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Skepticism and critical thinking is not panacea, but can help to understand the world better
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9/1/2010 | USATODAY.com
There are no visible picket signs on Wall Street. The U.S. stock market— the world's biggest when measured by the market value of the companies that trade here — still opens for business every trading day. And the 6 o'clock news still lets everyone know if the Dow finishes the day up or down.
Yet, increasingly, investors on Main Street are not playing the stock market game with confidence like they used to, mainly because the game of making money has gotten tougher and more volatile since the financial crisis. Retail investors are buying fewer stocks. They are paring back on stocks and stock funds they already own. Instead, they're moving into safer investments, like cash and bonds.
"Investors are on strike," says Axel Merk, president and chief investment officer at Merk Mutual Funds.
The fear on Wall Street is that this buyer's strike will linger for years, resulting in a lost generation of investors similar to what occurred after steep stock declines in the 1930s during the Great Depression and early 1970s, a recessionary time punctuated by high inflation.
Consider Stacy Harris, 58, from Nashville. While she's not totally out of the stock market, her cash stash has ballooned to 42% of her portfolio. That's twice as big as her slimmed-down stock holdings, now just 21% of her investment pie.
"I'm sitting on an uncomfortable amount of cash," says Harris, editor of Stacy's Music Row Report, an online publication that blogs about the country music scene. "Until things get better, I'm not putting any more money into stocks."
Another member of the shaken-investor class is Bill Woodward of Pittsburgh. He was once an avid stock investor. A decade ago, he used to troll stock chat rooms on the Internet in search of hot stocks. Now, his portfolio is down to three holdings: a dividend-paying oil tanker company, a fund that bets against the real estate market and a penny stock he calls his "lottery ticket."
He couldn't care less about the nearly 5,000 other stocks that trade on major U.S. exchanges. "I have no interest in coming back," says Woodward, 60, who works at a local employment center that helps people find jobs. His distrust of market regulators and his belief that they don't protect individual investors are the top reasons for his anti-stock stance.
It's hip to be conservative
After back-to-back stock market busts in a 10-year span in the 2000s, cocktail party chatter that once centered around get-rich-quick stocks has given way to sober chats about ways to reduce risk, the best places to stash cash and why it makes sense to buy boring bonds instead of sexy stocks. Days like Wednesday, when the Dow skyrocketed 255 points, are offset by months like August, when the Dow suffered its worst August drop since 2001.
Yanking cash out of the stock market for fear of losing it has been the trade of choice for Main Street investors since the start of 2009, when the fallout from the financial crisis made it clear stock prices don't always go up.
"The lost generation is not coming back," says Michael Panzner, who writes the blog Financial Armageddon.
Recent statistics paint a picture of retail investors in retreat. Nothing illustrates Main Street investors' diminished appetite for stocks more than the dollars flowing in and out of mutual funds. Since the beginning of 2008, stock mutual funds have suffered cash outflows totaling roughly $245 billion. In contrast, bond mutual funds have enjoyed inflows of close to $616 billion, according to data from the Investment Company Institute, a mutual fund industry trade group. Similarly, prior to the financial meltdown two years ago, 401(k) investors had seven of every 10 dollars of their retirement money invested in stocks, but that is back below 60%, according to Hewitt Associates.
Anti-stock sentiment is also evident in the soon-to-be-released 2010 Scottrade American Investor Study. While 73% said they still believe the stock market will produce long-term gains, 65% of investors polled said they were "very" or "somewhat stressed" about their current financial situation. The "economy" was the No. 1 source of that stress. Nearly one of three investors (31%) said they were "investing less money" or "investing more conservatively." The most conservative investors of all: Gen Y (18 to 28 years old) and Gen Xers (29-45), the study found.
Bad times for stocks
It's hard to blame individual investors for their growing skittishness toward stocks. They've endured not one but two of the worst stock market downturns in history — within a short 10-year span. The dot-com-inspired stock bubble burst in early 2000, knocking the broad stock market, as measured by the Standard & Poor's 500-stock index, down 49.1% by the time the bear market ended in 2002. That was followed by the 56.8% plunge from 2007-09, when a credit-driven bubble in stocks, real estate and many other assets ended badly.
As a result of the back-to-back bear markets, the Dow Jones industrial average is still trading just 270 points above the 10,000 level, a milestone it first attained to great fanfare back in 1999. Since the Oct. 9, 2007, high, the stock market's value has declined by $5.6 trillion, according to Wilshire Associates. "Investors are saying, 'Why would I want to put money into stocks? I'm still losing money,' " says Charles Biderman, director of research at TrimTabs, a firm that tracks fund cash flows.
Panzner ticks off three other key reasons Main Street investors have suddenly turned very risk-averse:
•Investors are trying to make sense of an unprecedented economic earthquake that has left them feeling blindsided and unsure about their economic futures like never before. Nearly 15 million are unemployed, and many have seen the value of their homes — typically their biggest investment — crater.
•There is a feeling among investors, Panzner says, that the investment "game is rigged" in favor of professional traders and money managers. The belief that the playing field is not level has created intense feelings of animosity toward Wall Street.
•The aging of the Baby Boomers has created a demographic headwind for the stock market."More people will be looking to draw down their savings," Panzner says. "As people get older, they will want to take less risk and protect their nest eggs."
And there's no guarantee that stocks will rebound strongly after major bear markets, as they have tended to do in the past. "Markets don't always go up," Merk warns. For proof, he points to the Nikkei 225, Japan's main blue-chip stock index. The index peaked on Dec. 29, 1989, at 38,915.87 before a multiyear asset bubble burst. On Wednesday, more than 20 years later, the Nikkei closed at 8927.02 — 77.1% below its record high.
Fears of another super swoon are what keep Ron Munn, a 69-year-old retiree from Green Valley, Ariz., up at night.
"As part of the 'Lost Generation,' now is certainly not the time to jump back in the market and possibly become part of the 'Gone Forever Generation,' " Munn says in an e-mail. "Keeping your powder dry with safe cash and bond investments makes sense under the current economic and political situation."
What will get investors back?
Despite all the doom and gloom, not everyone on Wall Street believes that investors will stay away from the stock market for years, if not decades.
"A lost generation? I don't buy it," says Jim Paulsen, chief investment strategist at Wells Capital Management. He says investors always say they hate stocks and that they "don't want to touch a stock" after a sharp downdraft. They said it after the 1973-74 bear market, they said it after the dot-com crash and they are saying it now. "I've heard this all before," he says.
What will bring the Main Street masses back to Wall Street?
Jobs. When hiring picks up, so will consumer and investor confidence. With that will come higher stock prices, Paulsen says."At this point we have ourselves in such a panic that the only tonic to calm mind-sets is you will need two, three and even four months in a row of 200,000-plus jobs created," Paulsen says. "If we get that, you could see a fairly violent move up in interest rates and stocks. But if jobs don't show, the depression mentality is going to grow."
A new bull market. Animal spirits will return when the stock market starts heading higher and your neighbor starts bragging about all the money she made in the market, says Michael Farr of money management firm Farr Miller & Washington. More days like Wednesday, when stocks soared 3%, are needed."We need a bull market somewhere in something," Farr says. "As soon as the guy next door is making a buck, investors' curiosity will be piqued," and they will regain their courage and start investing in stocks again.To drive home his point, he uses a casino analogy: "The reason slot machines have ringing bells and flashing lights" to announce a winner is that it "keeps everyone else pulling their handles. You don't have to be the one that wins, you just have to know someone is winning."
Clarity over government policy. All the question marks on government policy, ranging from taxes to financial regulation, are stifling business decision-making and innovation, Merk argues."A key ingredient to functioning markets is clarity," Merk says. "You need to know what the government is up to. But we just don't have that. Investors will come back to the business of investing when investment can take place based on analysis of businesses, rather than anticipating the next government intervention."
A resurgence of dividends. In a world where yield or income is gaining popularity at the same time that yields on government bonds are sinking to or near record lows, investors will be more apt to return to stocks if companies upped their dividend payouts, argues Jason Trennert of Strategas Research Partners."Retail investors have been traumatized by two 50% declines in stocks in the past 10 years, serial misdeeds on the part of Corporate America and Wall Street, and for anyone left, the flash crash," he says. "I've come to the conclusion that only dividends could immediately restore some confidence on the part of the investing public in stocks."
Single-digit P-Es. It might take a scary stock market swoon that knocks the price-to-earnings ratio back to single-digits to create a truly good entry point for investors, Panzner warns. In prior bear markets, stocks bottomed out in October 1974 at a P-E of 7 and in August 1982 at less than 8, InvesTech Research data show. Both lows set the market up for big gains over multiyear periods, including the 18-year bull run from 1982 to 2000. The S&P 500's current P-E, based on projected earnings over the next four quarters, is 12.7, according to Thomson Reuters. The long-term P-E is roughly 15. Getting back to single-digit P-Es is "the best prospect for getting a sustainable recovery," Panzner says. "Stocks have to get so cheap, so washed out and so hated," the only direction is up.
There's one more thing investors like Harris and Woodward would like to see before they would feel comfortable investing aggressively in stocks again: a stiff crackdown by the Securities and Exchange Commission on unscrupulous Wall Street types that prey on individual investors.
Says Woodward: "What would bring me back? Show me that the SEC is back to protecting the little guy."
Adds Harris: "I don't think we want to be in a position again where we have a guy like Bernie Madoff." Madoff orchestrated the biggest Ponzi scheme in history, robbing the financial futures of countless people.
For now, "Everyone is thinking more conservatively," Harris says. "They want to make sure their money is there when they need it."
"Could investors fleeing stocks become a lost generation?" ++++++++++++++++ Take put the word "investors" and plug in "gambling addicts", and I say good riddance. But the stock market "investing/gambling" firms suck in new suckers every day with their slick TV ad campaigns .... now you even have them pushing AMATURES into CURRENCY trading .....
Sheep to slaughter ..... and the "killers'' laugh all the way to the bank!
Y'see, the problem is right there in the story. Stock Price=Profit. Sorry, not true. The price of a share of stock was NEVER meant to be "profitable". The COMPANY was to make the profits and DISTRIBUTE them to the shareholders as DIVIDENDS and with the shareholders helping to cover the risk of doing business. This core idea has been well and truly perverted in the past 20 years. It was the greed and the media that invented the stock market as a "Get Rich Quick" scheme when some of the internet and computer companies rang up such astounding profits in such a short time. Microsoft, Yahoo, Google. All of a sudden, the news started throwing the DOW in our face and how much profit some companies and investors were making. Thus started the great stampede to the stock market. Even boring companies were now faced with "WHERE'S MY PROFIT?" from their shareholders. Well, profits did rise by slashing headcount, acquiring other companies, or perhaps moving expenses to another year. CEO's were given huge incentives to rise the stock price by outrageous bribes of "options". Was all this "profit" good for the COMPANY, its CUSTOMERS, or the SHAREHOLDERS? You wonder why so many companies are now floundering with no trained people, few good customers, and a flat stock price. Will the market recover? I cannot see that happening for 10-15 years. Why? The US baby boomers are the richest generation that has ever lived on this planet. They have been burned badly 4 times in less than 10 years, 2 stock crashes, a housing crash, and finally a staggering loss of jobs. Like my parents who lived through the depression, that is a truly bitter lesson that they will remember for the rest of their lives. It will not be until an entirely new generation that will regard what we have been through as "history" that will start investing again. Hopefully, with a new maturity at the risks involved in investing and with an awareness that a good company to invest in is one that rewards the stockholders with dividends, not hyped up stock prices.
"His distrust of market regulators and his belief that they don't protect individual investors are the top reasons for his anti-stock stance."
Exactly, why put your money where a den of theives live?
:highlySkilled (0 friends, send message) wrote: 29m ago
The problem is that there is no longer a stock market to invest in.... what we have is wall street insiders racing Ferraris on a track they designed (directly connected hi frequency trading robots) and keep messing with in a game that has nothing and I mean nothing to do with investment or reasearch, and the rest of the so called non Wall Street "investors" are subjected to heavy marketing to come rent a Ford Pinto to race blindfold.
In short investment is the wrong name, Wall St is a fixed game for insiders to PLAY using outsider's money.
You can invest directly in businesses or franchises--laundrymats, liquor stores, etc.
The Stock Market was initially used for companies to raise capital in exchange for ownership - it gradually turned into a gambling parlor.
It's really pretty simple. The average investor on Main Street feels like he's been duped by the Wall Streeters. We play one game, while the big cats on Wall Street play an entirely different game where they know and make the rules. We lose, they win.
As the old saying goes, "Fool me once, shame on me ..................... "
the industry has earned it's "reputational bankruptcy" very well.
It will be safe to invest once again when those who tried to steal our economy are jailed, and those regulators who helped them, (or simply looked the other way) are also jailed for failure to protect the public interest. Until then, white collar crime is simply the best paying occupation in the world.
Larry Elford, Canada http://www.youtube.com/user/investoradvocate?fea ture=mhum
2 minute video on how to become an investment advisor (in canada) 4 minute video on how to commit the perfect crime BREACH OF TRUST, The Unique Violence of White Collar Crime, by a twenty year veteran broker turned whistleblower
.. Inequality in the United States has soared to levels comparable to those in Argentina six decades ago — with 1 percent controlling 24 percent of American income in 2007.At a time of such stunning inequality, should Congress put priority on spending $700 billion on extending the Bush tax cuts to those with incomes above $250,000 a year? Or should it extend unemployment benefits for Americans who otherwise will lose them beginning next month?
... ... ...But there is also a larger question: What kind of a country do we aspire to be? Would we really want to be the kind of plutocracy where the richest 1 percent possesses more net worth than the bottom 90 percent?
Oops! That’s already us. The top 1 percent of Americans owns 34 percent of America’s private net worth, according to figures compiled by the Economic Policy Institute in Washington. The bottom 90 percent owns just 29 percent.
... ... ...
And then I see members of Congress in my own country who argue that it would be financially reckless to extend unemployment benefits during a terrible recession, yet they insist on granting $370,000 tax breaks to the richest Americans. I don’t know if that makes us a banana republic or a hedge fund republic, but it’s not healthy in any republic.
pdxtran Minneapolis, November 18th
The right-wing media have encouraged the development of a Stockholm syndrome among middle class and working class Americans.
That is, an awful lot of people who earn closer to $25,000 than $250,000 a year are opposed to letting the Bush tax cuts expire and yet disparage the long-term unemployed and oppose any extension of unemployment benefits, blithely declaring that "there are plenty of jobs out there." They also make snide remarks about labor unions, negating the kind of cooperative efforts that forced the plutocrats of the 1930s through 1950s to share the wealth that their employees' labor had created.
I wonder what sort of psychological process is behind the people thus brainwashed.
Is it a belief that rich people work hard and poor people don't? (Riiight. All those trust fund babies work their fingers to the bone, and all those hotel maids and loading dock workers sit around all day.)
Is it a belief that the rich will create jobs if everyone thinks nice thoughts about the and gives them everything they want? (Thirty years and counting since Reagan first cut taxes on the top incomes. Where are the jobs?)
Is it a misguided jingoism, the kind of salute-the-flag-and-march-around patriotism that they used to teach when I was in grade school, a naive belief that America is always right about everything, and even if not, is always more virtuous than any other country?
Is it magical thinking, conceived in terms of, "If I despise poor people
and revere rich people enough, then God won't let me become poor"?
If they'd just look overseas (something that conservatives are loath to do), Americans could see the negative effects of income inequality.
The countries with the highest income inequality are terrific places to be rich. The super rich in those countries can buy clean water, education, medical care, and electricity privately, purchase anything they want cheaply, and hire servants for next to nothing. However, these countries are decidedly unpleasant for the 99% who can't afford to live in gated communities and also tend to have some of the world's highest crime rates and least stable political systems. Countries with high levels of inequality are dangerous places to live, especially if the lower classes have lost all hope of improving their lives by legal means.
Tim BalMr. Kristof is 100% right, but I would go a step further: our tax and trade policies promote this “hedge fund” characteristic.
The lower the tax on high income, the lower the disincentive to pay obscenely high income. There is a reason that CEOs made a lot less under Eisenhower: the top rate hit 92%. So, every dollar earned over $3.2 million (in 2010 dollars for joint tax returns; or joint income over $400,000 in 1952 dollars) was taxed at 92%, leaving only 8 cents for the CEO. So, corporate boards thought twice about essentially giving a raise to Uncle Sam.
This also was a disincentive to send millions of American jobs overseas. Since most of the profit in doing so would end up in the U.S. Treasury, there was no incentive to trade American jobs for CEO income.
Therefore, President Obama should veto any extension of the Bush tax cuts, and strive to raise the top tax rate to over 90%. CEOs would still be rich, as they were under Eisenhower, but the rest of us would benefit from a sane trade policy and the return of 20 million jobs to our nation. Not to mention the other benefits of lower budget and trade deficits. nuzum
Very nice turn-of-the-tables Mr. Kristof. Thanks for doing a little fact-gathering and reporting that America is actually a tad worse than traditional banana republics. The operative word here is fact. Maybe you need to do another contest where you take dyed-in-the-wool, tax-obsessed TeeGOPers on a tour of the world. Show them how great public transportation can be in Europe or Asia, show them how awful conditions can be in rural Mexico or Guatemala or Sierra Leone, show them how communist China is out Adam Smithing capitalist America. Show them the horrors of loosely regulated polluters like in Hungary or in parts of Russia or India. Show them the Autobahn and lunch in a beer garden. Make sure they meet lots of people who can speak good English and also make them try from time to time to communicate with locals who don't know English. Show them things that put America in perspective. We have some great things and we have some awful things.
But politicians continually tell Americans that they are the greatest superhumans on the planet. Politicians stroke our egos, make us feel superior, when deep down inside I think most of us know the truth. We are just people.
People being usured out of our pitiful temp-job wages and nickel and dimed by insurance companies and bank account fees. We watch our tax dollars prop up mega businesses and financial hucksters and those same businesses return the favor by not refinancing mortgages and outsourcing jobs and lobbying against increases in minimum wages or health care or environmental protection or worker safety, etc. We are still seeing record profits from oil companies and banks. These two "industries" are our national problem and our national disgrace. Oil companies pump crude from national lands and then sell it back to us at $3 per gallon. They get subsidies to explore for more ways to do this. Banks get to borrow money from Us the People for almost 0% and then they lend it back to us at 20% or 30% in credit cards or 6% as a mortgage. Of course they won't refinance mortgages at 4%, they are making 6% now. If you have a mortgage that is too small, say under $150k then you are really out of luck. Your paperwork will never find the right slot. It simply won't ever see the light of day. Financial services only give you service if you have $500k in their system. Otherwise get ready to resubmit your paperwork multiple times and then get denied for a refinance that would lower your monthly payments. You were paying the high monthly payments on time, but apparently the bank thinks you won't be able to afford the lower monthly payments if they approve a refinance at a lower rate.
If evil is the absence of good, then I guess I know where evil resides.
Sorry I digressed, but the American myth is really annoying.
Napoleon Bonaparte, on bankers in general:
Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.
from Liaquat Ahamed, Lords of Finance, the Bankers Who Broke the World
The Bankers DNA is the main constant here as the times change they repeat the same sorry horror show albeit with different set of actors....
WE need Gene therapy/mutation for the Bankers and their political clients/benefactors/puppets.
Failing that I suggest straight jackets...
Napoleon is also quoted as having said this: "Never interrupt your enemy when he is making a mistake," That comment captures the reasons why I do not think a revolution will ultimately be needed to topple the financial titans from their lofty perch.
Either the pyramid is expanded exponentially until the money becomes worthless or the banks and sovereigns default on their debts.
If the latter, then the endgame is more protracted, because the big players will endeavor to manage the default process. Markets will eventually panic either way, as the authorities have already lost too many pieces to reliably control the situation. The debts are simply too large to be unwound in an orderly restructuring.
The central banks are trapped, doomed to be hoisted on their own petard. Interest rates will eventually soar and the affected economies involved will be forced into the inevitable default/devaluation crisis.
Pay now or pay later.
There is no exit from objective mathematical reality. The financial doomsday device was triggered a long time ago and there is no way to turn it off. Free thinkers are as prepared as they can be and have already stepped aside. The lemmings of the world are stampeding, oblivious, as always, as lemmings tend to be. Once they've vaulted the cliffs, things can get back to normal. A new generation and a new age will be born.
First: 'Even if you attribute half of the rise in unemployment to structural factors, that still leaves between 2% and 3% of the rise in unemployment to cyclical problems.'
So the post introduces the possibility of structural problems in the economy.
But, half the economy is government itself, state, local, federal and transfer payments.
Hence, there may actually be a structural problem, and if we found one it likely would appear in the administration.
How would that structural problem appear? Maybe, politicians, in the administration, running around saying the government has a structural budget problem and unable to act without fixing it.
Maybe Obama actually is dealing with a long term structural problem in the federal budget, a possibility we might consider.
calmo said in reply to Matt Young...
Thanks for the reply, sure to make someone like anne scurry to the BLS and produce a barge full of stats on how exactly the gov slice has grown over the successive administrations...but not me...all these willing workers...I cannot crowd them out.
"First"..volley back to you, I suppose...waitin for your "Secondly", is me.
"So the post introduces the possibility of structural problems in the economy."
I would say this is a gracious given, (moreover, a pretext for action) not an introduction...and therefore grounds to chase (I would put Big Dog bakho on this, you?) down that 2 or 3%. Are you arguing that this is not the right chase or that gov cannot give chase or that, no matter how infinitesimal the structural component, it rules? It almost sounds like you are sayin, the budget will not allow this action. Ok, volley done.
Ok, with current 10% UE and the decompolation of that as much as 3% structural...leaves us with the cyclical 7%, --about twice the pre-recession levels, yes? Agree, ex-BLSly, (--somewhat empirically and somewhat more than merely anecdotally ...the information/views I get/form/fudge/factor here is pretty tight).
Matt Young said in reply to calmo...ken melvin
If there is a structural problem it is likely hammering the Obama administration officials into desperation. So, the answer is Obama cannot act, he is in a fiscalidity trap.
The large states are near bankruptcy. The stimulus fix helped a bit by sending taxes from the feds to the states. But the problem is still there, unless the central government makes state subsidies permanent, the states are still headed toward bankruptcy. StructuralSummers @ Center for American Progress, Discussion on Jobs 4/3010
From about 3:06 to 3:15 on the video
Social Consequences of downturn:
- Calls to domestic hotline up 50%:
- Loss of job: 2nd (close) only to death of a spouse, equivalent to divorce
- Worse since WWII
- Normal Relationship of GDP to Unemployment did not hold
- Unemployment 1-1.5% greater than would normally be expected.
- Fewer people required to meet production reqmnt’s for increased demand.This means fewer jobs for the less educated worker;
- 40 yrs ago, at any given time, 1 in 20 adult males were out of workToday, at any given time, 1 in 5 adult males are out of work
- 5 yrs from now, after the recovery, at any given time, we can expect 1 in 6 adult males to be out of work, and 1 in 10 of those with college.
- Technology (automation) less labor required to produce more
- Off shoring of low tech jobs due to globalization.
Three weeks ago the euro was hitting 11-month highs against the dollar, and a favorite meltdown scenario centered on the demise of the greenback. Now, it's the euro that is sinking fast — it fell to $1.324 on Friday from $1.367 a week ago and $1.421 on Nov. 4 — and it's no longer taboo in Europe to discuss ending the 12-year-old experiment with the common currency.
Whether that would be catastrophic for the global economy or even for Europe is far from clear. But it's understandable that anyone who's anticipating financial Armageddon would view the euro's sudden slide as confirmation.
It's human nature to see our present situation, and the future, through the prism of our recent experiences. After living through what was (or is) for many people the worst economic nightmare of their lives, it's not surprising that we're now constantly looking over our shoulders, fearful that another crisis is imminent.
In the economy and markets, "People are afraid that every little dip is going to be a collapse," Ritholtz said.
We all know that the U.S. economy has been badly wounded by the Great Recession. We know that the unemployment rate is 9.6% — 17% if you count the underemployed and those who have stopped looking for jobs.
The Internet also echoes with the pleas of about 2 million long-term unemployed who face a cutoff of jobless benefits Tuesday if Congress fails to vote for an extension.
It's painfully difficult to reconcile their plight with the fact that 140 million or more Americans are expected to be out in force shopping this weekend, hoping to give a decent holiday to their kids or other loved ones.
It's also difficult to reconcile the ongoing struggles of many small businesses with government data this week showing that U.S. companies' earnings reached an annualized rate of $1.66trillion in the third quarter, the highest ever before adjusting for inflation.
The psychologically unsatisfying reality is that the Great Recession has further bifurcated the economy. Most people still are working, yet for many it will be a long time before they get another job, if they ever do. Many companies are more efficient than ever and are sitting on mounds of cash, but their success often is overshadowed by stories of other businesses hanging on by a shoestring.
The question, then, is whether the "haves" can offset the "have-nots" to a great enough degree to keep the recovery going.
This is where the zombie bears concede nothing to the economic optimists.
The recovery is a sham, the bears say, because the global economy's dive in 2008 and early 2009 was halted by massive financial intervention by governments and central banks worldwide: unprecedented money-printing and rock-bottom interest rates.
With Europe's debt crisis flaring again, and with the Federal Reserve this month committing to spending nearly $900 billion more to buy U.S. Treasury bonds by mid-2011, it's clear that governments' previous efforts weren't enough. They've been trying to solve a debt problem by papering it over with more debt.
"The worries about things falling apart stem from the sense that we haven't really fixed anything," said John Hussman, an economics PhD who heads the $9-billion Hussman Funds in Maryland.
While he says it makes no sense for the U.S. government to impose austerity measures on the economy at this stage of the recovery — the route that Europe is taking — he still believes the Fed's policy is "reckless."
Even so, Hussman said, "I'm not expecting the economy to fall off a cliff," in part because of the corporate sector's financial strength. "Many companies' balance sheets are liquid; they can handle a lot of pain," he said.
But for the global economy overall, the debt buildup of the last 30 years remains the paramount issue. One way or another, the debt has to be resolved.
Governments and central banks want us to believe that the debt load can be worked down over time without destroying the economy and the financial system in the process. They're counting on the spending of the haves around the world to make up for the drag on the economy from the have-nots (including the hopelessly debt-ridden).
The zombie bears are certain that the worst lies ahead, and that consumers and investors should prepare accordingly — although how exactly to prepare is a matter of debate.
"We need a deleveraging, deflationary depression, and in three to five years we're going to have a much better economy," said Michael Pento, senior economist at Euro Pacific Capital in New York.
"We just have to go through hell in the meantime."
First, there was Fred Schwed's Where are the Customer's Yachts?, which is still the standard bearer for why Money Managers are overpaid.
Now (via the NYT) there is The Investment Answer (preface here [PDF]).
The Prologue opens more Matt Taibbi than Jason Zweig:
Wall Street brokers and active money managers use your relative lack of investment expertise to their benefit...not yours
Of course, they have a method That Will Work to solve this, which looks suspicuously like what those Active Money Managers say they do. And what you would think Economic Theory would tell you to do, which may be why they have the endorsement of Eugene ("the markets are too efficient") Fama among many others.
