Financial Skeptic Bulletin, June 2009
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June
Matt Taibbi’s latest Rolling Stone article, “The
Great American Bubble Machine,” undresses Goldman Sachs–and finds a
“giant vampire squid wrapped around the face of humanity.” Not only
do former Goldmanites essentially run the world, they help manufacture
and burst economic bubbles, harvesting mean profits the entire time.
Taibbi details how the bank manipulated
investors, starting during the Great Depression.
Zero Hedge scanned the entire article onto Scribd; find it
here.
With a subtitle like "From tech stocks to high gas prices, Goldman Sachs
has engineered every major market manipulation
since the Great Depression - and they're about to do it again"
run, don't walk, to your nearest kiosk and buy Matt Taibbi's latest
piece in Rolling Stone magazine.
One of the best comprehensive profiles of Government Sachs done to
date.
Speaking of GS, they sure must be busy today, now that Bernanke is
about to be impeached and take the fall for all their machinations.
Taibbi’s conclusion: “It’s a gangster state, running on gangster
economics, and even prices can’t be trusted anymore; there
are hidden taxes in every buck you pay. And maybe we can’t stop it,
but at least we know where it’s all going.”
The Bank of International Settlements (BIS) will
release their
annual report tomorrow. The Guardian has a preview:
Recovery threatened by toxic assets still hidden in key banks
... Despite months of co-ordinated action around the globe to stabilise
the banking system, hidden perils still lurk in the world's financial
institutions according to the Basle-based Bank of International
Settlements.
"Overall, governments may not have acted quickly enough to remove
problem assets from the balance sheets of key banks," the BIS says
in its annual report. "At the same time, government guarantees and
asset insurance have exposed taxpayers to potentially large losses."
... As one of the few bodies consistently sounding the alarm about
the build-up of risky financial assets and under-capitalised banks
in the run-up to the credit crisis, the BIS's assessment will carry
weight with governments. It says: "The lack of progress threatens
to prolong the crisis and delay the recovery because a dysfunctional
financial system reduces the ability of monetary and fiscal actions
to stimulate the economy."
It also expresses concern about the dilemma facing policymakers
on when to start reining in the recovery. "Tightening too early
could thwart the recovery, whereas tightening too late may result
in inflationary pressures from the stimulus in place, or contribute
to yet another cycle of increasing leverage and bubbling asset prices.
Identifying when to tighten is difficult even at the best of times,
but even more so at the current stage," it says.
Also, the WSJ has an article on the incredibly shrinking PPIP:
Wary Banks Hobble Toxic-Asset Plan
I think the stress tests showed that the U.S. should have pre-privatized
BofA, Citigroup and GMAC. Oh well ...
Scrooge McDuck ()
Sorry,
CR, but got
pigged
States Turning to Last Resorts in Budget Crisis
"All but four states must have new budgets in place less than two
weeks from now — by July 1, the start of their fiscal year. But most
are already predicting shortfalls as tax collections shrink, unemployment
rises and the stock market remains in turmoil."
"In all, states will face a $121 billion budget gap in the
coming fiscal year, according to a recent report by the National Conference
of State Legislatures, compared with $102.4 billion for this fiscal
year."
"As a result, governors have recommended increasing taxes and fees
by some $24 billion for the coming fiscal year, the survey found. This
is on top of more than $726 million they sought in new revenues this
year."
http://www.nytimes.com/2009/06/22/us/22states.html?bl&ex=1245816000&en=6...
Faber is too simplistic and he was often wrong... Most respectabe
forecaster do not hyperinflation at least for several next years (2009-2012)...
June 25, 2009 | moneyshow.com
A: I'm not sure that the risk/reward now is particularly favorable.
The inflationary school of thought says the Federal Reserve has no other
option but to print money, and that will lift asset prices. The Standard
& Poor’s 500 could get to 1,000 or 1,100 or depending on how much money
they print, possibly even higher than that.
Between March and today, the S&P is up 40%, and in an environment
of zero interest rates, that's a huge gain. Many of the resource stocks
we were recommending in November and December have tripled. So, maybe
we have for two or three months now a reversal in expectations, where
people suddenly realize that maybe the economy doesn't recover a lot
and that deflationary pressures are still there. But if the S&P was
to come down to 800 or 750, the Fed would probably increase its money
printing activity. So, I kind of doubt that we'll see new lows.
Q. You've warned that US risks Zimbabwe-style hyperinflation and
then more recently said US inflation could reach 10% to 20% in five
to ten years. Isn't there a big gap between those outcomes?
A. We have the worst recession since the Second World War and actually
the prices of necessities are still rising, including food and energy.
So, one day within the next ten years, when the economy slowly recovers
and when further dollar weakness occurs, inflationary pressures will
increase. And once you have inflation increasing, it's not easy to stop
it unless you implement tight monetary conditions, which would imply
very high real interest rates. And I don't think that Mr. Bernanke or
the US government have any intention whatsoever of having positive real
interest rates. Combine easy monetary policies with large fiscal deficits,
and the likelihood of much higher inflation is there. Once we go to
10% inflation, 20% becomes quite likely and once we go to 20%, we can
easily go into hyperinflation.
While the CRB index is flat on the week, the implied inflation rate
in the 10 yr TIPS has fallen 22 bps this week to 1.71%, the lowest since
May 20th. It also coincides with the conventional 10 yr bond yield falling
to the lowest since May 25th on the heels of the three solid bond auctions
this week. Why is this? Inflation fears got ahead of itself (the y/o/y
May PCE rose just .1% today)? The FOMC, while maintaining their current
QE program, didn’t add to it and they also believe that inflation will
remain subdued for some time due to ’substantial resource slack’? Yesterday’s
jobless claims data has traders worried again about the economy and
the labor market and the deflationary implications, notwithstanding
the upside surprise in durable goods orders on Wednesday? Or is it just
a consolidation of the sharp move higher in inflation expectations over
the past few months?
From trucking data it looks pace of decline is diminishing and we might
be approaching the point of stabilizing the economy on a new lower
level... But the USA may need to see consumption
drop significantly before we can achieve a sustainable position.
CalculatedRisk
From the American Trucking Association:
ATA Truck Tonnage Index Increased 3.2 Percent in May
... ATA Chief Economist Bob Costello said the month-to-month
improvement was encouraging, but cautioned that tonnage is unlikely
to surge anytime soon. “I am hopeful that the worst is behind us,
but I just don’t see anything on the economic horizon that suggests
freight transportation is ready to explode,” Costello said. “The
consumer is still facing too many headwinds, including employment
losses, tight credit, rising fuel prices, and falling home values,
to name a few, that will make it very difficult for household spending
to jump in the near term.” He also noted that
he doesn’t expect tonnage to deteriorate
much further and that any growth in tonnage over the next few months
is likely to be modest.
... ... ...
Trucking serves as a barometer of the
U.S. economy, representing nearly 69 percent of tonnage carried
by all modes of domestic freight transportation, including
manufactured and retail goods
CalculatedRisk
There are many reasons for the rising delinquency rate. Earlier today
we discussed some
new research suggesting a number of homeowners with negative equity
are walking away from their homes ("ruthless default"). There are also
negative events that can lead to delinquencies - like death, disease,
and divorce - but one of the main drivers
is probably loss of income.
6/27/2009 | CalculatedRisk Here is an interesting new paper on homeowners
with negative equity walking away:
Moral and Social Constraints to Strategic Default on Mortgages by
Guiso, Sapienza and Zingales. (ht Bob_in_MA)
The WSJ Real Time Economics has a summary:
When Is It Cheaper to Ditch a Home Than Pay?
The researchers found that homeowners start to default once their
negative equity passes 10% of the home’s value. After that, they
“walk away massively” after decreases of 15%. About 17% of households
would default — even if they could pay the mortgage — when the equity
shortfall hits 50% of the house’s value, they found.
...
“Our research showed there is a multiplication effect, where the
social pressure not to default is weakened when homeowners live
in areas of high frequency of foreclosures or know others who defaulted
strategically,” Zingales said. “The
predisposition to default increases with the number of foreclosures
in the same ZIP code.”
... ... ...
I think one of the key points in the research are changing social
norms - the more people a homeowner knows that he believes "walked
away" the more open the homeowner will be to mailing in their keys.
This is what I
wrote in 2007:
One of the greatest fears for lenders (and investors in mortgage
backed securities) is that it will become socially acceptable
for upside down middle class Americans to walk away from their
homes.
This research suggests that this is happening in significant numbers.
Thus, first some proposals on altering the foundation of our economic
and financial system:
- Tightly regulate money supply by linking its growth to renewable
energy and the creation of a Sustainable Economy. That's
my Greenback proposal.
- Start actively dismantling the Permagrowth Economy. Some suggestions
could be to tax "black" energy heavily, cap and trade greenhouse
gas emissions and impose a national Value Added Tax (VAT) on all
transactions.
- Place the financial sector back at the "tail" of the economy,
where it belongs; it is the dog that should wag its tail, not the
other way round. One example would be to gradually increase reserve
ratios and capital requirements for banks (e.g. Tier I capital to
20%).
- Cease all financial sector bailouts and, where practicable,
ask for the government's money back, with interest.
Taking a firm position in an ongoing debate in the financial markets,
Buffett says he's not concerned about deflation, but thinks inflation
will be a problem in coming years.
TRANSCRIPT
BECKY: It continues to be? You
don't think any of the urgency has come away?
BUFFETT: No, I don't think the urgency has come
away. The urgency has moved away from a total meltdown of the
financial sector which we faced last fall. I've never seen anything
like that. But I would give enormous credit to the people there.
(Federal Reserve Chairman) Bernanke did a fabulous job. We were
right at the point where people lost faith in money-market funds, when
commercial paper stopped being issued. People would be having
a problem meeting their payroll, very big companies, if that hadn't
gotten addressed very quickly. And I give credit to people for
doing that. So that part, we've moved past that particular period.
We haven't got the economy going again.
The Coming Collapse of the Middle Class
Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy,
and commercial law at Harvard Law School. She is an outspoken critic
of America\'s credit economy, which she has linked to the continuing
rise in bankruptcy among the middle-class.
Series: \"UC Berkeley Graduate Council Lectures\" March 2007
On Monday, we looked at the impact of the Exhaustion Rate on Continuing
Unemployment Claims (See
Continuing Claims “Exhaustion Rate” and
Exhausted Claims part II). Those charts and tables made it clear
that Continuing Unemployment Claims were dropping not due to folks getting
jobs, but simply using up all of their benefits.Wednesday, we learned
of a)
record credit card chargeoffs and Increasing minimum Credit Cards
payments from
2% to 5% at Chase.
Now, lets see what happens if we can put those two together:
- dead hobo Says:
June 25th, 2009
Charge offs hit a 10% annual rate and may go to 12% soon. In
personal terms, this is an indication of a lowered quality of life.
After reading the below link about the history of GS, I can only
do two things
1) Want to start punching people
2) Campaign for chargeoff rates to go from 10% - 12% to as much
as you fricken don’t want to pay off. These banks don’t care about
anyone but themselves. Why should anyone who is feeling a little
crimped worry about paying them off? They’re all criminals and don’t
play using the same rules. Why should those who are paying the highest
prices care about these thieves?
http://zerohedge.blogspot.com/2009/06/goldman-sachs-engineering-every-major.html
At this time, almost everything in finance is a rigged came,
courtesy of Uncle Stupid and clever crooks of finance, with help
from an incompetent and often complicit media.
- call me ahab Says:
June 25th, 2009 at 9:09 am
dh Says-
“Why should anyone who is feeling a little crimped worry about
paying them off? They’re all criminals and don’t play using the
same rules.”
I have made this same point- hostility against the banks may
get to the point that folks who would normally want to do the right
thing will just tell the credit card issuers to screw themselves
and quit paying- where is their special treatment?- where is their
bailout?- especially now with record bonuses being reported-
here are the keys to my house- thank for the 2 or 3 years I lived
in it . . .oh . . .and by the way, those credit cards- I won’t being
paying those in the future either
- dead hobo Says:
June 25th, 2009 at
I’m feeling especially pessimistic this morning. I’m starting
to think that talk of a recovery in a few months is completely wrong.
We’re on a plateau on our way down to the new normal.
1) Massive CC charge off rates forecast to go higher
2) High unemployment compensation exhaustion rate likely to go
much higer
3) Massive initial claims and both increasing massive continuing
claims
4) Poor real estate market
5) Poor retail sales
6) Recent stock market increase probably partially due to liquidity
injection into markets for the purpose of making it easier to sell
new bank stocks at best prices. Fed injected liquidity possibly
gone.
7) Durable goods orders up BUT shipments, inventory and backlog
down substantially. Orders much less than shipments. A growing market
would show orders exceeding shipments and an increasing backlog,
just like any growing business would show. Inventories not being
replenished.
Massive continuing failures in auto business
9) Transportation companies describing dismal current and dismal
expected future conditions
10) Speculator driven high oil prices, choking the economy of
sustainable life
11) I can’t find even ONE good thing that points to growth, with
the possible exception of people changing behavior and downsizing
their consumption behavior, improving the business of low price
substitutes. If any real green shoots exist that have real economic
effect, please enumerate.
I’m at a loss to see a green shoot here. I think a new level
of down is coming. Once computers lose interest in jiggling the
stock markets, look out below.
Right now, the market is very tough. But in two years, or at most
three years, it will recover so we want to make sure we have the means
to meet demand then," said Niimi, who heads manufacturing operations
in Toyoda's new-look executive team.
"The company will have to learn to adjust to this new paradigm of
lower sales growth and higher technology spending. But they are definitely
in a better position than U.S. companies to do so," said Yoji Takeda,
a Hong Kong-based vice-president with RBC Investment Management (Asia)
Ltd.
In the United States, Toyota's biggest and until recently most profitable
market, its sales have dropped 38 percent year to date.
6/24/2009 | CalculatedRisk
From Bloomberg:
King Says U.K. Recovery May Be ‘Long, Hard Slog’ (ht Jonathan)
“There has to be a risk that it will be a long, hard slog”
because of the problems in the banking system, King told lawmakers
in London today. “I feel more uncertain now than ever. This
is not the pattern of a recession coming into recovery that we’ve
seen since the 1930s. Having an open mind and not pretending
to foresee the future when it’s so uncertain is important.”
...
King said that there’s “not much evidence to change our view” since
the bank released forecasts in May showing that the economy won’t
return to growth on an annual basis until the second half of next
year.Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009
- 4:58 pm
Someone clearly did not get the memo. Fed says stuff is sorta
OK, no deflation, no inflation. Life goes on, bra.
wrote on Wed, 6/24/2009 - 5:04 pm
OT:
Apparently there is a new branch of the Appalachian Trail that
runs to Argentina.
It's called the Happy Trail...I'll be here all week, folks.
Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009
- 4:58 pm
Someone clearly did not get the memo. Fed says stuff is sorta
OK, no deflation, no inflation. Life goes on, bra.
Mike in Long Island (profile) wrote on Wed, 6/24/2009 - 5:05
pm From the prior thread(.
Citizen AllenM wrote,
This model was beyond stupid, yet pursued with great vigor.
I think you meant to say
This model preyed upon the stupid and was pursued with visions
of great vigorish yet to be collected.
creditcriminalslovetarp (profile) wrote on Wed, 6/24/2009
- 5:05 pm
maybe he's onto something with that Argentina Happy Trail..
Good for trade..
http://www.surfersvillage.com/gal/pictures/MissReefArgentina640_4.jpg
.Not One Cent (homepage, profile) wrote on Wed, 6/24/2009
- 5:05 pm
We need a hedonic adjustment for British understatement.
Mike in Long Island (profile) wrote on Wed, 6/24/2009
- 5:05 pm From the prior thread(.
Citizen AllenM wrote,
This model was beyond stupid, yet pursued with great vigor.
I think you meant to say
This model preyed upon the stupid and was pursued with visions
of great vigorish yet to be collected.
creditcriminalslovetarp (profile) wrote on Wed, 6/24/2009
- 5:05 pm
maybe he's onto something with that Argentina Happy Trail..good
for trade..
http://www.surfersvillage.com/gal/pictures/MissReefArgentina640_4.jpg
UnrealEstate (profile) wrote on Wed, 6/24/2009 - 5:08 pm
There will be a recovery? I thought the Western Civilization
has been now in the initial stages of the meltdown with the
Globalist pit bulls having a death grip on its throat.
