers. The assumption amongst the liberal peasantry – that the council members are “looking out for their interests” – is very hard to overcome. Especially if the council members are owned by the developers AND know which limousine-liberal songs to sing to the dumbass peasants (sustainable development, organic holistic community based growth, transit friendly, solar, etc…) But, in the end, it’s all about who pays; and developers – obviously – purchase politicians to get government to pay.

The wealthy purchase sociopathic politicians to sing bullshit to the easily manipulated dumbasses. It doesn’t matter what ideology it is; different clowns same circus.

liberal says: August 10, 2010 at 10:35 pm Especially if the council members are owned by the developers …

Is there any locality in the US where the council members are not owned by the developers?

attempter says: August 10, 2010 at 4:19 pm I’ve often said that to corporatism and “libertarianism”, society, the people, just like the earth, are seen as literally nothing but a resource mine and a waste dump.

They’ve already proclaimed themselves outlaws as a matter of ideology and proved it with their actions; I’d give them the full outlawry they must really want.

As for those bogus “profits”, where it’s not straight accounting fraud (all bank “profits”, for example) it’s the fraudulent return on looting public money (the Bailout, Pentagon budgets, and all other corporate welfare) or on cannibalization – cutting jobs, “consolidation”, spin-offs or M&A money shuffles, tax scams…

I don’t know how many years it’s been since I saw a corporation of any significant size report an actual legitimate profit, and of course the looting regime has only become more brazenly kleptocratic since the intentionally triggered crash. What we’ve seen since 2008 has been nothing but disaster capitalism, disaster profiteering, disaster looting, disaster rioting.

It’s no longer America but Bailout America. If we want the former back we must destroy the latter.

Psychoanalystus says: August 10, 2010 at 4:28 pm Loved the 4 Davidowitz interviews above. They’re guaranteed to uplift your soul and brighten up your day…

Psychoanalystus

abelenkpe says: August 10, 2010 at 4:40 pm Carianne is living in the wrong part of the country to make her education worthwhile. If she honestly has skills as a video game designer there are places hiring in CA. Why would one get a degree in design and then work in HR? My sister, D student extraordinaire works in HR.

Friedman's Ghost says: August 10, 2010 at 4:42 pm Problems are many and the solutions are nonexistent.

We have a massive tide of debt and consumers are swimming against it with no way to pay it back.

Boomers are heading into retirement scared half to death se they did not save enough and are praying anyone under 50 does not notice and will keep paying into a system from which they will never draw out.

There is no source of jobs. Period.

We are still way on the wrong side of the global wage arbitrage.

A secular shift in the attitudes of consumers towards housing and risk taking is underway.

The Fed is powerless to change attitudes.

deeringothamnus says: August 10, 2010 at 4:44 pm The success of the ruling class is based upon the fact that they are more unified by the ruled. In the first place, small businesses, in cannot compete with the free money shoveled to large corporations by investors. It stinks that companies like MacDonalds can sell debt at ridiculously low rates. In the second place, too many small businesses are also at least as crooked as the larger ones, making them an investment risk. The legal framework wherein this all exists also makes contracts expensive or impossible to enforce, allows anyone to sue anyone else for any or no reason. Only those with the most money win in this scenario, stacking the deck against everyone without a few spare million.

Tom Hickey says: August 10, 2010 at 4:58 pm According to Moody’s the upper 5% consumers 37.5 % and the lower 80% consumers 39% of GDP. The top quintile consumes 60%. The middle class is expendable and soon to be history as the upper tier feeds off global financialization and the profits of the multi-nationals. The great leveling is taking place as US workers get crammed down in the direction of Chinese workers.

Geoff-UK says: August 10, 2010 at 5:00 pm Amateur hour around here with those extra characters. Not worth the headache–removing you from my RSS feeder. Thanks for the free info over last 3 months…

Jim Haygood says: August 10, 2010 at 5:31 pm The real strip-mining is the 4% of GDP excess spent on maintaining the global US military empire.

This steady blood-suck of wasted expense and malinvestment has already hollowed out the US economy. Now it will begin eroding living standards to Third World levels.

No empire has ever survived, for exactly this reason — it doesn’t pay for itself. But these fundamental, macro-level misallocations of resources attract little attention from economists. We’ll be needing fewer of those value-subtracting professionals in our blighted future, too.

Jim Haygood says: August 10, 2010 at 5:31 pm The real strip-mining is the 4% of GDP excess spent on maintaining the global US military empire.

This steady blood-suck of wasted expense and malinvestment has already hollowed out the US economy. Now it will begin eroding living standards to Third World levels.

No empire has ever survived, for exactly this reason — it doesn’t pay for itself. But these fundamental, macro-level misallocations of resources attract little attention from economists. We’ll be needing fewer of those value-subtracting professionals in our blighted future, too.

PQS says: August 10, 2010 at 7:26 pm Hippie.

Just kidding. But I did think of Gates’ comments today about the “professional left” not being satisfied until they have Canadian healthcare and have dismantled the Pentagon.

I’d go for just the healthcare part, if I could get it. I know the Pentagon is full of white-collar welfare.

curlydan says: August 10, 2010 at 5:52 pm “Companies practicing slash and burn tactics on their own workforce [are] engaging in the euphemistic process of right sizing (rather than down sizing) as they prepare for an uncertain and bleak future [and] are at least attempting to do right by their shareholders”

Here is the crux of the problem with the corporate structure. Corporations think they are _required_ to work for the shareholders and that work requires them to increase EPS now. Each company has a short term interest to squeeze, but this will eventually backfire when the squeeze starts cutting topline revenue faster than they can squeeze the bottom. A move toward financials among companies had been prolonging the ability to increase EPS, but if the consumer is choking on too much credit, there is less and less ability to move into increased finance.