Perhaps it's time for economists to model why economic theory doesn't work?
The last time people realized their money managers were taking them for a ride, the market basically sat still for a generation. Whether this dying text is a leading indicator is left as an exercise, though not an academic one.
Mish's Global Economic Trend Analysis
Please consider PBOC Researcher Calls on U.S. to Sell Gold, People’s Daily Says The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China.
The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.
“The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper.
Here's the punch line, "the PBOC researcher didn’t mention whether China would be willing to purchase any gold from the U.S." Ya think not?
November 7, 2010
Andy Xie arguing that QE2's only impact is that it shows how the U.S. is checkmated by countries unwilling to let their currencies appreciate.
It seems that nobody wants to appreciate. Most major economies will do something to keep their currencies down. That is checkmate for the US. Without the devaluation benefit on rising exports, QE just leads to inflation, first through rising oil prices. The American people are suffering from declining housing prices and high unemployment. If the gasoline price doubles, the country may not be stable. How would the elite react? Probably more of the same.
The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis. The first sign would be a collapsing treasury market. The Fed is controlling the yield curve through its QE program. But, it is irrational for other investors to play this game. The only reason to stay in is that the Fed won't let the market fall. But, the underlying value is evaporating with rising money supply and the inflationary consequences. When all the investors realize this, they will run for the exits and the Fed won't be able to stop the stampede. If it prints enough money to take over the whole market, the people with freshly minted dollars would surely want to convert their money into other assets. The dollar would collapse too.
The world seems on course for another crisis in 2012. The same people who caused the last crisis are still in charge. They'll get us into another. Iceland is sending its former prime minister to court for causing the banking crisis. A worse fate awaits the people who are causing the next crisis.
Mish's Global Economic Trend AnalysisBloomberg reports Microsoft Record-Low Coupon Punishes Investors.I would suggest the opposite of Goldman's forecast. I expect low-quality junk to get hit, perhaps seriously hit as the recovery stalls.
Spreads in 2011 are likely to tighten most on debt from high-quality financials, low-quality non-financials and bonds maturing between five and seven years, Goldman strategists Charles Himmelberg, Alberto Gallo, Lotfi Karoui and Annie Chu wrote in a Nov. 19 report.
“Our rates team expects long-dated Treasuries to move higher on economic recovery, both in the U.S. and globally, and the normalization of U.S. inflation expectations, with yields on the 10-year rising to 3.3 percent by the end of 2011,” the strategists wrote. “We expect total returns on tight-spread credit to underperform accordingly, with high-quality names suffering the most.”
JNK - Lehman High Yield Bond ETF
click on chart for sharper image
The JNK ETF is a good proxy for low-quality "junk".
Nearly everyone is underestimating the likelihood of a significant selloff in corporate bonds, especially junk, not because of a strengthening economy, but because of a weakening economy and rising default risk.
Corporate bonds in general, and junk bonds in particular have been a one-way bet since mid-May. If the corporate bond market cracks, it will take the equities market down with it in a serious way.
It looks like we are following the path of Japan, but appearance can be deceiving!
The reason for their persistent deflation is because they did QE but after a few years their QE was unwound. We will not have that luxury. We do not have sufficient domestic savers to ever unwind QE. QE2 will lead to QE3, then to dollar crash, unless China revalued their RMB before we reach that point. Our terminal path is not persistent deflation, but persistent inflation.
"Japan is now in debt to the tune of 200%+ of GDP. It build bridges to nowhere hoping to cure deflation. It is madness. All Japan has to show for massive fiscal stimulus is debt."
Maybe Japan has a little more to show for all that stimulus. Guess it all depends on what a country decides to spend its money on. Consider:
United States' unemployment rate stands at 9.6 percent (real rate closer to 20 percent) Japan's unemployment rate fell to 5.0 percent in September from 5.1 percent in August
The US homicide rate is more than 11 times higher than Japan's
The US incarceration rate is 14 times higher than Japan's
Number of illegal immigrants in the US: 11 million plus Number of illegal immigrants in Japan: effectively zero
Nope, Japan and the US ain't twins separated at birth. More
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Lisajean says:Today, 2:30:06 PM“Blackswan, but as Prechter often points out, we have much more bad credit out there than Japan ever had. The credit implosion will be much much worse for us.
Bernanke is so far down the road of papering over problems that to do anything else now would be an admission that his cure is in fact the disease. As such I would expect more of the same until something completely goes haywire rendering his actions useless. Of course by the time this happens trying to take personal preventative measures may be a bit late.
Nice lead into the surreptitious trade war underway.
And, no fucking around here.......the Chinese are wanting to be paid for the UST iou one way or another. Quick calculation says Bejing can rally public opinion
What is worse than admitting to a creditor that I cannot pay the bill when due? Bernanke et al appear to be the experts at ripoff, of whoever, Chines or American for that matter..
Interesting.......what are rare earth minerals worth as a puzzle piece in the context of the big picture?
The chinese spent decades in the international dog house. During that time they developed a very truculent approach to perceived threats and slights; they pushed their hand to the limit. And nobody really cared. Thiry years on the Chinese are becoming very powerful, yet still take a kind loud, sledgehammer approach to the inevitable shoving that goes on between super powers. They have not always wielded their new power gracefully.
The USA is still the most powerful country in the world, and should not cower before anybody, no matter how many tons of rare earths they have. The chinese are playing chicken with the country that beat the Japanese and the Germans on opposite sides of the world at the same time. They may think we've gone soft in in the head and in resolve. I think they are due for a lesson in hard ball.
The US still controls the reserve currency of the world, the dollar. This is a double edged sword, and cuts both ways. The global economy runs on dollars, and to maintain this status we must flood the internation markets with dollars to keep adequate supplies of liquidity. The only way you can do this is to be a net debtor. This is seriously inflationary, although it does "export" that inflation to the people it is benefitting. One way to look at it is that there is a dollar funding nearly every international transaction. That's a lot of dollars, most of which the US doesn't need for itself.
Regardless of how you feel about globalization, we have been provider of the credit created money that made it happen. The chinese are a major beneficiary of all that liquidity, which operated like a loan that allowed developing economies (like China's) to get on their feet.
Of course, this is unsustainable; the USA cannot fund the liquidity of the world forever. The reserve status of the dollar must give way so we don't print ourselves into oblivion, which is obviously happening right now.
However, The Yuan is NOT ready to replace the dollar. The idea that a currency that doesn't even float could become the new reserve is ridiculous. They can only consume about 1/20th of what they produce, so they need to export or die. The creator of the reserve currency must, by definition, be a net debtor, and the bigger the better. Once the Chinese understand that (they probably already do), they wouldn't want the Yuan anywhere near reserve status, they could not withstand the inflation, exported or not. The Chinese have taken a very selfish and small minded posture, keeping as much profit for themselves as possible. They have not "grown up" and become a mature responsible members of the international financial world.
Don't get me wrong I have tremendous respect and admiration for what the Chinese have accomplished in an incredibly short period, but they seem reluctant to go from small mercantilist economy to one of the benevolent patriarchs in the global power play. The wealth a country receives from the world may be theirs, but they didn't create it.
I remember when the Japanese were so wealthy, they were going to buy the world. Rent Black Rain and Rising Sun again if you've forgotten. To me China looks like a replay of Japan's ascendency in the 1970s and 1980s. They have the same aging demographic that Japan had, they made a fortune manufacturing everything. The Japanese made better cars than we could, and eventually put GM out of business. We survived.
And our reaction to China is equally paranoid and xenophobic as it was to Japan. China is blowing a world class construction and real estate bubble, that must collapse on them just like ours did on us, and Japan's did on them. Their mistakes are not the same as ours, we sold houses to people who couldn't afford them, then sold the toxic mortgage several times over. The chinese build cities no one lives in. They over build to satisfy perverse political incentives, we over built to satisfy perverse financial incentives. The third act ends the same way.
Now, I'm no fan of The Bernank, but the other side of this argument gets way too much attention. The situation is, as always, vastly more complex. Already Bernanke's strategy is causing serious inflation in China. And he's not done. As the dollar goes down, the inflationary effect is felt much more strongly in China than here. He's deliberately pushing them to the brink, to force them to behave responsibly, like super power they have become.
If the world abandons the dollar in a panic driven flight to hard assets and commodities. it will create hyper-inflation in every currency. Nobody benefits from that. The Chinese have no incentive to make their 2.5 Trillion of dollar reserves worthless. Consider that the Chinese are scurrying around the global trying to lock up future oil production. We have been doing that for 70 years. The Saudis have been trading oil futures (to us) for gold futures for decades. We have ALREADY locked up huge amounts of future oil production. The Chinese are just trying to catch up.
The US is making some really serious mistakes, but we always have. We blunder our way to success, mostly because we just keep trying. My point here is that this is becoming a game of very hard ball, and we still hold plenty of cards. That story, right or wrong, doesn't get told.
Federal Reserve Chairman Ben Bernanke's $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don't?
Mr. Bernanke claimed earlier this month in a Washington Post op-ed that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy.
For a long time, including during the Bush administration, the Fed has been manipulating markets to disguise economic facts that the world must face and adapt to in order to get moving again
I notice a persistent cognitive dissonance in policy circles.
On the one hand, it's taken as an axiom in these circles that the hysterical behavior that led to this situation was, at least in part, the result of normal psychology: in boom times, people join in ever less rational behavior, making ever riskier "bets," as they perceive others profiting from ever riskier bets. According to this widely accepted model, this behavior continues until a "correction" arrives. At that time, the least prudent pay the piper for their excess as the economy corrects.
On the other hand, when the correction does present itself, the policy makers try to spackle over it: in this case, via monetary policy. It's one thing to devalue the dollar a bit to compensate for a relatively aberrant and short-term economic problem. It's another to try to fix fundamental and deep economic problems with these tools. It simply won't work. Devaluing assets in the books of irresponsible banks will do nothing to correct the behaviors that contributed to the problem in the first place. Nothing in the Fed's history, Wall Street's history or the banks' history indicates innate prudence or prescience. Letting them, and those who used them, off or softening their landing will only encourage more of the same behavior when the economy "reheats." The next time, the behavior will only be that much worse.
To put it another way, if a house (or office building) is only worth $1 in the open market, the owner will only get $1 for it. Devaluing the dollar so that it will sell for $2 fixes nothing.
Very misleading to say the Dow is down 254 points since the Fed's announcement. Andy Kessler of all people knows full well the massive move in equities throughout Sept. and Oct. was due to the markets discounting QE2 after Bernanke's Jackson Hole speech in August. Markets did not wait for the official announcement.
"Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks."
In other words, he's looking to create inflation in housing, rather than letting the market find an equilibrium in housing prices and start to clear inventory.
Propping up prices, whether it be by manipulating interest rates, skewing lending standards, injecting more "liquidity," or shifting risk from lenders to taxpayers is how bubbles are created and propagated. At some point, the market WILL win out over the best-laid schemes of government types. So, why delay and worsen the inevitable?
It's classic 'not on my watch' syndrome. He is so busy trying to avoid the eventual market floor 'on his watch' that he is missing an opportunity to actually fix the problem 'on his watch'.
Agreed that real estate is still headed down, and that the Fed is now in a continual bailout mode to save the banks. The huge displacement caused by ZIRP and QE1&2 is stripping wealth from traditional lenders including pension funds, insurance companies that offer annuities, endowments, and individual savers. This will end very badly. Someday we will learn that we cannot fool the market, and eliminate correction pain by government spending and central bank interest rate and credit manipulation.
That QE2 is intended as a bank bailout was obvious the day of the announcement. The Fed wants a "bear steepening" of the yield curve, which helps promote bank 'profitability' and flushes money out of the long bond and into equities. This has an inflationary effect - we will all pay for bank 'profitability' (be dam*ned).
The question remains whether the Fed will be able to maintain a steep curve, or if the vigilantes will orchestrate a "bear flattening." The bond market is fragile and there are many opptys for shorts - the muni bond market is just the latest target.
The point remains: when will they all learn that the deleveraging process needs to run the full course? Cheap tools won't solve the problem, they will only extend it and make it worse. Seems as if they were never taught that failure can lead to success......
What's missing in this discussion is the problem of our national debt. We will incur debt in 2011 at about a rate of $110 billion / month, coincidentally about the same as the QE2 program. Demand for US debt has softened substantially and would soften further if we attempted to push that level of debt into the private sector. I'm only guessing, but I estimate that 10 year Tbill rates would easily reach the high single digits, at least 500 basis points higher than today.
The results on the US economy would be devastating. First, it would increase the annual deficit even more. Much or our debt is now at the short end of the yield curve, so it would not take long before we had to re-finance most of our existing debt at these new higher rates -- $13trillion times 500 basis points would ultiimately add over $600 billion per year to the deficit. That added amount would force interest rates up even more, creating a "death spiral".
Second, any variable mortgages (and other loans) that haven't yet gone delinquent would quickly do so. "Look dear, we got a letter from the bank and starting next month the interest rate on our mortgage is 15%". Not a pretty picture.
Third is the impact on bank balance sheets / reserves, where a steep rise in interest rates would plummet the value of all their assets, not just MBSs. The stock market would also suffer, as a steep rise in Tbill rates would devastate the value of an S&P500 paying about 2.5% dividends.
I'm no fan of Bernanke, but I've said before and still believe that he had no choice but QE2, and that QE3 must follow later this year.
The solution is to drastically cut government spending, quickly reducing the deficit (raising taxes, on the "rich" or anyone else, will have a much smaller impact on the deficit than the current static scoring models predict; much of the higher rates will be offset by lower growth). Bernanke's great crime as head of the Fed, first under Bush and now under Obama, was to put up no fight to the massive growth in govt spending. The Fed could have used its illusion of independence to take a principled stand; I don't believe that concept is in Bernanke's dictionary.
You can see the 10 year heading to high single digits? If rates back up 500 bps like you say then you're right, housing plummets, balance sheets implode, stock markets tumble. Where will that money that money go? What happened the last time housing and the markets turned south? You seem to be only fixated on the supply side of the equation.
The current political trend is towards balanced budgets not increased deficits. Extending unemployment benefits did not even pass this week. That limits the supply side of the equation. Our deficit is not only the result of the money the government spent and is spending but also the gross tax revenue shortfalls at every level.
I see many people on these blogs comment that rates have to go up but I would argue that rates will continue to fall. Total credit is contracting and the government has already borrowed and spent most of it's "dry powder." More government borrowing and spending isn't out of the question however, if rates back up like you say there will be plenty of money rushing into the Treasury market to fund it. No matter what posturing your read about our fiscal situation, we are still looked at as the best of the worst when there is a flight to safety.
Last I looked, average maturities for US debt was 6-7 years. That means that with no new deficits, we have to sell over $2 trillion of debt every year. We are already seeing in the Muni bond markets how a glut of supply is driving prices down and yields up. If we add the $1.3 trillion dollar deficit to the $2 trillion of "roll-over", that will have to have a signifantly adverse effect on price. I'm estimating it would drive 10-year notes up to 6 - 8%, but that is based on minimal data analysis. It is consistent with 10-year rates through most of the 1990s; my memory is that 10 year rates didn't drop below 6% until around 1998 or 1999, and then went back over 6% in 2000/2001.
You are right in pointing out the we are "the best of the worst". But we are also the biggest of the worst. The world can absorb high Greek and Irish debt because their GDPs are so small. If the US debt hits a tipping point, there can be no IMF or Eurozone bailout. Being the best of the worst may buy us some time, but that is only valuable if we use it wisely.
I disagree with your assessment that the "current political trend is toward balanced budgets". The special commission identified $300-400 billion of deficit reduction per year, and most of that isn't realized until 5+ years out. Our current deficit is $1.3 trillion. CBO assessment of the deficit for the next 10 years assume things like full expiration of the Bush tax cuts, and that ObamaCare is deficit neutral. I suspect that a more reasonable assessment of deficits over the next 10 years would be at least double the current CBO estimates.
Until we are willing to confront the cost of entitlements (SS, Medicare, govt pensions, etc. at all levels of government are equal to almost 25% of GDP), which make up about 60% of total govt spending, then I can give no credence to the various committees and promises.
You are also right that growth can be a big part of closing the budget deficit, but growth requires investment -- into capital markets through cuts in tax rates and/or through direct govt investment in very specific initiatives (history says the former has greater short-term impact). I do not see a government willing to tackle either of those things.
Its an interesting discussion and a roundabout way of reaching the conclusion that the Fed has very limited monetary options right now, and that unless we fix our fiscal problems all the Fed can hope to do is buy a little time.
Frank, We are on the same page with the effectiveness of monetary policy and the the implications of Fiscal policy. There is no question that the government has a role to fill here with the private sector contracting. To clarify; the government should be injecting money into the economy but in a way that the country as a whole gets a long term return for it. This idea that they should just start giving it away and throwing it down a black hole is crazy. It is difficult to pay back money from malinvestment regardless if it is government or private investment. The difference is who is stuck with the bill.
I don't question your budget figures or your data, just the out come of higher rates. It seems to me our current system has a built in check for higher rates. Higher rates create the problems we discussed earlier. When that happens money rushes out of risky assets and into safe assets. (The US for now)
Until we get true price discovery of all assets resulting from the biggest credit boom in history, I can't see where the demand for more credit comes from at these higher rates you talk about.
Calculated RiskFrom Bond Girl: Some thoughts on the muni marketI have been somewhat hesitant to write about the recent sharp correction in the muni market, mainly because I do not like wasting my time.I think it is important to understand that these supply issues are what is driving the muni market - not an imminent default.
My opinion, for whatever it is worth to you, is that there are a handful of factors – mostly unrelated to the relative creditworthiness of muni issuers – that have provoked this correction. These factors are related, and they will likely contribute to volatility going into next year.
The first, obviously, is a supply glut. The pending expiration of the Build America Bond (BAB) program has pulled supply forward, and this is going to seesaw over the next several weeks. Since the BAB program was initiated, most issuers have structured their new issues with the sense that they will go to either the tax-exempt or taxable market, whichever is more advantageous at the time. It has been almost completely a supply management game since the market for these bonds was established and munis became truly bifurcated.
By allowing muni issuers to sell taxable bonds, the BAB program opened the market up to investors like pensions and foreign investors, who otherwise would not benefit from a tax exemption on the interest income on the bonds and would find tax-exempt yields unappetizing. This program has relieved the supply pressure on the market for essentially two years now, keeping interest rates low.
What is going on now is that muni issuers are scrambling to get deals done to take advantage of the program before it expires, and this is pulling the number of new issues that would ordinarily be coming to market forward. So the looming expiration of the BAB program is creating the very conditions it was created to alleviate. Issuers are very conscious of this fact, and that is why a large number of deals are getting pulled. As more issues get pulled and supply is reduced, there will be some relief on rates, which I think is what happened today. But you can expect that muni issuers will be dancing around this until the program expires at the end of the year, so there will likely be significant volatility. There is also considerable uncertainty as to how supply issues will play out in the first quarter of 2011.
I'm not saying there won't be a default, but the recent sharp decline happened for clear reasons.
However, in the longer scope, there's clearly going to be yield pressures. Even if they continue to permit taxable issues and the issuers can arb the bifurcated market, it seems like deteriorating creditworthiness -- especially given the parlous finances of the muni insurers -- is going to lead to muni bond market exposure to yield spikes. .
Rob Dawg wrote:
Very well said. As with any economic segment it is very important to avoid confirmation bias. Looking for trend in noisy data is a subtle business.
Bond Girl reminds us of many of the factors in the bond universe that have little to do with what we think of as risk default premia.
I think Meredith Whitney has the answer pegged better than Bond Girl.
Supply/demand is a much smaller factor driving munis down than is the end of multiple federal support systems for transferring money form federal govt. to states and localities. The election results triggered the muni bond selloff. Stimulus support to states/localities will end next summer, according to Meredith.
It is a reflection of how one-sided today’s class war has become that Warren Buffet has quipped that “his” side is winning without a real fight being waged.
That because the blues will stand by their man regardless of his merits (q.v. red team defense of Bush II) while there are endless guys with six and seven figure net worths stupid enough to think when someone shouts "class warfare" they're on the "rich" side. Single-Digit Millionaires are just another marketing demo.
Making The Last Use Of Reserve Currency Status
I suspect many in the mainstream academia haven't realized what QE2 is. It is the last use of the dollar's reserve currency status, intended or otherwise.
In a fiat currency system, inflation should be the only risk, because fighting deflation should be trivial -- just print money. This is a fundamental advantage of a fiat system over the old gold standard. Unfortunately for the US, the dollar's reserve status means the geopolitical border is not the dam holding the water as in other countries. As Fed pours in more water, it leaks right out to lowlands (good investment destinations) all over the world. Given the current economic prospects in the world, the result is that QE2 cannot stoke inflation in the US, but causes very unwelcome interference in exactly the other places in the world where inflation is a big concern.
It's small wonder all the growth EM economies are engaging in the low-grade currency war of capital control. To them, this is a defensive war for survival against the invading army of dollars. If the low-grade war proves insufficient, they would escalate the defensive posture. They have to.
Another consequence, intended or not, of QE2 + reserve status is that all growth economies are under tremendous pressure of currency appreciation. Some may be able to resist it and muddle through until an easier day; others will have to cave in, therefore caught in the catch 22 of either raging inflation or shrinking economy, or both. And, of all the growth economies, China arguably has the most capacity and strongest political will to resist appreciation. In such a scenario, if the intended target of Fed's fury is China, as hinted not so subtly by Bernanke, "collateral damage" would once again be the main theme, as has been in all recent offensives launched by the US.
In summary, Fed's dogged efforts in stoking inflation have caused and will continue increasing the risk of bringing all growth EM economies to a halt, significantly increasing policy risks in the rest of the world as each country tries desperately to deal with the capital tsunami, and all the while with huge doubt in whether it could reach its domestic goal of stimulating employment and housing. In other words, Fed is screwing the world for a slim chance of helping the US economy.
This is emphatically NOT a moral criticism. But it does represent a significant abandonment of the responsibilities on Fed's part as the issuer of world reserve currency.
Let's go back a little in history. Right on the heels of WWII victory, in 1944 US dictated Bretton Woods that established the dollar as a proxy for gold in the free world. The "proxy" part was only convenience, of course, as to be expected and proven by Nixon in 1971. The arrangement made sense: the US would provide security blanket, and the rest of free world would pay for it by accepting and holding the green paper printed by the US. It's the same idea as gangs collecting protection fee in NY, no cynicism intended.
Fast forward to Berlin Wall collapse. Now the fundamental premises of the dollar's reserve status were gone. Europeans quickly realized this change and created the Euro; why should they continue paying for protection when there's nothing to protect against? The US has made numerous fantastic efforts in creating threats (by "creating" I don't necessarily mean create; often times you just have to doze off for a second and the enemy will help you out): perpetual terrorism, WMD in Iraq, perpetual war in Iraq and Afghanistan/Pakistan, Iran, North Korea, China, even Somali pirates (now it gets really pathetic). But none of them could ever live up to the high expectations set by USSR.
After 10+ years of trying, it's become clear that this is futile. Nothing works; none of those idiots could do it. But with the reserve currency status comes its responsibilities. Win-win is BS-BS; there's no free lunch after all. The time has come to end Bretton Woods II.
Now Zoelick's surprise proposal of a new gold standard makes perfect sense.
With QE2 the Fed is saying: Ah fuck it, you don't like USD as the reserve currency? Well guess what? We don't like it, either. So let's drop it and from now on it's every man on his own. Good luck.
Good luck everybody. We all need it.
One of the prerequisites of a reserve currency is that the float is sufficiently large to handle cross border transactions of any size. So it is a bit ironic that QE2 actually helps the USD maintain its status as THE global reserve currency. One of the messages from the Bernank is that resistance is futile--we will overwhelm the world with a tsunami of dollars. Eventually, this could backfire. But for now it further cements the USD as the world's reserve currency.
I disagree with Bo Peng's claim that the US PTB do not like the dollar reserve status. "We don't like it, either."
The reserve or petrodollar status underpins the whole global empire.
Foreigners help pay for their own US military occupation, and even for the economic war against them. The petrodollar requirement for oil (and other commodity) purchases enables a global extortion racket, and partly explains the US insistence on Mideast control and dominance. For the cost of fiat dollars, the US theoretically "owns" the goods and resources of the world. The bizarro fiat economics compels other nations to push up the demand for dollars even as the US prints more of them.
No, although the US PTB may want to default on dollar-denominated debts, I do not think US leaders want to lose control of their global financial racket, any more than when they defaulted on their gold denominated debts.
Look to NATO and the IMF for the possible future.
Just another argument from induction. If we've learned anything over the last two+ years, it should have been to throw out the history books and rework the models. This thesis presumes that demand for dollars exists in perpetuity, foreigners demand to be enslaved, and the ability to pay for our industrial military complex lasts long enough to make a transition to a "world" currency (even though this status is already held by the dollar and the U.S. is presently in the driver's seat, but would have to cede some degree of control to make the transition). In short, the fuel runs out before we get to escape velocity.
In the end, isolationism will prevail and, as credit contracts, so does trade interaction. The camel is in the tent wrecking shit already.
by Oh regional Indian:
++ Ironically funny, Macho.
And that is quite an interesting train of thought, military might lasting just long enough for One world currency to be introduced, then a ton of breathing space for these guys to re-group.
It would explain their willingness to leave so many soldiers in far away bases at serious risk of supply chain disruption. Maybe they'll just be cut adrift, without the codes of course. Or become self-sufficient subsidiaries of the United Nations Corporation..
There is no thesis, other than to utilize the banking system as a means of controlling power. All else are simply palliatives used to soothe the global herd. Strip away the rhetoric, and what we have is naked aggression & imperial conquest. Who in the US of A wants to be viewed no differently than Nazi Germany & Imperial Japan?
Yup. The good thing, for us, is that implementation, monitoring, and management of the banking system is too dynamic for humans, despite our egos telling us with such power we inherently have the intelligence to control it. I say good thing, but obviously it could end very, very badly (strong likelihood of massive social upheaval, political unrest, even the changing of borders and allies)...
but what I mean is that eventually we (morts) grow exhausted on their treadmill, pass out, hit our heads on the ground, and wake up off the treadmill. Of course, the entirety of our recovery is spent trying to get us back on the treadmill, but luckily we naturally have a skeptical and weary period before eventually capitulating. In other words, just because we are apathetic to change is not necessarily dispositive of whether change will occur (inevitability upon contraction). Hopefully we are skeptical of the sales pitch for a very long time following our bump on the head.
The manager of the third-largest mutual fund focusing on junk bonds is buying stocks while cutting back in his portfolio’s primary area.
“I don’t see the value in the high-yield market,” said Mark Notkin, manager of the Fidelity Capital & Income Fund (FAGIX).
In an interview with Bloomberg, he added that stocks seem a better investment and that the rally in junk bonds is over.
Other bond managers and analysts agreed with Notkin.
His fund has the third-most assets, according to the report. It only trails American Funds High-Income Fund (AHITX) and the Vanguard High-Yield Corporate Fund (VWEHX).