HomeGnome (profile) wrote on Wed, 6/24/2009 - 5:09 pm
Reuters:
World wants "major reserve currencies" stable: China
China suggested in March that the International Monetary Fund's
Special Drawing Rights, or SDRs, could play a role as a future
reserve currency, which would lessen the reliance on the U.S.
dollar as the world's top reserve unit.
A review of the basket is due in late 2010.
2010.
The End, my friend.
Comrade Coinz (homepage, profile) wrote on Wed, 6/24/2009
- 5:11 pm
Since Mervyn is talking macro, I've been trying to figure
out the best indicators to look at for a possible up turn and
to watch for inflation spikes.
Here are main things I am watching:
- Chicago Fed National Activity Index (CFNAI)
- Treasury yield curve
- St. Louis Fed EMRATIO (continuing claims no longer much value)
- Initial jobless claims
- price of oil, gold, and copper
- Case-Schiller home prices
What does everyone watch?
nincompoop (profile) wrote (in reply to...) on Wed, 6/24/2009
- 5:20 pm
Comrade Coinz Best indicators to look for possible up turn?
Unemployment figures only. Forget
about the rest. In addition I want to see unemployment
figures which can be used to determine
where the jobs are coming from. Forget
about unemployment figures being a trailing indicator as who
cares if you are a little late with your assessment.
barfly (profile) wrote on Wed, 6/24/2009 - 5:42 pm
Green Shoots is one of the boldest con games I have witnessed
in my life.
- how does it stack up against WMD in Iraq?
Lucifer (profile) wrote on Wed, 6/24/2009 - 5:41 pm
I thought the great con game started in 1980... it is still
going on.
//"Green Shoots" is one of the boldest con games I have witnessed
in my life. //
Mike in Long Island (profile) wrote on Wed, 6/24/2009
- 5:46 pm
Citizen Allen,
We will have to agree to disagree. Maybe I'm too cynical but
I bet that the majority of those "loss leaders" of unsecured
lending were predicated on a certain percentage of borrowers
running up huge balances and then missing a payment triggering
the penalty rate.
Kind of like the meth dealer who
gives away some product knowing most freebies will result in
return business at much higher margins.
6/23/2009 | CalculatedRisk
Proposals for reform of financial regulation are now everywhere.
The most significant have come from the US, where President Barack
Obama’s administration last week put forward a comprehensive, albeit
timid, set of ideas. But will such proposals make the system less
crisis-prone? My answer is, no. The reason for my pessimism is that
the crisis has exacerbated the sector’s weaknesses. It is unlikely
that envisaged reforms will offset this danger.
At the heart of the financial industry are highly leveraged businesses.
Their central activity is creating and trading assets of uncertain
value, while their liabilities are, as we have been reminded, guaranteed
by the state. This is a licence to gamble with taxpayers’ money.
The mystery is that crises erupt so rarely.
Wolf discusses how it is rational for management and shareholders to
gamble when the risks are asymmetrical (huge potential winnings, limited
losses). And he argues that "creditors ... appear to have lent to a
bank. In reality, they have lent to the state." He also discusses how
tighter regulation isn't enough because the banks will find a way round
the new regulations.
Wolf concludes:
Such a crisis is not only the result of a rational response to incentives.
Folly and ignorance play a part. Nor do I believe that bubbles and
crises can be eliminated from capitalism. Yet it is hard to believe
that the risks being run by huge institutions had nothing to do
with incentives. The unpleasant truth is that, today, the incentive
to behave in this risky way is, if anything, even bigger than it
was before the crisis.
Regulatory reform cannot end with incentives. But it has to start
from incentives. A business that is too big to fail cannot be run
in the interests of shareholders, since it is no longer part of
the market. Either it must be possible to close it down or it has
to be run in a different way. It is as simple – and brutal – as
that.
Talk about pessimism.
Another financial crisis is unfortunately inevitable - all we hope to
do with reform is to put it off for a couple of decades or more.
pavel.chichikov wrote on Tue, 6/23/2009 - 6:01 pm
"A business that is too big to fail cannot be run in the interests of
shareholders, since it is no longer part of the market. Either it must
be possible to close it down or it has to be run in a different way.
It is as simple – and brutal – as that."
Lobbyist Ben Dover wrote on Tue, 6/23/2009 - 6:02 pm
It is not abnormal to over do it a bit. It is totally abnormal to put
a blind eye to the most basic signs of theft. Our Federal regulators
and politicians are the real crooks for not doing the slightest discipline
or for not warning of what was taking place!
Amen.
Counterpointer wrote on Tue, 6/23/2009 - 6:09 pm
There was no meaningful reform after the Asian Crisis, related to global
systemic weaknesses, but there were one hell of a lot of meetings and
new acronyms created. Countries had already gone national, G-L-B as
a rather good example. IMF multilateral surveillance was a late run
to address the impending bubble. No systemically important regulator
had the remotest intention of seeing that it worked.patientrenter
wrote on Tue, 6/23/2009 - 6:11 pm
Martin Wolf is correct, I am afraid. We have responded to a problem
by making its causes worse. Investors (including people who buy homes
for well over twice their income) no longer bear the full risks of their
decisions. Taxpayers and savers (through the subtle tax created by future
inflation)
pick up the tab for many of the losses. This was what created the bubble,
and now we have expanded, formalized and institutionalized the process.
This fix will last for a shorter time than the last one, and the next
fix after that will last for an even shorter period, and so on, until
all credibility is lost and real (lasting, sustainable) solutions must
be developed.
Far from some inevitable, harmless evidence of progress, this increase
in risk transfer is a mistake. It's an avoidable mistake as much as
Greenspan's extended cheap money policy was an avoidable mistake.
Lucifer
How kind of them..
banker= worker
__________________
Citigroup Is Said to Be Raising Pay for Workers
http://www.cnbc.com/id/31514432
By: Eric Dash, The New York Times | 23 Jun 2009 | 08:56 PM ET Text
Size
After all those losses and bailouts, rank-and-file employees of Citigroup
are getting some good news: their salaries are going up.
The troubled banking giant, which to many symbolizes the troubles
in the nation’s financial industry, intends to raise workers’ base salaries
by as much as 50 percent this year to offset smaller annual bonuses,
according to people with direct knowledge of the plan.
Lucifer> wrote on Tue, 6/23/2009 - 6:39 pm
But we rewarded them for lying and scamming us..
_________________________________________
The 86 Biggest Lies On Wall Street
http://www.cnbc.com/id/31491232/
Posted By:Gloria McDonough-Taub
In his newest book, The 86 Biggest Lies on Wall Street, John R Talbott
answers my question first by writing, "I know what you're thinking,
how was I able to narrow down the number of lies to just eighty-six."
Here are some samples from the "Biggest Lies on Wall Street"
Going into the current crisis, the American economy was the strongest
and most resilient in the world
This was simply a subprime mortgage problem that no one could have foreseen
Like the Great Depression, this is primarily a liquidity problem, and
injecting cash into the system will solve it
CEO pay is deserved because it is determined in a highly competitive
market
Excessive regulation is not needed in the financial markets because
anyone who is harmed can seek redress in the courts
Government regulation is bad for economic growth and prosperity
pavel.chichikov wrote on Tue, 6/23/2009 - 6:42 pm
"In his newest book, The 86 Biggest Lies on Wall Street, John R Talbott
answers my question first by writing, "I know what you're thinking,
how was I able to narrow down the number of lies to just eighty-six."
But when lies are compulsive and compulsory, it means that reality
is sliding out of our grip. Compulsive drinking, compulsive gambling
- compulsive banking?
pavel.chichikov
"I see, Pavel. You are afraid that circumstances that would cause the
general populace to lose faith in ever-larger doses of our current financial
medicines would also lead to social breakdown."Not quite, patientrenter.
I believe it's social break down that's leading the financial crisis.
"I think that people here in the US have enough remembered history
of individual economic responsibility to come to their senses when the
carrots stop coming even as they keep pushing the "easy food" button."
I hope you're right.
dryfly wrote
Regulations are useless (anyway the regulations that Obama wants).
Do you think that it's regulations that kept 1929 from happening for
80 years? No it's psychology. The bust turned out so bad that market
participants became very
risk averse.The bigger the bubble, the bigger the bust
(and in this respect the bubble of the 20"s was a picnic compared to
today). Odds are that the outcome will be so bad that such a crisis
will not happen again before, a long, very long time.
Regulations are like traffic laws - they only work if the population
wants to makes them work [i.e. the psychology]. After the depression
almost all market participants wanted to make them work... the few that
didn't were constrained by enforcement of those 'useless regulations'.
By the 80s the majority of participants wanted those useless regulations
thrown aside and didn't remember why they were there in the first place.
They got thrown aside. They now why they were there.
Lucifer wrote on Tue, 6/23/2009 - 6:52 pm
"Experience keeps a dear school, but fools will learn in no other"
_________________________________________________________
By the 80s the majority of participants wanted those useless regulations
thrown aside and didn't remember why they were there in the first place.
They got thrown aside. They now why they were there.
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:01 pm "REGULATE
THE MORTGAGE INDUSTRY
30 yr fixed, 20% down on EVERYTHING."
Amen to that, Danny. That one simple step would be a huge step in
avoiding another housing bubble.
Ain't gonna happen, unfortunately.
Lucifer wrote on Tue, 6/23/2009 - 7:03 pm
It will work out that way.. eventually.//Why can't you all just accept
that everything is for the best in this the best of all possible universes.//
patientrenter wrote on Tue, 6/23/2009 - 7:05 pm
"They are failing today just as then... we can't cover them all or
even cover some of them all the way. We aren't halfway through this
pain fest."
In the 1930's, when banks failed, the people who put their money
into them lost some of it. Not true today. It really is different today.
Oh, and another amen to the 30 yr fixed, 20% down on everything comment.
With that one change, our housing market would be almost normal again.
But the house price gain orgy would be well and truly over for 2/3 of
our population. The end of the biggest
free lunch scheme ever hatched. So, it ain't going to happen.
Lucifer wrote on Tue, 6/23/2009 - 7:06 pm
You mean, common people should be more moral than banksters or businessmen?
Why?
//When people decided they wanted it, deserved it NOW.//
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:07 pm
"Going into the current crisis, the American economy was the strongest
and most resilient in the world"
Agreed, anyone who still believes the US economy is/was the strongest
and most resilient in the world needs to think some more.
The real joke though is how, during the Asian crisis, people like
Geithner et al went around and lectured the Asians on how to run their
economies.
No wonder they are trying to bail on our currency and economy today.
ghostfaceinvestah wrote on Tue, 6/23/2009 - 7:08 pm
"A resonance phenomenon? "
I think so, brought to you by a pure fiat currency and fractional
reserve banking.
Lucifer ()
Respectibility of western thought and people is one of the biggest
casualty of this crisis.
//The real joke though is how, during the Asian crisis, people like
Geithner et al went around and lectured the Asians on how to run their
economies.//
Lobbyist Ben Dover wrote on Tue, 6/23/2009 - 7:12 pm
Twenty percent down will show also the home prices are to high. Flake
financing has created the need to pump people into homes they can not
responsibly afford. Bang we have a warped reality!
Lucifer wrote on Tue, 6/23/2009 - 7:21 pm
Is UBS not leveraged 50x and > 4X the GDP of Switzerland? Do they
have any credibility? Does anyone big have any credibility left?
//UBS cuts Swiss Life to "sell"//
km4 wrote on Tue, 6/23/2009 - 7:25 pm
What .....you mean financial (
ponzi scheme ) engineering of the US economy is not sustainable
going forward
Anak wrote on Tue, 6/23/2009 - 7:37 pm
Who was it some time ago who opined that in future banking should
be no more exciting and remunerative than a public utility?
Lucifer ()
Many have opined that.. including Taleb.
//Who was it some time ago who opined that in future banking should
be no more exciting and remunerative than a public utility?//
Comrade Dazed and Amused wrote on Tue, 6/23/2009 - 7:42 pm
josap (profile) wrote on Tue, 6/23/2009 - 9:04 pm
Lucifer
The problem started not because of infaltion. During the high inflationary
times we just bought less or on sale only. Still no credit card.
When people decided they wanted it, deserved it NOW. And credit card,
TV rental companies figured out how to give it to them. That was the
begining of the end.
Marketing helped, allot. All the you "deserve it" commercials, the
"you can have it now" ads.
In 1994 I started a business in Mexico. After the peso devaluation
in Dec 1994, I lost everything, including my house in the US and $40k
in credit card lines of credit. It was the most liberating experience
of my life because it forced me to live on a cash-only basis. You really
CAN live on cash only. It forces you to evaluate very purchase, and
to plan what and where you are going to spend your hard earned cash
on.
I think this is something that many people in the US are going to
have to come to grips with soon. "You can have it now" is going
to become "You can have it when you pay off the lay-away".
Life will go on. It's just the transition that will be painful.
broward wrote on Tue, 6/23/2009 - 7:57 pm
Their debit is my credit. Folks will get it soon enough.
---------
"Survival of the fittest" don't work so good when your lifeline is
tied to the guy you put out of work.
Rob Dawg wrote on Tue, 6/23/2009 - 8:03 pm
Tech bubble -> housing bubble -> government debt bubble.
I knew an old lady, she swallowed a fly...
peAk wrote on Tue, 6/23/2009 - 9:04 pm
Credit cycle becomes increasingly unstable as debt gets larger
and larger..
Historians will note that while the credit-collapse was swift,
the ensuing fall in asset prices was anomalously slowed, intentionally
by those seeing the danger of liquidation and undertaking to disguise
the reality of the price drops so as to discourage self-reinforced
selling, and unintentionally by those who hopefully or ignorantly
expected buying and lending to re-emerge at each new low. The antidote
to the credit-asset-price-collapse contagion will prove to have
been the liquidation of non-distressed business and personal assets,
even at decreasing "below-market" levels, and the preservation of
cash in whatever forms appeared more essentially durable, but the
remedial solution will have remained invisible to almost all, hiding
in plain sight.
June 22, 2009 | Yahoo(ETFguide.com)
Is the worst over? It's an open-ended question that solicits many
diverse opinions but none that yields any clear answers. And no matter
how good the thesis sounds about which way the market is headed, the
future is forever unknowable. What does this mean for your investment
portfolio?
Not knowing the future is hardly an endorsement for leaving your
investments up to chance.
Even during difficult economic periods and directionless markets,
it's possible to achieve profitable results. For example, four of ETFguide.com's
live model ETF portfolios have outperformed major benchmarks like the
S&P 500 (NYSEArca:
SPY -
News) and the MSCI EAFE Index (NYSEArca:
EFA -
News) on a year-to-date basis. What does it prove? Getting the correct
mix of assets inside your portfolio still works. Desirable results don't
typically happen by accident.
What can you do to prepare your money for the next market decline?
Let's evaluate three simple strategies.
Avoid Financial Puberty
'Financial puberty' is a term I invented to describe a state of financial
immaturity that prevents people from prospering. The three main aspects
of financial puberty are:
- Having behavioral disorders counterproductive to successful
investing;
- Having limited or no education about the realities of successful
investing, and
- Having a distorted investment philosophy or having no investment
philosophy at all.
Do you have symptoms of financial puberty?
One way to know is through self-examination of your attitudes. For
example, many investors have adopted a defeatist attitude. 'If my neighbor's
portfolio is down 60% and mine is down 50%, I'm not gonna complain,'
they tell themselves. Other investors have become callus to risk. They've
convinced themselves, 'My portfolio is down so much, I need to take
on more risk to earn back my losses.'
In both cases, this kind of flawed reasoning is rooted in financial
puberty, an all encompassing self-destructive characteristic.
Remember: This isn't 'Play Money'
Entrusting your money to investment managers is no guarantee
of success and sometimes results in full-blown disaster. Not realizing
this caught many people by surprise.
In 2008, the Oppenheimer Core Bond A (Nasdaq:
OPIGX -
News) cratered 35.83% yet the Barclays Aggregate Bond Index as tracked
by Vanguard's Total Bond Market ETF (NYSEArca:
BND -
News) climbed 5.17%. How long
will it take Oppenheimer's bond fund shareholders to make up that 41%
deficit?