May says: August 10, 2010 at 6:47 pm US is not trying to become like China (which reduced poverty);but,like India (where poverty is growing). India is also better analogy with its crumbling infrastructure, poor ed standards, and tiny elite getting jobs.

liberal says: August 10, 2010 at 10:37 pm Good point. Some people blither on about India as developing, but their female literacy rate is atrocious. China’s isn’t.

The humanity says: August 10, 2010 at 7:30 pm History, while not repeating itself, often rhymes.

In the closing days of the Roman Republic, internecine class warfare destroyed the Roman Citizen Farmer, and the depravity of the Roman Empire ensued, with the Aristocracy living lavish lifestyles supported by countless slaves. In the end, there weren’t enough stakeholders left to maintain Empire, and it melted away.

The Aristocracy is a nihilistic parasite, first bleeding, then savaging, and finally killing its host.

aet says: August 10, 2010 at 8:45 pm About those slaves in Rome….since the time of Augustus onwards, the Romans found it necessary to l;imit the ability for an owner to manumit, or free, his slaves, to a number of not more than 100 per year.

Slaves were property: and one was taxed not on income, but on property.

That they felt the necessity of passing a Law to restrain people from freeing their slaves may go some way to clarifying that slavery was not all “cakes & ale” for their owners. Apparently, many Romans wanted to have fewer slaves.

aet says: August 10, 2010 at 8:52 pm Oh, and the Roman empire did not fall until the 13th century. The Empire persisted for about 1,200 YEARS from the extinction of the Republic, which itself lasted about nene centuries.

I guess the “American Empire”…although I would not call it that – might not have the same kind of “staying power”. It is a youthful place, after all: and I think that it’s just starting. America is not Rome. Any comparison is unwarranted, and vanishes upon detailed inspection. The two societies and the state of human knowledge aare simply too different for a comparison to be useful on any substantive way.

May says: August 10, 2010 at 9:15 pm Do read the article about generational mismatch posted earlier as a link on this site.

skippy says: August 11, 2010 at 3:31 am Rome had the upper hand in almost every aspect, this is not true today, time lines have condensed.

Jim Haywood says: August 10, 2010 at 7:56 pm Occasionally the host pre-emptively intervenes. But in our case, 150 years of public education has done its job all too well, in incalculating a deracinated, dependent complacency.

Were the Founding Fathers alive today, they would be executed as terrorists.

aet says: August 10, 2010 at 8:54 pm I disagree. America is not Rome. Not even close.

Moe Green says: August 10, 2010 at 10:50 pm Yeah, the romans were more civilized……

Ed Straker says: August 11, 2010 at 2:22 pm “150 years of public education has done its job all too well”

I wish I could engage in simplistic scapegoating. If only the answers were so simple.

anon48 says: August 10, 2010 at 8:00 pm The strip mining analogy was really clever. Reading through the first half of the article, the powerful picture that clearly emerges is that of an evil soul-less scheming corporate elite, permanently devastating any of the surrounding human landscape with which it comes in contact.

But then half way through the article Mr. Sparrow suddenly and unexpectedly changes direction 180 degrees:

“What should be done about this? Should U.S. companies somehow be forced to give up their “strip mining” ways and start hiring again? No. Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.”

“Companies practicing slash and burn tactics on their own workforce – engaging in the euphemistic process of “right sizing” (rather than downsizing) as they prepare for an uncertain and bleak future – are at least attempting to do right by their shareholders.”

He seems to imply that companies are actually conducting themselves in a reasonable fashion. So where does the author diagnose the real problems- first with failed government policies. Policies that enable a population addicted to “…America’s infamously gluttonous, reliably idiotic “shop till you drop” consumer culture, in which bigger is always better and more is better still, is at long last on the ropes.”

Further, he foresees the need for the addicted masses to experience a form of economic withdrawal… and this seems to be where he sees the true underlying chronic problem. The withdrawal is a necessity “…we must go through an adjustment period in which consumer spending becomes a significantly smaller component of the overall U.S. GDP mix…”

In this context, the strip miners are relegated to the role of being a symptom of the problem rather than the underlying cause. They too are not in control of their own destiny, but rather are just along for the ride… for as long as it lasts.

I thought the strip mining metaphor was attention grabbing – but distracted from the points he was really trying to make, and with which I totally agreed

Jack Sparrow says: August 10, 2010 at 9:35 pm Thanks for the kind words… re, the 180 on public companies, I agree that was a bit of a pirouette, but a necessary one given the complexity of the situation.

Also, re, public companies (the strip miners) being another symptom rather than the source: I had not articulated that explicitly, but on thinking about it you are right, that is part of the broad thesis. We arrived here through a whole host of bad decisions and bad policies, and now many of our actions for good and ill are forced.

i on the ball patriot says: August 10, 2010 at 10:43 pm When you identify a viper as a lamb you aid and abet the viper.

When you identify intentional genocide of the global middle class and underclass by gangster ruling elite propaganda as inept strip mining you aid and abet the gangster ruling elite.

Deception is the strongest political force on the planet.

Canute says: August 10, 2010 at 8:06 pm “What should be done about this? Should U.S. companies somehow be forced to give up their “strip mining” ways and start hiring again? No. Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.”

First, free + market = married + bachelor. Look up the definitions.

Second, “another” heavy handed solution? Maybe I missed some heavy handedness somewhere, but all I’ve seen out of the federal government is grovelling capitulation to the financial industry.

Here’s an idea: link government aid, subsidy, and tax breaks by some equation to non-management payroll. The operative question should be, “How much are you pumping into the economy through wages?”

aet says: August 10, 2010 at 8:55 pm Bingo!

Bail out the poor, not the wealthy.

Doug Terpstra says: August 10, 2010 at 10:39 pm Indeed. I choked on the same point. “Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.”