But in the past five years, Notkin’s returns have beaten all other rivals, according to the report.
It seemed to be the only decision that was not made in a panic. It adhered to the rules of capitalism — when your company is insolvent, it goes into reorganization or dissolution. The brutal, Darwinian rules of the market and of bankruptcy applied — not the influence of lobbyists, or special favors from Senators. The Treasury Secretary’s former gig was not running an auto company, he ran a Wall Street bank — so there could be no special favors expected to come from that quarter either.
Instead, Uncle Sam’s involvement was to provide Debtor-in-Possession financing. The bankruptcy plan was obvious: Wipe out shareholders, give bond holders a haircut, fire management, pare the company down to a sustainable size without sentiment.
This was what was done. A turnaround plan was created and executed. If the company met its milestones, the firm would be taken public, which would allow the government to significantly reduce its stake and exposure to GM. The Fed also helped, keeping financing rates at ultra low levels.
The long term stock sale plan would lead to the taxpayers being made nearly whole. All told, it was a wild success. Malcolm Gladwell argued that Rick Waggoner should get more credit and Steve Rattner less, for GM’s effective turnaround; many of the new models that are now doing so well were first created and planned for under Waggoner’s tenure 5 years ago.
So what is arguably the most successful bailout of the 2007-2010 era was in fact a non-bailout: It was a bankruptcy reorganization that eliminated the most toxic aspects of a century old rust bucket of a company. The new firm has clean books, is well capitalized, is without crushing debt, has a less onerous labor contract, pension and health care obligations. Its hard not to see how this was anything but a ginormous winner for all involved.
Which brings me to the Banks.
Currently, the United States has a weakened financial sector. Many of the largest Banks are technically insolvent, but thanks to an accounting rule change, are not required to admit this simple mathematical fact. They are carrying an enormous amount of bad loans on their books. They are sitting on several million REOs — bank owned foreclosures for which there is essentially no market. This shadow inventory of houses amounts to years worth of sales, not mentioning the depressing effect the excess supply will have on prices.
The reckless lending of the 2000s was merely the tip of the iceberg. From start to finish, the engaged in all manners of irresponsible behavior. When a company’s actions are so reckless it compromises the firm’s ability to survive, why would we expect it to have performed any of its other duties competently? They didn’t, which is why we have learned about how poorly the banks not only made these loans, but also administered, securitized, serviced, and foreclosed on them. The entire process was reckless, it was done on the cheap, riddled with errors, fraud and felonious behavior.
It has become a national embarrassment.
The bank bailout plan was ill conceived and poorly executed. Trillions were thrown at them before Uncle Sam had any idea as to how much debt was actually on the books. What were once considered decent holdings were eventually revealed to be highly toxic assets.
Recapitalizing the banks is a huge priority. But after the first round of trillions were given away to the banks, the public was disgusted. The politicians lost their appetite for overt bailouts. But the banks were still under-capitalized, their balance sheets were still laden with junk. A direct transfer of taxpayer monies was out of the question.
An easy backdoor was found: Arbitrage the Fed and Treasury. Zero interest rates and QE allowed giant Wall Street banks to borrow at no cost from the Fed, and then turn around and lend this same zero cost money back to the Treasury at 3% or so. Do this for another 10 years or so, and the banks would be recapitalized. By then, maybe there might even be a market for all those REOs. Sure, that would mire the nation in a decade long Japanese-like slump. Hey, at least the bonuses would be paid on time.
The motto of the bank bailouts: To hell with the banking system, save the banks!
The results should not be surprising. The banks remain in a weakened condition, perilously at risk for additional problems in RE. Despite the massive liquidity, Credit still remains tight. If financing is the fuel that drives the economy, the US is running on fumes.
Wall Street has returned to business as usual. The Street is nothing if not savvy. Just as a shark detects blood in the water, the Street can smell weakness and exploit it like no other industry. Once they figured how to play chicken — mutual assured destruction – with the entire global economy, there would be no restraining them.
Compare the differences between the banks and GM/Chrysler, and will see the full folly of how we rescued the financial sector.
Instead of letting insolvent banks fail, we turned over the keys to the castle. We could have fired the incompetent management that caused the problems — but most of these execs are still in the same highly placed positions in their firms. In terms of senior personnel, the industry is literally unchanged.
- Bad debt? Still on the books.
- Sufficient capital? Many years away.
- Business model? The same highly leveraged reckless strategy that got them into trouble in the first place
- Regulatory Oversight? A modest improvement which the newly elected, bought and paid for Congress, seems hellbent on overturning.
If you want to understand why we should never have bailed out the banks, just look at the differences between the Auto and Banking industries. One is healthy, with a likely cost of near zero. The other remains a debacle, whose costs are incalculable are likely to be an economic drag for years if not decades.
Too bad the minds behind the bank bailouts did not have the foresight to appreciate the full advantages of prepackaged bankruptcy for the sector . . .
November 18, 2010
The environment today is way too hard to live with. Lenders are suspect and in any event slow, inefficient and abusive. Congress is a collection of extremists who pray to the rich and will screw the borrowers any way they can. Other in congress are followers of a well off media that has little patient for the less lucky. The government is occupied by former bankers and their friends; it obviously could care less.
If you are a borrower or in debt you are on your own.
Yes life is difficult even if we ignore the existence of abusive lenders and Congress converted to a banker club. Actually both are side effects of the process of financialization of the economy that has started long ago. The current crisis is just a sign that it reached a mature stage.
I think that the key effect of financialization is devaluation of labor. This process was actually initiated and supported by government. Dissolution of the USSR removed the last breaks.
The results actually are pretty sobering: – Most people in the USA both in lower and upper middle class work harder and get less and less. – Working day became unregulated like in early industrialization period – Many work several jobs. – Many jobs change too fast to adapt (IT is one example). – Outsourcing is like Damocles sword.
All-in-all financialization of the economy became a real tragedy for labor. Today those who earn their living from work are coming out as huge losers: shrinking wage growth, problematic pension and healthcare insurance coverage, decline in health and safety protection.
The transition to the post-carbon age,By Luc REYNAERT (Beernem, Belgium) -
October 23, 2010
In this mighty guide N.M.Ahmed analyzes the interconnection between the main aspInternational terrorism: is linked to the world's over-dependence on oil. It is sponsored by Western intelligence in order to destabilize strategically important countries and to redesign actual geographical maps.
Political violence: its `normalization' by the `deep State' could generate `Police States' and curtail seriously civil liberties. Neoliberalism Neoliberal (`pure market') policies are unable to recognize long-term human costs by focusing on short-term profit maximization for a super-wealthy oligarchy (an imperial social system). Economically, it drives actually nearly exclusively on oil energy. Its ideology is based on unlimited growth and consumption maximization. Structural reforms On the political front, there should be more real democracy (decentralization of power) through community-lead governance.
On the economic front, there should be sustainable (not unlimited) growth.
On the social front, there should be new mechanisms for more equal wealth distribution, land reform and widespread private ownership of productive capital.
On the financial front, there should be a monetary reform based on interest-free loans (only fees for banks) for productive and innovative investments.
On the energy front, there should be large-scale investments in decentralized renewable energy technology (solar, tidal, wind, bio-fuels, geothermal, hydro-electric).
On the agricultural front, there should be smaller localized organic agricultural enterprises.
In one word, there should be a new human model through a cultural reevaluation of the human lifestyle.
The author could underestimate the demographic explosion which he sees steadying at around 10-11 billion people.
Some of his Marxist concepts are debatable at least.
- The class struggle is only one element in the history of mankind. Other extremely important elements are power (see below), nationalism (the nation-State) or advances in medicine (vaccines, the pill), chemistry (fertilizers, plastics), technology (atom bomb, computers) or industrialization (spinning wheel, injection engine).
- Man's nature (his genetic basis) doesn't change under altered production conditions. All people are materialist consumers (of cars). A class is the sum of its members, nothing less, but also nothing more. There are no `good' (proletarian) or `bad' (capitalist) genes. People use their own `class' for personal benefits.
- Capital (investments) runs after profits, not the other way round: (dwindling) profits running after capital (and its organic components).
- Having power means having a bigger chance (also genetically) to survive. E.g., in one European country nearly all its inhabitants are descendants of the dukes of Burgundy. In a capitalist system, power means money (capital); in a totalitarian system, power means being a (one) party chief, in a military dictatorship, power means being a general; in a theocracy, power means being a High priest; in a clan, power means being an `uncle'.
N.A. Ahmed wrote a highly necessary book, presenting (sometimes nearly utopian) solutions in order to save our planet. It is a must read for all those who want to understand the world we live in.
The Oil Drum Campfire
Dr. Ahmed is a professor and political scientist working out of London. His new book, “A User’s Guide to the Crisis of Civilization: And How to Save it,” not only fills this gaping void, but does so with a powerful and convincing account of how our civilization is threatened by a system of crises.
Dr. Ahmed examines five separate crises confronting our civilization:
- “Climate Catastrophe,
- ” “Energy Scarcity,”
- “Food Insecurity,”
- “Economic Instability,”
- “International Terrorism”
- and the “Militarization Tendency.”
While his coverage and explanation of the root causes of each of these crises is outstanding and well worth reading in their own right, this is not the true strength of the book. Rather, he clearly and directly explains that, while the impact of each of these crises is great, we can only understand their true impact and how to potentially solve or mitigate them as a system. We cannot solve or optimally mitigate climate change without considering peak oil, peak oil without considering the collapse of the nation-state, or global poverty without examining our economic and finance structure, etc.
Dr. Ahmed considers civilization to be a complex adaptive system facing a "continuum of crisis":
The world is on the verge of a potentially cataclysmic convergence of crises, which fundamentally threaten the viability of modern industrial civilization. Seemingly diverse phenomena such as international terrorism, climate change and resource depletion are in fact intensifying manifestations of the same structural dynamic generated by the inherently dysfunctional character of the global political economy, its ideology, its value system, and the interrelation of these with state policies and individual action.
While the book certainly pulls no punches in its description of the nature and scale of the problems facing civilization, it is not, ultimately, a story of doom and gloom. Rather, reviewing and integrating the lessons in civilizational systems-theory developed by Joseph Tainter, Thomas Homer-Dixon, John Michael Greer and others, Dr. Ahmed notes that "the danger of collapse also heralds the hope for 'catagenesis' - renewal through reversion to a simpler state, followed by the emergence of a novel form of society . . . global crises are not simply symptoms of a global systems failure - they are simultaneously symptoms of civilizational transition."
Dr. Ahmed takes the existing state of civilizational systems theory and layers on top a nuanced understanding of socio-political, class, property and productive relationships that define the reality of our efforts to do something about the problem. Dr. Ahmed then outlines 11 "key structural problems" that he argues prevent us from actually addressing and overcoming the challenges facing our civilization, such as:
The systemic over-dependence on hydrocarbon resources for industrial production, sustained by an international division of labour designed not to meet the needs of local populations, but purely to maximize profits for primarily Northern banks, corporations and governments.
After this compelling narrative of why we have failed to recognize or effectively address this reality, Dr. Ahmed then provides a vision for a "Post-Carbon Revolution and the Renewal of Civilization" that directly addresses each of his "key structural problems." While it would be a stretch to call this vision uplifting or "happy," it is certainly positive while remaining firmly rooted in reality and the possible. For his compelling analysis and recommend path forward, I highly recommend Dr. Ahmed’s “Crisis of Civilization” to readers of The Oil Drum.
While the discussion of peak oil is well done, it may not challenge many Oil Drum readers with new material. However, even for those well-steeped in energy issues, Dr. Ahmed’s coverage of our fractional reserve banking system, the bleak outlook for global food systems, or other related crises will certainly be informative—especially his coverage of how these crises and their structural predicates arise from, cause, and interact with our energy situation. Even the best informed student of peak oil will find new, challenging and provocative material in “Crisis of Civilization”—material that will not only help to advance the discussion of peak oil, but that will help integrate peak oil concerns within the broader system of economic and political action and policy. In the end, if the crisis of our modern civilization can be solved—or at least if the transition to whatever replaces it can be softened—then it will be through a syncretic understanding of the system of threats we face, such as that presented by Dr. Ahmed, that pave the way.
Dr. Ahmed is the director of the Institute for Policy Research & Development. "A User's Guide to the Crisis of Civilization" can be found on Amazon.
Nov 17, 2010 | Tech Ticker
Warning of the risk of an "implosion" in the bond market, former Treasury Secretary Robert Rubin says the soaring federal budget deficit and the Fed's quantitative easing are putting the U.S. in "terribly dangerous territory."
Speaking at an event at The Pierre Hotel in New York City honoring Sen. Kent Conrad (D-N.D.), Rubin joined the growing number of current and former officials (foreign and domestic) to criticize QE2. The Fed's plan to buy $600 billion of Treasuries "has a lot of risk," he said, calling the international reaction "horrendous."
Rubin, who issued a similar warning about the bond market at The FT's "Future of Finance" conference in October, said Congress' vote on raising the deficit ceiling next spring could be the "trigger" for a rout in the Treasury market. Several Republican and Tea Party candidates vowed to not increase the government's debt ceiling unless Democrats agree to sharp cuts in spending that may not be politically tenable.
A Congressional standoff on the debt ceiling could spook international investors, Rubin said, alluding to a market event similar to the Dow's 778-point plunge on Sept. 29, 2008, when the House initially voted no on TARP.
While most pundits worry about the potential for China to dump its Treasury holdings, the former non-executive chairman of Citigroup said a financial version of the Cold War concept of Mutual Assured Destruction will likely prevent them from doing so. But he is worried about selling by the government's of Singapore, Hong Kong and Malaysia. "They could say ‘the Chinese are stuck but we're not,'" Rubin predicts.
(Update: Ignoring Rubin's warning, Treasury prices jumped Wednesday following a tame report on U.S. consumer inflation and a weaker-than-expected report on housing starts.)
Rubin's comments came during a panel discussion that also featured Sen. Conrad, chair of the Senate Budget Committee, former Nebraska Senator Bob Kerrey and former U.S. Comptroller General David Walker. The panel was moderated by former Commerce Secretary Pete Peterson, the senior chairman and co-founder of The Blackstone Group as well as founder of the Concord Coalition.
Update: The main thrust of the panel was to discuss what should be done - and what can be done politically - to address America's dire fiscal straits.
Repeating his warning about the dire need for action, Walker called the initial recommendations by President Obama's deficit commission, of which Sen. Conrad is a member, "a good start."
The recommendations are constructive," Walker said, because they put "everything on the table," meaning taxes, entitlement programs and defense spending, as well as discretionary spending, and government waste, fraud and abuse. (See: Deficit Commission's Proposal D.O.A., But Make Congress Vote On It Anyway, Pento Says)
On Wednesday, a separate panel led by former Senator Pete Dominici and former Clinton economic adviser Alice Rivlin offered a competing proposal with similar themes -- and a greater emphasis on raising taxes.
Political Reality vs. Economic Necessity
"We have to work both sides of the equation," Sen. Conrad said. "If we fail [to act] our nation will be condemned to second-class status."
Saying the U.S. is facing a "defining moment," Sen. Conrad chastised Republicans and Democrats, respectively, for being in "deep denial" about the need to both raise revenue and cut spending.
Yesterday, for the first time, Conrad said he was "hopeful... by some act of God...about possibly finding a way to get" the 14 votes necessary to send the panel's recommendations to Congress for a vote.
Then (political) reality set in.
"Even if you do [get 14 votes], what are the odds of getting it through the House and Senate," Rubin asked, spurring Conrad to quip: "Thanks for coming Bob."
That exchange spurred laughter but also highlighted the sobering truth, as described by former Sen. Kerrey: The commission's recommendations are "beyond what's politically possible and short of what's economically necessary.
Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoocom
11/17/2010 | zero hedge
From Nic Lenoir Of ICAP
A combination of Fed front-running and perspectives of a more fiscally conservative Federal government (including the ever so independent Federal Reserve Bank) has had the bond market on the backfoot the past few days with a lot of stops being run through. As we discussed last week, how the market digests the actual liquidity injections by the Fed and the buybacks is what will drive all other asset markets. Indeed liquidity injections by central banks has been the sole driver of asset prices with the shadow credit markets contracting.
Don't judge a book by its cover though. The fact that Fixed Income markets have been selling off ever since QE 2.0 started is mainly a matter of positioning going into it more than a market rejection of the Fed's policy. Yes there was quite a bit of (expected) backlash by the international community which suffers from a competitive disadvantage for the most part if the USD is too weak, and yes there has also been some dissenters within the Fed and Washington more broadly. However it was to be expected that the size of the program would be left to possible change based on data (pretty much every Fed decision always comes with that caveat anyways) which can mean both less or more. The fact Mr. Bullard questioned whether the whole $600Bn is needed is part of that conversation, but the weak PPI and Empire Manufacturing surveys released this weak imply that whatever Bullard says won't matter until we see better numbers. In the same line of thought, a little bit of complaining by Europeans about the Fed's policy is not about to make Mr. Bernanke rethink his religious-like beliefs in the marvels of monetary stimulus. Since our academicians had enough self-sufficiency's to criticize the Bank of Japan for the last 15 years, one can expect they are not sleepless over a few comments from the ECB (run by Jean-Claude Trichet who happens to be him too an imbecile, making it easier to shrug off!).
In terms of whether this move is done, I personally don't think it is. There has not been enough panic yet. If the 10Y future re-tested the 122-30 support and the 5Y future the 118-30 level, the market would have essentially retraced the entire pre-Fed move driven by QE expectations. In that sense I feel it is fairly likely that respecting Murphy's law we will go test those levels. By the same token, I do not believe possible for the bond market to sell-off much beyond that in the present state of affairs. If anything talks of balancing the budget and a smaller than expected QE 2.0 program will lead to a more sluggish economy which would certainly reinforce structural deflationary forces and push yields lower eventually as it also alleviates flight away from bonds on solvency/rating concerns. So really until fiscally conservative measures are tested and appear to be failing I don't think we can have a Fixed Income sell-off lasting beyond position squaring. If we follow the Greek tragedy's storyline: a) Market realizes public finance are a complete joke b) a fiscal resolution is attempted c) the fiscal solution fails as the slowing economy choked by austerity lowers revenues and offsets benefits of entitlement cuts. Note that b) and c) should occur in several iterations until entitlement cuts are no longer tolerated and the country is forced to resort to default. We haven't even tried one yet, so pace yourself, and remember that higher yields in Fixed Income creates risk averse sell-offs in other asset classes which in turn create demand for US bonds as money seeks a safe heaven. That status of safe heaven is not just yet abandoned, even though it will be eventually.
So short-term, I expect bounces in Fixed Income to be short-lived until we reach the aforementioned levels. During that time period risky assets should be under pressure. The trend following indicator using the 5-dma open vs. close has resolutely turned, and today for the first time in 3 months the S&P future has broken through the mid-bollinger band, indicating that bounces towards 1,193 should be sold. After that, whether it's risk aversion driving yields lower or the Fed driving yields lower in turn spurring risk appetite remains to be seen.
In the path to default above I omitted the "bail-out" iteration which comes along with an attempted fiscal resolution of the matter as it is only relevant for smaller peripheral economies. When we get to more sizeable bankrupt entities that step will have to be skipped. Ireland finds itself close to that intermediary bonus-bailout stage on its way to default. Part of the issue is that even though Ireland's budget is pre-financed until mid 2011, this has been made possible because Irish banks have bought the sovereign Irish issuances and pledged them in turn to one of the ECB's liquidity facilities. While Germany is perceived as the main player pushing for a bail-out package, it is in fact apparently the ECB which is most pressing on the issue. Indeed the funding scheme used by Ireland via Irish banks pretty much ties the ECB to extend its liquidity facilities until mid 2011. However just for a laugh I would recommend the ECB looks into who has been buying at Spanish auctions. How do you spell cajas again? Could it be that Spanish banks have been buying Spanish bonds and financing them via the ECB liquidity facilities? If messing around can seem like good fun and games when the patient is Ireland which is a small fraction of the European economy, Spain with more real estate inventory than the US (not relative, in absolute number of cases) will probably prove a bit more painful. That's certainly another motivation for Germany and the ECB to push exploring quickly a miniature bail-out and hope the effects are rather soothing on the rest of the PIIGS so they don't have to deal with problems of bigger magnitude. But even such foolish calculation will only buy them a few months. As I have long contended: they are done, the Euro in its present form is unsustainable, and the road to disbanding this wonderful currency will be long and painful as an entire generation of economically moronic politicians struggle to abandon its baby and attempts all sorts of magic to delay the inevitable outcome.
I apologize that I could not add any charts: I am using BBG anywhere and I do not have a set-up allowing to save and send charts, but I promise to make up for it tomorrow!
Good luck trading,
Mish's Global Economic Trend Analysis
A full year of municipal bond gains went up in smoke in the past two weeks. Worse yet, it's highly likely more blood is coming as issuance soars amid decreased demand from investors. A Moody's downgrade of Philadelphia, a complete mess in California, and a looming city bankruptcy in Michigan all weigh on the sector.
MUB iShares National Muni Bond Fund
click on chart for sharper image
Moody's Cuts Philadelphia Bond Rating
Bloomberg reports Philadelphia Bond Rating Cut to A2 by Moody’s on Fiscal Weakness
Philadelphia’s credit rating was reduced to A2 from A1 by Moody’s Investors Service, which said the sixth most-populous U.S. city is financially weak and has limited budget options.Realistically, Philadelphia is Bankrupt
The downgrade, to the firm’s sixth-highest investment grade, affects $3.8 billion of general obligation bonds and similar debt. The outlook for the city of 1.5 million is stable, according to Moody’s.
Philadelphia is rated BBB by Standard & Poor’s, two steps above noninvestment grade, and A- by Fitch, four steps above noninvestment grade, according to data compiled by Bloomberg.
“The city has little budgetary margin over its five-year plan which includes significant repayment of deferred pension contributions in 2013 and 2014,” the Moody’s report says.
Philadelphia is in the same big mess for the same reasons as Los Angeles, Miami, Houston, and Oakland: pension promises and public union benefits that cannot possibly be met.
It is unfair and immoral to keep raising taxes on city residents to support benefit promises that should not have been made, and cannot possibly be kept no matter how high taxes go.
Philadelphia should declare bankruptcy.
Swaps on Property and Casualty Insurers Jump on Muni Selloff
Please consider Swaps on Property and Casualty Insurers Jump on Muni Selloff
The selloff in municipal bonds is helping push the cost to protect the debt of property and casualty insurers to the highest in more than a month.Flood of Issuance Amidst Head Winds
Credit-default swaps on New York-based Travelers Cos. and Chubb Corp. climbed to the highest since October. Municipal securities account for 26 percent of the financial assets of property and casualty insurers, Hans Mikkelsen, credit analyst at Bank of America Corp., wrote in a report yesterday.
“Some investors view P&C insurer CDS as hedges against muni risk,” Mikkelsen wrote. The swaps gain value as investor confidence in the companies’ ability to repay debt deteriorates.
Municipal bond prices are dropping amid a surge in issuance. Pacific Investment Management Co.’s Municipal Income Fund has dropped 12.3 percent since Nov. 3, when the Federal Reserve said it would undertake a round of quantitative easing, known as QE2, by buying $600 billion in U.S. debt.
Yields on top-rated tax-exempt bonds due in 10 years climbed to a four-month high as the market absorbed the highest weekly issuance of municipal debt in at least seven years. California led states and local governments issuing $16.3 billion this week.
Credit-default swaps on Sprint Nextel Corp. jumped to the highest in more than two months after Moody’s Investors Service said yesterday it’s reviewing whether to cut its rating on the third-largest U.S. mobile phone carrier. They rose 9.2 basis points to 398.5, according to CMA.
“The question becomes will the federal government help,” Buffett, 80, said at the U.S. Financial Crisis Inquiry Commission in New York on June 2. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”
A flood of issuance from California and other states comes amidst downgrades of Philadelphia, problems in California, and renewed fears of sovereign default in Europe.
Please consider the Wall Street Journal article Head Winds Facing Muni Issuers.
The tumble in long-term municipal bonds last week comes as a flood of states and municipalities are seeking money in the debt markets, raising the prospect some will have to pay higher yields to lure investors.There much more in the article. Those interested in Munis should give it a look.
California leads the list of planned borrowers. The state alone is planning $14 billion of sales before Thanksgiving.
Investors have been keeping a close eye on the municipal debt markets in recent months, amid reports—albeit rare—of some municipal borrowers struggling with or walking away from debts. Investors also have begun to worry about the future of Build America Bond program and the effects of the Federal Reserve's bond-buying efforts.
That came to a head last week when yields on consulting firm Municipal Market Advisors' index of AAA-rated 30-year municipals jumped up 15 basis points—or 0.15 percentage point— from the prior week. That is the biggest move in 18 months, said Matt Fabian, managing director at the firm.
Difficulties have been felt by even high-quality borrowers. Last week Harvard University was forced to pay an interest rate above a key benchmark rate and reduce the amount of debt it sold to close a $600 million bond deal. That got investors' attention, said Mr. Fabian, and helped trigger the price correction in the broader market.
Another concern: the future of the Build America Bond program. The program was designed as part of the Obama administration's effort to help states, cities and other local government entities borrow in the bond markets and lower financing costs by offering a federal subsidy.
The gains for Republicans in this month's midterm elections, market participants say, makes reauthorization of the program less likely. "The threat is if that [the BABs program is] not authorized than all that volume comes back to the tax-exempt side," Mr. Friedlander said.
Bad Timing in California
It is quite typical of California to run into problems at exactly the worst possible time. Le Los Angeles Times reports Bad timing: California seeks bond buyers amid rout in muni market
Yet another way the California Legislature has stuck it to taxpayers: The long delay on a budget agreement this year also delayed the state’s plans to raise cash in the municipal bond market.California Bond Sale Pricing Delayed
Now, Treasurer Bill Lockyer is trying to get investors to buy $14 billion in debt amid a broad sell-off in the bond market overall, and the worst sell-off in many tax-free muni bonds since the financial crash of late-2008.
That will mean higher interest rates on the debt than the state would have paid two months ago.
CNBC reports Institutional Pricing on California's $10 Billion Notes DelayedInstitutional pricing of California's $10 billion of revenue anticipation notes, which had been scheduled for Wednesday, has been delayed until Thursday due to litigation over a state building sale, the state treasurer's office said on Wednesday.Build America Bond Program About to Expire
"The state is required to disclose the lawsuit to investors, and did so this morning. Retail investors on Monday and Tuesday ordered $5.89 billion of the RANs. Those orders now have to be reconfirmed in light of the new disclosure," a statement from Tom Dresslar, spokesman for California Treasurer Bill Lockyer said.
The building sale and lease-back plan was approved by the governor and legislature to help eliminate California's budget deficit.
Earlier on Wednesday, Lockyer issued a notice for the deal's preliminary official statement that said a taxpayer lawsuit was filed in state court on Tuesday seeking to block the sale of 11 state office properties.
Build America Bonds, a brainchild of the Obama Administration, was supposed to be a "temporary emergency" program. The debate now is whether to kill it.