'Thousands of parents of college-age children who thought their college
savings were sheltered in low-risk portfolios watched their accounts
shrink last year after a bond fund (Oppenheimer Core Bond Fund) offered
by at least four state 529 plans lost more than a third of its value,'
reported the USA Today. OPIGX was offered by 529 plans in Oregon, Texas,
Maine and New Mexico.
What if 529 state administrators in charge of this mess had enough
sense to just use low cost index funds or index ETFs? Is it possible
they could have protected college savers from the nightmare scenario
they're now facing? Treat your money and invest your money like you
care. It isn't play money.
Be Alert, Stay Vigilant
Nothing can be more dangerous to a soldier's safety than his or her
own complacency. Sometimes when it appears everything is calm and safe
is right when the enemy strikes! From an investment perspective, being
inattentive, apathetic or lazy could cost you a bundle.
Towards the end of February and early March, the downtrend for the
Nasdaq Composite began to slow (NasdaqGM:
ONEQ -
News). Much earlier the Dow and S&P 500 had already dropped significantly
below their 2008 lows, whereas, the Nasdaq did so much later and to
a smaller degree, which indicated a shift towards riskier stocks.
This, along with a composite of other indicators, led the
ETF Profit Strategy Newsletter to issue a Trend Change Alert on
March 2nd, only four days before the S&P 500 bottomed on March 6th.
Along with a number of ETF profit strategies for conservative, moderate,
and aggressive investors, the alert forecasted the following: 'A multi-month
rally, the biggest rally since the October 2007 all-time highs, should
lift the indexes by some 30-40%. Tuesday's 4% spike may be an indication
of the initial intensity of the rally.' Being alert to this reversal
in stock prices paid off. For aloof investors, they were too busy doing
nothing to notice.
What's Your Action Plan?
This is not the friendly stock market of a few years ago. Combining
today's bear market and economic recession with the wrong investment
philosophy will inevitably lead to financial disaster. Millions of investors
have lost more far more of their wealth than they expected to lose.
And millions more will join them. What will you do?
If the stock market has trashed your portfolio, isn't it time you
made the necessary changes to get your money back on track? Avoiding
financial puberty, treating your money with care and staying alert are
three simple steps to preparing your money for whatever lies ahead.
Taipei Times
...much of the rise is not justified, as it is driven by excessively
optimistic expectations of a rapid recovery of growth toward its potential
level and by a liquidity bubble that is raising oil prices and equities
too fast too soon. A negative oil shock, together with rising government-bond
yields — could clip the recovery’s wings and lead to a significant further
downturn in asset prices and in the real economy.
Jun 21, 2009"Decidedly the worst (of the crisis) is already behind
us," said Soros, a 78-year-old Hungarian-born American with Jewish roots.
He did not elaborate but went on to stress the uniqueness of the
current economic turmoil.
"This is not like previous crises but marks the end of an era. The
system to date had been based on the false assumption that markets can
independently regain their equilibrium and that the system is self-correcting,"
he explained
By Chris Reiter
June 20 (Bloomberg) -- Chancellor Angela Merkel said the slumping
German economy has nearly hit bottom and will unlikely recover quickly,
the AP reported, citing a speech she made in Berlin.
The chart of the German economy may look more like a “bathtub”
than a “V” as output stagnates before recovering, she said, according
to the news agency. “I hope it is a children’s bathtub and not a bathtub
for people with particularly long legs,” Merkel is quoted as saying
by the AP.
[Jun 21, 2009]
Buyers Fatigue? By Barry Ritholtz
June 20, 2009 | The
Big Picture
Some 15 weeks after the March 666 lows, indices are 40% higher. After
that sprint, might the buyers be suffering from some fatigue? Are the
markets now fully reflecting a second half recovery?
Are we priced for perfection?
Those questions are looked at in
Barron’s Up & Down Wall Street column this week:
“There were hints, as well, that bullish sentiment, which for
a spell remained fairly constrained, had escalated to something
approaching euphoria. Investors Intelligence readings of advisory
sentiment showed most of these supposed savants, who often function
best as contrary indicators, have come a bit late to the party;
in recent weeks, the percentage of bulls among them have registered
in the mid-40s, compared with the low 20s for the bears.
Moreover, trading took on a distinctly more speculative tone,
with small stocks chalking up big gains despite their conspicuous
lack of very much in the way of sales and nothing in the way of
profits or prospects. And perhaps the most persuasive evidence of
the gamier spirit abroad in Wall Street is that, despite the mounting
demolition of the commercial-property market, Morgan Stanley plans
to sell re-securitized commercial mortgages.
Which, as one portfolio pro acidly observed to Dow Jones Capital
Markets, amounts to peddling tarnished assets nicely repackaged
with higher ratings. That kind of thing has been going on in residential
asset-backed securities in recent months, presumably fueled by the
notion that the housing decline has bottomed. But that it now has
spread to commercial mortgages when things are getting notably worse
is clear indication that the mind-set and, indeed, some of the very
stuff that got us into such a jam is back. Alas.”
Hence, the expectation that the rally may have run its course, and
is heading south.
That seems to be too pat for Mr. Market, who delights in confounding
everyone. A more frustrating course of action would be to back and fill
— but not collapse –and keep going up (albeit at a slower
pace) after some digestion over the summer months. Sucker some
more people in, only to retest the lows in September / October period.
That’s just my guess . . .
Selected Comments
constantnormal Says:
June 20th, 2009 at 10:26 am “…only to retest the lows in September
/ October period”
Not in the October-November period?
That seems to be more the norm for fall excitement.
Of course, it will happen once the last bear has thrown in the
towel and there are no more people to serve as buyers … so it could
be September / October … of 2010.
dead hobo Says:
June 20th, 2009 at 10:34 am And exactly who is going to be buying?
Computers will continue daytrading with each other and some hedgies
will try to live up to the image of their talking head personnas.
Rumored Fed backed financial programs might add more liquidity via
helpful iBanks in an effort to jump start the economy via the wealth
effect. A few risk chasers who prefer the stock market over Vegas
will stay at it.
Ma and Pa aren’t coming back. Most people who had money just
hope to get more of it back. It would take a special kind of stupid
to lose 40% of your life savings and then withdraw from the bank
account to replenish the brokerage account.
The pumpers are now probably in a maintenance mode. They likely
hope green shoots propaganda will bring out the stupid again. Maybe
if some magic charts can be jazzed up, people will think they control
the world and wealth is assured if they only buy another ticket.
I’ll buy the next big big dip, but not before. Maybe the pumper
can run it past S&P 1000 next time. (I bet they’re too chicken shit
to manufacturer some ranges to trade). Meanwhile, I am hearing stories
of affluent people taking their cash and paying off major debts.
Pundits who are waiting for the mobs to return are disconnected
with reality.
Chief Tomahawk Says:
June 20th, 2009 at 10:40 am EJ over at Itulip believes the Fed
will cause a market selloff on their first attempt to remove liquidity
from the system. But yet feels the averages will end the year more
or less where we are now.
cvienne Says:
June 20th, 2009 at 10:53 am The bears certainly see excessive
valuations in equities at the moment…(and I think the S&P has most
likely put in an interim top - or very close to it)…
But when I consider the “nature” of the sell-offs during the
‘08 - early March ‘09 time periods…Much of it was liquidation from
over leveraged positions…Which was why the velocity was so high…
Right now, if the system is simply OVERBOUGHT (as opposed to
overbought & over levered) - we may not see the severity of declines
on pullbacks the way we have in the past year…Although I believe
the market will trend lower (and for a long time) from here…
There may be instances where someone gets in trouble (and/or)
if there’s an EVENT which prompts a steep selloff, but I see the
possibility of opportunistic buying coming in on those events…It’ll
most likely be a TRADERS market for the next two years with a downward
glidepath…
The other part is going to be the bond market…I
see that any time the 10 year gets above 4% (and perhaps on occasion
they’ll let it go to 4.5%), then you’ll see money shift there while
equities correct, then maybe reverse…
ON PAPER - What I describe above may seem smooth & orderly…The
fly in the ointment is going to be how long the economy can actually
hang on before a huge crisis in DEFAULTS (on everything - credit
cards - CRE - munis - ARM resets) causes the next liquidity squeeze…
So the markets may operate in a fashion that attempts to DENY
those problems until they actually start hitting OPERATIONS in the
gonads…
some_guy_in_a_cube Says:
June 20th, 2009 at 11:22 am
The market can be expected to fool nearly all of the people nearly
all of the time. This is a game where the many losers fund the outsized
gains of the few winners.
And the winners have nothing going for them other than dumb,
stupid luck.
~~~
BR: Gee, that Jim Simons of Renaissance is pretty lucky — 40%
returns for 30 years.
call me ahab Says:
June 20th, 2009 at 11:22 am
dh-
however- commodities will be dependent on a weakening $ and heavy
inflation expectations- when it is realized that it is deflation-
the air will blow out of commodities- I don’t foresee Americans
being able to continue with their excessive ways- and all the the
junk that is made has to be bought by someone-
also- I honestly believe that markets are manipulated by the
Fed and market players to create bubbles with approval from the
USG- if only for the reason to forestall total implosion
Partnoy is a skilled and often very funny writer, and he sets forth
in detail that a layperson can understand how some of the products worked
and what the economics to the firm were. But the centerpiece is the
lurid, shameless, but prized for its productivity culture.
... ... ...
Even though Partnoy's book is now more than a decade old, I'd assume
things have not changed very much. The internal banter may more civil,
the predatory imagery less open, but I'd suspect that
customers are still viewed as sheep to be
sheared. Or worse.
“If another decline in the market is going to bankrupt you or put
you out of business or destroy your retirement account, you should not
go back into the stock market,” said
John C. Bogle, the founder of Vanguard and viewed by many as the
father of index investing. “It’s not complicated. The stock market can
go up and down a lot and nobody really knows how much and when.”
What’s worked for Mr. Bogle may not work for you, but his method
isn’t a bad place to start. “I have this threadbare rule that has worked
very well for me,” he said in an interview this week. “Your bond position
should equal your age.” Mr. Bogle, by the way, is 80 years old.
... ... ...
As to those investors who got out of stocks, Mr. Bogle said it might
be time for some of them to get back in. “But I would take two years
to do it,” he said. “Maybe average in over eight quarters, and do an
eighth each quarter. I am just not in favor of doing things in a hurry
or emotionally.”
And then? “Don’t touch it,” he said, emphatically. “One of my rules
is don’t do something. Just stand there.”
... ... ...
There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years
of annual expenses in a bond ladder, with an equal amount coming due
every six months. The ladder can include high-quality corporate bonds,
Treasury notes, certificates of deposit or
municipal bonds, depending on the retiree’s tax bracket. Mr. Simon
takes a similar approach using a 15-year ladder of zero-coupon bonds.
He says that investors can start building the ladder in their 50s, with
the first rung coming due the year they retire.
MrM ()
MLM -
Thanks for taking a stab at the estimates. Based on your back of
the envelope, states will need to raise more $200 Bil in tax to plug
holes in their budgets. This is actually quite close to the total amount
of 2009-10 tax refunds to individuals in
the stimulus package.
Then there is also the shortfall of real estate taxes hitting municipalities.
I think of this as yet another reason why people like Krugman and
Roubini view the stimulus packages as inadequate.
Then again - where can the government take all this money short of
the printing press?..
Jun 10, 2009 | Asia Times
Productivity growth, the most mysterious
of economic statistics, was announced on Thursday for the first quarter
of 2009 - revised upwards from 0.8% to 1.6%.
After a quarter century of stellar growth from 1948 to 1973, productivity
growth suddenly collapsed and remained low for the next decade.
Then after 1982, it recovered somewhat, accelerating further slightly
in the middle 1990s, although still not to its 1948-73 level.
6/20/2009 | CalculatedRisk
From Bloomberg:
GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders (ht Comrade
de Chaos)
shoots group yet,” [General Electric Co. Vice Chairman John] Rice
said ... “I have not seen it in our order patterns yet. At the macro
level, there may be statistics suggesting the economy is starting
to turn. I am not seeing it yet.”... ... ...
“We see a world where good companies and good consumers can’t
get all the credit we would like,” Rice said. “Companies with lots
of cash on their balance sheet are worried about whether they will
get what they need for working capital” and are cutting spending.
“Until that changes I don’t think you will see a significant
rebound,” Rice said. “We are preparing for 12 or 18 months of tough
sledding.”
Maybe the cliff diving is over, but no green shoots ....
Personal income fell in 37 states in the first quarter, according
to estimates released today by the U.S. Bureau of Economic Analysis.
Most of the states where income rose were in the Southeast.
June 16, 2009 | Sudden Debt
This blog's position has always been that the US economy's performance
post-2000 has been due to ever-increasing assumption of debt, particularly
by households to finance real estate purchases and personal consumption.
I don't think anyone can dispute this any more: just look at the chart
below.
(...deleted...)
Debt kept accelerating while GDP remained "stuck" at around 5% annually
(these are nominal figures). In the end, the debt boom created its own
bust and dragged down the entire economy. Cement shoes come to mind...
So, now what? What does the future hold? In particular, I am referring
to corporate profits, the fundamental driver of stock market performance.
We can analyse markets using a multitude of perspectives from astrological
to psychological but, when it's all said and done, what matters is profits.
Since 1997, or so, households assumed ever more debt in order to
consume and, thus, increase corporate profits. At the top in 2006 it
took an additional $1.3 trillion in household debt to generate an additional
$300 billion in profits, i.e. a ratio of 4.3 times
(see chart below).
The debt intensity of corporate profitability
was huge, but it weren't corporations themselves that were going into
debt; it was their customers.
Annual Increases
In Household Debt and Corporate Profits ($ Billion)
We are now deep in a debt-bust crisis and it is
the first time since at least 1953
that household debt is decreasing in absolute numbers, year on
year. What does this mean for corporate profits? Based on the relationship
above, I expect they have quite a bit more to drop, perhaps after a
(very) brief period of stabilization due to cost cutting
(see chart below).
Corporate Profits After Tax
I would thus not be at all surprised to see after-tax profits go
back to around $300 billion/year, where they were in 1992 at the beginning
of the debt acceleration cycle. What does this mean for stocks? Look
at the chart of S&P 500 below (click
to enlarge).
S&P 500 Share Index
In 1992 S&P 500 was around 400, or 57%
lower than current levels. Of course, this is a pretty
simplistic and one-faceted approach to corporate profits and the market,
dealing as it does only with debt. (But then again... KISS has always
been pretty good guidance.)
Posted by Hellasious at
Tuesday, June
16, 2009
16 comments:
specularbage said...
Hellasious said...
Hellasious said...
Jun 18, 2009 | The Big Picture
[Jun 18, 2009] Senator Shelby Calls Fed's Expertise "Grossly Inflated"
as Geithner Attempts to Defends the Indefensible
Mish's Global Economic Trend Analysis
Like every bloated bureaucracy, the Fed wants still
more power. Secretary of Treasury Tim Geithner, a former Fed Governor,
is all too happy to give it to them.
Mish's Global Economic Trend Analysis
The Nelson A. Rockefeller Institute of Government has issued a
State Revenue Flash Report discussing an across the board enormous
drop in personal income tax revenues.
Total personal income tax collections in January-April 2009 were
26 percent, or about $28.8 billion below the level of a year ago
in states for which we have data. In April 2009 alone (April being
the month when many states receive the bulk of their balance due
or final payments), personal income tax receipts fell by 36.5 percent,
or $18.2 billion.
Personal income tax receipts in the first four months of calendar
year 2009 were greater than in 2008 in only three states — Alabama,
North Dakota, and Utah.
In FY 2008, personal income tax revenue made up over 50 percent
of total tax collections in six states — Colorado, Connecticut,
Massachusetts, New York, Oregon, and Virginia. Personal income tax
revenue declined dramatically in all six of these states for the
months of January-April of 2009 compared to the same period of 2008.
Among all 37 early-reporting states, the largest decline was in
Arizona, where collections declined by nearly 55 percent.
In the month of April alone, 37 early reporting states collected
about $18.2 billion less in personal income tax revenues compared
to the same month of 2008.