Remind me again, when have we had anything but a massively RIGGED market? And when was it that we ever imposed anything heavy-handed, or even limp-wristed for that matter, on these masters of the universe? The idea is purely academic. They own all branches of the government, including regulators and media, and such a kleptocracy will never impose heavy-handed solutions on itself.

This unsustainable Ponzi farce must choke on its own excess. I think that’s the better point of the article, not that we can do anything at all but be well away when the Kraken falls.

anonymous says: August 10, 2010 at 8:28 pm I blame Trig.

This in an excellent evisceration of the political class. There are only two points missing. Point one: Democrats, not Republicans, won the WH and majority control of both the Senate and House. Point two: cogent critiques of the failures of the political class, such as this, avoid any mention of which political party has been in power for the last two years.

I read eight years worth of critiques of Bush economic policies from the likes of Krugman, Brad de Long, Michelle Cottle, John Judis, Matt Yglesias et al, who never failed to point out the connections between the banksters and the Republican party. Made sense to me, because Bush and his allies in Congress were looting the public purse.

You’d think that 9.5 percent unemployment might merit a serious, scathing critique of the Dem politicians, the Dem hacks, and all Krugman’s pals who sit on the various economic councils run by I Got My Home Loan From the Bank of Rezko.

Instead, we get oceans of ink devoted to “the racist Tea-Party.”

Given the porky reality of the Dem political class, it would have been infinitely preferable to have a Republican in the Oval office, and equal balance in both the House and Senate. HCR delivered millions of new customers to the insurance companies and consumed an immense amount of energy, time, and political capital.

No matter how bad the Bush economic policies were, consumer demand, consumer confidence, and employment numbers were considerably better.

The economic failures of this Dem administration and this Dem Congress belong as much to De Long and Krugman as they do to Obama and Pelosi. Krugman et al, theoretically at least, were supposed to be the bright stars in the room. Krugman did, to his credit, try to criticize Obama policies only to find himself accused of disloyalty and worse.

Unfounded accusations of “racist” are destroying our ability to engage in meaningful discourse about the ineptitude of an individual who demonstrated the most appalling judgment in the administration of his personal finances, while maintaining close political connections with a class of politicians in Chicago who have been linked with corruption at the highest levels.

But we won’t be reading much about that, because the journOlist enforcers, like Ackerman and Tomasky are quite willing to brand an journalistic critic of this administration as a bigot.

Organizing and unionizing are the only options workers have left, short of working in a strip club. The Dem political class has abandoned the unemployed entirely and those who want real change are branded as racists.

It’s an absolute disgrace.

liberal says: August 10, 2010 at 10:42 pm No matter how bad the Bush economic policies were, consumer demand, consumer confidence, and employment numbers were considerably better.

Your’e kidding, right? The bubble expanded on Bush’s watch, and burst only at the end. So of course those numbers looked better on his watch.

That being said, it’s true that the two parties are least dissimilar on the question of corporate power. But if you haven’t noticed, the Republican Party is batshit crazy.

anonymous says: August 11, 2010 at 1:32 am The bubble expanded through large parts of Clinton’s presidency. Consumer confidence tanked when I Never Once Heard Rev. Wright Accuse the US Government of Creating Aids slither into the Oval Office.

Like it or not, throughout eight years of highly questionable policies by Bush, unemployment rates were nowhere near where they are now. Keeping the bubble from popping is what Bill Ayers is Just Some Guy in My Neighborhood was supposed to prevent. I think you’re having a little trouble wrapping your mind around the concept of “dishonest” and “Harvard Law.”

Think Al Gonzales and John Hindraker. That may help.

Americans want jobs and real change. They got neither from Dems. The jobless are victims of De Long, Pelosi, Krugman, and Hope and Change. Whatever Bush did, demand, consumer confidence and employment didn’t collapse during his two-terms.

Hope and Change had a green light and a mandate to do whatever it takes to keep things from crashing. His own analysts put unemployment at 8%, without the porky handout to the banksters. The money got spent and real unemployment is at 10% or higher.

He’s clueless, you seem surprised, and rather than accept the fact, you’re blaming a guy who is starting to appear competent, at least compared to the hoop-shooting Dufus, a rapidly diminishing number of Americans would most like to have a beer with.

You need help.

skippy says: August 11, 2010 at 3:35 am Yeah….cut off your limbs one at a time…till you have no means to eviscerate further…sounds like a plan to me.

anonymous says: August 11, 2010 at 5:24 am Republicans did a better job with the economy under Bush than Hope and Change has done with control of all three branches, a mandate for change, and Krugman and De Long giving him all the help they could.

I don’t know how frequently you turn to Bank of Thug when you just can’t say no to that must-have new home, but at our house we try to live within our means.

I spent eight years waiting for and writing about the need for an end to the sort of the porky politics we saw from Bush, and this is what we get pork and high unemployment?

I’m longing for the days of simple, Republican corruption and end to the Dem ‘good times.’

This administration has accomplished the impossible: made Bush appear like a fairly competent president.

Take a bow, Dems!

skippy says: August 11, 2010 at 6:40 am Political parties have nothing to do with this, as they are secondary, your anguish, lament should be directed at the the ruling class.

May says: August 10, 2010 at 9:26 pm Blame campaign finance. GOP will come and be worse and do again that “looting the public purse” only with even less money in the chest. On top of we will get Religious Right policies pushed on the nation. Bush was better in numbers because the process started under him had just begun to get under way. If he was here today, he would not see better numbers.

Do keep this in mind also: http://www.examiner.com/p-383070~New_Book___The_Big_Lie__How_Our_Government_Hoodwinked_the_Public__Emptied_the_S_S__Trust_Fund__and_Caused_The_Great_Economic_Collapse___Released_Today.html New Book, ‘The Big Lie: How Our Government Hoodwinked the Public, Emptied the S.S. Trust Fund, and Caused The Great Economic Collapse,’ Released Today

See also: http://www.thebiglie.net/

jumping says: August 10, 2010 at 9:46 pm “Corporate America is reaping the rewards from cutting costs, especially in capital investment and labour, through an unpleasant mix of redundancies, reduced hours and lower pay. The great squeeze cannot go on forever, of course, but it shows no sign of slackening.”