David Reilly writing for the Wall Street Journal says Build America Bonds Need Tearing DownStarted in early 2009, the program offered state and local governments a subsidy to help issue debt when credit markets were largely frozen. The idea was that government borrowers, who largely sell tax-exempt debt to individual investors, needed help tapping the wider institutional market.I concur with David Reilly. States need to get their fiscal budgets in order. Going into more debt does not work.
To this end, the U.S. government decided to rebate to state and local governments 35% of the interest paid on a taxable bond issue. That allowed them to sell debt with yields comparable to, say, corporate issues, and so garner wider investor attention, yet ultimately pay less interest. The program has proven popular — more than $150 billion of Build America Bonds have been issued as of October, according to the Treasury Department.
Whether that flies will depend on the lame-duck session of Congress that begins on Monday. The best course would be for legislators to end what is essentially just another bailout.
Why? State and local governments need incentives to get their financial houses in order, as painful as that might be. By subsidizing the cost of borrowing with this program, the federal government reduces the incentive to do so.
Muni Risk-Reward Setup is Horrid
Regardless of whether the Congressional lame duck session approves a permanent extension to the temporary Build America Bond Program, munis are very richly priced in this backdrop of increasing global uncertainty and likelihood of additional bond downgrades and even defaults.
I see no point in investing in munis at all. The sector crashed in October 2008 and there is no reason it can't (or even that it shouldn't) crash again.
Mike "Mish" Shedlock
Why wasn't a financial transaction tax part of the Bowles-Simpson deficit reduction proposal?
It would raise substantial revenue and has desirable properties in terms of cooling speculative money flows.
I guess the problem is that the tax falls largely on the wrong people -- those who can afford to pay it.
Publius 10The clear and direct way to counter high frequency trading is to require market to have discrete clearing of trades. That means trades are aggregated for a period of time (e.g., 1 minute, 5 minutes, 30 minutes, etc), and then cleared simultaneously at the same price.
Professor Michael Wellman of the University of Michigan wrote about this. http://ai.eecs.umich.edu/people/wellman/?p=40
A financial transactions tax is a terrible idea, because it will hit individual investors that invest in mutual funds and ETFs, as well as arbitrageurs that keep mutual fund and ETF prices in line with the underlying securities, merger and convertible arbitrage that also help individual investors.
A financial transactions tax is really just another way to tax main street to pay for the bail out of wall street.
LylePublius 10... It the scheme of things a transaction tax will affect traders not investors. An investor should want to hold for at least a reasonable period of time in fact we should encourage the lengthing of this period by also extending the long term gains period to 5 years. In the scheme of thing over 5 years 50 basis points is nothing. Now if your holding period is based on day trading yes its a big deal, but what good does that do the economy?
Publius 10Lyle... Lyle, Bernanke boosted asset prices to artificially high levels, so the elderly living on fixed income can't earn decent interest to live. When Bernanke cuts interest rates to the bone, they're forced to invest outside the US to earn interest income. Or to invest in mutual funds that earn income by doing short term trading, like merger arbitrage, convertible arbitrage, buy-write strategies, and the like.
If you want people to invest for the long term, then Bernanke needs to let financial asset prices fall to levels low enough that they can earn a decent return by doing long-term investing.
SimonPublius 10... Bernanke? Interest income is DOA anyway, considering the economic stakes. By letting asset prices fall, you are destroying all the leftover productive capital left in the US, all the seniors will be dead anyway. Hence, you can't get invest in a corpse, which your "price level" would commit too.
It is the price of the current global economic structure that is pushed towards efficiency and global growth, the problem is the transfer mechanism has failed in the "developed" countries.
Min"Why wasn't a financial transaction tax part of the Bowles-Simpson deficit reduction proposal?"
Because it was not really a deficit reduction proposal, it was an attack on Social Security.
anneGaining a sense of cost, a 0.5% or 0.005 transaction fee on the cost of the Vanguard 500 index fund would mean an increase in cost from 0.07% or 0.007 to 0.12% or 0.012 for a $100,000 transaction which strikes me as minimal for an individual other than a high frequency trader or speculator while less speculative trading could be beneficial to would be long term investors in what are the high turnover funds which have become the market norm.
When Bernanke starves fixed income investors of interest income in an attempt to impose austerity measures on households, in order to continue to bail out the big banks.
When Bernanke does that, the only way that widows, orphans, and other weak of society can make money to live is by short-term trading. Some do this by investing in merger arb mutual funds; some do it by investing in convertible arbitrage funds. Some do it by doing short-term investing on their own. Also, when central banks try to inflate asset prices with money printing, and assets trade at prices totally divorced from fundamentals and totally driven by psychology and money printing, you're left with short-term trading.
Like I said before, a financial transactions tax is just another way for Congress and Bernanke to impose austerity measures on main street to bail out the big banks. If you want to impose the cost of bailouts on the big banks, impose a 30% or 40% surtax on big banks on all of their payments on debt and leases and maybe derivatives. If that raises their cost of capital high enough to prevent them from operating, then we can put them in receivership and recapitalize them by converting their debt into equity.
Uh, no:The only way the poor can survive is by day trading?
Want to find a real argument instead of this hackish attempt to protect the wealthy?
Even the retirement funds invested on behalf of workers would hardly be affected by this tax, that's long-term money, not speculative, hot money or flash trades, etc.
anneThere is reason to be concerned about the effect of liquidity trap or near zero short term Treasury interest rate conditions on persons who fortunately are able to save and invest. However, we have been passing through the finest long term bull market in bonds since the 1930s. Returns to individual bond holders these 10 years have been quite important and we would be fortunate were more supposedly conservative institutional investors to have had significant bond portfolios these 10 years.
The problem of bond market income, especially for recent bond market investors, has really only appeared in, say, the last month but there is still relatively significant yield to gained with minimal or reasonable risk. The bond market has become difficult, but sectors are still securely reasonable.
anne"When Bernanke starves fixed income investors of interest income in an attempt to impose austerity measures on households, in order to continue to bail out the big banks.
"When Bernanke does that, the only way that widows, orphans, and other weak of society can make money to live is by short-term trading."
Good grief. This does not consider past bond market gains which have been excellent, and means a person will not look to current secure bond market possibilities, while the idea of short-term trading for widows and orphans let alone for almost any of us non widows and non orphans who are not institutional professionals is nutty.
anne"Even the retirement funds invested on behalf of workers would hardly be affected by this tax, that's long-term money, not speculative, hot money or flash trades, etc."
Especially for retirement funds which should be invested conservatively, the less portfolio turnover the better since reducing the cost of turnover will surely mean higher returns in all. Why retirement funds have not been more conservatively and less expensively invested for the long term should be a concern for us.
denim in the U.S.In trading stock, there is a buy transaction and a sell transaction. Sure, you can let your heirs do the sell transaction but they will be taxed on that transaction. However, in the case of high frequency trading, selling the stock must happen frequenty because there are only about 5000 significant companies that have listed stock. The broker knows that you bought the stock and the sale cleared on a date certain. The broker knows that you sold the stock and the sale cleared on a date certain. The broker can compute the capital gains and capital loss for your account real time, can he not?
billb"Why wasn't a financial transaction tax part of the Bowles-Simpson deficit reduction proposal?"
Perhaps because Erkine Bowles is paid $335,000 a year by Morgan Stanley?
Fred C. DobbsA cost of a transactions tax would of course be passed along to consumers, so brokers really shouldn't complain too much. Really.
But the reason why not is that whenever anyone brings this up, Wall Street goes ballistic. It interferes with transaction volumes, & that reduces political donations.
cmFred C. Dobbs... This is a detraction from the main point, but "A cost of a transactions tax would of course be passed along to consumers, so brokers really shouldn't complain too much. Really." misses the point. At some point "passing through prices" invalidates micro-arbitrage opportunities where the money is made by shaving from a relatively small margin on many transactions. I have no idea what margin brokerages are making on the average deal, but if it is in the few percent range (not unplausible), a sub percent charge can affect the margin, and perhaps more importantly "marginal" transactions (where little gain is taken) quite substantially.
Not that I want to defend brokerages, but this will definitely impact the business they are making from quick-churn transactions. Which is overall for the better but they for sure won't like it.
Alex TolleyI recently read a paper that showed that intra-day, low latency (but not necessarily high frequency) pairs trading would lose 50% of it's profits with just 15 basis points of extra transaction costs.
This is so miniscule for normal investments that a small transaction fee would probably remove much of this pointless trading. There wouldn't be much tax revenue to collect, just reduced trading.
I recently read a paper that showed that intra-day, low latency (but not necessarily high frequency) pairs trading would lose 50% of it's profits with just 15 basis points of extra transaction costs.
This is so miniscule for normal investments that a small transaction fee would probably remove much of this pointless trading. There wouldn't be much tax revenue to collect, just reduced trading.
[Low latency trading or trading in immediate reaction to a perceived price discrepancy however small is trading that is exclusive to the best equipped institutions, and unless I fail to understand the matter I would have no objection to taking away a considerable part of the incentive or reward.]
Alex Tolleyanne... "[Low latency trading or trading in immediate reaction to a perceived price discrepancy however small is trading that is exclusive to the best equipped institutions, and unless I fail to understand the matter I would have no objection to taking away a considerable part of the incentive or reward.]
Agreed. The attempts at justifying this activity as providing increased liquidity is laughable.
November 12, 2010
The 3 month Treasury interest rate is at 0.12%, the 2 year Treasury rate is 0.50%, while the 10 year is 2.78%.
- The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years and a duration of 2.4 years, has a yield of 1.72%. The Vanguard A rated intermediate-term investment grade bond fund, with a maturity of 6.9 years and a duration of 5.4 years, is yielding 3.08%. The Vanguard A rated long-term investment grade bond fund, with a maturity of 23.6 years and a duration of 12.8 years, is yielding 5.35%. *
- The Vanguard Ba rated high yield corporate bond fund, with a maturity of 6.7 years and a duration of 4.8 years, is yielding 6.07%.
- The Vanguard convertible bond fund, with a maturity of 5.0 years and a duration of 4.3 years, is yielding 3.29%.
- The Vanguard A rated high yield tax exempt bond fund, with a maturity of 8.3 years and a duration of 7.0 years, is yielding 3.68%.
- The Vanguard GNMA bond fund, with a maturity of 1.9 years and a duration of 1.9 years, is yielding 3.36%.
- The Vanguard inflation protected Treasury bond fund, with a maturity of 9.3 years and a duration of 4.9 years, is yielding 0.03%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
[Portions of the bond market are still viable, but I lean to Joseph Stiglitz rather than Paul Krugman in thinking that the buying of relatively longer term Treasuries Federal Reserve is artificially distorting yields, flooding selected international markets with dollars and becoming ever more of a problem for would-be conservative bond investors.]
bakhoWhy doesn't the anger translate into ending the Bush tax cuts for the wealthy special interests who were bailed out? The public could recover some of their ill gotten gains by taxing them.
cmbakho... People don't make the connection. Politics of envy seems to overall be successful, and always has. (What I mean by this is identifying and vilifying one or more groups of people who are allegedly living it large at the expense of the hard working, bonus points if they are also corrupting the moral fiber of society. This has rarely failed.)
donIf (as I suspect), the effect on quantity of transactions would be large, the standard economic analysis would indicate that it would have a bigger welfare deadweight loss attached to it than most other taxes.
To offset this, one could argue that the financial transactions are somehow 'evil,' that those who 'trade' add less to society than those who 'invest.' This may have some validity when the trading is pernicious, but I am unconvinced that this describes more than a minimum of transactions. For example, the recent oil price 'speculative' bubble can be seen as a reasonable guess that the future value of oil would be much greater than the present and that we should conserve more now (so prices should change to encourage such behavior).
Speculators win when they are right, in which case they reduce price swings and produce a more efficient outcome for society. If they exacerbate price swings, they lose along with society. I see no need to throw sand in the market mechanism that brings these results. If you say rank speculation helped bring us the financial crisis, I would counter that the crisis was the result of other forces that created huge imbalances, and that speculators brought it to a head more quickly than would otherwise have occurred.
johnchxdon... Don wrote: the standard economic analysis would indicate that it would have a bigger welfare deadweight loss attached to it than most other taxes.
No, the analysis you're thinking of applies to taxes which reduce the output of the taxed good or service. Asset swaps -- such as the exchange of cash for financial instruments -- are not analogous to the purchase of real goods and services. The volume of asset-swap transactions is not a measure of the quantity of goods and services created. So a transaction tax could lead to a drastic reduction in trading volume with minimal loss of welfare.
donjohnchx... ? I take the production decline to be the reduction in financial services provided to effect the transactions, including commissions, book keeping costs, etc. The net profits and losses to the traders from asset price changes cancel each other, so they should never be confounded with the social benefit provided by speculative trading ...
While I'm at it, the IRS treats speculation more harshly than other income producing activities. For example, capital gains from futures transactions are marked to market for gains, whereas losses cannot be recognized against most other income, such as interest income. Thus, there is a net taxation of the capital gains from speculative activity, even though the net gains are zero (futures trading losses cannot be netted against most other income, such as interest income). This already discourages futures speculation relative to other income producing activities. It's as if the IRS agrees with those who think 'investing' is a superior social activity to 'trading' (on some quasi-religious grounds not clear to me).
Bozatdon... johnchx gets it right, don wrong. Applying std econ analysis to assert welfare deadweight loss, inappropriate here.
[Nevermind std econ analysis flawed anyway re: rational actors, perfect & symmetric information, etc... Minsky, Stiglitz, Akerloff, Fehr, Loewenstein, Baker, Galbraith, Ariely unclog their noses in Don's general direction.]
Maybe not 'evil', but to extent 'trading' = speculation (as opposed to 'investing' or even hedging); certainly doesn't contribute to productive output.
"When trading is pernicious... unconvinced"??? With support offered equal to that offered for your view (to wit, none... at least so far), I say systemically calamitous and positively persuaded.
Ballooning trading volumes, ballooning weight of Fin sector in S&P 500 index, ballooning derivatives' (CD swaps & otherwise) notional values greater than real global GDP, too many clown-crafted balloon animals to cite... particularly while real economy sputters and median household income suffers and income/wealth inequality concentrates [Gilded Age blossoms again... Huzzah!]. Suggest checking your dictionary again for definition of 'pernicious'.
"Speculators win when they are right"... or just plain lucky. But "reduce price swings"? Interesting how VIX correlates to bubble growth & bursts and ensuing recessions. Efficient outcome for society is explosively carbonated fluid dynamics?
"If they exacerbate price swings, they lose along with society." Unless of course they exit the trade before the bubble pops, and the greater fool - society - is left holding the bag.
'Trading' is a net zero sum game? Ready, set, debate: Most evidence suggests it is, some suggests sub-zero. Hard to find empirical (or even logical) evidence it is above-zero. Open-minded to proof otherwise, just don't see it yet.
"... the crisis was the result of other forces that created huge imbalances..." Including 'rank speculation' or exclusive of such? Can't tell which is your view? The latter is pure turd-polishing.
What 'other forces' and why are these alone culpable?
When speculators all make the same mistake(s) in the same direction, they don't just 'bring it to a head more quickly', but rather exacerbate it [the crisis] exponentially.
Who says speculative bets are nicely normal distributed around a Pareto optimal equilibrium price? Behavioral econ suggests otherwise.
And why is "bringing it to a head more quickly" an efficient, socially utile macro result?
Allowing air to escape from bubbles more slowly, not faster, seems more socially utile than increasingly frequent and increasingly precipitous chaotic concussions of irrational exuberance.
Markets fail and fail to self-correct. Sand in gears not full answer, but better than c'est la vie, c'est la guerre.
Especially considering cost/benefit equation.
Agree that unintended consequences need to be factored and properly structured around. But, so far, the only secondary/tertiary effects raised to date have been from parochial self-interests wringing their hands over the fate of their dubious business models.
patrickThe Dean Baker article on FTT suggested that an FTT tax would apply to derivatives "many times over". Correct me if I'm wrong, but my understanding is this would only apply to derivatives where investors hold an underlying position. The "naked" varieties of derivatives would not be subject to the tax. It seems like a FTT could force traders into this more speculative variety of derivatives.
I don't think that I'm against an FTT, but authors of the law need to be cognizant of its unintended consequences.
Lylepatrick... If it were me I would apply the tax to derivatives also. Derivatives are and I agree with Buffet weapons of mass financial destruction. Take futures and options hedging would become buy and hold not trade trade trade. Yes there would be less money made but the economy would improve for it. It could be imposed on all financial instruments that are not demoninated in dollars (i.e. checks and the like).
El SnarkoThis is one of the top ten things to do to save the US.
Also consider phasing out cdo's over four years.
donThe coloring of speculation as somehow 'evil' relative to good christian 'investing' reminds me of nothing so much as the ignorance Alexander Hamilton had to battle in the debate over establishing a 'modern' system of banking and financial markets. In one notable episode, Jefferson and others wanted to deny the profits to speculators who had bought up Continental script from the soldiers who were paid with it during the Revolutionary War. When the new government honored the script, its value soared. I suppose there are a good number of people visiting this board who would have agreed with Jefferson. I fear the result if they ever start to get their way.
My view - a special tax on speculation will do little more than give markets a case of arthritis, causing them to lurch from one equilibrium to the next with discrete movements after pressures build up sufficiently to overcome the tax. Sort of like friction that prevents movement of the earth's crust until pressure build up sufficiently for an an earthquake.
Bozatdon... Nice piece of history, will have to read for myself. Thanks for interesting anecdote.
Don't, however, mistake anecdotes for evidence.
If proposed FTT rate(s) were sufficiently high your view might have (some) merit.
If, say, they were so high as to bring trading volumes to screeching halt.
But, as presently proposed, they are not. Most analyses I've seen suggest return to pre-dot com bubble levels. Don't recall seeing threat of systemic melt down then.
More like impedance circuit than tectonic friction.
Heat given off by such an "impedance" tax might generate $70B/year; would help provide resources for recovery and/or resolution authority, which is needed given tough fiscal/political constraints government faces now.
Especially if deliberately reserved exclusively for such purposes.
Speculation not 'evil', just socially non-utile, at best. Investment IS socially utile (raises capacity for productive output), hedging less so (neutral to marginal positive), but not objectionable. Speculation can/does distort real capital formation, and offers nothing for the common weal.
Not 'evil', per se, but clearly not 'good' either from a social perspective.
Moral/religious/Christian has nothing to do with it. Stop proffering the red herring. Like pagan sacrifice of same name, your straw man is already in ashes.
don"Heat given off by such an 'impedance' tax might generate $70B/year; would help provide resources for recovery and/or resolution authority,"
Agreed. But I think there are more efficent ways to do this. In particular, requiring insurance payments for implicit insurance now received by the TBTF's.
"Speculation not 'evil', just socially non-utile, at best."
Here, we disagree strongly. The classic arguments on this issue were made by Milton F in the context of currency markets. The arguments cross over nicely to most financial markets, and almost certainly to large commodity markets such as oil.
hapadon... what is the social good of billion-dollar pools pushing & pulling the markets to generate minute-to-minute returns for itself. what is the approximate gain in market efficiency from manufactured distortions.
11/13/2010 | zero hedge
The main reason why in a recent Zero Hedge poll the bulk of respondents believed that the next asset class to be purchased by the Fed are municipals, is that the market appears to have finally relented to what pretty much everyone with half a working brain has realized for over almost two years: the very soon, only the Fed's endless bid will be able to withstand the state and city default onslaught. Two main catalysts over the past week, as Zero Hedge highlighted last week, were the now imminent bankruptcy of Harrisburg, and the dramatic deterioration in California's fiscal situation. However, there are other far more important considerations that suddenly have led to a massive blow out in the muni curve, that made even the highly volatile action in the UST curve seem tame in comparison.
Citigroup's George Friedlander summarizes the biggest risks to the muni space, of which the number one is the least surprising: what happens when the government removes its crutches... With the entire economy now expressly reliant on constant and endless support of every branch of the US government, as more and more austerity is priced in, assorted asset classes will start feeling the wrath of this long-forgotten concept known as risk. Munis are just the beginning.
Below is a summary of the most relevant recent changes in the muni market from a curve standpoint:
As the table shows, the difference in yield between 7-YR paper and 30-YR paper increased from 211bp to 239bp over the course of a single week, an unusually rapid change.
And the reasons per Citigroup:
In our view, the factors that led to the dramatic relative weakness of the long end of the yield curve, wider credit spreads and generally reduced liquidity were fairly well foretold in the concerns we have been discussing over the past several weeks:
Growing concerns that the BAB program might not be extended beyond the 12/31/10 sunset. As we have noted, the fate of BAB reauthorization appears to be closely tied to the likelihood that the Bush 2001/2003 tax cuts would be extended during the lame duck session. If a deal can be reached between the administration and the newly invigorated Republicans in the Senate and the House on the Bush tax cuts, then a reauthorization of BABs is likely to be part of the deal – most likely, the 1-YR extension with a 32% subsidy contained in Senator Baucus' "mini-extender" bill. However, at this point, it is very difficult to tell whether a deal regarding the tax cuts will be reached. If such an agreement is not reached, new legislation will have to be drafted during the new Congress, and it is far from clear that a Republican-dominated House Ways and Means Committee will support an extension of BABs.
Concerns regarding other muni provisions in the stimulus bill that need to be reauthorized. In addition to BABs, there are four other significant sections of the stimulus package that are included in the Baucus bill but whose fate remains unclear, either in the lame duck period or in the new Congress.
1. The exemption of private activity bonds from the alternative minimum tax on individuals and corporations,
2. The exemption of all munis issued in 2009-10 from the Adjusted Current Earnings AMT on property and casualty companies,
3. The increase in the maximum amount of bank-qualified tax-exempts per "small issuer" from $10 million per year to $30 million per year, and
4. The 2% de minimis, under which commercial banks can buy munis worth up to 2% of total assets and still write off as an expense the interest cost associated with carrying these bonds.
At this point, it appears that, in terms of market impact, because of the lack of certainty regarding extension of the sunsets, the factor among these four that is having the greatest affect on the market is the exemption from the AMT for private activity bonds. The reason is this: issuers, such as airports, recognize that their borrowing costs would increase appreciably if interest on their bonds were once again subject to the AMT, so several airport issues are being rushed into the market to avoid the 12/31/10 sunset. Since private activity bonds, such as airports, ports and housing bonds, do not qualify for BAB treatment, these issues contain a significant amount of long-term tax-exempt supply.
An ongoing heavy new issue calendar, which is unlikely to let up. According to The Bond Buyer, the 30-day visible supply on Friday, 11/12, is $17.3 billion, only slightly below the high for 2010 of $18.7 billion, reached on September 28. It seems likely, in addition, that the new issue calendar will remain heavy right through the middle of December, when heavy supply can be particularly difficult to place. This could particularly be the case if bond fund flows continue to be weak, as noted next.
Continued weak flows into tax-exempt bond funds. For the week ending 10/3/10, tax-exempt bond fund flows were extremely weak, according to Lipper/AMG Data, with weekly reporting funds having less than $1 million in total inflows and long-term funds showing outflows of $178 million. This week's reported flows were only very slightly better, with all weekly reporting funds showing inflows of $42 million and long-term funds showing outflows of $33 million. With monthly reporting fund flows included, the four-week moving average of all funds is at $392 million, still down very sharply from the $1 billion range reported in most of July and August. Our greater concern is that next week's flows will probably be worse still. As we have noted, flows tend to weaken after a significant increase in muni market yields. As noted above, the increase in long-term yields in the muni market from 10/3 to 10/10 was quite substantial. And, indeed, a large proportion of the increase occurred during the last two days of the period, which does not bode well for flows over the next week.
In terms of pricing patterns, we note that stronger, more liquid BABs have held up well relative both to tax-exempts and to similarly rated corporates. We do not find this at all surprising. In the event that BABs are not reauthorized, we expect the best, most liquid BAB issues already in the market place will continue to outperform as supply dwindles. Initially, other less liquid BABs may weaken under these circumstances, but even in these cases, we expect the supply of outstanding BAB paper to dry up, with most of that paper absorbed by individual investors in the secondary market.
Another topic that has gotten little attention is Ambac's bankruptcy w/r/t muni exposure:
On Monday, November 8, the holding company parent of Ambac Assurance Corporation, Ambac Financial Group, filed for bankruptcy. In our view, this move was not unexpected, given the firms inability to write new policies or maintain minimum capital requirements. Nevertheless, we do not believe that this move gives the insurance subsidiary the ability to continue to make payments on insured municipal obligations at this point. The company has initiated a "rehabilitation proceeding" in order to protect the majority of policies related to municipal debt.
Back in March, the Office of the Commissioner of Insurance of the State of Wisconsin (OCI) approved the establishment by AAC of a segregated account containing certain non-performing policies, primarily consisting of structured products transactions, including Residential Mortgage-Backed Securities. The Las Vegas Monorail was also placed in the segregated account. The rehabilitation of the structured book is intended to shield policyholders of AAC from ongoing losses in the structured book. While the proceeding is subject to court approval as well as ongoing litigation, in our view, the insurer currently has the capacity to continue to make payments on policies for defaulted municipal issues not included in the segregated account, which includes nearly all municipal bonds.
We note that the muni market continues to give very little extra pricing value on Ambac-insured munis over what they would be worth as uninsured issues. Nevertheless, particularly on Ambac-insured muni credits with very weak underlying credit strength, we believe that the existence of the insurance policy significantly enhances the value of the bonds.
Lastly, a topic that has gotten much attention recently, and which is what lead the mainstream to realize that muni spreads and the MCDX were surging, has to do with ETFs. Of course, using the recent plunge in assorted synthetics, Citi uses the opportunity to present this as an ETF buying signal. We, on the other hand would recommend a convergence pair trade, as as sell off in intrinsics is just as likely, as in our extremely correlated markets, ETFs traditionally are the primary negative convexity catalyst, after which all other asset classes follow. For the past two years this has been to the upside. It can just as easily happen in the opposite direction...
In the last several days, we have seen an unusual move in muni ETFs. Prices of several dropped by more than 2% in the last several days – an unusually large move for this ETF product. Given where several of the ETFs are trading at the moment, their NAVs are at the largest discounts to the current prices in a long time. In our view, the move of the ETFs was too abrupt and strong to account for the weaker price action of long-dated muni tax-exempt market. Keep in mind that the average life of some ETFs is just 15 years, so they should have been partially insulated from the large move of the 30-YR munis. In our view, this selloff is technical in nature and should be taken advantage of.
Since the near-term outlook for tax-exempts is somewhat cloudy, investors should take advantage of the ETF selloff by averaging down into the weakening market. Alternatively, they could hedge their exposure by shorting MMD against their ETF positions. To match maturity exactly, one could either use 15- YR MMD or, consistent with our steepener recommendation, one should short the 30-YR MMD.