States most dependent on Personal Income Taxes
68.5% of Oregon's Tax Revenue from PIT. Collections off 27.0%
57.2% of Massachusetts' Tax Revenue from PIT. Collections off 28.5%
55.9% of New York's Tax Revenue from PIT. Collections off 31.8%
47.5% of California's' Tax Revenue from PIT. Collections off 33.8%
52.4% of Connecticut's Tax Revenue from PIT. Collections off 25.9%
52.7% of Colorado's Tax Revenue from PIT. Collections off 25.4%
Arizona's collections were down a whopping 54.9% depending 25.3%
on Personal Income Taxes. South Carolina, Michigan, Vermont, Rhode Island,
New Jersey, Idaho, and Ohio are also in deep trouble.
20 states depending on personal incomes taxes for > 25% of total
taxes were down 20% or more on collections.
This is a very grim report on state finances.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The stock rally after 9/11 lasted more then three months. S&P500 rallied
more then 20% from lows.
The problem of “too much money” (read US dollars)
will continue to influence financial markets. Any increase in risk appetite
will see dollars leaving the US (thus falling) and flowing back to asset
markets, and vice versa. An abundance of money will make markets over-react,
resulting in big swings. The recent upsurge in asset prices also seems
to be an over-reaction helped by liquidity flowing back rather than
by a change in the fundamental picture. Several analysts feel that many
asset classes, especially commodities, have run too far ahead.
A sharp run-up in commodity prices and a jump in US
bond yields have done some damage to reviving sentiments and business
activities; this could show up in coming months. Besides, after having
re-stocked at record volumes, Chinese appetite for commodities in H2
may remain low key. A revival in economic activities could take a pause
here rather than continuing to improve at the same pace as shown in
last few months. The combined effect of these may help markets to slide
in next 2 quarters, slowly and quietly.
Similar to IMF, several analysts expect recovery to
start in H1 2010. Expecting the next bull market to price these probabilities
3-5 months in advance, the new-year could mark the turn at the earliest.
However, at the moment, the world seems to have entered
into a twilight zone where most of us are waiting for the first ray
of dawn while being worried about the length of night. The sky is black
now, but will be blue quite soon.
Republicans "tricked" working class voters to go against their economic
self-interest by mobilizing them on social "value" issues like abortion
and gay rights.
Simon’s
weekend summary included this sentence on the macroeconomic situation:
“The real economy begins to bottom out, although unemployment will not
peak for a while and could stay high for several years.”
We are now in that phase of the crisis when there is a lot of arguing
about whether things are going well or poorly, and that largely comes
down to whether the current slowdown in the rate at which things are
getting worse (that’s all it is so far) will be followed by a healthy
recovery, a prolonged period of stagnation, or an accelerated contraction
brought on by higher oil prices, a new bank panic caused by defaults
in credit cards and commercial mortgage-backed securities, or one of
any number of other factors. I discussed this topic
somewhat impressionistically a month ago; this time I’m going to
highlight some analyses done by other people around the Internet.
Last time I cited
James Hamilton and
Calculated Risk, both of whom thought that a peak in the four-week
moving average of new unemployment claims was a good predictor of the
end of a recession. Hamilton in particular has been following this closely,
and while we may have passed the peak, the number isn’t falling like
it should. Here’s Hamilton’s picture from
last week’s post:
Selected Comments
- strike three
Repent? as in beam me up Scottie? I agree with Bill Maher
last night. Obama, get off the TV
and start toughening up …..
- The “World Trade: YoY” chart is telling us something
– namely that nothing post-WWII is comparable to what is happening
now. Not surprisingly you have to go back to the ’30s to find anything
comparable.Also look at “Investment grade spread” and “BAA spread”
that shout the message: this is far from over.
Actually Mr. Swartz buries the lede. The most important chart
of all is the last one – “Real Home Price”. How many people realize
that the fall in home prices is dramatically worse now than in the
’30s?
I repeat – this is far, far from over.
-
I can across these charts yestarday – frightening…
http://www.voxeu.org/index.php?q=node/3421
…though not unexpected. While the credit/banking crisis may
be over (for now), the real economy is still falling pretty
fast and at some point that could feed back into the banking
system causing another crisis. I think people forget it took
the GD 3.5 years or so to become as bad as it was, and the monetary
crunch caused by the FED really didn’t happen until 1931 – over
a year after the crash. There is still way too much to play
out before this can be called over with.
-
These Paul Swartz charts are so depressing. It definitely doesn’t
compare well historically. The only
good to see there is industrial production didn’t collapse as
severely as during the Depression, and the percentage
of unemployed is not nearly as high as during the Depression.
And the spread on debt now really punches you in the face on
those charts.
Ya, I definitely don’t see things improving in the next 18
months, that makes a difference in people’s everyday lives.
I think the best we can hope for in these next 18 months is
stagnation which gives people time to tighten their belts, time
to move into growing fields, time for the government to put
some controls on excessive risk-taking in the banking sector.
There will be those fools (like our boy Posner) who say there
is no need to put in risk-taking controls NOW because the banks
will be gun shy, or the banks “have learned their lesson”. But
anyone who reads this site knows that’s garbage talk.
We need to put these risk controls (example 1: making credit
default swaps illegal, example 2: separating commercial banks
from investment banks) as soon as can possibly be done.
Also just the basic step of increasing capital requirements
for all banking institutions would be a great move in the right
direction. IF YOU LOOK AT CANADA, THEIR BANKS HAVE BEEN MUCH
MUCH LESS AFFECTED THAN AMERICAN BANKS. WHY??? This is a question
Geithner should be delving into deeply. Here is a link to an
NYT blog article which explores some of the differences between
Canadian banks regulation, and American banks regulation.
Many answers in here for Geithner and his cohorts.
http://economix.blogs.nytimes.com/2009/06/08/canadas-way-how-our-northern-neighbors-do-banking/
Jun 12, 2009 | FT.com
In response to my previous blog,
“The fiscal black hole in the US”, ‘Peter’ makes the comment
that much of the unfunded ‘liabilities’ under social security and
Medicare are index-linked and cannot be inflated away. This
is an important point.
Inflation reduces the real value of nominal liabilities. If these
nominal liabilities are interest-bearing, and have fixed market-determined
interest rates that mas or menos reflect the rate of inflation
expected at the date of issuance of these liabilities over the maturity
of the liability, then only actual inflation higher than the inflation
expected at the time of issuance actually reduces the real value
servicing that liability.
If longer-maturity nominal debt instruments
are floating rate securities, whose variable interest rate is linked
to some short-term nominal rate benchmark, it becomes very difficult
to inflate the real burden of that liability away.
If the liability is index-linked, it is impossible to inflate
its real value away. The same
holds if the liability or the commitment is denominated in foreign
currency, something that is uncommon in the US, but common elsewhere.
Only a change in the real exchange rate can affect the real burden
of foreign-currency-denominated liabilities.
- Matlock
"to the extent that any liabilities, whether they
are formal contractual obligations or political promises
or commitments are de-facto index-linked, they cannot be
inflated away."
I think that Governments have one more trick up their
sleeves. That is they control
the calculation methodology and publication of the inflation
index. Governments can inflate away index linked obligations
to the extent that the real rate of inflation exceeds the
indexed linked rate.
The greater the rate of real inflation the greater the
scope for these differences to be significant. I think
that this is a real risk for holders of inflation linked
US Treasuries.
By way of an example - Shadow Stats has charts comparing
the official US CPI rate since 1980 and with the CPI rate
as it would have been had the US Govt continued to use the
CPI methodology from 1980 (i.e. not continually tinkered
with the methodology).
The difference has been increasing
and is now over 6%. No surprises for guessing
that changes in the methodology for calculating inflation
always tend to lead to inflation being less than it would
have been under the prior methodology.
- Ming
I want to echo Post5 (Matlock) about how inflation measures
can be "adjusted" to flatter supposedly inflation-indexed
government liabilities.
By miscalculating inflation,
ie making inflation lower than it should be, government
liabilities can too be wriggled out of.
Well spotted, Matlock (Post 5)
- The Goldwatcher
'If' , or perhaps better to say 'when' unfunded social
security obligations are acknowledged as a solvency issue
the debt burden will probably be reduced by restructuring.
This will involve reneging on political obligations as you
indicate. But compared to a solvency crisis it will be seen
as the lesser of two evils. The effects will be the same
as inflating debt away.
- Don the libertarian Democrat
If Structural Imbalances are the problem, as Martin Wolf
says, I think, shouldn't the Saver/Export Countries now
begin buying from the Spender Countries? Why should it all
be a US matter? If these countries won't do that, what's
wrong with a bit of default? As Dr.Johnson said:
"Those who made the laws have apparently supposed, that
every deficiency of payment is the crime of the debtor.
But the truth is, that the creditor always shares the act,
and often more than shares the guilt, of improper trust.
It seldom happens that any man imprisons another but for
debts which he suffered to be contracted in hope of advantage
to himself, and for bargains in which proportioned his own
profit to his own opinion of the hazard; and there is no
reason, why one should punish the other for a contract in
which both concurred."
Johnson: Idler #22 (September 16, 1758)
Surely the Saver/Export Countries deserve to pay a penalty
for Improper Trust. Don't they?
High yield bonds were probably overbought by speculators betting of
quick recovery. As quick recovery is nowhere in sight some retrenchment
is probably overdue...
June 4 2009 |
FT.com
The strong rally in US credit over recent months has only driven spreads
back to levels seen prior to the collapse of Lehman Brothers, still
leaving the market facing a long road back to normality.
“The proper characterisation of the market
is that two months ago, credit spreads were distressed, while now they
are just stressed,” said Tad Rivelle, chief investment
officer at Metropolitan West Asset Management.
As other parts of the financial system normalise, thanks mainly to
the Federal Reserve’s efforts to improve liquidity,
investors are faced with credit spreads,
by many measures, at levels that exceed the wides posted in 2002.
This previous and notable episode of extreme risk aversion was sparked
by the bankruptcies and accounting scandals of Enron and Worldcom and
the bursting of the technology bubble.
This has investors asking not just how far can credit rally from
current levels, but where does fair value exist in a post-credit bubble
environment.
“There is a new normal, but it is not
near what we saw in 2007,” said Jack Ablin, chief investment
officer at Harris Private Bank.
Jim Turner, head of debt capital markets North America at BNP Paribas
said: “There are still good returns in the market, but as things ratchet
tighter and tighter
Mr Rivelle said investment grade credit spreads were formerly
characterised as being normal in a range of 100 to 125 basis points
over Treasuries.
Investment grade [bonds] spreads are about 350bps, while in 2002
spreads widened out to 270bps.
“Investment grade credit [spreads] is
still far wider than historic levels and also wider than the bottom
seen in 2002,” Mr Rivelle said.
[ But what are historic levels he is talking about
-- Great Depression is probably the only comparable historic period
-- NNB]
High yield spreads still trade at what are considered distressed
levels at about 1,100 basis points, but they have halved since peaking
at 2,200bps last year.
Martin Fridson, chief executive of Fridson Investment Advisors, believes
the new normal for high-yield bond spreads
should be a risk premium of roughly 600bps.
“It may take a year for that to happen,
but it is a realistic target,” Mr Fridson said.
Other investors agree time will heal risk appetite for high yield
as the corporate default rate peaks this year.
Scott Minerd, chief investment officer at Guggenheim Partners, said:
“The return of corporate credit spreads
to their historical averages will take time, 12 to 24 months if things
hold together.”
One of the reasons for the much bigger spike in spreads last year,
versus what occurred in 2002, was the degree of leverage within the
overall financial system.
“The major dislocation we saw in credit spreads was not just about
specific economic and company issues, it was also a function of forced
selling as investors were forced to deleverage their holdings,” said
Ashish Shah, co-head of global credit strategy at Barclays Capital.
Last December, Barclays’ US Credit Index widened to its all-time
wide of 545 basis points. The index has subsequently narrowed to 299bps,
near the 259bps wide posted in 2002.
From 2002 to 2007, accelerating demand
from hedge funds using carry trades also pushed high yield spreads to
levels that were narrower than they should have been.
“They would buy the lowest quality and highest yielding paper,” Mr
Fridson said. “Spreads weren’t really adequate, but the returns looked
good versus their cost of capital.”
For now, financials, which were at the epicentre of the credit bust,
still lag the overall rally in credit, but they have started to recover
since the passage of the stress tests in May.
Barclays’ US financials index hit a record wide of 792bp in March
this year and the index has pulled back to 440bps, whereas in 2002 financials
only widened to 242bps.
“Financial spreads are still trading at one of the highest ratios
to industrial spreads since the 1930’s,” Mr Shah said.
“There is plenty of room for credit to
rally further and the cash is there,” he added. “You can’t have financial
paper trading around 440bps, there is further upside.”
Much depends on the path of the eventual recovery in the economy
and how the expected rise in corporate bankruptcies plays out in the
months ahead.
Mr Rivelle said that since March markets had recognised that
the rate of economic decline had moderated,
but that should not be confused with a near term recovery.
“We remain in an environment that is tough economically and unemployment
is still rising,” he said.
The Fed’s cutting of interest rates close to zero per cent and hefty
purchases of mortgages, which has made this asset class overvalued,
leaves yield-hungry investors little choice but to focus on corporate
bonds.
“Fixed income investing is about relative
value, and right now, corporate bonds are the one major asset class
that active money managers are over-weighting as yields are still at
attractive levels versus Treasuries and mortgages,” Mr Shah said.
The rally over the last few months has taken high-grade spreads to
levels seen prior to the Lehman bankruptcy, cutting risk premiums in
half.
“We have eliminated the premium associated with the prospect of a
total meltdown of the financial system before a recession or a peak
in the default rate,” Mr Fridson said.
Mr Minerd said: “High yield spreads on
a default adjusted level are still 200 to 400 basis points wide and
by the end of the year we expect defaults will have peaked around a
rate of 10 to 11 per cent.”
Copyright
The Financial Times Limited
Bond bear markets
June 16 2009
Clinton administration éminence grise James Carville once
quipped that he wanted to be reincarnated as the
bond market because then he could intimidate everyone. Sometimes
it is hard to tell though if it is baring its teeth or just smiling,
as highlighted by the recent debate between Paul Krugman and Niall Ferguson.
Focusing instead on the limited empirical evidence, it is at least clear
that the economy’s most forward-looking economic indicator, the equity
market, often gets the message wrong initially.
Taking the unofficial measure of a bear market for equities of a
20 per cent decline and applying it to long bond futures, those most
sensitive to interest rate expectations, analysts at Bespoke Investment
Group identify seven US bond bear markets since 1977.
On average, by the time the trigger for the definition of a bond
bear market had been reached, about two-thirds of the eventual fall
had taken place and, time-wise, the bear market was already four-fifths
over.
The S&P 500 rallied by 13.9 per cent
during the period in which bond prices fell the first 20 per cent, or
11.6 per cent annualised, on average.
But the last fifth of the bond bear markets,
time-wise, led to annualised equity losses of 13 per cent.
This bodes poorly for the sustainability of the recent 40 per cent
rally in the S&P 500. As higher bond yields make financing more expensive
and make earnings yields less attractive by comparison, investors have
less reason to buy stocks. In turn, the bond bear then ends when a drop
in asset prices encourages economic pessimism and expectations that
the Fed will relax monetary policy. Today, though, monetary policy could
hardly be looser. If yields are really rising due to fiscal jitters
then the bond bear may not be sated unless a horrific equity market
swoon prompts a new flight to safety back into bonds. Talk about intimidating.
June 16 2009 | FT
A paper by professors Eichengreen and O’Rourke shows
global industrial output tracking the decline
in industrial output during the Great Depression horrifyingly closely.
The question is whether today’s unprecedented stimulus will offset
the effect of financial collapse and unprecedented accumulations of
private sector debt in the US and elsewhere.
First, global industrial output tracks the decline in industrial
output during the Great Depression horrifyingly closely. Within Europe,
the decline in the industrial output of France and Italy has been worse
than at this point in the 1930s, while that of the UK and Germany is
much the same. The declines in the US and Canada are also close to those
in the 1930s. But Japan’s industrial collapse has been far worse than
in the 1930s, despite a very recent recovery.
Second, the collapse in the volume of world trade has been far worse
than during the first year of the Great Depression. Indeed, the decline
in world trade in the first year is equal to that in the first two years
of the Great Depression. This is not because of protection, but because
of collapsing demand for manufactures.