I got a great idea to improve profits for corporations. Lets take HP for instance. Shouldn’t the board go over to China or India and pick up some executives that will do the same executive job for less than $30-$50million a year? I bet the board could find some well qualified chinese which would do a much better job at cost cutting and outsourcing! Not to mention, who could do the same job for less than a couple million a year, compared to the inflated $50million pay packages and severance packages. Much better for the shareholders don’t ya think!

Hugh says: August 10, 2010 at 10:21 pm Strip mining, cannibalizing, these are just looting by other names. The question we should be asking ourselves is how long can all of these variants of looting continue before there is another collapse? This is beginning to look like an end stage process to me. But the question remains how long can it last. A year? I have difficulty seeing how it could last longer than this.

psychohistorian says: August 10, 2010 at 11:32 pm I have given up predicting how long the criminality can go on after 40+ years of watching it. Looking at the scale of the US economy in relation to the rest of the world, adding in that we control the money supply that most commodities are traded in and can/have expanded this monetary based at will, what sort of problem can’t be bought off with a few more trillion dollars?

Extend and pretend works if you are not on the gold standard and have all the nukes……

Doug Terpstra says: August 10, 2010 at 10:56 pm I’m with Hugh. It’s astonishing to behold the continued kiting of something so grossly unsustainable, like witnessing the (apparent) suspension of gravity.

Sparrow’s Yahoo link above is yet another article confirming that it can’t last much longer. Regarding corporations sitting on cash reserves and profits at pre-08 levels:

“It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.”

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.”

“…A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?”

“…Wall Street? It’s a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?”

Thus fraud itself must be leveraged to keep the confidence game going.

http://finance.yahoo.com/banking-budgeting/article/110218/the-biggest-lie-about-us-%20%20companies?mod=bb-budgeting&sec=topStories&pos=3&asset=&ccode=

drb48 says: August 10, 2010 at 11:05 pm I wrote the following earlier today on HuffPo in a slightly different context but it’s equally applicable here:

The capitalists are reminiscent of the aliens from “Independence Day”. They move in, drain an area of all resources and life and move on. Unfortunately for them, unlike the aliens, they lack the capacity for interstellar travel. Once they’ve destroyed the planet, they’ve nowhere else to go.

Sundog says: August 11, 2010 at 1:29 am Sometime today it occurred to me that the “George Washington” byline seems to have become scarce around here lately. I don’t miss it.

I grew up on the outskirts of the suburbs in a subdivision thrown on what remained after a valley was strip mined. And I’m old enough to have been through enough ups and downs that employers’ retrenching and ratcheting up productivity in the midst of this Mess is hardly a surprise.

If I had to summarize this post it would be something like “OMG the rich get richer OMG ordinary folks get squeezed OMG Americans don’t really want that stuff Walmart sells in such vast quantities day in and day out.”

And the tag: “On the bright side, the practices that consumers have adopted in response to the economic crisis ultimately could, as a raft of new research suggests, make them happier.” I submit that those practices are revealed less in temporary turns in consumption patterns and more clearly in local opposition across the country to the exercise of First Amendment rights.

http://www.fpif.org/blog/no_mosque_in_my_backyard_911_Islam

The conclusion of the post is correct; the US is setting itself up for big problems in the coming decade. IMHO little of this has to do with non-financial corporate retrenching; quite a bit has to do with refusing to recognize bad debt and propping up TBTFs while disadvantaging smaller institutions more likely to lend to SMEs; most has to do with failure of governance both in the private sector (lack of accountability and exploding remuneration) and public (jerrymandering; 70:1 voter representation in the Senate between most/least populous states; hell, just DC in general).

skippy says: August 11, 2010 at 3:45 am CONsumers are the buy]product of advertising…nuff said.

cheale says: August 11, 2010 at 6:03 am It won’t go on for much longer. People have stopped consuming since they’ve got no money and the easy credit has gone, and this means the consumer and finance driven economy is finished and will drag the TBTF and other companies down with the rest of us. We’re on schedule for another depression (in the next ten years).

doc says: August 11, 2010 at 7:57 am Aren’t the profits shown in the graph a bit misleading as many of the banks/financials are holding all the CDS’s and mortgages off the books? Not denying they made money off of us , the public, just saying maybe they aren’t as healthy as one might thing even though the top guys are pulling in the bucks.

Lil'D says: August 11, 2010 at 9:20 am I think “the corporations” know it’s unsustainable. They are not all acting in concert – it is in any ones best interest to strip-mine first and hardest even though that is not in the best interests of us as a whole. Yet another variation of the tragedy of the commons.

farmer says: August 11, 2010 at 9:49 am Tragedy of the commons…

All human commerce is based on “extraction”, just like BP in the Gulf. “Take what you can” is instutiionalized, and now politicized.

bayoustjohndavid says: August 13, 2010 at 7:58 pm Is it just my imagination, or did Jim Cramer say almost the same thing as Jack Sparrow Tuesday night?

http://www.cnbc.com/id/38649249

If you can bear to listen to the full clip, it’s astonishing to hear Cramer try to put such a happy face on the problems Sparrow describes — if the government would just let corporations export all our jobs, we could all prosper.

I know, Cramer bashing is easy. I was just struck by the fact that Cramer’s bizarro version came on the same day.

I also was impressed by the post but objected to 180: “Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.”

It brought to mind something Yves Smith once wrote about most Americans think of “Little House Prairie” rather than “The Jungle” when they think of American History. Do Americans still read “The Jungle”? Are they still taught about the Triangle Shirt Factory? The fact is, industrialization worked out much better for most our great grandparents after heavy-handed solutions were imposed. Before that, it was pretty lousy. Why should globalization be any different?