When all is said and done, it would seem that the bulk of the risk in the muni space is not one of monetary intervention requirements, despite various markets going bidless, but of regulatory concern. And since Congress will not allow states to go bankrupt, now that Citi has raised the strawman that it will the House's fault should there be no improvement, it is only a mater of time before the whole BAB issue is resolved. That said, with every successive can kicking, the time to the inevitable market test approaches. However, unlike our readership, we believe that the Fed will actually preserve its last bit of backstop purchasing dry powder for something much more important: the securitized markets, which are materially greater than the muni markets by, and whose fate will have an immediate impact not so much on assorted municipalities, than on the core of Bernanke's electoral constituency itself: Wall Street's TBTFs. After all, recall that QE works only to address a liquidity crunch (as the Fed become a buyer of only resort, and nothing more), which is why it will do nothing to ameliorate the current increasing solvency problems. Only when solvency risks metastasize into the realm of liquidity once again, that is when the time to panic will be nigh.
That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.
Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale overwhelmed the market last week. After performing so well for so long, munis and funds that invest in them fell hard. One big muni fund, the Pimco Municipal Income Fund II, for instance, lost 7.5 percent. The fund is still up 6.75 percent so far this year.
While the declines were relatively small given the remarkable gains in these bonds over the last two years, the slump was swift enough to leave investors wondering if this was a brief setback or the start of something worse. For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees.
“I think it’s too early to say that it’s more than a correction,” said Richard A. Ciccarone, the chief research officer of McDonnell Investment Management.
“The facts just don’t support a serious conclusion that the whole market’s going downhill,” he said. “They could. We’ve got some serious liabilities out there.”
The causes of the week’s big decline are clouded by unusual factors like the looming end of the Build America Bonds program, which has prompted local governments to race new bonds to market before an attractive federal subsidy is reduced.
But the big question confronting this market is how state and local governments will manage their debts. Many are staggering under huge pension and health care obligations that seem unsustainable.
Certainties are impossible because governments do not have to disclose the pension payouts they will have to make in the coming years, as they do for bond payouts.
California, for example, will have to sell nearly $14 billion of debt into the falling market this month, because of its record delay in getting a budget signed this year. The warnings keep coming. On Friday, Fitch, the credit ratings agency, issued a report saying that ratings downgrades for municipal bonds outnumbered upgrades for the seventh consecutive quarter.
And a few prominent defaults have made the market jittery.
“This is what happens with our market now, with these fears of a systemic credit crisis,” said Matt Fabian, managing director at Municipal Market Advisors. “Any weakness is related to fears of default.”
Standard & Poor’s, meanwhile, issued a report last Monday observing that even troubled cities like Detroit were still able to bring debt to market at what the rating agency considered favorable rates. It said most government officials seemed determined to honor their general obligations.
Analysts like Mr. Ciccarone said much of the decline was concentrated among longer-maturity bonds and bonds with lower credit ratings. Their values fell more sharply as investors watched the Federal Reserve buying hundreds of billions of dollars of Treasury bonds and concluded the Fed’s move would be inflationary over the longer term. That made some investors less willing to hold long-term municipal bonds, so the prices of the bonds fell.
Until two weeks ago, the municipal bond markets had been frothy, thanks in part to the intensifying interest of wealthy individuals in tax-sheltered investments as the sunset date on the Bush administration’s tax cuts looms. People seek a tax shelter like municipal bonds because the interest is usually not taxed, and the bonds are considered very safe.
This year, however, tax-exempt municipal bonds have been harder than usual to find, because the governments that normally issue them have switched over to taxable bonds.
So investors were bidding up the prices. Mr. Fabian said that had fed into the prices of all of the municipal bonds held by mutual funds, which are assigned a value each day on the basis of a model because they may not trade.
The reason for scarcity of tax-exempt bonds has been, in part, the Build America Bonds program, created as part of the fiscal stimulus program. That federally subsidized program is scheduled to expire at the end of this year, so states and cities have been rushing to take advantage of it.
Yet the values of tax-exempt munis fell, defying those who said it was all a matter of supply and demand. The last week also brought some large tax-exempt bond issues, including one by a public authority in Massachusetts for Harvard University, which was reduced because of poor investor demand.
Mr. Fabian said the downdraft could continue next week.
“The risk is that you don’t know,” he said.
“You have an awful lot of money, including from households, that simply follows momentum.”
"Housing is totally F**Ked for years and years to come. "
November 13, 2010 | naked capitalism
I am an attorney in a major mid-western city and as part of my job I’ve reviewed dozens of loan mods over the last 12 months for my clients. This modification is very typical and is par for the course, so to speak.
Overall, this is a terrible deal. The mortgage has been extended to 40 years from today, so all those years of paying are for naught. The note still has an increasing interest rate provision to it meaning that in a few years the payment goes up regardless of what happens to the borrower’s income.
and the most insidious part of the loan is that there is a balloon payment at the end. An enormous one, nonetheless. So think about this for a second: even if the borrow pays the note on time for the next 40 years, he still won’t own the home.
As I tell my clients, loan modifications are not for the borrower’s benefit, they are for the bank’s benefit. The bank runs a secret NPV test on the borrower which includes such factors as income, months last, interest rate, zip code, comps, etc. If the test comes back that the bank will make more moneyin the next five yeras by offering a loan mod, the make a loan mod based roughly on 31% of the borrower’s income. If they determine they can sell the home in foreclosure for more money than a loan mod, they put the home into foreclosure. It’s that simple.
What usually happens is that borrowers in bad areas or economically depressed areas where homes are selling for a fraction of their 2006 prices are getting loan mods as such. The bank figures through it’s NPV test that it’s better to squeeze some money out of the borrower for as long as they can, because if they try to sell at a foreclosure, they’re getting only dimes on the dollar. These people probably did a cash out refi in 2006 for tens if not hundreds of thousands of dollars.
I’ve only seen one loan modification actually do a principal balance write-off of $16,000 on a $134,000 note.
Bear in mind that the prevailing belief among lawyers, and probably among the US Treasury itself, is that most, if not all, loan mods will eventually redefault and return to foreclosure.
Yes, that’s right. Most if not all of the HAMP modifications will redefault and go into foreclosure.
This is kicking the can down the road. That’s all that this is.
Housing is totally F**Ked for years and years to come.
Anyone who thinks there are ‘deals’ in housing today and wants to buy in the next 3-5 years is a GD fool.
11/12/2010 | by Tyler Durden
As we try to figure out how it is possible that the market can still be trading down on a massive POMO day, here are some thoughts from Nassim "Fat Tails" Taleb, who has obviously ignored the surgeon general's warning not to discuss the Fed. A visibly agitated Taleb, who may or may not have overindulged in the coffee IV drip earlier, was in full form on Bloomberg TV with Erik Schatzker lamenting that the Fed is not a publicly traded entity with options so that one can buy some seriously out of the money puts on Brian Sack. No choice words were spared, or Black Swans strangled, during the filming of this clip.
Taleb's thoughts on Bernanke and the Fed:
"It seems to me, from what I see, that these people [Bernanke] do not understand risk.”“Did [Bernanke] see the crisis? Did he see the accumulation of hidden risk in the system? No. He was flying the plane and he crashed the plane…"
"[Bernanke] underestimated risk. He is sort of risk-blind from his analysis of the situation before the crisis when he deemed it was the right moderation."
"[Bernanke] reminds me of LTCM people. They had brilliant people with great academic records and they blew up the fund and almost blew up Wall Street….So here we have a symptom that you notice in economic academia of the use of the wrong tools that underestimate risk. I don’t mind someone saying this is a policy, these are the risks, these are the returns, let’s see how it works. Bernanke does not seem to be taking that approach. He is someone who talks about returns without talking about risk. It’s identical to a pilot who is talking about speed -- not talking about safety. The measures he is using, this quantitative easing, may work but should it fail the risks are humongous.”
Taleb commenting on former Fed governor Randall Kroszner's statements that QE2 makes sense:
"This guy [Randall Kroszner] was governing the Fed? It's good that he moved to the University of Chicago. He reminds me of those people that sell out of the money options and claim that it's safe. This guy is not only claiming that its safe but that it’s the thing to do…He should definitely stay at the University of Chicago and not get involved in economic life."
Taleb on the risks of the central bank's quantitative easing:
"Talk to a German, particularly someone who has studied Weimar Republic and you’ll understand what the risks are."
"You short an out of money option on hyperinflation…The point is that you may print, print, print or do these devious methods to hide that you’re printing, but it won’t have any effect. Just like a ketchup bottle that you pour and nothing comes out. And then you make a statement like Bernanke saying you have evidence that this is working, that there is no risks, and then suddenly, just like an out of money option, the whole ketchup coats your French fries, everything, the whole table, your face, everything.”
“Let’s go back to the basics. [Bernanke] did not see the risks in the system before. Why are you listening to him when he talking about what to do? Why would are you listening to him?”
“Assuming there is a very small risk, who is bearing that small risk? Retirees. The debasement of the currency is something that would be borne by those who were the victims will not be the ones who benefited from the crisis. The thing is that you’re trying to print money to bail out those who have made mistakes by taking a mortgage that they shouldn't have taken…and by bankers. Who is paying the price? Retirees. And you’re debasing the currency and people who hold your currency. It’s an insult to those who have bought dollars in the past."
Taleb on what he believes the Fed should be doing instead:
"It’s not a Fed problem, it’s a deficit problem."
"People want a free lunch. It reminds me of people who lose money in the market and when I was an option trader, people would call me up and ask for a magic way to make their money back. That’s what the Obama team is doing. Instead of accepting that we have a risk problem, we have lost money, and you don’t double up with future generation’s money either by increasing deficits and or debasing the currency. You have to face the saying that there is no free lunch."
“The main problem was risk in the system. You cannot solve a risk problem by risky methods. You have to accept…We’re forcing the Greeks to reduce; ok you spent money you didn’t have; now you’re going to cut down. We're going to have to face the same thing. And you’re going to take pain, it’s painful, but that's life."
"The Fed's business should be price stability; unfortunately their business seems to be price instability."
In an interview with SPIEGEL, German Finance Minister Wolfgang Schäuble, 68, criticizes US calls for Germany to reduce exports, outlines his plans for an insolvency framework for indebted European nations and the emphasizes the significance of the German-French axis for Europe.
SPIEGEL: Minister Schäuble, how well do you get along with your American counterpart, Treasury Secretary Timothy Geithner?Schäuble: Mr. Geithner is an excellent minister. We have a good personal relationship.
SPIEGEL: Nevertheless, he constantly criticizes government officials in countries that are achieving high export surpluses and not doing enough to stimulate their domestic economies. He's referring to you, isn't he?
Schäuble: It would appear that way. That's why I tell him again and again that I think his point of view is incorrect in this regard.
SPIEGEL: All the same, the value of goods Germany sold to the United States exceeded imports from that country by almost €14 billion ($19.8 billion) last year. Can't you understand that the American treasury secretary is concerned about this?
Schäuble: No, because since we introduced the euro in Europe, the determining factor is no longer US trade with Germany, but US trade with the totality of countries in the euro zone. And in that respect the balance of trade tends to be even. So what's the problem? After all, we don't complain about the export successes of individual American states.
SPIEGEL: But the German economy benefits from the fact that German industry has focused primarily on foreign markets and wages have hardly gone up in years. The Americans see this as unfair.
Schäuble: The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses.
SPIEGEL: The US government sees it differently. It wants to see German exports to the United States curtailed in the future once they reach a certain threshold. Will you give in to the pressure?
Schäuble: The proposal is not acceptable for Germany under any circumstances. If we were to introduce such measures, we would be restricting international competition. But for years we, together with the Americans, have believed that world trade needs to be opened up further. We should stick to that approach and, for example, press ahead with the Doha round to promote world trade. This would stimulate global growth far more effectively than a bilateral agreement on quotas.
SPIEGEL: Last week, the US Federal Reserve Bank decided to flood the economy with $600 billion in new money. Will this stimulate the economy as hoped?
Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure.
SPIEGEL: The US wants to depress the value of the dollar in this way, so that it can sell its products abroad more easily. In light of the ailing US economy, isn't that a completely reasonable strategy?
Schäuble: No. The Fed's decisions bring more uncertainty to the global economy. They make it more difficult to achieve a reasonable balance between industrialized and emerging economies, and they undermine the US's credibility when it comes to fiscal policy. It's inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.
SPIEGEL: The G-20 nations will meet in South Korea this week to discuss the condition of the world economy two years after the deepest financial and economic crisis since the war. When the crisis erupted, the international community reacted with astonishing unanimity. But now many countries are trying to achieve advantages by influencing their exchange rates. Are you worried about a worldwide currency war?
Schäuble: I don't believe in such belligerent terms, but it's obvious that the global economy is in a tough situation. This is due to the enormous national debts many countries have taken on while fighting the crisis. Reducing these deficits is the primary objective, as the G-20 countries decided at their most recent summit in Toronto, where everyone, including the United States, agreed to cut their deficits by half by 2013. We should stick to these decisions, and if we do we will be able to curb unrest in the markets.
SPIEGEL: But the United States isn't the only country that's responsible for unrest in the markets. The euro crisis also continues to smolder. The risk premiums for government bonds from the crisis-plagued countries Ireland and Greece have gone up again. How much longer will it take before Europe has to issue new state guarantees?
Schäuble: I'm not that pessimistic in this regard. Although the Irish have accumulated huge debts to bail out their banks, they are making good progress in cleaning up their economy. And I also have great respect for the Greek government's resolve. A few months ago, hardly anyone would have believed that the Greeks would manage to implement such a drastic austerity program. They're moving in the right direction now.
SPIEGEL: Conditions in Europe are not as orderly as you describe. Just two weeks ago, the European Council (the EU body in Brussels that includes the heads of state and government of the membber states) decided to introduce a new crisis mechanism for over-indebted euro nations. Are you satisfied with the result?
Schäuble: The Council's decisions are a great success. Only a few weeks ago, many predicted that France would never support Germany in its commitment to a European crisis mechanism. And that the French would be willing to change the European treaties to do so was seen as completely out of the question. But then Chancellor (Angela) Merkel and President (Nicolas) Sarkozy met in Deauville and achieved a historic breakthrough on both issues. It's completely in line with the approach we Germans have always supported.
SPIEGEL: You can't possibly believe what you're saying. Until recently, Germany was demanding automatic penalties for countries that violated the debt rules of the euro zone. That demand is now off the table.Schäuble: In Europe, it just so happens that you don't always get everything you wish for. The overwhelming majority of EU members have made it clear that they would not accept automatic sanctions. Our response was: Instead of fighting for something you can't have, we'll try to achieve what's feasible.
SPIEGEL: That sounds like supreme statesmanship. But now there will be no change to the situation on the European Council, where the offenders and the watchdogs remain identical, as former constitutional judge Paul Kirchhof has said. The countries that don't have their budgets under control are helping to decide what penalties will be imposed for that. This isn't the way to come up with effective, prompt sanctions.
Schäuble: I disagree. It will be much easier in the future to enforce sanctions against deficit sinners. We will also be able to take preventive action earlier in the game. Besides, it didn't exactly advance the German position when the red-green government (the former center-left coalition of Social Democratic Party and Green Party that governed from 1998 until 2005), together with the French government, did serious, lasting damage to the Stability and Growth Pact by saying: The pact applies to everyone, just not to the two largest member states.
Part 2: 'The EU Wasn't Founded To Create Wealth for Financial Investors'
SPIEGEL: And now Germany has agreed to a permanent extension of the billions in bailout packages for Greece and Europe. Isn't this a high price to preserve the peace in the EU?
Schäuble: No, because we created a completely newly crisis mechanism, under which we achieved our most important demand: In the future, private lenders, that is, the banks and financial investors, will have a stake in the game when a country can no longer service its debts. Those who collect high risk premiums on government bonds will also have to bear that risk in the future when things get serious. This is an important principle: In the future, governments and investors will behave much more cautiously when it comes to new government debt.
SPIEGEL: Sounds good. But first the measures will have to be approved by the individual governments, on the one hand. On the other hand, it's completely unclear what the participation of private investors will look like.
Schäuble: We are in the process of working out the details within the German government and at the European level. It's already clear today that the new mechanism will not apply to old debt but only to new loans. I imagine that all bonds issued by euro countries will contain clauses in the future that specify exactly what happens to the claims of creditors in case of crisis.
SPIEGEL: Specifically, they will only get some of their money back.
Schäuble: In the event of a crisis. But the European Union wasn't founded to create wealth for financial investors. I imagine a two-stage process. If a country is having financial difficulties, the EU will launch an austerity and restructuring program, as it did in the case of Greece. In a first step, the maturities of those bonds that come due in this critical phase could be extended. If that doesn't help, private investors will have to accept a markdown on their claims, in a second step. In return, they'll receive guarantees on the rest.
SPIEGEL: And who will monitor the process, a European organization or the International Monetary Fund (IMF), which the Europeans already brought in during the Greek crisis?
Schäuble: For well-considered reasons, we decided at the time that we would involve the IMF. It proved to be a good approach. There is no other institution worldwide with a comparable amount of expertise on restructuring or a similarly strong reputation on the markets. We can also use this expertise in the future crisis mechanism. After all, we have to convince the financial markets that the new rules work.
SPIEGEL: You'll also have to convince your fellow Germans. When the euro was introduced, it was said repeatedly that German taxpayers would never have to pay for the debts of other countries.
Schäuble: Precisely because we want German taxpayers to be called upon as little as possible in a crisis, an organized debt restructuring involving the private investors is so important. But we should all recognize that keeping the euro stable is primarily in our interest. No one benefits from the common currency as much as the biggest European economy.
SPIEGEL: European Central Bank President Jean-Claude Trichet hasn't been won over by your crisis mechanism either. He fears that the prospect of losing money in a crisis would only scare away investors.
Schäuble: I disagree. We will develop a convincing crisis mechanism for the euro zone that increases the credibility of the common currency in the long run. We cannot achieve this goal if we simply extend the bailouts without changing the rules.
SPIEGEL: The markets aren't really convinced of this. The phrase "Merkel crash" was already making the rounds last week, because private investors are afraid of the risks that the European heads of state want to impose on them.
Schäuble: I have to question whether the movement on the markets was truly a consequence of our summit meeting decisions. Something else is more important: Europe has always made progress when Germany and France took the initiative. This is precisely what Sarkozy and Merkel demonstrated in an effective way by reaching an agreement on the crisis mechanism. That's the real signal coming from the most recent EU summit, and I'm sure that this signal will reach the markets sooner or later.
SPIEGEL: Mr. Schäuble, we thank you for this interview.
Interview conducted by Michael Sauga and Peter Müller"some sort of"? Please be more precise, Herr Schäuble!
Schäuble: The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. [Ungh! A direct blow to Uncle Sam's solar plexus! These Germans play rough!]
The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, [Sorry for the cash register's ka-ching!, folks---but it's the Sound of Freedom!]
inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, [You're telling me!]
but they don't include German export surpluses. [But..but..but the Wall Street Journal says they do! They wouldn't lie to us!]
The Way begins where the path ends.
The Oil Drum Discussions about Energy and Our FuturePosted by Gail the Actuary on November 8, 2010 - 10:15am
Tags: aspo-usa conference, globalization, jeff rubin, recession [list all tags] One of the keynote speakers at the recent ASPO-USA conference was Jeff Rubin, former Chief Economist with CIBC World Market. Rubin talked about why he believes high oil prices caused the recent recession. He also talked about how high oil prices are likely to vastly reduce globalization. He views this as a positive situation, because he expects this will change supply curves in such a way as to make American-made products more competitive. He believes that we will find our new smaller world much more livable and sustainable.
You know, knowing the nature of the disease is usually an essential first step to finding a cure. And so too, it is with a recession. Knowing the true nature of a recession goes a long way in helping us to avoid falling into another one. Particularly when the recession we are just coming out of happens to be the deepest global post-war recession on record.
Conventional wisdom, as espoused by central bankers, finance ministers, and the pundits that you watch on TV would have you believe that the recession that we are still feeling here in America, and, indeed, throughout the world, was all about a financial crisis, whose roots lie in the failed sub-prime mortgage market in the United States. In other words, a whole bunch of boarded up, repossessed unsalable houses and depressed property markets in places like Cleveland, all financed with easy credit and subprime mortgages, hit financial markets like some toxic hydrogen bomb, and then all of a sudden, a property market crash in the United States, somehow morphed into a deep, global recession.
Gee, I never knew that Cleveland was that big. No one has to tell me about the impact of the subprime mortgage market on financial markets. Why do you think I am an author now? But there is a big difference between blowing up the bonus pools of investment banks, and blowing up Wall Street, and what happened.
If you are wondering why risk-averse institutions like the bank that I used to work for had to write down almost $10 billion of assets of things called Collateralized Debt Obligations that were funded by pools of subprime mortgages, the reason is pretty simple: they were rated AAA, which meant that rating agencies assigned the risk of default with the same probability that the US Treasury would default. What the banks lost sight of is how rating agencies get paid. Rating agencies don't get paid by investors; they get paid by issuers. In Economics, we call this moral hazard problem. In investment banking, we call it, "Shit happens."
It is easy to see how sub-prime mortgages blew up Wall Street; it is a little more challenging to see it as the author of the global recession. Why were there economies that had no sub-prime mortgages that experienced even deeper recessions than the United States? Why did those economies go into recession even before the US economy went into recession? Maybe, just maybe, there was something more important going on--more important to the global economy than Wall Street or sub-prime mortgages, like $147 barrel oil, for example. If we know anything about watching the global economy in the last 40 years, we know this: feed it cheap oil, and it runs very smoothly. All of the sudden, give it expensive oil, and it stops in its tracks.
Every major recession in the post-war period has oil's fingerprints all over it. The 1973 first oil shock led to what was then the deepest post-war recession, at the time. The second OPEC oil shock led to no less than two recessions: 1979 and 1982. And then when Saddam Hussein invaded Kuwait, and left half of its oil fields on fire, and oil spiked to the then unheard-of price of $40 barrel, lo and behold, the industrialized world again fell into recession.
Gee, I wonder what happened to oil prices before this recession. It seems to me that oil prices went from about $30 barrel, at the beginning of 2004, to almost $150 barrel by 2008. Even in real terms, that is, inflation-adjusted, that price increase was over double the price increase of either the first or the second OPEC oil shock. If they had led to devastating recessions, why would not the biggest oil shock of them all, be the obvious culprit for what has been the deepest recession to date?
There are many ways in which oil shocks create global recessions. First, the transfer of income. When oil went from $30 barrel, to about $147 barrel, over $1 trillion of income was transferred from the industrialized oil consuming world to OPEC. Now, that was not neutral for the economy, because the savings rates from which money was coming from, like the United States, was virtually 0%, meaning that consumers spent everything they made. And where the money was going to, places like Saudi Arabia, or Kuwait, or the United Arab Emirates, had savings rates of almost as high as 50%, so it certainly was not demand neutral.
High price also create recessions by crowding out non-energy expenditures. Two years ago, when gasoline cost us $4 gallon, low-income Americans were paying more to fill their tanks than they were to fill their stomachs.
But by far, the most important mechanism, the most important path, by which oil prices cause recession is through their impact on inflation, and their impact on interest rates.
There is no shortage of people to blame for the subprime mortgage crisis. We could start with fraudulent mortgage companies that approved mortgages, then quickly sold them to financial institutions. We can blame financial institutions who played Russian roulette with depositors money, and of course we can blame rating agencies who assigned AAA ratings to this. And we can blame regulators, who were asleep at the wheel, like the Securities Exchange Commission, who were either blind or indifferent to Wall Street's systemic risk to subprime mortgages.
However, the real culprit behind subprime mortgages was the very low cost of capital and 0% interest rates. All the greed in the world could not do what the Fed's easy money made possible. The subprime mortgage rates were created by interest rates and the subprime mortgage market was pricked by interest rates. Everybody would agree with that. What people don't seem to ask is, "Just why did interest rates go from 1% to 5.5% from 2004 to 2006?"
Well, any central banker, even Alan Greenspan, will acknowledge that your borrowing cost is a mirror image of your inflation rate. We had 1% federal funds' rate in 2004, because we had a 1% inflation rate. All of the sudden, in 2006, inflation was over 5.5%, the highest it had been in America, since, coincidentally, 1991, when we just happened to have the last oil shock. All of the sudden, money wasn't free any more. All of the sudden, you weren't getting credit cards in the mail any more that you never applied for. And all of the sudden, people who held negative amortization sub-prime mortgage rates had to start paying 7% or 8%.
Well, if interest rates hadn't risen, that wouldn't have occurred. Why did inflation move up? Virtually all of the increase in inflation came from one component of the US consumer price index basket--the energy component. By the end of 2006, energy inflation was running at 35%, because of one price: the price of oil. The price of oil went from $30 barrel, which incidentally, every oil analyst at the time said it was going to stay at that level, to over $70 barrel. If oil had stayed at $30 barrel, inflation would never have spiked; neither would have interest rates. All of those good folk in Cleveland would probably still be there, in their homes financed by 0% interest rate sub-prime mortgages. Lehman Brothers and Bear Stearns would probably still exist, and I'd probably still be the chief economist at CIBC.
But that is not what happened. Why did oil prices go up to $147 barrel? Somewhere where virtually every economist said it could not go. Well, there were two reasons that economists said that oil prices could not get into triple digit range, and that was the cherished principles of supply and demand. First, the theory of the upward sloping supply curve--higher oil prices would bring new supply, just like it did after the OPEC oil shocks, where oil gushed from Prudhoe Bay and the North Sea. And not only did that break OPEC's strangle-hold on the market, but sent oil prices tumbling down.
Unfortunately, as you all know, there are no more Prudhoe Bays or North Seas to come on tap. Yes, there are tar sands, and theres is deep water, and the upward sloping supply curve did bring new sources of supply, but only at prices that we at the end couldn't afford to burn.
What about the cherished principle of demand? Would not triple digit oil prices quash demand? Well, it did, in certain places. It did in the United States. It did in Canada. It did in Japan. It did in Western Europe. Fifteen years ago, if those economies suddenly cut back their appetite for oil, oil prices would have fallen, because 15 years ago, those countries would have accounted for almost three-quarters of world oil consumption. Today, they account for barely half. Tomorrow, they will account for less than half. It wasn't the US consumer that drove oil demand to $147 barrel in the last cycle, and it certainly won't be the American consumer that drives a barrel of oil to $147 and higher in the next cycle. We have already seen peak demand, in this economy, and in the economy of the other industrialized countries.
Where do you think oil demand has been growing the strongest? Many of you will probably be saying China, and indeed it has. It's grown from around 2 million barrels a day, to about 9 million barrels a day. But I know a place where the demand for oil is growing even faster than in China. And it is the same place your politicians have told you your supply is coming from in the future. Last year, OPEC and two non-cartel producers, Mexico and Russia, consumed 14 million barrels a day. That is almost two Chinas.
What makes OPEC so thirsty for its own fuel? Well, if you ever filled your tank up in Caracas, you would get some sense of it. It is 20 cents a gallon. And if you go to Riad, in Saudi Arabia, it is a little bit more-it's 40 cents a gallon. And it's 40 cents a gallon, whether oil costs $20 barrel, or whether oil costs $150 barrel.