Third, despite the recent bounce, the decline in world stock markets
is far bigger than in the corresponding period of the Great Depression.
Posted by Neil Hume on Jun 17 12:56.
NYTimes.com
At his metal-working plant here in Connecticut, Andrew Nowakowski,
president of Tri-Star Industries, says the program is good for employers,
workers and the economy.
“It’s a lot better than layoffs,” said Mr. Nowakowski, whose skilled
machinery operators make metal parts for products as diverse as cellphones
and car engines.
His 29 nonmanagerial employees now work three- or four-day weeks.
“The alternative would have been to lay off three to seven workers,”
he said, “but that would mean that when things become busier, I’d run
the risk of not having the trained people I need.”
The Big Picture
Our quote of the day:
“The panic’s hasty retreat should not be confused with robust
recovery. The rather indiscriminate bounce off the bottom — across
virtually all assets and geographies — may be more indicative of
a one-time reset, which may or may not be complete.”
-Federal Reserve Governor Kevin Warsh, remarks to the Institute
of International Bankers annual meeting in New York.
Wall Street Journal
Rising interest rates threaten to dim prospects for a housing recovery
and choke off a refinance wave that was a major plank of the Obama administration's
economic-stimulus efforts.
June 12, 2009 | Washington
Post
The FBI, which is handling about 20 such cases in the Washington
region, has almost 500 open Ponzi investigations nationwide -- up from
about 300 in 2006, bureau officials said. Law enforcement officials
with other agencies have noticed similar trends, and authorities said
they expect to turn up many more cases in coming months.
...But their very nature -- the constant solicitation of new investors
to pay off old ones -- makes them vulnerable to the harsh economic climate.
Federal officials said they also have become more aggressive in trying
to uncover schemes before they implode and the assets evaporate.
...As recently as a few decades ago, most Ponzi schemes were relatively
small, relying on word of mouth, direct mail and advertisements in magazines.
They generally burned out after two or three years. But through the
Internet and modern communications, Ponzi schemes have grown in size,
scope and sophistication.
"This kind of climate is death on Ponzis," said William K. Black,
a law and economics professor at the University of Missouri-Kansas City
School of Law and a former executive director of the Institute for Fraud
Prevention.
But Black said the same trends that pumped up the Ponzi industry
and then tore it apart will eventually lead to new opportunities for
scam artists who manage to escape the law and financial carnage. The
crooks know that potential investors, some desperate for a quick return,
will not always be so wary.
...the world economy had yet to weather
the worst of a recession that claimed a record number
of European jobs.
The 16-country euro zone lost a record 1.22 million jobs in the first
quarter, official data showed. The number of employed fell 1.2 percent
year-on-year, the deepest annual drop since measurements started in
1995. [nLF389614]
"Markedly weakening labor markets are
a major threat to recovery prospects in the euro zone,"
said Howard Archer, economist at IHS Global Insight.
... ... ...
Further underlining the fragile state of the global economy, an influential
economist said China would not see a rapid rebound and South Korea's
finance minister said its economy was still sliding, although the pace
had slowed.
A very interesting analysis...
Market chatter over green shoots and rising prices has fueled a bear
market rally that won't last, despite policymaker 'noise.'By
Andy Xie, guest economist to Caijing and a board member of Rosetta Stone
Advisors Ltd.
(Caijing
Magazine) A combination of growth optimism and inflation fear
has catapulted asset markets in the past few weeks. These two concerns
should drive markets in different directions: Inflation fear, for example,
should limit room for stimulus and prompt stock markets to retreat.
But the investment camps expressing these opposite concerns go separate
ways, each pumping up what seems believable. As a result, stock and
commodity markets are mirroring the behavior seen during the giddy days
of 2007.
Regardless of what investors or speculators say to justify their
punting, the real driving force is the return of animal spirit. After
living in fear for more than a year, they just couldn't sit around any
longer. So they decided to inch back. The
resulting market appreciation emboldened more people. All sorts of theories
began to surface to justify the market trend. Now that
the rising trend has been around for three months globally and seven
months in China, even the most timid have been unable to resist. They're
jumping in, in droves.
When the least informed and most credulous
get into the market, the market is usually peaking. A rising economy
and growing income produces more funds to fuel the market. But the global
economy is now stuck with years of slow growth. Strong economic growth
won't follow the current stock market surge. This is a bear market rally.
People who jump in now will lose big.
Over the past three weeks, the dollar dove while oil and treasury yields
surged. These price movements exhibited typical symptoms of inflation
fear, which is complicating policymaking around the world. The United
States, in particular, could be bottled in. The federal government's
fiscal stimulus and liquidity pumping by the Federal Reserve are twin
instruments for propping up the bursting U.S. economy. The fiscal deficit
could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase
by one-third the total stock of federal government debt outstanding.
Such a massive amount of federal debt paper needs a buoyant Treasury
to absorb. If the Treasury market is a bear market, absorption becomes
a huge problem.
U.S. Treasury Secretary Timothy Geithner recently visited China to,
among other things, persuade China to buy more Treasuries. According
to a Brookings Institution estimate, China holds US$ 1.7 trillion in
U.S. Treasuries and GSE paper (about 15 percent of the total stock).
If China stops buying, it could plunge the Treasury market into deep
bear territory. If China does not buy, the Treasury market will get
worse. But China can't prop up the market by buying.
In the past few years, purchases by central banks around the world
have dominated demand for Treasuries. Central banks have been buying
because their currencies are linked to the dollar. Hence, such demand
is not price sensitive. The demand level
is proportionate to the U.S. current account deficit, which determines
the amount of dollars held by foreign central banks.
The bigger the U.S. current account deficit, the greater the demand
for Treasuries. This is why the Treasury yield was trending down during
the bulging U.S. current account deficit period 2001-'08.
This dynamic in the Treasury market was changed by the bursting of
the U.S. credit-cum-property bubble. It is decreasing U.S. consumption
and the U.S. current account deficit. The 2009 deficit is probably under
US$ 400 billion, halved from the peak. That means non-U.S. central banks
have much less money to buy, while the supply is surging. It means central
banks no longer determine Treasury pricing. American institutions and
families are now marginal buyers. This switch in who determines price
is shifting Treasury yields significantly higher.
The 10-year Treasury yield historically averages about 6 percent,
with about 3.5 percent inflation and a real yield of 2.5 percent. This
reflects the preferences of marginal buyers in the United States. Foreign
central banks have pushed down the yield requirement substantially over
the past seven years. If marginal buyers become American again, as I
believe, Treasury yields will surge even higher from current levels.
Future inflation will average more than 3.5 percent, I believe. Some
policy thinkers in the United States believe the Fed should target inflation
between 5 and 6 percent. The Treasury yield could rise to between 7.5
and 8.5 percent from the current 3.5 percent.
A massive supply of Treasuries would only worsen the market. The
Federal Reserve has been trying to prop the Treasury market by buying
more than US$ 300 billion – a purchase that's backfired. Treasury investors
are terrified by the inflation implication of the Fed action. It is
equivalent to monetizing national debt. As the federal deficit will
remain sky-high for years to come, the monetization could become much
larger, which might lead to hyperinflation. This is why the Treasury
yield has surged in the past three weeks.
One possible response is to finance the U.S. budget deficit with
short-term financing. As the Fed controls short-term interest rates,
such a strategy could avoid the pain of high interest rates. But this
strategy could crash the dollar.
The dollar index-DXY has fallen 10 percent from the March level,
even though the U.S. trade deficit has declined substantially. It reflects
the market's expectations that the Fed's monetary policy will lead to
inflation and a dollar crash. The cause of dollar weakness is the outflow
of U.S. money, in my view. It is the primary cause of a surge in emerging
markets and commodities. Most U.S. analysts think the dollar's weakness
is due to foreigners buying less of it. This is probably incorrect.
The dollar's weakness can limit Fed policy options. It heightens
inflation risks; a weak dollar imports inflation and, more importantly,
increases inflation expectations, which can be self-fulfilling in today's
environment. The Fed has released and committed US$ 12 trillion (83
percent of GDP) for bailing out the financial system. This massive overhang
in money supply could cause hyperinflation if not withdrawn in time.
So far, the market is still giving the Fed
the benefit of the doubt, believing it will indeed withdraw the money.
Dollar weakness reflects the market's wavering confidence in the Fed.
If the wavering continues, it could lead to a dollar collapse and make
inflation self-fulfilling.
The Fed may have to change its stance, even using token gestures,
to assure the market it won't release too much money. For example, signaling
rate hikes would soothe the market. But the economy is still in terrible
shape; unemployment may surpass 10 percent this year. Any suggestion
of hiking interest rates would dampen growth expectations. The Fed is
caught between a rock and a hard place.
Oil prices have doubled since a March low, even though global demand
continues to decline. The driving forces again are expectations of inflation
and a weaker dollar. As U.S.-based funds flee, some of the money has
flowed into oil ETFs. This initially impacted futures prices, creating
a huge gap between cash and futures prices. The gap increased inventory
demand as investors tried to profit from the gap. Rising inventory demand
caused spot prices to reach parity with futures prices.
Rising oil prices, though, lead to inflation
and depress growth. It is a stagflation factor. If the Fed doesn't rein
in weak dollar expectations, stagflation will arrive sooner than I previously
expected.
Stagflation in the 1970s spawned the development of rational expectation
theory in economics. Monetary stimulus works
by fooling people into believing in money's value while the central
bank cheapens it. This perception gap stimulates the
economy by fooling people into demanding more money than they should.
Rational expectation theory clarified the underpinning for Keynesian
liquidity theory. However, as they say,
people can't be fooled three times. Central banks that
tried to use stimuli to solve structural problems in the '70s saw their
stimuli didn't work. People saw through what they tried again
and again, and began behaving accordingly,
which translated monetary stimulus straight
into inflation without stimulating economic growth.
Rational expectation theory discredited Keynesian theory and laid
the foundation for Paul Volker's tough love policy, which jagged up
interest rates and triggered a recession. The recession convinced people
that the central bank was serious about cooling inflation, so they adjusted
their behavior accordingly. Inflation expectations fell sharply afterward.
The credibility that Volker brought to the
Fed was exploited by Alan Greenspan, who kept pumping money to solve
economic problems. As I have argued before, special factors
made Greenspan's approach effective at the same. Its byproduct was asset
bubbles. As the environment has changed, rational expectation theory
will again exert force on the impact of monetary policy.
Movements in Treasury yields, oil and the dollar underscore the return
of rational expectation. Policymakers have to take actions to dent the
speed of its returning. Otherwise, the stimulus will lose traction everywhere,
and the global economy will slump. I expect
at least gestures from U.S. policymakers to assuage market concerns
about rampant fiscal and monetary expansion. The noise
would be to emphasize the "temporary" nature of the stimulus. The market
will probably be fooled again. It will fully wake up only in 2010.
The United States has no way out but to print money. As a rational
country, it will do what it has to, regardless of its rhetoric. This
is why I expect a second dip for the global economy in 2010.
While inflation expectations are causing some in the investor community
to act, the rest are betting on strong economic recovery. Massive amounts
of money have flowed into emerging markets, making it look like a runaway
train. Many bystanders can't take it any longer and are jumping in.
Markets, after trending up for three months, are gapping up. Unfortunately
for the last-minute bulls, current market movements suggest peaking.
If you buy now, you have a 90 percent chance of losing money when you
try to get out.
Contrary to all the market noise, there
are no signs of a significant economic recovery. So-called
green shoots in the global economy are mostly due to inventory cycles.
Stimuli might juice up growth a bit in the second half 2009. Nothing,
however, suggests a lasting recovery. Markets are trading on imagination.
The return of funds flowing into property is even more ridiculous.
A property burst usually lasts for more than three years. The current
burst is larger than usual. The property market is likely to remain
in bear territory for much longer. The bulls are talking about inflation
as the bullish factor for property. Unfortunately, property prices have
risen already and need to come down even as CPI rises. Then the two
can reach parity.
While rational expectation is returning to part of the investment
community, most investors are still trapped by institutional weakness,
which makes them behave irrationally. The Greenspan era has nurtured
a vast financial sector. All the people in this business need something
to do. Since they invest other people's money, they are biased toward
bullish sentiment. Otherwise, if they say it's all bad, their investors
will take back the money, and they will lose their jobs. Governments
know that, and create noise to give them excuses to be bullish.
This institutional weakness has been a catastrophe for people who
trust investment professionals. In the past two decades, equity investors
have done worse than those who held U.S. market bonds, and who lost
big in Japan and emerging markets in general. It is astonishing that
a value-destroying industry has lasted so long. The greater irony is
that salaries in this industry have been two to three times above what's
paid in other sector. The key to its survival is volatility. As markets
collapse and surge, possibilities for getting rich quickly are created.
Unfortunately, most people don't get out when markets are high, as they
are now. They only take a ride.
Indeed, most people who invest in the stock market get poorer. Look
at Japan, Korea and Taiwan: Even though their per capita incomes have
risen enormously over the past three decades, investors in these stock
markets lost money. Economic growth is a necessary but not sufficient
condition for investors to make money in the stock market. Most countries,
unfortunately, don't possess the conditions for stock markets to reflect
economic growth. The key is good corporate governance. It requires rule
of law and good morality. Neither is apparent in most markets.
It's a widely accepted notion that long term stock investors make
money. Actually, this is not true. Most companies don't last for more
than 20 years. How can long term investment make money for you? The
bankruptcy of General Motors should remind people that this notion is
ridiculous. General Motors was a symbol of the U.S. economy, a century-old
company that succumbed to bankruptcy. In the long run, all companies
go bankrupt.
Property on the surface is better than the stock market. It is something
physical that investors can touch. However, it doesn't hold much value
in the long run either. Look at Japan: Its property prices are lower
than they were three decades ago. U.S. property
prices will likely bottom below levels of 20 years ago, after adjusting
for inflation.
China's property market holds even less value in the long run. Chinese
properties are sitting on land leased for 70 years for residential properties
and 50 years for commercial properties. Their residual values are zero
at the end. The hope for perpetual appreciation is a joke. If you accept
zero value at the end of 70 years, the property value should only be
the use value during those 70 years. The use value is fully reflected
in rental yield. The current rental yield is half the mortgage interest
rate. How could properties not be overvalued? The bulls want buyers
to ignore rental yield and focus on appreciation. But appreciation in
the long run isn't possible. Depreciation is, as the end value is zero.
The world is setting up for a big crash, again. Since the last bubble
burst, governments around the world have not been focusing on reforms.
They are trying to pump a new bubble to solve existing problems. Before
inflation appears, this strategy works. As inflation expectation rises,
its effectiveness is threatened. When inflation appears in 2010, another
crash will come.
If you are a speculator and confident you can get out before it crashes,
this is your market. If you think this market
is for real, you are making a mistake and should get out as soon as
possible. If you lost money during your last three market entries, stay
away from this one – as far as you can.
June 15, 2009
One of our longstanding themes — that the current environment is
a secular Bear market, punctuated by cyclical bulls — gets the full
coverage in the WSJ this morning.
“Many investors are now calling the rebound in stocks since early
March the start of a new bull market.
But it could be only a temporary respite from a longer-term bear
market dating back to the beginning of this decade.
If the market is poised for a multiyear run, investors can be
more aggressive about diving into stocks. If the bear market will
regain its grip on stocks and send prices lower again, investors
need to be cautious. Historical data and the still struggling economy
seem to point to the latter case, called a cyclical bull market
in a secular bear market . . .
In late 2001, Ned Davis Research, a market analysis and money-management
firm, raised the idea that stocks had entered a secular bear market,
a long period of flat or declining stocks. That idea gained traction
last autumn as stocks fell below levels of a decade ago.
Ned Davis considers this the fourth secular bear market since
1900. The last one, from 1966 to 1982, ended when the Federal Reserve
moved to aggressively crush inflation. These “secular” cycles run
for long periods; secular bull markets have lasted from six to 24
years and bear markets 13 to 16 years. Within those cycles are many
more cyclical bulls and bears — nearly three dozen of each since
1900. (Ned Davis uses its own criteria for a cyclical bull or bear
market, based largely on 30% moves.)
>
Source:
Is This Bull Cyclical or Secular?