MadeMyMillion says: August 16, 2010 at 1:17 pm The author has made a valid point with his “strip-mining” analogy. The American consumer has been brainwashed by corporations (by way of advertising to women, primarily) to believe that they must spend their entire lives consuming products, now mostly made in China. That consumer is now broke and cannot borrow anymore to support their addiction to shopping. The party is over and these same corporations are now sucking the last morsels of profit out of the American economy by downsizing and out-sourcing. Of course, the rich have become even richer throughout this gala party. The American economy is in for a long and protracted decline that will be marked by repeated and deeper recessions. The American stock markets are NOT where I will be investing!

[Sep 09, 2010] Drunken, Rowdy Bond Market Is About to Be Ill - By Mark Gilbert

Sadly, the bond market suggests the investment community has learned none of the lessons of the misguided adventures of recent years that prompted the biggest bankruptcy in history.

Like a drunk at a party, the bond market is starting to bump into tables, telling off-color jokes, talking too loudly and spilling drinks. The smart guests will steer clear before he starts screaming at his shoes and wanders off to pray to the porcelain.

Did you think a 950 billion-euro ($1.2 trillion) emergency backstop cobbled together by the European Union and the International Monetary Fund in May was the answer to Europe’s debt crisis? Were you expecting central banks to turn off the money taps as normal funding service resumed in the banking industry? Had you hoped the heavy hand of government would only briefly slide its interfering digits into the folds of finance?

Ireland, which proudly brewed its own flavor of austerity medicine and swallowed the potion without demanding so much as a spoonful of sugar, now pays a record 3.8 percentage points more than Germany to borrow 10-year money. Spreads on Greek debt, which triggered the crisis by revealing that it forged its euro- membership qualifications and lied ever since, have surged to 9.5 points, a whisker away from a record.

The U.S. and Germany, meantime, are enjoying the cheapest borrowing costs they have ever had. That schizophrenia follows a pattern seen before during this credit crisis, with an endgame that is all too predictable.

First, the allegedly good banks were distinguished from the undoubtedly toxic ones -- until they all turned out to be as bad as each other. Next, the financial system was perceived to have been rescued by governments -- until the cold sting of logic pointed out that risk was being transferred, not dissolved.

Brothel Raid

Now, the bond market is differentiating between fiscally irresponsible governments and those ostensibly big enough to weather the storm. That seems to be missing the point -- when the brothel gets raided, even the piano player gets arrested. All governments are tainted with the same stain of indebtedness and profligacy, especially should a slump back into recession undermine their debt-paying abilities.

You may be agnostic about U.S. President Barack Obama’s politics, and the desirability of Keynesian stimulus packages. Still, lending 10-year money to a government for a yield of 2.65 percent when the administration is proposing to spend $50 billion on roads, railways and runways to goose the economy doesn’t seem like the most prudent of investments.

30-Year Risk

The corporate-bond market looks even more like an accident waiting to happen. Investors decided to lend $400 million for 30 years to Stanley Black & Decker Inc. this month. They will be paid an interest rate of 5.2 percent by the toolmaker, which has total debts of $4.5 billion in the form of bonds and loans, according to Bloomberg data.

The job of a fixed-income investor is to balance risk and reward. That interest rate seems like an awfully skimpy reward for quite a big risk.

Peer three decades into the future. Tell me you don’t see some new globetrotting enterprise from China -- where Western retailers now do most of their manufacturing -- employing the workers Stanley Black & Decker trained and undercutting the U.S. company with cheaper screwdrivers, drills and hammers.

Collapsing yields make buying corporate debt a gamble. One way to calculate riskiness is using duration, a measure of how much a bond will lose for a given change in yield. The sensitivity of bond prices to shifts in yield is at a record, according to indexes compiled by Bank of America Merrill Lynch.

Hidden Danger

If, for example, you bought Telecom Italia SpA’s 5.25 percent notes due 2055 in June, when they yielded about 7.2 percent, you risked losing about 4 euros for every 100 euros invested, in the event of yields climbing 50 basis points. Buy the same notes today at the current yield of about 6.2 percent, and you’ll lose 50 percent more if the bond market slumps.

The global default rate among so-called speculative borrowers dropped to 5 percent last month, down from 5.5 percent in July and less than half the 12.3 percent failure rate of a year ago, according to Moody’s Investors Service. The credit-rating company says even fewer companies will renege on their obligations in coming months, with nonpayments dropping to 2.7 percent by the end of 2010 and to 2 percent a year from now.

That sounds like good news -- unless you are of the cynical bent of mind that suspects the lack of defaulters has nothing to do with the financial health of junk-rated companies and everything to do with the reluctance of asset-impaired banks to push any more of their ailing borrowers over the edge unless it is absolutely unavoidable.

Alarms Switched Off

There’s also the connected problem of lax lending standards during the credit boom. The loan covenants that would normally get triggered when a borrower is in distress were watered down to the point of uselessness. So it is entirely plausible that zombie companies are blundering along in the twilight lacuna between alive and dead, distorting the default data.

Next week, it will be the two-year anniversary of the collapse of Lehman Brothers Holdings Inc. Sadly, the bond market suggests the investment community has learned none of the lessons of the misguided adventures of recent years that prompted the biggest bankruptcy in history.

The problem with hangovers is that once they fade, the prospect of getting drunk all over again starts to seem like a great idea. This fixed-income party will end badly.

(Mark Gilbert, author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.)

[Sep 09, 2010] Looking For Yield This Is The Definitive Presentation For You by Tyler Durden

09/09/2010 zero hedge

Why Are Div. Yields Rising vs. Bond Yields

1. Possibility of a structural de-rating of stocks

2. An outlook for weak long-term earnings growth and reduced possibility of P/E expansion, meaning that div. yields are a more dominant part of total returns

3. Higher equity risk premium. We estimate the ERP is ~5.2% vs. an avg. of 3.5% since 1990, thus a higher div. yield is required.