If you think drivers have a good deal in OPEC countries, they don't have anything as good a deal as power users. What's the coolest thing to do in Dubai? Ski, of course. I love skiing; I'm Canadian. But going skiing in an area where it's hot enough to fry an egg on the pavement uses up a whole lot of energy. In fact, one day at Ski Dubai uses the equivalent energy that a North American would consume in a month's worth of driving. So the question isn't really how much productive capacity that OPEC has. How much export capacity is the real question, and every year that is less and less, because every year, more and more is consumed at home.
Now, it's their oil and gas, and if they want to consume their oil and gas going skiing in one of the hottest deserts in the world, that is their right. All I'm saying is, chances are, your future oil supply ain't coming from OPEC, and chances are, it ain't going to be cheap.
Now sure, oil prices fell to $40 barrel during the recession. And for many folk, that was evidence enough that it never had any business being in triple digit range in the first place. But what a lot of those folk forget is that in the last recession, world oil demand actually fell. It fell for the first time since 1983. Such was the severity that the recession was.
Peak oil is not a problem if the economy that it is powering is shrinking. Peak oil is only a problem if the economy we are in is starting to grow. The first thing you know about an economic recovery is that economies start burning more oil. The next thing you know about an economic recovery is that oil prices start rising. Where is oil trading today? It is trading at over $80 barrel. With the exception of Germany and Canada, every other economy in the G7 is still miles below the level of GDP that they were at before the recession began.
And yet, where oil is trading today, turn the clock back to three years ago, and that would have been a world all-time record high. Now, it is where oil trades in the shadow of the deepest global post-war recession. Where do you think oil prices are going?
I will tell you where I think oil prices are going. Even in this most anemic of economic recoveries, we are going to see triple digit oil prices. We are not going to see triple digit oil prices in 10 to 15 years. And it is certainly not clear to me that the global economy is better able to handle that than in 2008. Now, a lot of people will say, "Jeff, economic history tells us that scarcity is the mother of invention. Give us 10 to 15 years of adjustment, and we will develop alternate technology, so we won't be carbon-dependent."
And they are right. Give us 10 to 15 years, and we will solve this on the supply side. But as I say, our rendezvous with triple digit oil prices is not in 10 or 15 years; it is in 10 or 15 months. So instead of trying to turn cow-shit into high octane fuel, we are going to have to learn to get off the road, and that is just what happened. In 2009, there were 4 million fewer cars on the road than there were the year before. In the next ten years, 40 million North Americans will be taking the exit lanes. The question is, "Will there be a bus to get on?" Instead of giving $40 billon to General Motors, what we should have done is spend $40 billion on public transit, so there would be a bus to get on.
In a world of triple digit oil prices, all of the sudden the economy's speed limit changes. And that is one of the problems that we have here in America, is that we don't recognize that our economy's speed limit has changed. What the economy could grow at when oil was $20 to $30 barrel is a whole different speed limit than what the US economy can grow at when oil is $80 to $150 barrel.
And that is something that I don't think the Administration recognizes. Because what President Obama cannot bring is cheap oil. He can get expensive oil. We can build a pipeline from the Canadian tar sands down to the Gulf refineries, and we can get oil. But in order to get the kind of oil that will be required, that will require the triple digit oil prices that we can't afford to pay. But trying to pump-prime the economy with fiscal stimulus is not a substitute for cheap oil. It won't make the economy grow any faster. It will just make the deficit that much bigger.
Worse than that, triple digit oil prices will not only take millions off the road, it will send our economy right back into recession, unless of course, the economy changes. We can't do a whole lot about triple digit oil prices. That is where the supply curve lies. And if you doubt that, just look at the Canadian tar sands. Like sure, there is 170 billion barrels of it there, and there is 500 billion barrels in the Orinoco heavy oil belt, but that is not the issue. Depletion is not just the geological concept, it is more fundamentally an economic concept. Because if the cost of extracting that oil from the tar is greater than we can afford to burn, it doesn't matter how many billion barrels of oil there are in the tar sands.
So how do we adapt? How do we grow in an economy of triple digit oil prices? We change the nature of our economy. In a world of triple-digit oil prices, distance costs money. The global economy, where we produce one thing at one end of the world, to be sold at the other end of the world, doesn't make any economic sense, because in too many cases, what will be penny-wise, will soon become pound-foolish. The wage "arb", what we save on wages, we will more than squander on bunker fuel.
Take the steel industry, for example. Just before the recent recession, some very curious things were happening in the US market. When oil prices got to be over $100 barrel, all of the sudden, Chinese steel exports to the US fell at double-digit rates. And all of the sudden, US steel production was up. And all of the sudden, US Steel Corp., which was one of the biggest dogs in the market, all of the sudden its share price doubled.
What was going on? I'll tell you what was going on. For the first time in 20 years, it was cheaper to make steel in the United States than to import it from China. Why? Consider what China has to do to send you steel. First, it has to ship iron ore from Brazil, across the Pacific Ocean, turn it into steel, which is itself a very energy-intensive process, then ship it back, across the Pacific Ocean, to you. At $20 barrel, that works. At $100 barrel, that doesn't work. It added on $60 to $70 dollars, to the cost of a ton of hot-rolled steel. How much labor time do you think there is in making steel these days? One and a half to two hours. The transit costs all of a sudden exceeded the labor costs. Who would dream that triple digit oil prices would breathe new life into our hollowed-out Rust Belt? But in a world where distance costs money, that is exactly what is going to happen.
Take food. Last year, China exported $6 billion of food to America, everything from apples to frozen chicken wings, bringing a whole new meaning to having your Chinese food delivered. Steel doesn't have to be refrigerated. Hopefully, frozen chicken wings do. What do you think powers that refrigeration unit? Bunker fuel! The same thing that is powering the boat. The world of triple digit oil prices--it won't matter that farm labor is cheaper in China than in the United States, because the cost of bringing those frozen chicken wings to us will be too expensive.
it's not like we are going to stop using steel in America, and it is certainly not like we are going to stop eating. What we are going to have to do is make our own steel. What we are going to have to do is grow more of our own food. Unfortunately, much of our agricultural land has been paved over with suburban sprawl. Just as triple digit oil prices will breathe new life into our hollowed out Rust Belt, triple digit oil prices will turn those far-flung suburbs and exurbs back into the farmland they were, thirty to forty years ago. The very same economic forces that gutted our manufacturing sector, that paved over our farm land, when oil was cheap and abundant, and transport costs were incidental, those same economic forces will do the opposite in a world of triple digit oil prices. And that is not determined by government, and that is not determined by ideological preference, and that is not determined by our willingness or unwillingness to reduce our carbon trail. That is just Economics 100.
Triple digit oil price is going to change cost-curves. And when it changes cost curves, it is going to change economic geography at the same time. I know that the world of triple digit oil prices has been the domain of the apocalypse. For many people, the advent of peak oil and triple digit oil price means the end of our economy. For some, civilization as we know it. I don't share that pessimism. I don't share that outlook. I'm an economist. I believe in the power of prices.
Sure, if we continue to want to get our frozen chicken wings from half-way around the world, where labor is cheap, if we want to get our steel from half way around the world, if we want to commute back and forth eighty miles to work in our SUVs, peak oil won't just be a recession, peak oil will be peak GDP, and that will be apocalyptic. But as I say, I am an economist, and I believe in the power of prices. I believe we are going to change. I believe that we are not going to end up importing food from half-way around the world, or steel from half-way around the world. I don't think we are committed, irrevocably, to suburban sprawl.
And we might just find that that new smaller world around the corner is a whole lot more livable, and a whole lot more sustainable, than the big "oily" one we are about to leave behind.
Thank you very much.
November 10, 2010
I spent a over two hours yesterday interviewing Justin Mamis — the famed technician, author and adviser to big money — on his career and market approach. Its absolutely fascinating stuff.
At 81, he comes in the city each week to play squash. I am looking forward to doing part II with him next week.
While we wait for that post to go up, here is an excerpt from his most recent commentary:
“We have, on a Post-It scrap of paper left over from her previous life at MER, a scribbled reminder to ourself, written last spring, and stuck under our plastic desk blotter, alongside various phone numbers and business cards. It reads: “The more enthusiasm, the closer to a Top –”
Written when enthusiasm was a stranger, and yet share prices were going up, that’s all it needed to say. The public has been almost totally missing during the entire rally from March ’09. But instead of sulking, they’ve successfully loaded up on fixed income stuff, including, so we are told, a massive (for them) amount of Treasuries, preferreds, and all sorts of fancy new-fangled stuff, with some of the more venturesome discovering municipals, and have only recently started to believe the brokerage sales pitch that they should own dividend-paying familiar big cap stocks such as, say, JNJ or PG. In reality, that public on the sidelines has done well by protecting the resources of its collective self, especially since stocks themselves were not going up well, even though they didn’t want to go down.
But now, ah now, now it seems safe. It isn’t that the public knows that the Fed is right, or that the Republicans can save the world, it is simply that the public has seen the stock market suddenly go up in remarkably lively, even exuberant, fashion … and that seems to say, in bold headlines, that stocks are safe again, and can be bought. That sequence, from “I’ll never buy a share of stock ever again,” to believing it’s okay now, is how it has worked in past cycles, and evidently is starting to work today.”
Great stuff . . .
The next para is:
“We deal in the stock market per se. It is not our province to know more than that. “Wall Street” used to literally stand for that building at the corner of Wall and Broad (the rest was simply “downtown”), a broad indoor playing field, with men (no women in those days) who had never graduated from high school but when they were sixteen got jobs as runners on the floor of the Exchange, and came eventually to wear elegantly tailored suits and silk neckties as specialists successfully nursing various economic and trading trends along. Given the shenanigans nowadays, including, as the newspaper reported the other day, manipulating the silver market, the specialists we knew a generation or two ago were the most honest men we ever met. They traded hundreds of thousands of shares back and forth, on a handshake, on each other’s word. Try that with today’s Congress.”
‘Dumb Money’ Returns To Stocks – WSJ, 8-Nov-10
“The public missed nearly the entire rally from March ’09…”
You bet your ass they did. And after the 2001 CRASH and the 2008 CRASH, it looks to me like the public has learned a lesson about Wall Street and the magic manipulators of stock prices.
Great-grandma’s approach never failed. And while it sure didn’t make her rich, it did mean there was always milk in the frig, bread in the bread box and butter in the butter dish.
Cash in the mattress = peace of mind.
She never met anybody who got rich in the stock market — sort of like meeting someone who got hit by lightening and lived to tell the tale.
I think a big chunk of “the public” has simply given up on Wall Street and the stock market.
In the United States, the scent of decline is in the air. Imperial overreach, political polarization, and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to the “British disease.”
Doomed to slow growth, the US of today, like the exhausted Britain that emerged from World War II, will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty.
In thinking about these prospects, it is important to understand the nature of the British disease. It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain’s failure in the late nineteenth century to take its economy to the next level.
Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors like electrical engineering, which impeded the adoption of mass-production methods. It also failed to adopt precision machinery that depended on electricity, which prevented it from producing machined components for use in assembling typewriters, cash registers, and motor vehicles. The same story can be told about other new industries like synthetic chemicals, dyestuffs, and telephony, in all of which Britain failed to establish a foothold.
The rise of new economic powers with lower costs made employment loss in old industries like textiles, iron and steel, and shipbuilding inevitable. But Britain’s signal failure was in not replacing these old nineteenth-century industries with new twentieth-century successors.
Is America doomed to the same fate? Answering this question requires understanding the reasons behind Britain’s lack of technological progressiveness. One popular explanation is a culture that denigrated industry and entrepreneurship. Over the long course of British modernization, the industrial classes were absorbed into the establishment. From the mid-nineteenth century, the best minds went into politics, not business. Enterprise managers promoted from the shop floor were, it is said, second rate.
Now we supposedly see a similar problem in the US. In the words of David Brooks of The New York Times: “After decades of affluence, the US has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place….America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting, and nonprofit activism.”
In fact, this supposed explanation for British decline has not stood the test of time. There is no systematic evidence that British managers were inferior. Indeed, expanding the pool of potential managers beyond the children of a firm’s founders had precisely the opposite effect. It allowed the cream to rise to the top.
In today’s America, too, it is hard to find evidence of this purported problem. Silicon Valley companies do not complain of a dearth of talented managers. There is no shortage of new MBAs establishing start-ups or even going to work for auto companies.
A second popular explanation for British decline focuses on the educational system. Oxford and Cambridge, established long before the industrial era, produced eminent philosophers and historians, but too few scientists and engineers. It is difficult, however, to see how this argument applies to the US, whose universities remain world leaders, attracting graduate students in science and engineering from around the world – many of whom remain in the country.
Still others explain British decline as a function of the financial system. British banks, having grown up in the early nineteenth century, when industry’s capital needs were modest, specialized in financing foreign trade rather than domestic investment, thereby starving industry of the capital needed to grow.
In fact, actual evidence of any such British bias in favor of foreign over domestic investment is weak. And, in any case, that history, too, is irrelevant to the US today, which is on the receiving, not the sending, end of foreign investment.
A final explanation for Britain’s failure to keep up makes economic policy the culprit. Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected high tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After WWII, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty and created chronic financial problems.
Herein lies the most convincing explanation for British decline. The country failed to develop a coherent policy response to the financial crisis of the 1930’s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable.
In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.
Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley.
For the life of me, I cannot fathom why anyone would waste one calorie of mental energy attempting to debate/rebut the relative merits of the purposeful lie that is QE2. Hello! The entire raft of policy prescriptions presented for public consumption during this crisis - both monetary & fiscal - have had only one intent: deceit.
Yes, the objective all along has been to deceive the body politic about the true nature of the underlying risk: derivatives exposure. And this exposure is so great that it represents a truly existential national security threat. Hence, the (criminal) partnership between governments, central banks and financial institutions to try and push back the day of final reckoning.
The problem isn't really the total absolute debt, it's the lack of viable growth alternatives to reduce the net nominal debt to a manageable basis. If you don't see/hear an official addressing the core essence of the economy and the ability to provide a sustainable employment basis, then it's all just a waste of electrons.
This obsession with Bennie & the Fed has got to stop. I guess he might have two months or so to continue hogging the spotlight, but when the 112th Congress is sworn in next year, it's show time. The beauty of their position is that we (and they - no one is getting out of this unscathed) are screwed either way:
They either tacitly let Ben continue by approving an increase in the debt ceiling or they don't. If they do, we will have a veritable revolution on our hands, and if they don't, then the deflationary collapse that has been forestalled for 2 years will finally commence.
2011 is going to be a very "interesting" year.
November 7, 2010 | The Big Picture
The rich are different. They not only have more money, they perceive the world and the economy very differenly than you do. Indeed their entire psychological outlook is decidedly different.
At least, that is what a recent Merrill Lynch survey (September 13 –October 7) found. Affluent Americans — those with more than $250,000 in investable assets — are feeling more confident about their finances than they did a year ago:
• 41% of affluent Americans feel financially better off today than they did one year ago;
• More than three out of four (78%) are confident that their financial picture will improve in the year ahead.
• 61% expect to retire later than originally planned, an increase from 29% in January 2010
Success! Quantitative Easing has worked! More people are confident that a few cortisone injections has cured Uncle Sam’s cancer.
I honestly don’t know because there are so many unknowns in the currency game brought about by people who can make up rules as they go and will do whatever is in their best interests.
I could make a good case for both inflation and deflation, but it’s always a good policy to be a bit skeptical of any person/group/corp who pitches a doomsday scenario while profiting from it. Not saying NIA is wrong, just saying that a lot of work (and hype) went into making Americans believe that U.S. real estate could not go down in value either.
Rich people are delusional too. Expecting constant growth forever on a finite planet with a drastically changing climate, depleting energy (and other, like potable water) resources, ongoing social and political stresses (just to mention a few of the intertwined issues) is pure folly.
Don’t plan for the “reality” future, just keep pretending your money or gold (“wealth”) will get you through all the rough times to come, independent of everyone else (you know, because you’re so special because you’re “rich”).
When are people going to realize that we’re all in the same fishbowl, that we’re polluting the hell out of it, and that it has consequences to our species (and all the others we depend on)? Never mind, everyone just go back to putting your head in the sand (or some other smelly dark place) and keep pretending “nothing will ever change.”
November 5, 2010 | The Boston Globe
THE FEDERAL Reserve is responding to the stubborn economic slump by creating more money. The central bank will purchase $600 billion in Treasury bonds, in an attempt to drive interest rates even lower. Is this a good idea?
Alas, it’s the only tool readily available. But even supporters of the strategy don’t think it will accomplish much, and might cause some harm. The problem is that cheap money doesn’t work very well in an economy such as this one.
The Dow rose 219 points yesterday, since falling interest rates invariably cause a temporary spike in stock prices. But that is hardly a test of effective policy.
The economy is in a self-reinforcing trap. Consumer purchasing power is down due to high unemployment and falling earnings. Businesses are reluctant to invest because they don’t see customers. Risk-averse banks won’t lend except to the most reliable borrowers. Depressed housing prices and a foreclosure epidemic are a drag both on household net worth and on bank balance sheets.
Still, cheaper money does produce a modest stimulus. Homeowners with good credit can refinance and lower their monthly payments. Consumers considering a new car can finance it for almost nothing. And the government gets to float its own deficit at low carrying costs.
But none of this is potent enough to get the economy out of its vicious circle of depressed consumption, high unemployment, damaged banks, reduced business investment, and slow growth. In the 1930s, when the same syndrome afflicted the economy, critics likened the aggressive use of cheap money to “pushing on a string.’’ It was — and is — the wrong tool.
What’s the right tool? The cure for the Great Depression was World War II — a massive fiscal and technological stimulus. Annual wartime deficits peaked at about 28 percent of Gross Domestic Product. The government went on a hiring binge, both for war production and via the military draft. The economy blasted out of depression.
Today, however, both parties are wringing their hands over much smaller deficits, projected this year at about 9 percent of GDP. Republicans just took back the House with a campaign against big government.
So there is no political appetite for the civilian equivalent of World War II — a public campaign to rebuild rotting bridges, roads, ports, water and sewer systems, and to invest in 21st century infrastructure such as a smart electric grid and clean energy technology that would make the economy more productive as well as creating millions of jobs.
The Republicans do speak of “fiscal stimulus,’’ but they mean tax cuts. However, a recent report by the nonpartisan Congressional Budget Office concludes that tax cuts are a far less efficient use of deficits than direct public investment.
President Obama signaled at his press conference Wednesday that he will likely compromise with the Republicans’ demand to extend the expiring Bush tax cuts, not just for 98 percent of Americans as Obama has proposed, but for the most affluent 2 percent as well. These tax cuts will increase the deficit, provide a mild boost to the economy, but not change the underlying dynamics of stagnation.
So we are left with the Fed, as an unlikely champion of cheap money.
And there are some risks. Cheap money has invited a new wave of leveraged corporate buyouts, which enrich middlemen but don’t help the broader economy. Low interest rates are driving down the value of the dollar and exporting inflation to other nations, which increases the risk of currency instability.
Financial traders are using low interest rates to speculate in commodities, raising the price of food and other raw materials. Cheap money with few rules is the best friend of speculators looking for some exotic action — exactly the dynamic that crashed the system in the first place.
Long ago, in an era of broad prosperity, former Fed Chairman William McChesney Martin famously said that the Fed’s job was to take away the punchbowl just when the party was getting going. Today, however, the Fed is imploring people to have some more punch. But much of the public is too traumatized to drink, and the wrong people could get soused.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is “A Presidency in Peril.’’
The cure for the depression was not WW2. The cure was the consumer - production boom that happened when the GIs returned from the war.
I don't think that $4.00 a gallon gas and home heating fuel are going to lead to a consumer led expansion. And higher oil prices have already been the result of QE2.
Economists who long for a stimulus like WW II overlook a key reason for US economic "blastoff" after that cataclysm. The rest of the world had been blown to smithereens. They ignore the facts that our homeland was intact after the war, and our national balance sheet was better than that of our competitors. And after the war, our private sector was in charge of the economy.
That's obviously not the case now.
Putting the US government in hock to prop up unrealistic house prices simply weakens us and does not cure the structural imbalance in this economy. It weakens us with respect to overseas competitors, and will prevent our private sector from making the necessary commitment for growth.
The cure for the depression was not WW2. The cure was the consumer - production boom that happened when the GIs returned from the war.
I don't think that $4.00 a gallon gas and home heating fuel are going to lead to a consumer led expansion. And higher oil prices have already been the result of QE2. ...........................
You're absolutely correct. In every other expansion of the 20th Century every rebound was accompanied by increased energy use, and lots of it. This time, it's different. World oil production is down because all the easy to find oil is gone. Even in the face of one of the world's worst recessions in decades, oil is very expensive. (High oil prices are actually the result of a combination of QE and stagnant to dropping world production.) Natural gas, while currently cheap, is largely a byproduct of oil exploration and as oil exploration continues to wind down due to the futility of finding any more cheap oil in significant quantities to recover exploration costs, natural gas will get dearer too (in addition to nat. gas being loved to death as a replacement for oil.) Meanwhile, the remaining coal is buried both deeper and is of lower BTU content.
A big difference between this attempted recovery and that one coming out of the 1930s Depression is that the world, but especially the US, was AWASH in cheap oil and coal back in the 30s which powered our triumph in WWII along with the amazing growth of the Post War period. Indeed, oil was cheaper than water in places like 1930s Texas and Oklahoma.
Sorry, but nuclear, wind, and solar just won't scale in the massive and cheap way, fossil fuels did 60 years ago. *IF* we get an economic recovery, it's going to have to be a far different one that those of the past century and defined by things other than more big houses, cars, and other energy-intensive toys and accoutrements.
The author is right in noting that it was WWII that brought us out of the Depression for good. Although he also notes that the full emnployment that came with the War was accompanied by huge government spending, he fails to note the fact and importance of the fact that one critical attribute of the war-time economy was that it required EVERYONE to SACRIFICE.
Most everyone worked at something that was important to the war effort (in the military, in war plants, men in their mid-70's and young teenagers like me worked on farms using horse-drawn plows and wagons), food and virtually everything else we now take for granted was rationed if available at all (no chocolate for civilians), there were no such thing as "luxuries", and most importantly there were wage and price controls.
In short, because the government consumed virtually everything-- metal, rubber, oil, labor, etc. etc.-- it was not the kind of consumer-driven economy we have had in the past couple of decades. Moreover, accompanying the "sacrifice" that characterized the War-time economy, much government spending went into innovation: we developed the ability to turn out one new ship a day, in three years we turned nuclear fission from an idea in the minds of a few scientist into a usable source of energy.
Continuing the relationship between large-scale sacrifice under threat of a catastrophic defeat by a foreign power, during the early Cold War the government spent a lot of taxpayer money on developing digitally-driven computerized systems for communication, detection, photographic reconnaissance, etc. then financed efforts to miniaturize those developments to the point where we all carry in our cellphones computers and cameras that have infinitely greater capabilities than the computers, etc. that went to the moon on Apollo 11.
In short, our economy will not be revived by techniques designed to increase the ability of Americans to once again consume all kinds of frivolous things they don't really need (i.e., bigger a bigger TVs, new and jazzier X-box games, etc.) It will only come about when the country as a whole, presumably led by those running the government, is forced to both sacrifice in order to innovate new and perhaps unimaginable techniques for heating and cooling homes and factories, for powering cars, for growing and preserving food, for creating, purifying or harnessing water, for reducing pollution of the air and water, etc. So long as the government and the people are focused on recreating jobs that produce consumer goods so that more people can keep consuming more of the same, the economy will continue to deteriorate over the long haul. And there is no point is thinking that increasing production of consumer goods will succeed because there will be a huge 700 million strong market represented by the population of China that is not already middle class by our standards, because the Chinese have developed themselves to the point where they will be able to
November 04, 2010
The only way they will hear you!
Think about what she says...stay local and stay small....banks, shops, etc..stay away from corporate stores and shops...shift your buying if you can... whether its coffee, banking, vegetables etc
Catherine Austin Fitts: The Looting Of America 1/4
Posted by: |at 05:27 PM
The IMF is circulating a warning that more bankruptcy,s the size of Lehman Brothers are on the way and are unavoidable. Le Monde, Nov.3rd. 10
Posted by: roger | November 04, 2010 at 06:48 PM
Mr. Stockman From Bloomberg TV
Posted by: Maybe Ben should just pen his confession | November 04, 2010 at 07:08 PM
Hey, Obie, watch me pull a rabbit out of my hat.
Nothing up my sleeve.
Oops, wrong hat.
Posted by: Blurtman | November 04, 2010 at 07:20 PM
Battered Obama took part in a 'cover up', says ex-regulator
Following the Democrat Party’s drubbing in mid-term elections, outspoken former regulator Bill Black takes aim at Barack Obama’s “disastrous” response to the financial crisis
Posted by: pelican bay is a prison | November 04, 2010 at 08:51 PM
QE2 = High grade monetary heroin that will one day kill the patient. So says David Stockman. Watch the Bloomberg TV item referenced above.
Posted by: Rocky | November 05, 2010 at 12:35 AM
There was talk of bank problems coming over at http://www.forecastfortomorrow.com/news
Do you just switch the news on in the morning and expect a financial crisis 2.0 to be declared. It is making me nervous. Obama and all his Enterprise liars have something in store for us end of this year, or probably early next year, they are just not telling us.
Posted by: jemma | November 05, 2010 at 01:47 AM
STARVE THE BEAST!
Christmas is coming. Black Friday is coming. And you, Dear Friends, have a choice to make. You can ratify - or reject - the illicit $600 billion tax increase that Bernanke just landed on our economy with his ill-conceived and outrageous "Quantitative Easing" nonsense - especially the most-vulnerable members of our economy - the poor and working poor, who are disproportionately impacted. How? Simple: DO NOT DO BUSINESS THIS HOLIDAY SEASON DIRECTLY, OR WITH ANY MERCHANT THAT BANKS WITH: JP Morgan/Chase Citibank Bank of America Wells Fargo... http://tinyurl.com/26hboyo
Posted by: Send a message | November 05, 2010 at 08:33 AM
We can't let anyone see how Greece hid their debt. We can't let the people know how the fraud was done. We certainly can't name the people involved and outline the derivative scams that were used, lest other people look for more of them (gee, you think?) or even worse, hold us to account for intentionally ignoring them ourselves.
Posted by: no fraud, no economy | November 05, 2010 at 10:51 AM
"will work its magic by lifting stock prices and cutting borrowing costs."
This means nothing to me, I have NO stock, I don't want a loan.
What these BS voodoo CPI numbers and 0 interest does is make me hunker down and conserve even more. As a retiree with now 2 years of no cost of living, and getting nothing on my savings I scraped together after years of living below my already low means all this crap is just more pilled on s**t.