TOM LAURICELLA
Actually not seeing the beginning of the recovery is more typical then
seeing it ;-)
Do you see what I see?
I'm still looking for, and still not seeing, the economic recovery
that everybody is talking about.
I was reading some links at FT Alphaville and one of them referenced
this interesting piece:
http://gregor.us/oil/overhead-crush/
Visually, we can think of demand in this phenomenon as being in
a kind of contracting triangle. Every time consumption resumes after
a previous demand crash, it hits the ceiling at a lower level. This
is the point where, if you find yourself living in the age of biomass
and wood, you get rescued by coal. For example. This is also the point
where, if you are living in the age of oil, it’s less likely you get
rescued.
I am curious Dr. Hamilton of what your views are about this hypothesis.
It appears to fit with your hypothesis of oil price shocks triggering
recession.
Posted by: Doc at the Radar Station at June 14, 2009
10:41 AM
Below is a post I posted in the discussion section of Slope of Hope
( a trading blog that everyone who is interested in trading should read
everyday ). Want to share with readers here.Where the market goes
in the future will mostly depends on where the dollar goes and where
the dollar goes will be determined by the policies made in DC. So the
Capital Hill and the White house will dictate over any chart reading
on the path of the market direction. I don't know how high or how low
$spx will go in the next few months or next few years but I am pretty
much sure about one thing that is if the current policies (both fiscal
and monetary) are not the right cure the prices of all kind of assets
will respond accordingly and the market forces eventually will push
politicians and American people to make the right decisions no matter
they like it or not.
The fundamental root cause of the current problem as we all agree
is overspending in governmental. corporational and personal levels.
The correct cure is to control spending within its means. The Consumer
is doing it (by foreclosure, default on credit card debt and spending
less while saving more) and corporations are doing it accordingly (by
layoffs and cutting capital investment) but the government is doing
the opposite due to political considerations. The market will respond
to the government policies in different stages which could be treated
as a scoreboard for the outcome between the forces of government and
the forces of the market:
Stage 1. from Oct. 2008 to March 6 2009: The market forces won. Market's
primary concern was deflation: therefore we saw equity , commodity drop
sharply while bond and dollar rallied even though Fed injected tremendous
amount of liquidity into the system and Government is bailing out everybody.
Stage 2: from march 6 to a near future (most likely to Sept. 2009):
The Government wins. Market's primary concern is government spending
when the financial system is seemingly stabilized ( which is not and
we will see the financial system collapses again in stage three) therefore
dollar weakened, bond yield jumped, equity rallied. Although the government
policies win so far the market is giving warning signals to the government
by testing the limit of how weak the dollar can go and how much weak
dollar induced inflation the US economy can withstand. The yield of
10 year treasury note and crude oil will keep climb (my guess is 10
year yield around 5 to 5.5% and 30 year mortgage around 7.25 to 7.75%.
as for oil little bit hard to project but it could go to 105 to 110
level) until the economy turns into a nose dive mood again. I don't
know the exact time frame but I suspect b4 Labor Day we will see oil
peaked by then and all the economic indicators pointing to deteriozation
in a fast pace.
Stage 3: market forces win again. $SPX down another 50% or so from
its peak in stage 2 (probably around 1050 as its peak). Commodities
tank again. Dollar and bond rally again. Unemployment rise above 12%
and heading to 15%. The second wave of foreclosures(mostly prime loans)
and credit card defaults and commercial real estate defaults will hit
the banks harder once again. Now what the government will do will once
again determines the outcome of next stage.
If by this time the government could adopt the correct policies and
let those should fail fail then the healing process will start from
here and we will see a start of a bull market pretty soon or at least
the market low reached in this stage will be the LOW.
If the government instead does not learn the lessons and increase
the magnitude of the wrong polices implemented in the stage 2 (more
spending and more bailout), we will see a repeat of stage 2 with hyperinflation
this time. The dollar could lose its reserve status and there will be
large scale social and political unrests until American people really
wake up and decide to take bitter medicines that they should take at
the first place. I was so mad at the politicians at DC and their stupid
policies that I was too biased to think the American Century is gone
and this country will end up falling apart. However I strongly believe
we human beings are able to learn from our own mistakes and are adaptive
to the new challenges. The American people may not be able to convince
themselves now that less government spending and live a simpler life
is the best solution but they will realize they have to to do so when
they see otherwise their country will be falling apart and they will
have no life instead of a simpler life. The market dynamics will force
American people to adopt the correct policies in the end and will rebuild
the great American experience. It's just too sad to foresee the Americans
could go through this tough period with less cost and pain instead the
luck of the will of both its citizen and their leaders will cause them
to go through much bigger ordeal.
Watch California. What happens in California will indicate what will
happen to the whole country.
For short term, just watch dollar, bond yields, commodities and be
ready to short the stocks.
Just remember there is no green shoots.
Also remember the run on oil, bond yields and commodities will not be
sustainable because their own rise will lead to their own free fall.
They are used as a pressure by the market dynamics to force government
to revert back to correct policy making. Buy them when government issues
wrong policies and sell them when the bad outcomes from these policies
become obvious to everybody.
I believe a large part of the slopers will share the same view as
I described above and hope this could make you feel better about the
big picture and will not be confused or frustrated by the daily market
fluctuations.
Posted by: frankzhao at June
14, 2009 11:00 AM
The demise of the housing market and tightening
of credit card lending have disable the mechanisms through which Asian
trade surplus income was recycled back to those US consumers willing
to take on ever-higher debt. On top of that, the ranks
of those willing to take on ever-higher debt have been greatly thinned,
and will continue to be thinned by ongoing job losses, working-hour-cuts,
and the collapse of pension funds.
The leading edge of the baby boom is
nearing retirement (in the case of public-sector employees
with their amazing defined-benefit pensions, already retiring) while
staring at the realities that they're not
going to become "accidental millionaires" by down-sizing out of their
current homes, that the Fed's zero-interest-rate policies
are going to ensure they never make a penny of real after-tax income
on any safe investment of their savings, that if they have a defined-benefit
pension (even a public one) its promises may not be kept, and that "buy-and-hold"
may not be the sure-fire stock investment strategy they'd been sold
on for the last few decades.
The evidence is clear all around that this is leading to a very serious
hunkering down and increase in saving.
The conventional economic wisdom is that people will save more if
interest rates are high, and less if they're low. But I clearly remember
that the high interest rates of the early Volcker years did not increase
the savings rate as expected -- because
people felt confident that with those high rates (of course assumed
to be permanent) they could get the retirement income they'd need with
far less saving. And in Japan we can see that when people
know they'll get zero income on their savings, they know that means
they'll need to save more for retirement.
So the conventional wisdom that the Fed's zero-interest-rate policy
is going to revive economic activity -- and in particular that it will
revive the housing market -- is utterly wrong. This is especially so
because Asia's vendor-financing-fraud mercantilists remain poised to
snatch up any manufacturing order that can practically be filled by
an overseas source.
The only way to get the economy out of this will be for the government
to employ in national projects that component of the labor force that's
been put out of work by Asian mercantilism, and -- as in WWII -- to
employ it in ways that will create infrastructure that will pay a real
economic return in the future, while simultaneously suppressing wasteful
luxury consumption. If that's not done, there'll be no recovery.
Posted by: jm at June 14, 2009 12:15 PM
Thinkingoutof the box wrote: June 13, 2009 12:23
ON BANKS PAYING BACK MONEY TO TAXPAYERS
The crisis in the banking system inflicted very heavy damages on
the real economy! Thus, before letting banks go back to their normal
operations by paying back taxpayers money, they should also pay back
the heavy indirect costs that they have caused to the real economy!
In such a case the amounts due to the taxpayers are by far higher than
the bailing out money giving to them directly.
Furthermore, the collapse of the banking system inflicted even far
higher damages by eroding the trust and confidence of the so called
the economic agents (all the players in the economic & business system.)
For instance, it is suggested that the financial crisis has probably
increased the risk premium on doing business all over the world!
If the banks have to pay back the TOTAL damage that they have inflicted
on the economy, it will take them years if not decades to pay it back.
So the call of captains of big banks to let them pay back taxpayers
money and carry on with their old usual business, should be considered
BUT ONLY IF THEY PAY THEIR REAL DAMMAGE TO SOCIETY!
It's not that the risk of the Japan syndrome has receded very much.
The risk of a full, all-out Great Depression - utter collapse of everything
- has receded a lot in the past few months. But this first year of crisis
has been far worse than anything that happened in Japan during the last
decade, so in some sense we already have much worse than anything the
Japanese went through. The risk for long stagnation is really high
The current financial elite is still in power. And it is still calling
the shots.
Joe Nocera of the New York Times has
a good piece today on the Obama executive pay proposals, such that
they are. While I have sometimes been hard on Nocera for taking positions
that I have found to be a bit too forgiving to the financial services
industry, today he gave an articulate rendition of a fundamental problem:
It was another one of those Timothy Geithner moments....Looking
sternly into the cameras, Mr. Geithner read a statement in which
he described executive compensation
as a “contributing factor” to the crisis. Then he
outlined a series of tough-sounding principles, including a “re-examination”
of such egregious practices as golden parachutes, a need to align
compensation practices with “sound risk management” and the importance
of having compensation plans that “properly measure and reward performance.”
But then, as he so often does, he proceeded to follow these tough
words with actual proposals that were less than inspiring. The only
legislation his department planned to propose — indeed, the only
legislation he deemed necessary — were bills that called for compensation
committees to be made up of independent directors, along with “say-on-pay”
legislation, which would give shareholders the right to vote on
a company’s pay plan. That vote, however, would not be binding....
Until the financial crisis, most people, myself included, did
not make distinctions between different kinds of companies when
it came to executive compensation. It was just one big problem,
revolving primarily around the idea that there was something fundamentally
wrong about executives taking home giant, multimillion dollar pay
packages for mediocre performance or even outright failure — something,
alas, that happens with annoying regularity in corporate America.
But if the near collapse of the financial system has taught us
anything, it is that there should be a distinction. On the one hand,
there are companies whose executives can make awful mistakes, even
driving their corporations into bankruptcy, but whose actions have
little or no effect on the rest of us. Most companies fall under
this category.
And then there are those handful of companies — the too-big-to-fail
banks and other large financial institutions that pose systemic
risk — whose failure can wreak devastating havoc on the economy.
For these latter companies, getting compensation right isn’t just
a matter of fairness or improved corporate governance. It turns
out to be critically important if we are to prevent a repeat of
the calamity that has befallen us. But as difficult as it has been
to overhaul executive compensation overall, it is going to be even
more difficult to take the tougher measures that need to be taken
with the banking system.
Yves here. As much as I support Nocera's second observation, that there
are some big companies where "getting compensation right" is essential,
he is incorrect in saying that the fact
that many of the others pay egregiously for failure, and often still
overpay for success, has "little to no effect on the rest of us."
The pay practices are part and parcel of
a legitimazation of a gaping disparity in incomes, and the promotion
of a fantasy that certain people are endowed with skills so rarified
that it merits outsized rewards even if the job is botched.
Yet the companies profiled in Jim Collins' Good to Great had
CEOs who paid themselves modestly, even when they shepherded their businesses
through major transformations. The idea that money beyond a certain
level is motivating bears far more examination than it has gotten. The
evidence is strongly to the contrary, that the companies with the most
lavishly paid leaders were stock market laggards.
But the excessive and highly publicized
CEO pay also serves to provide a price upbrella for all sorts of other
pay and fees, such as consultants, lawyers, lobbyists, even executive
coaches. Even if you are a Serious Player in your field, it would be
unseemly to charge more than your clients' top executives earn. But
the flip side is that if you do not charge a lot for your very top professionals,
you send the signal that you think you are not in their league. If you
are providing services to a seven figure CEO or his board, fees of,
say, $500 an hour are way too low. So high CEO pay has
pulled up a lot of boats on its rising tide. Back to Nocera:
I think there is a decent chance that the compensation games will
come to an end — though it won’t be by doing anything so radical
as trying to cap pay, something that simply doesn’t work. (Mr. Geithner
was right about that.)Instead, it will be because boards have
come under renewed pressure, thanks to the financial crisis, to
control executive pay. It is also because, with the Democrats in
charge, the issue is high on the agenda....
Most important, though, it is because the re-energized S.E.C.,
under Ms. [Mary] Schapiro, is preparing a handful of new rules that
will force companies to do a great deal more to spell out their
compensation rationales, while making it easier for shareholders
to express their displeasure if they feel boards have been too generous.
In particular, the S.E.C. has begun laying the groundwork for a
rule that will make it easier for shareholders to nominate directors
— something that is tremendously difficult right now. Ms.[Nell]
Minow is among those who believe that the ability to replace incumbent
directors is likely to have the biggest effect in reforming executive
pay.
I wish I shared their optimism. These changes
may keep pay from moving higher, but I doubt these measures will do
much other than stop the worst abuses, such as big checks for obvious
underperformance.
The reasons are twofold. First, even if shareholders may be able
to secure some board seats, it will still take an effort. And why should
they bother? As Amar Bhide pointed out in a prescient and ignored (because
too offensive to the orthodoxy) Harvard Business Review article, "Efficient
Markets, Deficient Governance," the US decision
to have highly liquid stock markets inherently leads to lax governance.
Why?
In liquid markets, shareholders cannot have sufficient information
to make a truly informed decision about what stocks to buy. A company,
for competitive reasons, cannot disclose the details of its strategy
and market situation that an investor would like to have. It would be
give competitors insight that they could use to their advantage. The
only way an investor can have good enough knowledge is through a venture
capital type relationship, where he is privy to a good deal of internal
information and can also assess the caliber of management.
So equity investors are inevitably in
a position in which they are always at least a bit, if not a lot, in
the dark. That means executives can hide their mistakes
for at least a while, and probably reap more in the way of rewards than
they should.
If an investor becomes unhappy with how management is paying itself,
it is much more sensible to sell the stock than to devote the effort
to try to bring management to heel. Even with the SEC lowering the barriers,
it will not be cost free for unhappy shareholders to locate and nominate
their own board candidates and promote their cause to other shareholders.
The second is that even having a board member or two installed by
outsiders does not assure success. It is unlikely, given staggered directors'
terms in office, that shareholders could achieve a majority of outside
board members and thus gain control of the compensation committee.
The irony of the current arrangement
is that these fancy incentives intended to align executive pay with
shareholder interests were meant to solve a principal-agent problem.
That is, the concern was that CEOs would take advantage of their position
and pay themselves well but not work very hard, hence they needed equity
based incentives to make sure they did a good job. That view means that
the CEOs were presumed to be less than trustworthy.
Yet who was in charge of recommending the compensation packages to
the board? Well, outside comp consultants, engaged by the HR department,
which of course means the fees are paid by the company. And even if
the board hires a comp consultant, the board is nominated by management
and the fees of the consultant are still paid by the company.
In other words, the people whose possible
abuses were supposed to be curtailed are still ultimately in charge
of the pay packages. The foxes still are in charge of the henhouse,
but with a few intermediaries in between to make it a tad less obvious.
So it is any wonder pay skyrocketed?
Jun 13, 2009 | Calculated Risk
Fitch expects "home prices will fall an additional 12.5% nationally
and 36% in California" from Q1 2009.
And, oh, you remember subprime?
From HousingWire:
Subprime Bloodletting Continues at Fitch
Fitch Ratings today made massive downgrades on various vintage ‘05
through ‘08 subprime residential mortgage-backed securities (RMBS),
indicating the extent of the fallout related to subprime defaults
has yet to subside.The rating agency slashed hundreds of RMBS
ratings further into junk territory.
Here is the Fitch statement:
Fitch Takes Various Actions on 543 2005-2008 U.S. Subprime RMBS Deals
On home prices:
The projected losses also reflect an assumption that from the first
quarter of 2009, home prices will fall an additional 12.5% nationally
and 36% in California, with home prices not exhibiting stability
until the second half of 2010. To date, national home prices have
declined by 27%. Fitch Rating's revised peak-to-trough expectation
is for prices to decline by 36% from the peak price achieved in
mid-2006. The additional 9% decline represents a 12.5% decline from
today's levels.
In explaining the downgrades, Fitch said the actions reflect updated
loss expectations and further economic deterioration:
“The home price declines to date have resulted in negative equity
for approximately 50% of the remaining performing borrowers in the
2005-2007 vintages. In addition to continued home price deterioration,
unemployment has risen significantly since the third quarter of
last year, particularly in California where the unemployment rate
has jumped from 7.8% to 11%.”