4. Investors doubt companies can reinvest earnings to create value, thus return money back to investors.

5. Rising div. yields can be interpreted in two ways:

i) risk premiums have permanently risen (4%-5%) and dividend yields thus need to rise, or

ii) long-term earnings growth has shifted down, implying expectations of low GDP growth and even weaker earning growth. Thus div. yields need to rise in order to compensate in total returns.

If inflation continues to fall and real bond yields rise, the div. yield gap narrows. Only if this persists do we worry about a permanent shift in equity valuations. Rising dividend yields is a valuation measure that may support stock prices.

In other words, surging dividend yields is not an indication that dividend stocks are cheap: on the contrary! It indicates an increasing loss of confidence in equity as an asset class. Buyer better beware... and definitely not listen to Cramer.

571919

Powerful technical factors driven by a seasonal issuance lull and the encroachment of Build America Bond supply, in conjunction with a white hot US Treasury market, have facilitated repeated record low yields in the tax exempt arena. Not surprisingly, the most popular late-summer muni question has become “Can it continue?” If the US Treasury (UST) market is able to retain its solid footing, which we admit is a major “if”, we believe there is little in the way of muni-centric pressures through the first half of September.

But there are definitely uncertainties and challenges in the coming months, including an extended difficult credit environment for many state and local governments. In this edition we examine some of those challenges. We also offer some input on the second most popular late-summer muni question:

“What to do now?”

https://www.morganstanleysmithbarney.com/contentmanagement/pdf/MuniBondMonthly.pdf

Initial Claims Come At 451K On Expectations Of 470K, Trade Deficit Declines From $47 Billion To $42.8 Billion

zero hedge

nopat :

You're assuming the trade deficit dropped because we exported more. Importing less due to a shift in private incomes/consumption/propensity to import has the same impact. Looks like we saw a boost coming from civilian aircraft sales and a slowdown in imports contributing to GDP on a seasonally adjusted basis. Non-seasonally adjusted, the slowdown in imports was greater than the slowdown in exports on a month-over-month basis. Year over year, the story is still the same: exports growing at a slower rate than imports, showing positive growth from 2009, but imports are off where they were from 2008 to the tune of 10%-20%, exports to the tune of ~10%.

What does this tell me? Your guess is as good as mine. If I were to form a hypothesis, I'd say that consumer de-leveraging continues, unemployment is still persistent, and we're seeing both shifts in productive capacity (services to goods) and consumption of goods (or lack thereof). But that's a long-term trend that'll play out over the course of a decade. As a short-run indicator this tells me there is continued weakness in the domestic markets as the US consumer wanes in terms of being a key driver of growth (still big, mind you, but naturally going to shift).

But I'm not an expert, just some jerk speaking when he should probably listen.

[Sep 09, 2010] Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis is Imminent Dr. Mark Skousen

May 3, 2010

“If we do nothing, we’re headed for a real crisis.” – Jack Bogle

Jack Bogle is 81 years old, but he still doesn’t pull any punches.

I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…

Jack Bogle’s Had “Enough” of Wall Street

For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).

Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)

Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”

As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”

And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.

I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).

As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.

But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.

So how should you invest in this new era?

Jack Bogle Says to Keep it Simple… And Invest According to Your Age

Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:

“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”

To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.

From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.

Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:

But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”

So if you’re looking for the cheapest way to buy a broad-based index fund, consider:

Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.

Good investing – AEIOU,

Mark Skousen

Editor’s Note: So what is the “Gone Fishin” strategy, mentioned in today’s article?

Simply put, it’s a long-term approach to investing, based on diversification, asset allocation and low costs. It includes large-cap and small-cap stocks alike, foreign investments, gold, bonds, REITs and other assets.

It’s a strategy that Chief Investment Strategist Alexander Green uses as the bedrock of The Oxford Club’s trading philosophy – and since its inception in 2003, The Gone Fishin’ Portfolio has outperformed the S&P 500 every year. For more information on The Oxford Club and The Gone Fishin’ Portfolio, take a look at this report.

[Sep 05, 2010] Double Dip Rumors resurfaced ;-)

Roubini's latest media appearance, and now that the spectre of a double dip has fully arisen there are quite a few of them, is with the FT's James Blitz in which the NYU professor does a quick 5 minute summary of what he sees as the main threats to the US economy, among which are a 40%+ chance of a double dip, a sub 1% GDP growth in H2 2010, the disappearance of all stimulus pushes (and the conversion of the fiscal stimulus from a tailwind to a headwind), an awful job market, bigger bank losses, declining home prices, a drop in the stock market, widening spreads, a feedback loop from stock markets into the economy, and much more. We are happy the professor has revised his call from a few months back seeing virtually no chance of a double dip. As to policy, Roubini thinks the US has run out of policy bullets on both the monetary and fiscal side: he is sure the Fed will do more QE, but it will be impotent as there is already over $1 trillion in excess reserves (of course, it simply means excess reserves will be $2 trillion, $3 trillion... etc. And IF the economy picks up, this money will hit broad money. But no, aside from that, there is no threat of inflation. Because the Fed is fully prepared to absorb $3 trillion in excess money....).

As to Europe, Roubini thinks austerity will also result in a disaster, first for the periphery and then for Germany, so basically damned if you do and damned if you don't vis-a-vis stimulating, which is precisely what we have been saying for over a year: the central banks have boxed themselves in a corner from which there is no escaping, regardless of what they do.

Lastly, on Asia, and specifically China, Roubini notes the obvious that even the world's most overheating economy is faced with so many problems that it can only do what the US has been doing so well to date: kick the can down the road.