Posted by: NO stocks 4 me | November 05, 2010 at 10:53 AM
Not the Intended Effect.... There is much more to this than just stuffing the banks vaults.See Euobserver.com or Mish blog on South Korea,Hong Kong,Brazil,China,Volker
Posted by: roger | November 05, 2010 at 11:59 AM
Let Them Eat Mud Pie
The monetary and financial system that we are enslaved under at the current moment in human history has recently transformed itself into one of the most immoral and destructive forces the world has ever seen. The reason many citizens in America cannot see the extent of it at this time is because the Federal Reserve in coordination with Washington D.C. and the money center banks are doing everything in their power to keep you blind and complacent while they rob you blind. Many of the people in these institutions are not cognizant of the theft they are engaging in as they are either useful idiots or so wrapped up in their ego and false belief that they are making the paycheck they are based on some useful skill rather than simply working at the institutions that are instrumental in carrying out the ponzi scheme. You see, at the highest levels the elite must understand that the U.S. is flat broke; however, an admission of this would mean loss of power and possibly criminal prosecution. As a result, they have zero, I mean ZERO interest in the outcome for the general public and will do “whatever it takes” to quote Ben Bernanke to cover up their economically fatal mistakes and keep the mirage alive. As I mentioned above, there are two main segments that are crucial to keeping the ponzi scheme going, Washington D.C. and the big money center banks. This is why the Federal Reserve is quite purposefully directing all of the new money they are creating out of thin air into these two already bloated and corrupt cancers on the American landscape.
Posted by: What's for dinner? | November 05, 2010 at 12:26 PM
From an astute BoomBustBlogger that reads the fine print buried in the middle of a 250 page servicer agreement…
IF THIS IS A TYPICAL PSA, NO WONDER SO FEW LOAN MODS BECOME PERMANENT. THE SERVICER GETS 25% OF THE FORECLOSURE PROCEEDS.
Posted by: The economy is based on the vig | November 05, 2010 at 01:13 PM
What it says to me...
Lower corporate bond rates don't encourage me to be an investor in corporate bonds; quite the opposite. Why do I want to put money in something with a low rate of return?
Higher stock prices? Maybe, for those who still own stocks and haven't sold everything to pay the mortgage or the bankruptcy attorney or loan consolidator. But how do I know the higher prices mean more wealth, or just inflation? How much purchasing power has the dollar lost? How much more does it have to lose? When the value of the measuring tape is changing, why do the numbers mean anything in comparison?
I'm not increasing spending unless forced. And I don't know many who are experiencing higher profits, unless they are trying to force income into 2010 in case the tax rates spike in 2011. Any earnings/income figures are smoke and mirrors subject to manipulation until we know what will happen during the Lame Duck session with respect to the tax system.
The Democrats may have lost a lot of elections, but I don't know anyone who really thinks the Republicans will be able to stop a carnivorous cannibalistic government from devouring the truly productive parts of the private sector, special interests with political ties like finance/banking not withstanding. It has too much momentum, and too few of the electorate are smart enough to see the limits to what it can spend.
Posted by: ruralcounsel | November 05, 2010 at 03:50 PM
My carrots are coming in good but some nails in my shop roof need to be replaced with screws.
Posted by: francismarion | November 05, 2010 at 04:39 PM
A brief excerpt from GATA Chairman Bill Murphy's appearance on Jesse Ventura's "Conspiracy Theory" program to be broadcast tonight on the TruTV network has been posted at the network's Internet site here:
Jesse investigates the intimate relationship between our government and the financial sector
Posted by: married to the mob | November 05, 2010 at 05:39 PM
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 (link), 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.
zero hedgeSubmitted by Tyler Durden on 11/04/2010 11:33 -0500
Contrary to conventional wisdom the SocGen duo of Edwards and Grice has not turned bullish (despite Dylan's "call" for a 63 million Nikkei). In the following note, Edwards debunks this recent fallacy. More importantly, Albert provides a geographic locus of where the next bubble pop will come from, which is no surprise as it is the focus of all capital flows - Emerging Markets. As he says: "The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008." Sorry Albert, with every central bank now all in, and ammo for additional operations now gone, the next blow up with make the H2 2008 implosion seem like a walk in the park. This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.
From Albert Edwards:
A very good client complained that we were doing a U-turn, ditching our previous Ice Age bearish stance on equities and becoming vastly more bullish – using QE as the excuse. And to be fair, Dylan’s last two notes, suggesting that the Nikkei could go to 63 million in 15 years and that emerging markets could double, might be construed as being a tad bullish. In this note I will make MY view crystal clear and tie it into Dylan’s recent work.
Our Ice Age views have driven our asset allocation for over a decade. We still believe we are locked in a secular valuation bear market for equities that will take many cycles to play out. We believe that we are now one recession from outright deflation in the west and that cyclical failure will take us to new lows on both equity prices and bond yields.
It remains my view that recession looms and will trigger yet another 60% decline in equity prices - the third in just a decade. But to be sure, the latest US ISM was better than widely expected, and the ECRI$s weekly leading indicator has just begun to turn upwards after reaching very weak levels recently that are normally consistent with recession (see left-hand chart below). The excellent folks at the ECRI recently declared "definitively" the risk of a double dip has now passed. But while I commend their lack of prevarication, I think this is a premature call given the degree of fiscal tightening coming down the tracks. In addition, the Conference Board leading indicator has also now moved into recession territory when the now defunct yield curve sub-component is excluded (because at zero Fed Funds the shape of the yield curve will now always add positively to the lead indicator, see right-hand chart below).
Meanwhile, bull-bear indicators suggest that the equity rally is now exhausted and crying out for a major correction (see left-hand chart below) at a time when the Conference Board measure of the jobs market suggests that the unemployment rate may be close to heading back up again, stoking further trade tensions with China (see right-hand chart below).
Dylan Grice and my erstwhile colleague James Montier have one key point in common when it comes to their investment approach - namely they both recognise the futility of economic forecasting. Dylan's mantra (apart from "make the tea Albert") is !there is no such thing as toxic assets, only toxic prices". Hence, like James, he is happy to invest if the asset is cheap enough. This approach also applies to insurance. Where there is a credible risk and insurance IS CHEAP, then one should buy that insurance. Hence his recent note on the high risk of runaway inflation in Japan sending the Nikkei to 63,000,000 in 15 years came to the conclusion that insurance is cheap and it is available.
However, as we first said about a year ago, the only statements that matter are the H.4.1 and the H.3. Everything else is now ignored. Which is why the hedge fund community will soon lose a bulk of their analyst pool: their services are now redundant (unless they are good at ferreting out insider information of course). They will be replaced by former Fed workers who can at least pretend to think like the bearded madman.Cognitive Dissonance
In the same context, his note last week showed that to the extent that EM had become the liquidity and momentum trade de rigueur, valuation was not a binding constraint and prices could rise significantly if we were to reach the same excesses seen in 2008 (see charts below). Even a wizened bear such as myself would buy out of the money calls if they were cheap enough as a hedge against my central case being wrong or, indeed, too early.
But for me, despite all this liquidity pouring into EM equities, they are just another high beta trade, outperforming on the way up and underperforming on the way down (see charts below). Show me a period when developed markets are down 20% and EM equities rise by 20% and I might be more of a believer.
The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008.
This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.
The herding into the risk trade has accelerated. This is an "all in" FED bet with an unlimited supply of chips. I'm simply amazed how many people wish to believe the lunacy that it's all right to pig pile into EVERYTHING because they'll be able to see the top before everyone else.
As someone who worked in an insane asylum for a summer as an orderly, there is no describing how quickly a wave of hysteria sweeps through 50 lunatics gathered in one room. Breathtaking in speed and magnitude, what really surprised me when I witnessed it twice in three months was the effect it had on me, the supposedly sane one in the room.
We are witnessing the same thing in the world and the markets today. This could last another day or another month. But when the change happens, and it always happens, it will be swift and merciless and no one will see it coming. No one. You'll know it's coming at some point because it's obvious, but you won't actually see it until you're engulfed and gasping for air.
Here is a summary of Grantham’s attack:
1) Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
2) Therefore, lowering rates to encourage more debt is useless at the second derivative level.
3) Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
4) Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
5) It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
6) It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
7) The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
8) The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.
9) Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
10) Artificially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
11) Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
12) More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing-related purchases.
13) This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
14) Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
15) Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
16) Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
17) Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
18) In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.
Click here for the full report (registration is required).
Source: Jeremy Grantham, GMO, October 2010.
In his historical novel, The Leopard, Giuseppe di Lampedusa writes that things have to change in order to remain the same. That is what happened in the US congressional elections on November 2.
Jobs offshoring, which began on a large scale with the collapse of the Soviet Union, has merged the Democrats and Republicans into one party with two names. The Soviet collapse changed attitudes in socialist India and communist China and opened those countries, with their large excess supplies of labor, to Western capital.
Pushed by Wall Street and Wal-Mart, American manufacturers moved production for US markets offshore to boost profits and shareholder earnings by utilizing cheap labor. The decline of the US manufacturing work force reduced the political power of unions and the ability of unions to finance the Democratic Party. The end result was to make the Democrats dependent on the same sources of financing as Republicans.
Prior to this development, the two parties, despite their similarities, represented different interests and served as a check on one another. The Democrats represented labor and focused on providing a social safety net. Social Security, Medicare, Medicaid, food stamps, unemployment insurance, housing subsidies, education, and civil rights were Democratic issues. Democrats were committed to a full employment policy and would accept some inflation to secure more employment.
The Republicans represented business. The Republicans focused on curtailing big government in all its manifestations from social welfare spending to regulation. The Republicans’ economic policy consisted of opposing federal budget deficits.
These differences resulted in political competition.
Today both parties are dependent for campaign finance on Wall Street, the military/security complex, AIPAC, the oil industry, agri-business, pharmaceuticals, and the insurance industry. Campaigns no longer consist of debates over issues. They are mud-slinging contests.
Angry voters take their anger out on incumbents, and that is what we saw in the election. Tea Party candidates defeated Republican incumbents in primaries, and Republicans defeated Democrats in the congressional elections.
Policies, however, will not change qualitatively. Quantitatively, Republicans will be more inclined to more rapidly dismantle more of the social safety net than Democrats and more inclined to finish off the remnants of civil liberties. But the powerful private oligarchs will continue to write the legislation that Congress passes and the President signs. New members of Congress will quickly discover that achieving re-election requires bending to the oligarchs’ will.
This might sound harsh and pessimistic. But look at the factual record. In his campaign for the presidency, George W. Bush criticized President Clinton’s foreign adventures and vowed to curtail America’s role as the policeman of the world. Once in office, Bush pursued the neoconservatives’ policy of US world hegemony via military means, occupation of countries, setting up puppet governments, and financial intervention in other countries’ elections.
Obama promised change. He vowed to close Guantanamo prison and to bring the troops home. Instead, he restarted the war in Afghanistan and started new wars in Pakistan and Yemen, while continuing Bush’s policy of threatening Iran and encircling Russia with military bases.
Americans out of work, out of income, out of homes and prospects, and out of hope for their children’s careers are angry. But the political system offers them no way of bringing about change. They can change the elected servants of the oligarchs, but they cannot change the policies or the oligarchs.
The American situation is dire. As a result of the high speed Internet, the loss of manufacturing jobs was followed by the loss of professional service jobs, such as software engineering, that were career ladders for American university graduates. The middle class has no prospects. Already, the American labor force and income distribution mimics that of a third world country, with income and wealth concentrated in a few hands at the top and most of the rest of the population employed in domestic services jobs. In recent years net new job creation has been concentrated in lowly paid occupations, such as waitresses and bartenders, ambulatory health care services, and retail clerks. The population and new entrants into the work force continue to grow more rapidly than job opportunities.
Turning this around would require more realization than exists among policymakers and a deeper crisis. Possibly it could be done by using taxation to encourage US corporations to manufacture domestically the goods and services that they sell in US markets. However, the global corporations and Wall Street would oppose this change.
The tax revenue loss from job losses, bank bailouts, stimulus programs, and the wars have caused a three-to-four-fold jump in the US budget deficit. The deficit is now too large to be financed by the trade surpluses of China, Japan, and OPEC. Consequently, the Federal Reserve is making massive purchases of Treasury and other debt. The continuation of these purchases threatens the dollar’s value and its role as reserve currency. If the dollar is perceived as losing that role, flight from dollars will devastate the remnants of Americans’ retirement incomes and the ability of the US government to finance itself.
Yet, the destructive policies continue. There is no re-regulation of the financial industry, because the financial industry will not allow it. The unaffordable wars continue, because they serve the profits of the military/security complex and promote military officers into higher ranks with more retirement pay. Elements within the government want to send US troops into Pakistan and into Yemen. War with Iran is still on the table. And China is being demonized as the cause of US economic difficulties.
Whistleblowers and critics are being suppressed. Military personnel who leak evidence of military crimes are arrested. Congressmen call for their execution. Wikileaks’ founder is in hiding, and neoconservatives write articles calling for his elimination by CIA assassination teams. Media outlets that report the leaks apparently have been threatened by Pentagon chief Robert Gates. According to Antiwar.com, on July 29 Gates “insisted that he would not rule out targeting Wikileaks founder Julian Assange or any of the myriad media outlets which reported on the leaks.”
The control of the oligarchs extends to the media. The Clinton administration permitted a small number of mega-corporations to concentrate the US media in a few hands. Corporate advertising executives, not journalists, control the new American media, and the value of the mega-companies depends on government broadcast licenses. The media’s interest is now united with that of the government and the oligarchs.
On top of all the other factors that have made American elections meaningless, voters cannot even get correct information from the media about the problems that they and the country face.
As the economic situation is likely to continue deteriorating, the anger will grow. But the oligarchs will direct the anger away from themselves and toward the vulnerable elements of the domestic population and “foreign enemies.”
Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: PaulCraigRoberts@yahoo.com
Authors of the book, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle ClassAfter Tuesday's drubbing, Democrats will search for the hidden message of the election. But the message isn't hidden: The decisive blocs of voters that switched from Democrats in 2008 to Republicans in 2010 were angry and disillusioned -- with the economy, with a political system they see as helping banks and CEOs, not ordinary working families, and with both parties, Republicans (exit-poll favorability rating: 41 percent) an economic recovery package that included major tax cuts, to expanded health insurance and medical cost control, and to extension of the 2001 tax cuts for the middle class; the party that shamelessly courted lobbyists and corporate donors while claiming they were only against reform because it represented a "bailout" of these very same interests.
In exit polls, voters were asked who they blamed for the state of the economy. In order, they blamed banks, then the Bush administration, and only then the current administration. Yet those who blamed banks gave their votes by a wide margin to the GOP. Their votes have made Speaker-to-be John Boehner the second most powerful person in Washington only months after he staged an open rally for bank lobbyists, urging them to block Democrats and their "punk staffers." The rally worked: Wall Street swung toward the Republicans, joining health insurers, big business groups, energy companies, and the rest of the GOP's new money trust.
Midterm election losses are a virtual inevitability for the party of the president. A terrible economy makes them more certain -- and larger. The only thing that would have saved Democrats from big losses this time around was a huge organizational and fundraising edge. Thanks to the Tea Party and billions in outside campaign spending that favored the GOP, the edge was Republicans'.
If there is a hidden message in the election, it's one that we, in our recent book, Winner-Take-All Politics, call the "dirty little secret" of political science: most voters pay little attention to what happens in Washington and have only the vaguest sense of what is happening there. Most are completely unaware of how the filibuster has been used relentlessly to block action on the economy, and a majority mistakenly believes that the astonishingly unpopular TARP legislation passed under Obama, when in fact in was signed by George W. Bush.
We are taught to believe that voters call the shots. And they often do. Yet the vote is a blunt, heavy weapon -- one that voters barraged with negative ads and misleading messages, without strong guidance from grassroots organizations, often wield with little awareness of or regard for the collateral damage that will result. In this case, the damage is likely to be the crippling of goals and policies that most Americans continue to support.
One salient example sums up the whole: Republicans' big gains came with older voters -- in part because they were frightened by GOP attacks on the health care bill. Yet Republican budget blueprints -- from Paul Ryan's "Roadmap for America's Future" to the GOP "Pledge to America" -- mean even bigger cuts in Medicare and the revival of the GOP's mothballed plans for partial privatization of Social Security and Medicare. Ask older Americans whether they would like to trash their cherished programs in return for massive new tax cuts for the richest of the rich, and the answer will be a resounding no. Only on election day, a strong majority of older Americans, in effect, said yes.
In John Steinbeck's Grapes of Wrath, perhaps the most memorable line was uttered by an angry farmer about to lose his home (sound familiar?). Enraged and despairing but unable to pinpoint blame for his terrible loss, he asks, "Who can we shoot?" That's what voters were asking in 2010, and most had no clearer idea than the farmer of where responsibility for their plight lay.
The 2010 election was the political equivalent of the perfect crime: The GOP vigorously took on all reforms designed to rebalance the economy for the long term, tying Washington up in contorted knots, then were rewarded at the polls by voters dissatisfied with an ugly D.C. culture unable to produce economic renewal.
Jacob Hacker and Paul Pierson are the authors of Winner-Take-All Politics: How Washington Made the Rich Richer--And Turned Its Back on the Middle Class
At a Republican victory party suffused with vengeful glee, the man who body-surfed the anti-establishment wave to become the next Speaker of the House was looking very establishment.
Even though it was predicted, it was still a shock to see voters humiliate a brilliant and spellbinding young president, who’d had such a Kennedy-like beginning, while electing a lot of conservative nuts and promoting this central-casting congressman as the face of the future: a Republican who had vowed in a written pledge to restore America to old-fashioned values, returning to a gauzy “Leave It to Beaver” image that never existed even on the set of “Leave It to Beaver.”
Republicans outcommunicated a silver-tongued president who was supposed to be Ronald Reagan’s heir in the communications department.
They were able to persuade a lot of Americans that the couple in the White House was not American enough, not quite “normal,” too Communist, too radical, too Great Society. All that Ivy League schooling had made them think they knew better than average American folks, not to mention the founding fathers.
The Speaker-in-waiting sounded the alarm: the elites in the White House were snuffing out the America he grew up in. It only took two years to realize that their direction for the country was simply, as he put it, “a contradiction with the vast majority of Americans.”
No one gets to take America away from Americans — not even the American president!
“What the American people were saying is ‘Enough!’ ” the Speaker-to-be told me, as he savored his own win and his party’s landslide, which he said was “a historical tide, not just a partisan election.”
Washington had not been listening. Washington had been scorning the deepest beliefs of Americans. And now that would have to change.
“American people are clearly fed up with what they see as the decay of American society,” he declared.
The new leader of the House took a more black-and-white approach than the nuanced president. It’s enshrined in the Declaration of Independence that you need the consent of the governed and the governed did not consent.
Ascending to third in the line of succession for the presidency: a working-class kid who rose in the House as a rabble-rouser willing to throw bombs to score points against powerful Democrats.
Now he’d be helping to run the country, saving it from what he regarded as an arrogant and out-of-touch clique of elites.
In the revolutionary flush of the electoral map glowing red, he was floating, working hard to avoid gloating (even though Sean Hannity was around, gloating about the pain about to befall the Democratic president).
But he could not resist taking a few jabs at the “liberal media elite” distorting things, and a few more at a puffed-up White House that got punished for not paying enough attention to people’s anxieties.
“They had an enormous opportunity to bring about change and they failed, and I don’t say that harshly,” he said, adding: “They really are left-wing elitists and they really thought the country didn’t get it, and, therefore, it was their job to give the country the government that they thought the country needed, even if they didn’t want it. That’s the whole history of the health plan.”
There was a lot of talk, as in the campaign, about the misbegotten health care plan, about balancing the budget, about lowering the deficit and taxes, about doing something on abortion and bloated government. Meanwhile, bloated fat-cat lobbyists were dancing down K Street.
The next Speaker felt that the humbled president should take the election as a cue to be conciliatory, and he proposed they talk in the next few days. He offered to reach out to Democrats who wanted to work with his side, but also noted that the president would not be wise to stand in the way of the conservative agenda.
“I prefer to believe that this president, who is clearly very smart, is quite capable of thinking clearly about a message sent by the American people,” he said.
He said that, contrary to what the media elite had been jabbering about, he would not use his subpoena power to rain down a series of investigations on the Democratic administration.
No “witch hunts,” he said. Only “legitimate” investigations.
Yeah, that all worked out for Newt Gingrich. He really came through. The quotes above came from Gingrich, when I covered his heady victory in Marietta, Ga., in the 1994 Republican landslide that made him Speaker.
And, obviously, the Republican House only pursued “legitimate” investigations of Bill Clinton. Sixteen years later, as a weeping John Boehner extolled the American values he learned at his father’s bar — in the moment he dethroned Nancy Pelosi — the new crop of anarchic conservatives are saying all the same things.
God help the Republic. And, Mr. Speaker, in the immortal words of Sharron Angle, man up!
The Big Picture
The first item damned him to a mediocre economic team, one that failed to respond strongly to the banks that created the crisis. The second error earned him the enmity of the opposing party. The third error was political, and likely cost him the House, and possibly the Senate.
The great irony is that the man who ran on the campaign slogan of Change failed to deliver it in any meaningful way — at least, where the public wanted it — in getting the reckless runaway banks under control, and in stimulating the moribund, post-credit crisis economy.
I hasten to add, that from a political perspective, the President was a wimp. Had Al Gore been President from 2000-08 (and controlled Congress), the next GOP President would have flailed him for the recession and crisis bank relentlessly. Hell, the GOP still beats Jimmy Carter like a piñata. Once Obama took office, that was pretty much the last we heard of the Bush recession. The public actually forget who authorized TARP, who bailed out Citibank, BofA, AIG, Fannie Mae, Bear Stearns, etc.
This amounted to political suicide.
Critics have debated Obama’s hands off approach to passing National Romney-Care, his giving up (?!) the winning issue of partial Bush tax cut extensions. I am perplexed as to why he would not force a full confirmation battle over the charming midwestern Elizabeth Warren as new Consumer Financial Protection Bureau chair — Bnaks versus your grandma.
But as far as I am concerned, those are secondary political issues. To me, his presidency began its fatal downward spiral once he allowed Robert Rubin to determine his initial financial appointments. By passing over more pragmatic candidates not tied to banks and Wall Street, the president missed his opportunity to rise to greatness.
The opportunity existed to get the renegade banks under control — to reduce their leverage, their recklessness, and to get their hands out of the taxpayers pockets.
That opportunity was squandered, and Obama ended up as a defender of the banking status quo. It is where his presidency could have achieved lasting greatness, and instead was turned into just another elected official, who over promised and under delivered . . .TakBak04:trainreq:
It is a Tragedy. So much time wasted..with so much that needed to be done. With his huge staff it shouldn’t have been “impossible.” Yet it seemed from the beginning that those who would serve in his Administration had been “hand picked by someone” from the get go for a “smooth, seamless transition.”
I don’t know if he was “suckered” or was “willing.” I guess the Historians will parse that one out…long after those who suffer from the deregulation since Reagan are gone. Who will be left to read? We have to hope the folks who “BROUGHT THE CHANGE” will be left.
Hope….. Man…so much work to be done. But, at least we now see how it all works and so much has been revealed that perhaps we aren’t still living and accepting “Smoke and Mirrors.”
Roll up our shirt sleeves and let’s get AT IT!drey:
A proper epitaph for this administration.cpd:
Good analysis, Barry.
Unlike some who would ascribe sinister or conspiratorial motives to Obama’s failings, I chalk them up to inexperience, ineptitude, and naivete. Good campaigners do not necessarily make good leaders. We’ve seen it time and time again. It’s a different skill set entirely.
Start dealing in reality, BO – the Republicans do not LIKE you and never will. Nor will they work with you toward goals which will ultimately be seen as your accomplishments, not theirs. Get over it and start to govern. You may refer to the Clinton playbook….Heretic:
Very good summary. It also shows the tremendous hold special interests have on the politicians. So much private money flowing through DC has completely corrupted politics. Take private money out of politics, have publicly financed elections and institute across the board term limits and then there is half a chance of getting elected representatives that will do the right thing.
By the way, don’t forget Obama reappointed Bernanke. That was unforgivable. It’s time to put a non-economist in charge of the Fed (or better yet, just get rid of it).Mannwich:
Sadly, I have to agree with most of this. But if Mr. Obama was going to get any kind of health care legislation, could he wait? The watered down thing we got just barely made it with Democratic majorities in both houses – and losing the house seemed likely even in Jan 2009. But to do health care you have to do the big parts all at once: Everyone has to be insured, no one can be denied coverage, and subsidies for those who can’t afford coverage. This may have been Obama’s only chance to get that sort of a bill through.beaufou:
@Heretic: That’s a fair point if he had thrown more weight into the economy and jobs situation it might have given him more political capital to then tackle the health care issue. Instead he used up his political capital on a health care bill that nobody seemed happy with or truly understood (which made people even unhappier). He got his priorities all mixed up.RW:
He had a great opportunity, he could have pushed the Republicans into a corner and kept at them relentlessly; but it was all “anger accomplishes nothing” “I get it”…no, you didn’t get it Barrack.Chief Tomahawk:
I agree that going for national Romneycare was probably a mistake — it should have been a straight-up call for Medicare-for-everyone and damn the torpedoes — but the notion that passing health care reform was a serious tactical error is simply ill-informed: As Krugman notes here at http://tinyurl.com/39vaefj those who make this claim cannot name a single significant economic policy initiative that Obama could have successfully pursued otherwise. In fact those making this argument appear to think that economic policy is more a matter of ‘focus’ — AKA a matter of PR and superficial expressions of ‘caring’ (bleh!) — than it is a matter of actually doing something.
But that fundamental error probably better describes the dysfunctional and declining state of our democracy than anything else: Appearance appears to be trumping actual form virtually everywhere as Reality-TV substitutes for reality and our nation dies the death of a thousand cuts in the process.
Panem et circenses (Juvenal, Satire 10.77–81), “Bread and circuses:” There are too few citizens devoted to civic duty and too many devoted to being fed and entertained. That is the problem.Mannwich:
Where’s the blame for the media?!?
They’ve reported this as the most expensive election at $4 billion, yet little has been examined about where the money is coming from and what the donors are hoping to get in return. Yet despite the enormous expense, candidates are still lining up to shell out the dough. There’s only one reason they’d do it voluntarily and that’s if there’s a bigger expected payday to come by selling votes down the road. So, dear media,
How much are votes being sold for???druce:
@Chief: The whores in the MSM are on that very money meat wagon as well. Hence, the obvious reasons to not mention it.jcmcn5:
Fatally cautious…one can understand keeping Geithner in the thick of the crisis, but not why he’s still there.
But I have difficult believing enmity of the right would not have been the far worse if he had truly reformed Wall Street, washed out the zombie bank shareholders, put the sundry crooks in jail, enforced transparency, limited leverage, put in investor and borrower protection with teeth, etc., etc.Robespierre:
I agree with most of what you wrote except the part about not flailing the previous admin. Are you kidding? Hardly a week went by without Obama saying something to the effect that he’d inherited a mess. It’s true, he did. But let’s not pretend he didn’t use that to his advantage when he could.
The fatal error was not focusing on job creation immediately, instead of wasting time and capital ramming a HCare bill down the throats of everyone and using bribery and pork to get it done. If he’d focused on creating jobs — immediate, private sector jobs (not teachers, not gov’t heathcare workers) he’d have coasted through this election with an even larger majority. With that blunder, he revealed himself as the liberal idealogue he pretended not to be throughout the whole campaign of 2008.