Credit default swaps are “instruments of destruction” that should
be outlawed as the world looks to re-regulate the global financial system
in the wake of last year’s credit crisis, the billionaire investor and
philanthropist George Soros said on Friday.
Mr Soros, the Hungarian-born US fund manager, said that the swaps
were ‘truly toxic’, grossly distorting risk, encouraging speculation
and with the potential bring ruin on financial institutions and companies.
Citing the recent bankruptcy of General Motors in America, Mr Soros
said that some bondholders had stood to gain more from bankruptcy than
re-organisation as a result of their CDS positions.
“It’s like buying life insurance on someone else’s life and owning
a licence to kill him,” he said of the swaps, which pay the buyer face
value if a borrower defaults, in exchange for the underlying securities
or the cash equivalent.
Although warning against the tendency to over-regulate markets in
the wake of the crisis, Mr Soros proposed three principles that should
guide regulators as they seek to build systems that will prevent a repetition
of events.
- Firstly, regulators must overcome
their previous tendencies to what Mr Soros called ‘market fundamentalism’
and take responsibility for identifying and correcting
asset, credit and equity bubbles before they caused undue damage.
He acknowledged that regulators must accept this assignment “knowing
full well that they are bound to get it wrong” but that once engaged
in the process they would learn from their mistakes and get better
through a ‘process of trial and error’.
- Secondly Mr Soros argued for flexible
credit controls that would react to market mood-swings, requiring,
for example, requiring mortgage lenders to adjust loan-to-value
ratios on residential mortgages in order to forestall property bubbles.
Mr Soros cited the 2001 dotcom equities bubble as an example
of where, in his vision for a re-regulated global financial system,
regulators would have stepped in to cool the market by freezing
new share issues.
- Lastly Mr Soros said that the practice
of securitizing bank assets had greatly added to systemic risk and
must now come under tighter controls, including requiring banks
to limit proprietary trading to their own assets in order to protect
depositors.
“Banks must use less leveraging and
accept risk on their investments, they should not be allowed to
speculate on their own account with other people’s money,” he added.
“This may push proprietary trading out of banks and into hedge
funds which is probably where they belong.”
"The real question is not whether these cities shrink – we're all
shrinking – but whether we let it happen in a destructive or sustainable
way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting
it is like resisting gravity."
Karina Pallagst, director of the Shrinking Cities in a Global Perspective
programme at the University of California, Berkeley, said there was
"both a cultural and political taboo" about admitting decline in America.
"Places like Flint have hit rock bottom. They're at the point where
it's better to start knocking a lot of buildings down," she said.
Flint, sixty miles north of Detroit, was the original home of General
Motors. The car giant once employed 79,000 local people but that figure
has shrunk to around 8,000.
Unemployment is now approaching 20 per cent and the total population
has almost halved to 110,000.
The exodus – particularly of young people – coupled with the consequent
collapse in property prices, has left street after street in sections
of the city almost entirely abandoned.
In the city centre, the once grand Durant Hotel – named after William
Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee.
The large building has been empty since 1973, roughly when Flint's decline
began.
Regarded as a model city in the motor industry's boom years, Flint
may once again be emulated, though for very different reasons.
But Mr Kildee, who has lived there nearly all his life, said he had
first to overcome a deeply ingrained American cultural mindset that
"big is good" and that cities should sprawl – Flint covers 34 square
miles.
He said: "The obsession with growth is sadly a very American thing.
Across the US, there's an assumption that all development is good, that
if communities are growing they are successful. If they're shrinking,
they're failing."
But some Flint dustcarts are collecting just one rubbish bag a week,
roads are decaying, police are very understaffed and there were simply
too few people to pay for services, he said.
If the city didn't downsize it will eventually go bankrupt, he added.
Flint's recovery efforts have been helped by a new state law passed
a few years ago which allowed local governments to buy up empty properties
very cheaply.
They could then knock them down or sell them on to owners who will
occupy them. The city wants to specialise in health and education services,
both areas which cannot easily be relocated abroad.
The local authority has restored the city's attractive but formerly
deserted centre but has pulled down 1,100 abandoned homes in outlying
areas.
Mr Kildee estimated another 3,000 needed to be demolished, although
the city boundaries will remain the same.
Already, some streets peter out into woods or meadows, no trace remaining
of the homes that once stood there.
Choosing which areas to knock down will be delicate but many of them
were already obvious, he said.
The city is buying up houses in more affluent areas to offer people
in neighbourhoods it wants to demolish. Nobody will be forced to move,
said Mr Kildee.
"Much of the land will be given back to nature. People will enjoy
living near a forest or meadow," he said.
Mr Kildee acknowledged that some fellow Americans considered his
solution "defeatist" but he insisted it was "no more defeatist than
pruning an overgrown tree so it can bear fruit again".
By Barry Ritholtz - June 12th, 2009, 1:30PM
I continue to hear pundits overstate that “Employment is a lagging indicator.”
Yes, in the aggregate, that is true. But if you drill down into all
of the employment data, you can find elements that lead (temp Help,
Hours worked) or are Coincidental (Continuing Claims, Wages).
Here are some recent Employment Charts that show the state of the
employment market, with an emphasis on the leading aspects.
Verdict: Not very good.
>
Temporary Help:
A major leading indicator of future hiring.
>
Employment, Hours (CES)
BLS via
Jeff Frankels Weblog
>
Its even more dramatic when you just look at only private employers:
>
Lastly, there are the continuing claims, which shows no signs of
abating:
Continuing Unemployment Claims
via
Calculated Risk
>
PERMALINK |
COMMENTS (78)
Q1 2009 Flow of Funds results show the housing sector ran a financial
surplus or net saving position of $341b in the past quarter, while paying
down $155b in household debt. Monthly consumer installment credit points
to the same household sector deleveraging with credit cards and non-revolving
loans. We believe professional investors may be underestimating the
importance of household sector deleveraging this time around. We have
never seen households retire debt like this, now in three of the past
four quarters, over more than a half century of results reported in
the Flow of Funds accounts.
Household debt can only be reduced by three actions. Households can
default on debt, and the debt is written off. Households can sell assets
to another sector, and use the proceeds to pay off debt. Or households
can save money by spending less than their income flows, and use the
saving to retire debt. The rise in household net saving suggests the
third method is playing a key role in household debt deleveraging, and
this has import implications for the profile of any prospective consumer
spending recovery, even one backed by massive fiscal stimulus.
We suspect working from the usual business
cycle playbook will not be especially rewarding in such an environment.
Furthermore, if banks are sitting on excess reserves, are perceived
to now have sufficient capital, and are reporting an increased willingness
to lend (which makes sense given the slope of the yield curve and the
associated net interest margins), while consumers are intent on net
paying down debt, then banks may need to consider a new business model.
Loan volumes to households are going nowhere. Alternatively, they can
ride the yield curve like they did in 1991-3, but here they will need
to buy and hold longer dated Treasuries if they wish to avoid capital
losses as Treasury bond yields back up.
Nevertheless, ETF’s on consumer discretionary stocks are up over
50% since the March 6th lows, and the ETF on banks are up over 100%.
What do equity investors know that we may be missing?
Our beef with the equity market boils
down to this: the widespread perception is that the old global growth
model, dependent in no small part on the willingness of US consumers
(and other consumers in the developed world) to deepen their deficit
spending, can and will be revived. We would merely suggest
with the level of household net worth to disposable income back to a
level last seen in 1995 (before household deficit spending began), and
with households extinguishing debt for the first time in over half a
century, this assumption deserves to be questioned.
Humpty Dumpty may not be able to be put
together again.
Treasury results this week reported a trailing 12 month federal government
fiscal deficit of over $1.1tr, well on track to break the CBO $1.8tr
forecast by September end. The reality is that without some other sector
increasing its deficit spending or reducing its net saving, attempts
by some domestic firms and households to save out of their money income
flows will simply show up as income shortfalls, and hence unexpected
dissaving, by other domestic private firms and households. Call it the
tyranny of double entry book keeping.
If the trade deficit is done shrinking (which means foreign net saving
is done shrinking) as appears to be the case over the past three months,
then the domestic private sector can only
increase its net saving if the fiscal deficit increases.
Without net saving, the domestic private sector will find it difficult
to deleverage without dumping assets or defaulting on even more debt,
which begs the Fisher debt deflation dynamics that have been discussed
on this blog previously. Few but the Austrian School want to go there,
and for good reason: debt deflations introduce instabilities and dislocations
that most democracies cannot handle. These conclusions about financial
balance flows from simple accounting, not high theory, yet they remain
essential points that escapes many professional investors and economists.
In a monetary production economy, one sector
cannot net save unless another is prepared to deficit spend.
Just the same, even if fiscal deficit spending is the necessary counterpart
to private net saving, and so a necessary condition for private sector
deleveraging, we have noticed the percent of marketable privately held
Treasury debt that comes due in a year or less has surged of late from
just above 30% to nearly 45%. Short term
debt was last this large a share of outstanding debt in the first Reagan
administration.
We believe the dramatic shortening of the maturity privately held
marketable federal government debt is very significant for two reasons.
First, since the short end of the Treasury curve has been suppressed
by the near ZIRP policy of the Fed, the net interest expense outlays
on public debt have been suppressed. Since this is a line item on the
expenditure side of the federal fiscal balance, Fed policy is also reducing
the fiscal deficit from what it would otherwise be if the short end
of the Treasury yield curve was closer to historically normal levels.
That means Chairman Bernanke may face more friction from the Administration
than usual once he believes the time to lift the fed funds rate has
arrived. That may be many quarters away, but questions about the Fed’s
independence are already being raised, and would be inflamed by such
a confrontation. It also means that if the short end of the Treasury
yield curve starts to return to historical norms, interest expense will
rise, and this will add to the fiscal deficit at the time. For deficit
hawks, this introduces fears of compounding and a runaway public debt/income
ratio.
However, it must not be forgotten that
that the federal government’s interest expense must become somebody
else’s income. The nuance under current conditions is
with so much of the marketable federal debt held abroad, the creditors
that benefit from bond coupon payments are less likely to be domestic
households. With the Treasury issuing at the short end of the curve,
and thereby minimizing current interest expense on the public debt,
this is no big deal now, but what happens if interest rates return to
historical norms?
Such a development not only suggests
a larger current account deficit, as interest payments to foreign lenders
reduce the trade balance, but it also takes a stream of income out of
the range of federal government taxation, so a feedback loop that would
otherwise reduce the budget deficit is thereby thwarted.
To be clear, we are not fans of the “twin deficits” view since we find
it neither holds true empirically nor theoretically, but this interest
expense channel is one that could lead to spillover effects on the trade
balance.
Looking at the unique aspects of this
recession, we find the sharp reversal of household financial balances
from a deep deficit position to a net saving position quite important.
Households are reducing debt loads, in part
with higher saving out of income flows, and this has implications for
prospective bank loan volumes and sales revenue growth at consumer discretionary
firms. Larger fiscal deficits are supporting the ability
of households to net save, yet the shortening of maturity of Treasury
debt issued, as well as the reaction of investors to a heavy calendar
of issuance this year and beyond, is complicating matters.
In addition, the shift of investors toward
inflation hedges like oil is draining income from US households to foreign
producers that tend to net save. We try not to be stubborn
in our portfolio positioning – having learned the hard way that is a
very expensive luxury – but we can think
of two sectors that have led the US equity market charge, banks and
consumer discretionary stocks, that can be questioned if we are correct
that household deleveraging is unique to this business cycle recession
and still matters.
The old saw on Wall Street is that it is never wise to conclude “this
time, it is different”. Yet we believe it is in the early identification
of the key differences, and in tracing out their implications, that
macro analysis can add value to intelligent investors.
Arbitraging the gap between reality and
perception eventually tends to pay off – just make sure you can remain
solvent as long as the thundering herd remains deluded!
After Marc Faber said he gives a 100% guarantee that we'll have hyperinflation,
and many other commentators singing from the runaway inflation songsheet
as well, I have been waiting to see Mish's counter-argument for continuing
deflation.
Without even using the word, Mish has provided pretty stunning evidence
for deflation at least in the short-term. Specifically, here is the
first paragraph of an article entitled "Benefit
Spending Hits $2 Trillion, Highest Percent Since 1929; One Dollar Out
of Every Six From Vouchers":
As economic conditions deteriorate and unemployment continues to
soar, one in nine Americans are now on food stamps. Moreover, a
staggering one of every six dollars of Americans' income is now
coming in the form of a federal or state check or voucher.
Ouch.
Note: I believe we will
eventually have hyperinflation, and even Mish doesn't discount the
possibility. Just not yet.
I was going to post something on this CDS trade, but Professor Hamilton
did a much better job than I could:
How to lose on a sure-fire bet
Read Hamilton's take ...
Here are the details of the trade from the WSJ:
A Daring Trade Has Wall Street Seething
The trade involved credit-default swaps and securities backed by
subprime mortgages. The original securities ... were backed by $335
million of subprime mortgages mostly on homes in California made
at the housing bubble's peak in 2005 ...Following a wave of refinancing
and defaults, only $29 million of the loans were left outstanding
by March 2009, half of which were delinquent or in default...
Believing the securities would become worthless, traders at J.P.
Morgan bought credit-default swaps over the past year from Amherst
... Other banks including RBS Securities ... and BofA also bought
swaps on the securities from different trading partners.
The banks ... paid as much as 80 to 90 cents for every dollar
of insurance, the going rate last fall according to dealer quotes,
expecting to receive a dollar back when the securities became worthless
...
At one point, at least $130 million of bets had been made on
the performance of around $27 million in securities ...
In late April, traders at some banks were shocked to find out
from monthly remittance reports that the bonds they had bet against
had been paid off in full. Normally an investor can't pay off loans
like that but if the amount of outstanding loans falls to less than
10% of the original pool, the servicer ... can buy them and make
bondholders whole.
That's what happened in this case. In April, a servicer called
Aurora Loan Services at the behest of Amherst purchased the remaining
loans and paid off the bonds.
girlbear ()
Cicero may have said it best in Rome in 55BC"The budget should be
balanced, the Treasury should be refilled, public debt should be reduced,
the arrogance of officialdom should be tempered and controlled, and
the assistance to foreign lands should be
curtailed lest Rome become bankrupt. People must again learn to work,
instead of living on public assistance." - Cicero - 55 BC
The Fed published its latest
Flow of Funds report today. One key takeaway: While total debt is
growing more slowly, it is still growing. Since Q3 '08 households have
cut their debt (slightly), but the federal government is borrowing so
rapidly, overall debt continues to expand.
Even Volcker is talking about a Q4 recovery now. According
to my recent poll, you lot don't really believe.
According to the latest Bank estimates, the global economy will decline
this year by close to 3 percent, a significant revision from a previous
estimate of 1.7 percent. Most developing country economies will contract
this year and face increasingly bleak prospects unless the slump in
their exports, remittances, and foreign direct investment is reversed
by the end of 2010.
June 11, 2009 |
FT.com
US long-term interest rates continued to test important levels on
Thursday as investors worried about the level of national debt and whether
the Federal Reserve might have to raise interest rates to combat inflation.
The yield on the 10-year Treasury note, the benchmark rate for US
mortgages, briefly traded above 4 per cent, only to attract buyers once
more after
weekly jobless claims and retail sales data were published in line
with expectations.
The 10-year note was recently trading at 3.97 per cent, up 3 basis
points, having hit 4 per cent during Wednesday after an auction of $19bn
in 10-year government debt came at higher than expected yields.
The next test of the US Treasury’s issuance programme looms later
on Thursday with the sale of $11bn in 30-year bonds. An auction of 30-year
bonds last month went badly as investors signalled their concerns about
the budget deficit.
“That did not go well last time, so there is also some additional
concern,” said Dominic Konstam, head of interest rate strategy at Credit
Suisse.
The yield on the 30-year bond was up 6 basis points at 4.81 per cent
early Thursday. Last week, the yield was trading below 4.50 per cent.
“Once the 30-year is out of the way, the market should have a window
to rally,” said analysts at MF Global. “The bull story rests in higher
mortgage rates slowing the recovery.”