[Sep 05, 2010] Credit Bubble Stocks Mutual Fund Cash Balances at Five Year Low

According to this Decision Point chart, mutual fund cash balances (as a percentage of assets under management) are at the lowest level in their five years of data.

The highest percentage of cash was in March 2009 (the stock market low!), and the previous lowest percentage of cash was in summer 2007 (the stock market high!).

This seems to be a fantastic contrary indicator. And why wouldn't it be? If mutual funds are fully invested, who is the marginal investor?

[Sep 05, 2010] Analysts Iraq war ‘partly to blame’ for financial crisis

Raw Story

Stiglitz and Bilmes write:

Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.

The Iraq war didn't just contribute to the severity of the financial crisis, though; it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession. With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war. Stiglitz and Bilmes estimate that about a quarter of the debt increase the US saw during the first five years of the war are attributable to the war -- about $900 billion of a $3.6 trillion rise in the debt. They also estimate that the war added about $10 to the cost of a barrel of oil, amounting to a cost of $250 billion to the US economy.

In articles in the Times of London and the Washington Post two years ago, Stiglitz and Bilmes estimated that the cost of the war, including the costs to the US economy, amounted to $3 trillion. At the time, the Pentagon questioned their assertion.

"It appears that our $3 trillion estimate (which accounted for both government expenses and the war's broader impact on the U.S. economy) was, if anything, too low," the authors state.

SR

War, while being ridiculously bad for the economy, isn't on its own the biggest problem. I say that as somebody who is both familiar with economics and vehemently against these two wars -- and military adventurism in general.

The core problem lies in the level of outstanding debt (private & public) relative to GDP (400% debt to GDP), coupled with massive net outflows of capital in the form of real losses to global trade, and foreign outflows related to the maintenance costs of global military empire.

This 'lost' money cannot be used to service the staggering debt load at home, and thusly translates directly into domestic debt defaults. The consequence of higher defaults is that lending becomes riskier, causing banks to reduce or cease lending, leaving even less money in the economy available to service existing debt loads, and, of course, less money for general consumption or business investment.

We will create asset bubbles in an attempt to compensate for these staggering real losses. But as we all know, the net benefit of those asset bubbles is at best temporary, and are extremely disruptive to the real economy when they finally unwind-- just as the equities bubble (margin debt expansion) under Clinton, and the housing bubble (mortgage debt expansion) under Bush all ended badly.

Investigate-NWO-globalists:

The GOP is the War Party, & the Dems are merely War-Party enablers!

1984

Sorry but the both have been bitten by the MIC-virus. The neocons are however batshit crazy.

Lorili:

They are both bought and owned by the same corporations and wealthy elite. The only reason they keep the two party facade is to fool stupid Americans into thinking it's a 'democracy.' And it works.

[Sep 01, 2010] Another Installment of 'Scenes from a V-Shaped Recovery'

September 01, 2010 | Financial Armageddon

In honor of today's single-positive-data-point-driven-triple-digit rally, I thought it would be a perfect time for another installment of "Scenes from a V-Shaped Recovery":

"Financial Depression Spreads Among Seniors" (Blacklisted News)

President Obama has U.S. taxpayers paying billions to meet the costly payrolls of 50,000 troops and 190,000 contractors in Iraq while 20-million-plus jobless are looking for work in USA and can't find it.

Among the hardest hit now are more than 2-million people age 55 and over, half of whom have been looking for work for six months or longer. For them, the Great Recession is a no-fooling, deepening Depression.

Many of these seniors have no families to care for them. Others are too proud to ask their families, churches, or relief agencies to help them in their time of need. Even so, many a proud, independent, well-dressed senior is a soup kitchen regular because it's either that or go hungry.

Many seniors have been loyal to a corporation for much or all of their working lives only to discover the corporation has no loyalty to them. Instead, their employer laid them off before the retirement age and hired a younger, cheaper worker to replace them or just shipped their job to an office or plant on foreign soil. Many seniors are right to feel betrayed.

“The unemployment rate for this age group actually reached 7.1 percent in May, the highest it's been since the late 1940s,” writes A. Barry Rand, chief executive officer of the AARP in his September “Bulletin.” That's more than double the 2005 rate of 3 percent.

"New Job Means Lower Wages for Many" (The New York Times)

After being out of work for more than a year, Donna Ings, 47, finally landed a job in February as a home health aide with a company in Lexington, Mass., earning about $10 an hour.

Chelsea Nelson, 21, started two weeks ago as a waitress at a truck stop in Mountainburg, Ark., making around $7 or $8 an hour, depending on tips, ending a lengthy job search that took her young family to California and back.

Both are ostensibly economic success stories, people who were able to find work in a difficult labor market. Ms. Ings’s employer, Home Instead Senior Care, a company with franchises across the country, has been expanding assertively. Ms. Nelson’s restaurant, Silver Bridge Truck Stop, recently reopened and hired about 20 people last month in an area thirsty for jobs.

Both women, however, took large pay cuts from their old jobs — Ms. Ings worked for a wholesale tuxedo distributor, Ms. Nelson was a secretary. And both remain worried about how they will make ends meet in the long run.

With the country focused on job growth and with unemployment continuing to hover above 9 percent, comparatively little attention has been paid to the quality of the jobs being created and what that might say about the opportunities available to workers when the recession finally settles. There are reasons for concern, however, even in the early stages of a tentative recovery that now appears to be barely wheezing along.

For years, long before the recession began, job growth had become increasingly polarized in this country. High-paid occupations that require significant amounts of education and training grew rapidly alongside low-wage, service-type jobs that do not, according to David Autor, a labor economist at the Massachusetts Institute of Technology.

The growth of these low-wage jobs began in the 1980s, accelerated in the 1990s and began to really take off in the 2000s. Losing out in the shuffle, Dr. Autor said, were jobs that he described as “middle-skill, middle-wage” — entry-level white-collar positions, like office and administrative support work, and certain blue-collar jobs, like assembly line workers and machine operators.