As for his lack of execution — Maybe next time the Dems will hold out as savior someone who has done a little more with his life than be a community organizer. Really! What on earth did you expect from this guy? This is not about McCain or even Republicans. This is about about acting like a bunch of high school girls when some hot guy walks by, even though the hot guy is a shallow narcissist.
Hell, Hilary would have been a better choice. At least she had balls.lalaland:
A good read of “The Prince” could have saved him but nobody reads history anymore.Mannwich:
I think your view is myopic.
A: Government intervention in business is the 3rd rail in America for a very good reason – you don’t want it to happen because it’s too prone to corruption, pure and simple. I think you fail to appreciate the justified cautiousness of his approach. We stepped in and took over several companies, and threatened the livelihoods of many more. I think the calls for more action on the administration’s part should consider how that sets precedent, and how that precedent could be abused in the future. He’s already called a socialist just for completing what Bush began (gm and chrysler, aig, fannie and freddie, etc.)
B: They didn’t have the votes. Kennedy died. Byrd died. You fail to appreciate the opposition. Democrats simply could not steamroll Republican opposition, pure and simple. Mitch McConnell has been vindicated as a tactician this very evening.
Did we have a substantive debate on financial regulations? No. Did we have a substantive debate on Health Care Reform? No. Was this because Obama didn’t want a conversation, to find the best ideas? I don’t believe that for a minute. If you are upset with what you got from Finreg, blame the opposition. If you are pissed at the healthcare bill you got, blame your representative who cast it as an ‘all or nothing’ proposition instead of a process they are supposed to engage in. We’ll see how these republican victories stick when after 2 years they have nothing to show for it. After all, they didn’t run on doing anything so I doubt they will disappoint.Mbuna:
RW: So he couldn’t have pursued a more robust (and effective) fiscal stimulus and attention to the economy and the creation of actual jobs? There were plenty of areas here (hello decaying, embarrassing infrastructure everywhere?) where he could have been much bolder. Instead he focused on ramming through a bad health care bill. That’s been his hallmark from Day 1, confusing activity with accomplishment. His style of leadership might have worked fine in the ’90′s, but not in a time of crisis where bold leadership is required.huxrules:
How much of a deal with the devil did Obama make to get elected in the first place hmm? Was it in fact the big corporations that put him over the top, despite what common knowledge dictated back then? Maybe he was already captured by the banks before he even got elected. Perhaps the electorate is already irrelevant, passe, because the candidates of both major parties are already captured by their corporate masters before they get elected. The electorate loses no matter who wins.paull:
There was a good story on All Things Considered today about how Clinton didn’t come into his presidency till he lost the congress in ’94. We will see what Obama does tomorrow. I hope he finally comes out swinging.jcmcn5:
Unfair and hyperbolic. Obama is working within the realm of the possible and has done good things; at a minimum, he hasn’t done disastrous things, like his predecessor. It’s the senate’s rules that need to be changed.limaur:
huxrules — Barack Obama is no Bill Clinton. Clinton may have been a scoundrel and sexual predator, but he was a master politician who had already tasted political defeat twice before. Obama has never faced any such test. He will wilt.
But take heart. He may very well be saved by the incompetence of his political opponents.Jackrabbit:
A muslim disguised as a christian, a communist pretending to be a liberal, a democrat hoping for bipartisan cooperation to get the country moving again. You , the people of the U.S., wanted the man to solve all your economic problems ,and with dispatch,while everybody bitched and complained and obstructed his every step. I do most sincerely hope that your U.S. will go to hell, for its arrogance, for its stupidity , for its bigotry and for being .. oh.. so fatuous.Mannwich:
Don’t forget renominating “Subprime is contained” Bernanke.
And any notion that Obama will change in any REAL way (he might make some show of it) should be dispelled by his performance on the Daily Show where he praised Summers for a “heck of a job” and tried to minimize the costs of bailing out the banks.
I have been skeptical of the line that Obama is owned by the banks but his Daily Show performance may have finally convinced me.gregh:
LOL limaur. Halloween was Sunday night.Mannwich:
Presidents are figureheads not experts. Most politicians don’t know economics or finance, apparently most economists and finance people obviously don’t know economics.
If you were president and were suddenly handed some war – 9/11 – in addition to hundreds of other major non-financial you’d probably be equally lost and having to put your trust into someone elses hands. He chose wrongly, but did he have time to study intracies and seriously vet those he’d trust to vet his potential choices? Would you have the time the study war, nation-building, anti-terrorism, etc in order to make what you felt to be the perfect decision while juggling 100 other balls? You’d probably have to trust the word of close folks on the hill… who would all make the same bad decisions. Barry you would have made great decisions regarding our financial troubles but you’d probably make blind ones regarding some very different crisis that isn’t your regular schtick.RW:
I think most of us simply wanted plain old-fashioned bold, principled leadership. Is that too much to ask? Apparently it is now.FrankInTheFalls:
No argument Mannwich but that’s not the game the (feckless and useless) pundits have been playing: The cry that Obama should have been doing X or Y is not accompanied by a concrete example of am economic policy he could have actually proposed, passed through the Republican blockade, and successfully pursued.
The victory of Republican candidates today is more a message of voter confusion and despair than a message of actual policy direction.
The real “tragedy of the Obama administration” is less in its policies than in its message: But you already knew that didn’t you.call me ahab:
Very good analysis. But I cannot disagree more with this: “Once Obama took office, that was pretty much the last we heard of the Bush recession”
You have got to be kidding me. All we have heard for the past ten months is, “we were handed this economy, it will take a long time to undo the past eight years, blah blah blah” It even went on during Obama’s recent stumping trip.
Yeah, we KNOW you were handed a pile of garbage, so tell us when you will do something to clean it up.Mannwich:
Clinton didn’t come into his presidency till he lost the congress in ’94. We will see what Obama does tomorrow. I hope he finally comes out swinging.
not that you’re a dumb ass - but Clinton in 1994 - moved to the right (and therefore did not come out swinging) - and worked with the Republican’s on Republican initiatives after the congressional defeat-
but let’s hope Obama comes out swinging- whatever that meanscall me ahab:
Agreed RW. People on Main Street are failing desperately in this country. Looking for an answer. Any answer. The next two years should be interesting to say the least. Pull up a chair, get some popcorn. The circus is not only in town, it just doubled.Mannwich:
I do most sincerely hope that your U.S. will go to hell, for its arrogance, for its stupidity , for its bigotry and for being .. oh.. so fatuous.
blow me douche bagDM RTA:
@ahab: This GOP to date has had NO interest whatsoever in “working with Obama”. Absolutely none. Their only interest has been “making him a one-term president”, no matter the consequences to the country. The poetic justice now is they’ll either be totally exposed (assuming anyone is paying attention, of course) or will have to work with him now.call me ahab:
RW: “As Krugman notes here at http://tinyurl.com/39vaefj those who make this claim cannot name a single significant economic policy initiative that Obama could have successfully pursued otherwise. In fact those making this argument appear to think that economic policy is more a matter of ‘focus’ — AKA a matter of PR and superficial expressions of ‘caring’ (bleh!) — than it is a matter of actually doing something.”
How about if the President had taken the back half of the stimulus bill spending and worked it tirelessly to make sure that there was more than 1100 pages of bill left over when it was spent? How about if instead of making comments like there are no shelf ready infrastructure projects making sure that the most stimulative ideas were being readied. How about glorifying the details and making them look like they were worked on by the people who know better than anyone else?…and then selling it as being worth it.Matt P.:
Clinton went to the GOP after the congressional defeat-
not the other way around-
also- glad to see everyone on this blog lay down like a bunch of little bitches after the 10:11 comment above-
I guess I’ll see you in hell mannymaximo:
All Presidents are not dealt the same hand. Obama was set up perfectly and has so far failed miserably. He came in with tremendous good will and with a HUGE advantage in Congress. They had more votes than any GOP President in the last 90 years or so. Crazy advantage for getting your legislation done with hardly a GOP vote required. Also, he came in after the blow up of the economy. No one blames him for the economy, they blame him for setting the wrong expectations on the recovery.JimRino:
It’s sad to admit but you’re absolutely right, Barry. Boy, this is a Fukuyama moment for America and the joke is on us.Lariat1:
“But I have difficult believing enmity of the right would not have been the far worse if he had truly reformed Wall Street, washed out the zombie bank shareholders, put the sundry crooks in jail, enforced transparency, limited leverage, put in investor and borrower protection with teeth, etc., etc.”
Agreed. To do any of these, he’d have to find an effective means of dealing with the right wing Fox Professional Liars. As long as you have One Network Lying and Smearing Every Single Day you won’t get anywhere near optimal policy passed. I guess I’m surprised just how deep racist feelings run on the right. They don’t give a Damn about this Country as long as they can Smear a President.JimRino:
I’m disappointed in Obama and ashamed of the Republican strategy of just NO to everything. Statesmanship is dead and it is only going to get worse. I just came back from 5:15 am to 9:40 pm election working. It was sad, all the people coming in literally talking about the Revolution with the Tea Party and how everything will be fixed now. This was seriously felt and voiced by a lot of people. My God what is happening to this country.JasRas:
I now think the ONLY way you can deal with Wall Street is to elect 100 Liberals to the Senate. The only way the Republican party could do more rear kissing of Wall Street would be to become gay.Mannwich:
The best opportunity wasted by a failure to grasp the situation and properly adjust… And now we will all pay regardless of party, place, demographic… Good luck to all.jeg3:
@Jim: But who cares if the “right would have been far worse”. “W”, whom I disagreed with on mostly everything was able to ram through nearly his entire agenda (except privatizing SS) with a far slimmer majority because he didn’t give a rat’s ass what the Dems or Dem voters thought. Use the bully pulpit and lead with conviction and principle, and the people will usually follow. If that doesn’t work, then so be it. Losing while being conviction-less and unprincipled is much worse. The public, rightly or wrongly, admires bold leadership and people who lead with conviction and principle. The O man, and his constant giving away the house at every turn to an enemy that wanted nothing more than to destroy him and his presidency, showed neither throughout the last two years.dss:
Great post BR, on the mark.
Obama is not a liberal ideologue, he is exactly like Bush II, A Neoliberal Corporatist. Obama followed the same failed Bush II policies and started his own with corporatized healthcare. Mainstreet America elects Austerians into office expecting the opposite, and BR is right in that the best you can do is to figure out how to use it to your advantage (and/or not to your disadvantage).
“confusing activity with accomplishment.”
Well said, Manny. With the ridiculous health care bill that was allowed to pass (2014 if you can stay alive that long) he needed to go down swinging, fighting for what was right rather than what the insurance companies bought. At least while the citizenry was being screwed they could say that someone fought for the right to have health care rather than the privilege that it is today.
Just like allowing the banksters to carry on with their ill gotten gains, the insurance and drug companies are very pleased to have Obama as president.
These times called for a fighter, the change agent he promised instead of this sad excuse for a leader. Oh sure, his administration points to the bills that were “allowed” to pass, the ones that would have passed with any Democratic president, as proof of his efficacy, they were bills he didn’t fight very hard to get passed.
Now two more years of gridlock. two more years of pretending that Republican policies were not what drove this economy off the cliff. 2012? Who cares.
People are angry because they are tired of being sold down the river by both all political parties.FrancoisT:
If any president had economic advisers like Rubin (whom Obama had since he was senator), they too would have made the same rotten decisions in regards to Wall Street. Heck his entire roster of economic advisers read like a list of Wall Street insiders and tools.
You won’t get intelligent nor honest information from such a sorry lot period.Mannwich:
Now that the House will be controlled by the Reichpubliscums, thou shall look at the last two years as a model of political civility and good manners.
It’ll be unbelievably ugly in Washington DC until November 2012. Just take a look at the crop of Tea Partiers, mobster-tied ex-attorneys, total fuckheads, anti-science, worshipers of the folksy ignorance drinking at the fountain of power, ready to paralyze the country if their “requirements” are not met.
It’s gonna hurt; BTW, pray we don’t get a REAL crisis until the next election.call me ahab:
I have to say, I’m embarrassed to have voted all these years for such a spineless, wimpy party. Enough already with the “other party is mean” meme. When you get the kind of majorities the Dems had, that shit just doesn’t fly. LEAD, please.
It’ll be unbelievably ugly in Washington DC until November 2012.
so what’s going to happen then that’s so fan-fucking-tastic? Obviously you know the future- and I guess fuckheads and folksy people are going to get what’s coming to themJimRino:
Hey, it’s all well & good to have 20-20 hindsight and skewer the invalids – let’s face it – I should have been a lot smarter when I retired in 2001 and moved my money as well as our bodies offshore. Smart me would have been 2x as smart to move the $ to CH as we built a house in MX and moved here. At least we have the 50′ sailboat and the rum and we can go and spend 3-4 months in Tahiti while the corporate “avatars” duke it out over the bones and skin and the scabs that are left of the US corpse. Politicians are avatars – trust me.Jojo:
plantseeds, What do you expect the “Republicans” are going to do? They’re going to bankrupt you and your assets, take away your healthcare, ship your job overseas, and stick a flag up your ???. Then what are you going to do?
But, you’re taxes will be lower. You just gave the country away to the Wall Street Mafia.AGORACOM:
What a flame out! So much hope wasted and squandered.
Obama seemed to have so much poise and self-confidence coming into office. He was on the crest of a wave. He had a beautiful wife and two cute children. Thoughts of JFK and Camelot were in the minds of many.
But Obama stumbled from the beginning, failing to show any real sense of urgency. Everything he did was slow and methodical, one step at a time. He seems unable to express real empathy or understanding in any situation due to his inability to emote effectively. He is always cool and collected. And yes, he does come across as a wimp, afraid to or emotionally unable to stand up to and confront the Republican opposition front and center.
In these troubled times, we wanted and needed BOLD leadership. But Obama was and has been unable to rise to any opportunity. He simply does not have the personality or experience to be a real leader.
You can’t change the color of the stripes on a zebra. The Dems should be searching for a new presidential candidate for 2012. Obama should not run for a 2nd term.plantseeds:
Americans haven’t been happy with the health care system for decades.
BUT they were really mad about Wall Street / Bank fleecing right now.
He should have tackled Wall St first and hard.
It would have inspired citizens that desperately needed a hero.
He could have then ridden that wave into any reasonable legislation he wanted.
Obama blew it. I didn’t want him to. I’m a Conservative from Canada – but hoped that someone would stop the Wall Street train wreck.
It would have been nice to watch a President act Presidential.
George … The Greek … From Canadacall me ahab:
JimRino – you’re dizzy from the political tail chase. there is no difference between the two. you are a victim of the biggest scam in the history of the USA. they all belong to the same country clubs and stay on the same floor of the hotel. they all fly the private jet. republicans and democrats are one in the same. i don’t rely on them and I am in charge of my own health and therefore health care. they can’t take my job…I ‘ll leave the flag comment alone. the lower my taxes the better. the government is not the solution to anything. the sooner you learn that the better. keep playing the blame game if you choose but I am not so easily distracted.Mannwich:
They’re going to bankrupt you and your assets, take away your healthcare, ship your job overseas, and stick a flag up your ???. Then what are you going to do?
take away my healthcare that I pay for myself?
Hey plantseeds – what about those with a pre-existing condition through no fault of their own, except maybe faulty DNA? Should the plan be either “our own healthcare” or food and shelter? And that’s assuming anyone would even cover you with a pre-existing condition. What say ye?wunsacon:
Why do we Americans continually have hope that a government filled with losers can do anything? Right or left, the people that go there are not our best or brightest. They are the ones who groove living at Hollywood for ugly people. Power and fame are their motives. Their skills? Their abilities? Come on.Mannwich:
I’d be *happy* if I thought there were enough Karl Denninger remnants in the “tea party” that something might actually happen on the finance front. But, I see *mostly* neocon retreads. I don’t see why you would take such offense to Francois’s comment…Darkness:
@wunsy: Retards or retreads? LOL. Sorry…..Greg0658:
So, this should be interesting. BoA goes bankrupt and then what? The house is no way bailing them out. Has the populace become inured enough to avoid a generalized bank run?
The republicans sure are acting like teens being given a car with a full tank of gas. Surprise…call me ahab:
I’ll catch up on the 1/2 remaining coments later .. from my FB earlier to a J6P friend
1. like the puppet in the WH can break from the strings and grab his bazooka and go to town & country busting ___ umm .. I’m at a loss for …. Right Now by Chris Gaines aka Garth Brooks http://www.youtube.com/watch?v=I7fM_jAmpWw
3. :-) what :-| ok I’ll write a book .. the White House is one office building in the USA (thats United States of America) he has control of the military as long as they don’t do a coupdetta on him .. we have elections for that .. so thats the .. power of government .. plus much more like redistribution of taxes on stuff of each side R or D sees as the focus … the other part of all that is USA .. is the USA its people ? or its business ? .. and business really does control it all doesn’t it .. and can pull a coupdetta on its puppet president if it wishes
new & now here on TBP … best wishes all .. to our newly elected controllers / same … voters don’t be surprised if the elected go for the gusto while they can .. for I expect you would in their position .. ie: knowing they be gone in in 4 to 6wunsacon:
Covel nails it!
it was a partisan comment through and through-
but if you agree with the sentiments- then I guess it is hard to see it as what it is
November 3rd, 2010 at 12:13 am my response was to taking away MY healthcare which those dastardly republicans are going to try and do so says jimrino. don’t get me wrong, i’m for social programs too whatever the case. i think it starts and ends at the community level though. disabled, dependent on others, down on your luck, etc. i’ve needed help and i lend a hand when i can too. mr. rino isn’t talking about that though. he’s all about the fight. it’s like a sox fan and a yankees fan fighting it out in the parking lot when the athletes are watching from the top floor of the hotel laughing and drinking Cristal. i don’t agree with him so i’m a republican, he even knows how i voted.
Tom Delay, Phil Gramm, Bush/Cheney, Rumsfeld, Hank Paulson, Terri Schaivo, and pro-organized-religion legislation from DC are not distant memories. Obama never stopped digging the hole we’re in. But, he did slow down some. I *do* think the “pace of shoveling” increases again. ;-)
Nov 01, 2010 | zero hedge
A week ago we presented a comprehensive analysis by Moody's highlighting the key items in the cash flow statement of non-financial corporate America. Not surprisingly, we noticed that one of the biggest sources of cash over the past several years, in addition to cutting expenses to the bone and the resulting surge in unemployment, was the lack of investment in organic growth opportunities, via a plunge in Capital Expenditures, meaning that a revenue flat lining is the best most companies could hope for as most have now given up on traditional top-line growth and instead are either hording cash or investing it in an occasional M&A transaction. Now, in addition to that, courtesy of the Fed's free money policy resulting in surging input prices (see Jones Apparel), the next shoe to drop on the path to an upcoming EPS collapse for the S&P is the imminent drop in gross, operating and net margins for these very companies which are now seeing a contraction at both the top and bottom line. Today, David Rosenberg dissects this issue further, and sees nothing good on the horizon.
NOTICE THE WORD "PRICE CUTS"?
And, what the NYT had to conclude about 3M’s results? That it “reduced the top end of its full-year forecast and said rising raw materials costs and other pressures were cutting into margins, sending the company's shares sharply lower.” Margin compression at a time of low single-digit nominal GDP growth does not equate to a $95 operating EPS stream for 2011.
Further on this file of compressed margin pressure, S&P 500 revenue growth is already slowing down, notwithstanding the fact that 80% of the universe is beating their beaten-down profit estimates. The cost-cutting wave certainly did go much further than anyone expected but as the legendary Herb Stein once remarked, “anything that can’t last forever, by definition, won’t.” At some point, the well will run dry on the cost-cutting front and slowing revenue growth will take over — on track for +5.5% YoY in Q3 from 6.1% in Q2 and the consensus now for Q4 is sitting at +4.9%. As an added signpost of how this has proven to have been a revenue-less recovery, the top-line growth since the profits rebound began just over a year ago is running at barely more than half the average pace recorded in the 2002-07 cycle.
For all the talk about profits recovery, sales are still 11% lower now than they were in the spring of 2008. And, if you are wondering why it is that the stock market has still done little more than range trade in 2010, it is because earnings estimates are no longer rising as they were in 2009 — they are falling. The bottom-up consensus now sees 12.9% earnings growth for 2011 from 14.2% a month ago and 20.9% back in the spring. Have a look at the Paul Lim column on page 8 of the Sunday NYT business section — Raising a Caution Flag on Corporate Revenue.
From Gluskin-Sheff (full report pdf)
October 30, 2010
Swiss money manager Felix Zulauf shared his market views at a Barron’s conference, and according to Robin Blumenthal, much of it was grim:
“Most of the banks are not sound,” Zulauf told the audience of 250. “The crisis has only begun; there will be a long-term process of one mini-crisis after another.”
Zulauf, a Barron’s Roundtable member who raised the possibility of further Fed easing last January, when most pundits were anticipating tightening, said the next few years “could be the setup for much higher inflation later.” In response to a question about how the current mess differs from the 1930s, he quipped that “central banks can keep the economy afloat forever. At QE33, the Fed will own the whole system,” a reference to the possibility that Fed stimulus could go on indefinitely. The resulting inflation would lead to “the destruction of the currency,” he said.
The prescient macro-focused money manager likened investing in the industrialized world to “moving deck chairs around on the Titanic.” Among the possible icebergs: a Greek default, a 30% drop in Spanish real-estate values and a German popular revolt against the government’s support of fiscally irresponsible European Union members. Zulauf said investors should be focused on where to store their money, because “you might not be able to get it out when you want it.”
He suggests a portfolio that is 20% in gold (he accurately predicted in 2009 that gold would hit $1,300 this year); 30% to 40% in mostly emerging-market equities; and the rest in three-year government bonds, denominated in such currencies as the Singapore dollar and the Swiss franc.
Video interview with Zulauf is here.Alaric Investments:VennData:
Very good article & video.
All investors should be thinking about the issues Zulauf raises.
For those of a historical bent, I would suggest that they take the time to review, in light of the recent passing of President Kirchner, how Argentina went from having one of the top 10 economies in the world with a standard of living not much different from Europe 100 years ago to where it is now….
Could the US or the West generally, be heading in the same direction?
Most banks are leveraged, so they are [always] unsound to the extent of their leverage.
They were unsound bank when real estate was leveraging up prior to ’08. Now, they are in better shape, because they aren’t doing what they did.
If US banks were in a liquidity trap they could take some of the trillion they have on deposit they have at the Fed; they aren’t because they don’t need it. I’ll sell the XLF s to Mr. Zulauf all day long.
Related subject: Borrowing costs for eurozone members will go up for sovereigns who over leverage. That is / was the problem with the Euro: that governments could borrow near Germany’s rate. Now, they won’t be able to because investors will fear the “bail in” …forced hair cuts.
Alaric Investments Says:
October 30th, 2010 at 9:17 am Grego658 – what you are really saying is:
1. Never underestimate what a government will do
2. U.S. sovereign risk is under-appreciated
Who would have thought 10 years ago that we would have had 0% interest rates and that the Fed would be buying Treasuries like a drunken sailor….
Zulauf also thinks the S&P will drop to 500. He also thought that Greece was doomed. He also buys into the Bond Vigilante snuff fantasy in which rich boys like to jerk off to the idea that they control the universe.
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis explained last month before to the Financial Crisis Inquiry Commission why banks gave home loans to people who they knew couldn't repay. The whole piece is a must-read, but here are excerpts from the introduction:The data demonstrate conclusively that most liar’s loans were fraudulent, which means that there were millions of fraudulent mortgage loans because liar’s loans became common (Credit Suisse estimates that they represented 49% of new originations by 2006). The data also demonstrate that even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of such fraudulent liar’s loans. No honest, rational lender would make large numbers of liar’s loans. The epidemic of mortgage fraud was so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble (and the depth of the ultimate Great Recession.
In the cases where there have been even minimal investigations (New Century, Aurora/Lehman, Citi, WaMu, Countrywide, and IndyMac) senior lender officials were aware that liar’s loans were typically fraudulent. The lenders could not make an honest business out of selling overwhelmingly fraudulent mortgages.
Liar’s loans were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” (Akerlof & Romer 1993). A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by following a four-part recipe:
A. Extreme Growth
B. Making bad loans at a premium yield
C. Extreme leverage
D. Grossly inadequate loss reserves
Note that this same recipe maximizes fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy. This explains Akerlof & Romer’s title – Looting: The Economic Underworld of Bankruptcy for Profit. The failure of the firm is not a failure of the fraud scheme. (Modern bailouts may even recapitalize the looted bank and leave the looters in charge of it.)
The first two “ingredients” are related. Home lending is a mature, reasonably competitive industry. A lender cannot grow extremely rapidly by making good loans. If he tried, he’d have to cut his yield and his competitors would respond. His income would decline. But he can guarantee the ability to grow extremely rapidly by being indifferent to loan quality and charging weaker credit risks, or more naïve borrowers, a premium yield.
In order to become indifferent to loan quality the officers controlling the lender must eviscerate its underwriting.
There is no honest reason for a secured lender to seek or permit inflated appraisal values. This is a sure marker of accounting control fraud – a marker that juries easily understand.
In other words, banks made loans to borrowers who they knew couldn't really repay because the heads of the banks could make huge bonuses based on high volumes and fraudulent appraisals, and they didn't care if their own companies later failed.
In short, they looted their companies and the economy as a whole.
Professor Black brings us current to where we are today:Harvard and Iowa law school professor Katherine Porter sounded a similar call to legal action today in her testimony in the Congressional Oversight Panel's hearing on foreclosures:
History demonstrates that if the control frauds get away with their frauds they will strike again.By allowing the banks to use their political power to gimmick the accounting rules to permit them to hide their massive losses on liar’s loans we have made it far harder to take effective administrative, civil, and criminal sanctions against the elite frauds that caused the Great Recession. Hiding the losses also adopts the dishonest Japanese approach that cripples economic recovery and public integrity.
Prosecuting the elites control frauds can be done successfully. Create a new “Top 100” priority list and appoint regulators that will make supporting the Justice Department a top agency priority. That’s how we obtained over 1000 priority felony convictions of elite S&L criminals. No controlling officer of a large, non-prime specialty lender has been convicted of running a control fraud. Only one has even been indicted.
The FBI has written that any discussion of the crisis that ignores the role of mortgage fraud is “irresponsible.”America does not have to continue in a "crisis." We do not have to tolerate abuse of the legal system, systematic errors, bloated fees, and chaos in the housing and financial sector.On a related note, Chris Whalen (co-founder of Institutional Risk Analytics, who has been hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system) told me that the collection of credit default swap payouts might also have played into the banks extending loans to borrowers who couldn't repay:Whalen also notes that Freddie and Fannie helped to create the epidemic of mortgage fraud, and - like Black - blasts the government for covering it up:
There are some really bad incentive structures in this industry. Default increases servicing fees, etc. So yes, your example is not outlandish. And the wonder of CDS lets us all bet that the other’s home burns down. Speculative madness, but consistent for a culture that prizes sales about all else.The invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.
Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."
The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.
The fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason.
And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?
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