The recession appears to have magnified that trend, Dr. Autor wrote in a recent paper, released jointly by the Center for American Progress, a left-leaning policy group, and the Hamilton Project, which has a more centrist reputation. From 2007 to 2009, the paper said, there was relatively little net change in total employment for both high-skill and low-skill occupations, while employment plummeted in so-called middle-skill occupations.

"The Fastest-Growing Group Among Local Homeless: Families" (Seattle Times)

On this chilly May evening in the parking lot of Southcenter mall, Cherie Moore is growing anxious. She and her 17-year-old son, Cody Barnes, sit almost unmoving in the cab of their old Ford Ranger, all their belongings crammed in the back -- their 32-inch flat-screen television, a prized movie collection, Cody's video games.

Moore is down to her last $6. It's nearing 10 o'clock and it's been hours since the two have had a meal.

Mall security has been circling. Moore knows they can't spend the night parked here, but the 49-year-old single mother, born and raised in South King County, has no clue where to go.

"I'm mentally exhausted," she says.

While overall homelessness in King County has steadied, it appears to be rising among families, a trend playing out across the nation.

Parents with children are the fastest-growing yet least-visible segment of the homeless population, far more likely to be doubled up in the homes of friends or living in their cars than to be at a busy intersection asking for help.

"Our Blue-Collar Great Depression" (Wall Street Journal)

Today's job losses are concentrated among workers under 30 who are less well-educated, with those in blue-collar industries suffering the most. Employment in construction, maintenance and repair, machine-operation and transportation (think truck and bus drivers) has shrunk 18% since the recession's start.

To put this number into context, consider this: During the Great Depression of 1929-33, total employment is estimated to have fallen by slightly more than the same figure, 18%. In short, the current Great Recession for younger blue-collar workers feels more like a depression—with no end in sight.

"‘An Equal-Opportunity Recession’" (The Jewish Week)

San Francisco — Robert M., 58, worked for a news organization in the San Francisco Bay area until September 2008, when he lost his job in layoffs that eliminated 15 percent of the company’s workforce nationwide.

Robert had eight months of savings. They ran out in six months.

After 14 months of unemployment, in December 2009 Robert turned to San Francisco’s Jewish Family and Children’s Services for help with rent, utilities and, hardest of all, food.

“It was gut wrenching,” said Robert, who asked that his last name not be used. “I’d contributed a lot to charities over the years, including JFCS. My wife and I gave to the food bank regularly. Now we were on the other side.”

It sounds apocryphal: Former donors to a Jewish charity reduced to seeking help from that very same organization. But as more and more Jews are caught up in the recession, now two years running, food banks across the United States are reporting the same phenomenon. Middle-class Jews, professional Jews, young people with families — they’re out of work, their savings are gone, and they are showing up for help at Jewish social service agencies.

With unemployment extensions about to run out for many, the problem is expected to worsen.

“In addition to the poor and the working poor, which we’ve always served, there’s been a substantial increase the past 18 months among the middle and upper-middle class who are not in a position to make it, yet are not poor enough to get benefits” from government, said William Rapfogel, CEO and executive director of the Metropolitan Council on Jewish Poverty in New York.

"POLL: Unemployment Affects Three Out Of Four Americans" (Huffington Post)

Nearly three out of four Americans have been directly affected by the recession, either because they have been unemployed or know someone who has lost their job, according to a new survey.

The report, prepared by Rutgers professors Carl Van Horn and Cliff Zukin, find that 73% of Americans have either been unemployed themselves (14%) or saw an immediate family member (12%), another member of their family (30%) or a close friend (17%) lose a job.

The survey also finds profound pessimism about where the economy is headed. More than half of Americans say they believe the downturn reflects a "lasting economic change" (56%) rather than a "temporary economic downturn" (43%). Large majorities believe that the economy will remain in recession or worse a year from now.

"After suffering through the worst economic disaster most have ever experienced," Van Horn said in a statement, "American workers have diminished expectations about America's economic future and do not have much faith that the nation's political leaders can move the country forward."

"Small Business Owners Fear Double Dip" (Boston Business Journal)

Most small business owners - 86 percent - fear that the economy is heading into a double dip recession, according to a recent small business survey by Citibank.

The survey revealed that three fourths of respondents felt they were at least somewhat prepared for this prospect. Over 60 percent of business owners say they have changed the way they run their business for good, regardless of what the economy throws at them next. Among the adjustments, business owners said they reduced debt, increased cash reserves, froze hiring and and delayed plans for expansion.

“Small businesses continue to feel the effects of today’s uncertain business environment,” Raj Seshadri, head of Small Business Banking at Citibank, said in a statement.

Given that virtually every bit of bad news these days is somehow seen as a sign that the worst is behind us, I reckon this list of horror stories is really going to get those stock jockeys' bullish juices flowing -- right?

Posted by Michael Panzner on September 01, 2010

[Sep 01, 2010] 'The Consumer is Totally Wrecked'

August 31, 2010

Yes, I'm sure it reflects confirmation bias on my part, but it's hard to ignore Howard Davidowitz's thoughts on the state of the economy given that he has in recent years been correctly pessimistic on prospects for a sustainable recovery.

Here is a brief snippet from a recent Bloomberg Television interview (posted below) with the long-time retail analyst, entitled "Davidowitz Says `Worst to Come' for U.S. Retail Sales: Video":

The consumer is totally wrecked and that's why there's no way this economy's coming back, because the consumer is 70 percent of the U.S. economy....

The consumer is out of money....They have no jobs. We've got 18-and-a-half percent unemployment and underemployment. The consumer's debt is 120 percent of disposable income...The consumer is wrecked



Etc

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Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


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Last modified: September 20, 2017