On Thursday, the 30-year mortgage coupon rose to a peak of 5.12 per
cent, having surged from 3.90 per cent over the past month. This week,
the latest survey from the Mortgage Bankers Association showed that
its mortgage refinancing application index fell 12 per cent to its lowest
weekly level since mid-November. That was prior to the Federal Reserve’s
announcement of its plan to buy mortgages.
Concerns about the growth of government borrowing on Wednesday forced
the US Treasury to give investors in an auction of $19bn in 10-year
notes a yield of 3.99 per cent – 4 basis points higher than the yield
available before the auction. That constituted
the biggest yield markup since a 10-year auction in May 2003, said Morgan
Stanley.
Traders said the good news of the day was that buyers entered the
market when yields reached 4 per cent. “There
should be natural support for the 10-year note around 4 per cent,” said
Mr Konstam.
“We are seeing traders draw a line in the sand at 4 per cent” on
10-year notes, said Tom di Galoma, head of US rates trading at Guggenheim
Capital Markets.
In recent months, auctions have often been awarded at higher-than-expected
yields, with dealers and investors being asked to buy higher amounts
of debt as the US Treasury seeks to fund a growing budget deficit.
Treasuries fell, pushing 10-year yields to the highest level since
October, as the government sold $19 billion of the securities and Russia
said it may switch some reserves from U.S. debt.
[Jun 11, 2009] Shilling Expects U.S. Recession to Last `Another Year'
One positive quarter is typical for recessions. Three things still
need to be corrected: housing inventory, vicious cycle of consumer retrenchment,
clear financial mess. financial part of economy stabilized but consumer
retrenched. That's why recovery will be very slow.
June 10, 2009 | Bloomberg
Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg's
Carol Massar about the outlook for the U.S. recession.
Watch
As FT.com Willem Buiter's Maverecon
noted "...that this downturn is different from all past downturns, including
the Great Depression of the 1930s, because of the continuing high level
of private sector indebtedness, and that under these conditions neither
monetary policy nor Keynesian fiscal policies are likely to be effective.
"
FT AlphavillePosted by Tracy Alloway on Jun 10 14:06.
What is going on here?International Monetary Fund head Dominique
Strauss-Kahn issued a rather ominous warning on emerging markets on
Monday. Via
AFP:
Also worrying, according to Strauss-Kahn, is that foreign capital
required by emerging countries such as Mexico, Colombia or Poland has
dried up, which could lead to “consequences for the rest of the world.”
Unsurprisingly, the pronouncement sent jitters through the markets.
On Tuesday,
the peso slid against the dollar,
Mexican bond prices fell, the country’s 5-year CDS widened 8bps
and speculation that Mexico could face an
imminent downgrade of its sovereign rating ran rife. At the moment,
the three major ratings agencies have Mexico three notches into investment
grade territory — BBB+ at S&P and Fitch, and BAAA1 at Moody’s.
Here’s RBS Latin America economist Benito Berber on the fall-out
from Strauss-Kahn’s remarks (emphasis ours):
IMF director Dominique Strauss-Khan said
that Mexico, Colombia and Poland face challenging financing deficits
that if not corrected soon, could put them at risk of defaulting. The
external financing needs of Mexico and Colombia have been met for 2009.
In this regard, the comments of Strauss- Khan seem strange and could
add noise to the markets. . . .
The comments of IMF’s Strauss- Khan are
particularly inopportune but should not be taken seriously. The IMF
hasn’t published a formal press release confirming the fund’s view.
Mexico is still investment grade and it is very unlikely that any of
the three major rating agencies decide to lower it to junk.
Mauro Leos from Moodys said a couple of weeks
ago that “it was far fetched to believe that Mexico would lose its invest
grade category any time soon”. The view of the rating agencies has been
that Mexico needs to pass structural reforms to avoid a downgrade. Shelly
Shetty from Fitch commented recently that Mexico would need a plan “B”
in case Congress fails to approve a fiscal reform after the July elections
in order avoid a downgrade. This amounts to sort of running in order
to stand still.
But the prospects for comprehensive fiscal reform
are very slim. In fact, the two major political parties: the centre
left PAN and centre-left PRI have both said that they are not at all
interested in passing a fiscal reform package. While no party is expected
to publicly say that it favors increasing taxes particularly before
the congressional elections of July, the political climate does not
support the passing of any reform.
Mexico will be downgraded by one notch
on the back of deteriorating fiscal revenues as the economy contracts
to between -5.5% and -7.5% this year. Still the comments of Strauss-
Khan add noise to the market. . . .
Small wonder then, that on Tuesday the IMF rushed to backtrack. Via
Reuters:
But the Washington-based IMF softened its comments
on Tuesday and said in an e-mailed statement that Mexico is “very well
positioned to weather the global economic crisis.”
June 10 | Reuters/FT
Alphaville
Goldman Sachs CEO Lloyd Blankfein said on Wednesday
he believed a current upturn in world markets
was probably not a full recovery from crisis and said he expected a
further long recession.
“I think it’s going to be a long proctracted recession,” he told
an international regulators conference in Tel Aviv.
Addressing a current upturn in markets, he said:
“There is no reason to think this is it … So many things have
to be sorted out. Why would this be the recovery?
“The chances are it’s not.
Wow!
Of course, that doesn’t mean Goldman won’t do well, as investment
banking analysts at JPMorgan
noted on Wednesday.
We expect Investment & Wholesale Banks to post record revenues
in Fixed Income, supported by very favorable market conditions (high
volatility, wider margins and strong issuance volumes) and a fundamental
change in the competitive landscape. We estimate Fixed Income will
be the main earnings driver in 2009E, accounting for 14% to 61%
of group revenues in 2009E, and more than offsetting the increase
in loan loss provisions.
And who has the biggest FI division of all the IB’s? Goldman obviously.
One of the primary reasons I am not a big believer in the green shoots
thesis is due to the fragile financial condition of the Consumer.
Despite spending less time at the mall, throttling back consumption,
and increasing their savings rate, the US consumer still finds themselves
with too much debt and too little savings. Even worse (at least for
the economy), they lack the income or the equity to fund their previous
lifestyles.
In my opinion, consumer spending remains an unhealthy ~68% of the
economy. While this is down from a peak of ~71%, it is way up from the
63% of the 1950s. The difference over that period has been the massive
increase in revolving credit and accessible secure lending (2nd mortgages,
HELOCs, etc.).
“Despite recent frugality, consumers have barely dented their
debt load. The Federal Reserve will offer a fresh peek at that mountain
on Thursday, when it releases its “flow of funds” data for the first
quarter.
By the end of 2008, households were on the hook for $13.8 trillion
in debt — nearly matching the $14.3 trillion output of the entire
U.S. economy, not adjusted for inflation, that year.
Households are shedding debt; they’re just not doing it very
quickly. They owed roughly 130% of disposable income at the end
of 2008, down only slightly from a record 133% in the first quarter
of 2008.”
I am not sure that really puts this into the proper context of indebtedness.
Let’s go to
David Rosenberg’s recent charts on the same subject:
Judging from such comments it looks that power that be lost large part
of their legitimacy...
In
Bailout Nation, we discuss the possibility that The TARP
was all a giant ruse, a Hank Paulson engineered scam to cover up the
simple fact that CitiGroup (C) was teetering on the brink of implosion.
A loan just to Citi alone would have been problematic, went this line
of brilliant reasoning, so instead, we gave money to all the big banks.
This is a very important observation: stagflation is a real possibility,
might actually be emminent.
June 8 | Bloomberg
... It isn’t only GM’s
sales that might suffer. Higher energy costs helped trigger a 20
percent rise in a Standard & Poor’s
index of 24 commodities during May, the biggest monthly percentage
gain since September 1990. The increases threaten a burst of inflation
that could sap demand just as the U.S. economy is starting to right
itself after the biggest contraction in five decades.
“You could end up with something like
a stagflation scenario,” said
David Hensley,
director of global economic coordination for JPMorgan Chase & Co. in
New York. “There’s a risk the economic recovery might be stifled.”
Gasoline was up to an average $2.59 a gallon nationwide last week
from $2.05 on May 1, according to AAA. A 50-cent-a- gallon markup removes
about $70 billion from consumers’ annual
spending power, says
James Hamilton, a professor of economics at the University of California,
San Diego.
Prices still remain short of the $4.11 record set on July 15, which
helped push inflation that month to a 5.6 percent annual rate, the highest
in 17 years.
DiGiovanni told Wall Street analysts and reporters June 2 that Detroit-based
GM was better positioned to deal with more expensive gasoline this year
than last as it introduces several fuel-efficient models, including
a Chevrolet Equinox sport utility vehicle that the company says will
get 32 miles per gallon on the highway.
Getting Attention
At
United Technologies Corp., it’s copper that has gotten executives’
attention. The metal has climbed 59 percent this year on the New York
Mercantile Exchange to $2.28 a pound as of June 5.
Gregory Hayes, senior vice president and chief financial officer,
told a conference on May 14 that Hartford, Connecticut- based UTC is
keeping tabs on price movements because its Otis elevator and Carrier
air conditioner divisions buy 75 million to 80 million pounds of copper
per year.
At that rate, the increase so far this year would cost UTC about
$65 million, about triple Carrier’s $22 million
operating income for the quarter ended March 31.
The metal is still down more than 40 percent from an all- time high
of about $4 last year, and that’s “good news” for UTC, according to
Hayes. “We’ll see where that goes,” he said.
Commodities Index
The S&P GSCI Total Return
index, which tracks metals and agricultural commodities as well
as energy, has surged 39 percent since touching an almost seven-year
low on Feb. 18.
Concerns about higher inflation are reflected in the widening difference
between rates on 10-year notes and
Treasury Inflation Protected Securities. The spread on June 5 was
close to a nine-month high at 2.01 percentage points after the government
reported payrolls declined in May by 345,000, the smallest decrease
since September.
Spurring the commodity rally are signs of an economic recovery worldwide,
particularly in China, the world’s biggest consumer of iron ore, rubber,
copper and zinc; more interest from investors; and an 11 percent drop
over the last three months in the
dollar, the currency in which most commodities are priced. Stockpiling
by China’s government and supply constraints have also played a role.
Stockpiling
China’s Ministry of Land and Resources in January announced plans
to build emergency supplies of coal and metals to guard against potential
shortages. The nation’s
imports of Australian coal have soared more than 10-fold from a
year ago.
Macarthur Coal Ltd., the world’s biggest exporter of pulverized coal
used in steelmaking, is seeing new demand this year from China, said
Shane Stephan, chief development officer in Brisbane, Australia.
That is “a major change,” he adds. “We historically have never sold
coal into China at all.”
If the advances in raw materials were being driven mainly by U.S.
demand, there would be less worry that inflation might stymie growth.
That’s not what’s happening this time. Economists surveyed by Bloomberg
forecast the economy will contract at a 1.9 percent annual pace this
quarter after shrinking 5.7 percent in the first three months of the
year.
China, India Growth
What’s pushing up commodities instead is growth elsewhere in the
world, particularly in Asia, Hamilton said. India’s economy grew at
a 5.8 percent annual pace in the first quarter, topping economists’
projections of 5 percent. Chinese manufacturing picked up for the third
straight month in May, according to a purchasing managers’
index published May 31.
Investors have also helped fuel the price surge. More than $6 billion
has poured into commodity-industry funds so far this year, swelling
assets under management by more than 21 percent, according to Cambridge,
Massachusetts-based researcher EPFR Global, which tracks global fund
flows. In all of 2008, new investment boosted assets by just 1 percent,
EPFR figures show.
“Investors have been strongly attracted to commodity and energy plays
this year,” said
Brad Durham, managing director at EPFR.
Stagflation
Higher commodity costs are reminiscent of their climb in the 1970s
and early 1980s, when a 10-fold jump in oil prices drove both
unemployment and inflation above 10 percent. Economists coined the
phrase “stagflation” to describe what was then a new phenomenon of accelerating
inflation coupled with stagnant demand.
Hensley sees a risk of that happening to a lesser degree in the third
quarter, as costlier gasoline lifts annualized inflation to 4 percent
from 1.4 percent in the second quarter, depressing consumer demand in
the process.
“This is unambiguously bad news for consumers, who are already feeling
the squeeze from slowing wage gains and collapsing home prices,” said
Ian Shepherdson, chief U.S. economist at Valhalla, New York-based
High Frequency Economics.
Consumers’ sensitivity to gas prices is “extraordinarily high,” according
to
Richard Hastings, a consumer strategist at Global Hunter Securities
LLC of Newport Beach, California.
“You don’t have to go back to record-high fuel prices to see damage
to the economy,” he said.
Federal Reserve Chairman
Ben S. Bernanke noted the rise in oil and other commodities in testimony
to Congress on June 3, while saying excess capacity in the economy would
keep a lid on inflation. U.S. factories, mines and utilities operated
at a record-low 69.1 percent of
capacity in April, according to Fed figures.
Capacity Constraints
The picture is different for some raw materials. Global oil production
capacity use is about 95 percent, “and with the cutback in capital expenditures
and drilling, future capacity is dropping,”
according to a May 8
Goldman Sachs Group Inc. report. Production
of copper is at 85 percent of capacity and corn and wheat are above
90 percent, the report said.
Soybean supplies are squeezed by drought in Argentina and tighter
credit that curtailed plantings. Argentine farmers may harvest 32 million
tons of the crop, down from a record 48 million tons last year, the
Buenos Aires Cereals Exchange reported on June 3. Goldman Sachs says
output in Brazil will fall as much as 10 percent this year. Soybeans
on the Chicago Board of Trade have gained 22 percent in 2009 to $12.26
a bushel, the highest since September.
An example of the religious nature of economics is its promotion
of market as god. We are warned:
Don’t try to legislate on the market; it is stronger than our puny
laws. It is omnipotent
Don’ try to regulate outcomes, the market with input from all of
its participants always knows best. It is omniscient
Do the right things and the market will reward you, the wrong things
and you’ll be punished. It is beneficent
Omnipotence, omniscience and beneficence are the attributes of a
god, not a mere device for buying, selling and exchanging. - A strange
deity that abhors morality and where even the most atheistic libertarians
have been suckered into believing in the market’s "invisible hands"
like multiple Holy Ghosts.
NYCityBoy says:
I believe I live in what could still be called "The Financial
Capital of the World". I work in a field related to money and finance.
I often have talked to co-workers, and others in the field, about
this mess the past 3 or 4 years. When I speak to these people I
feel like we must be living on different planets. I can't figure
out how their minds work but it is not pretty.
The saddest part of this mess is to see anybody that isn't a mindless
optimist be labeled as Dr. Doom, negative, Chicken Little, gloomy,
etc. It shows that speaking the truth and acknowledging reality
is taboo. That is terribly frightening. I take every chance to correct
people when they call me such things. I tell them that being an
empty headed optimist does not qualify them as knowing what they
are talking about. I hope you all do the same thing.
I do love to laugh at idiots when their cheery little world collapses
around them. It's not my fault they want to act like fools. It's
theirs. The consequences should belong to them. The only lesson
that gets learned is the hard lesson.
abprosper says:
“I suspect that most of todays economists are as concerned about
their jobs as the rest of us. Like newspaper people and other news
aliens they (for the most part) can't tell the truth even if they
want to.
If they do, their add revenue goes down and they get fired
black swan says:
“The real U-6 unemployment rate in the US is probably over 20%.
I'm not sure how that compares with the unemployment rate during
the Great Depression, because I'm not sure they counted unemployed
women during the Great Depression.
N.Andrews, who wrote "Historical Unemployment in Relationship
to Today", says the peak U-6 unemployment rate in the Great Depression
was 37.6%. If that didn't include women, and we know that all they
had as far as employment data in the 1930s were guesses, then, at
present, we are nowhere near Andrew's best guessed rate.
Robert Shiller doesn't think real estate prices will turn around
anytime soon:
Why Home Prices May Keep Falling, by Robert Shiller, Commentary,
NY Times: Home prices in the United States have been falling
for nearly three years, and the decline may well continue for some
time.
Even the federal government has projected price decreases through
2010. As a baseline, the stress tests recently performed on big
banks included a total fall in housing prices of 41 percent from
2006 through 2010. ...
Such long, steady housing price declines seem to defy both common
sense and the traditional laws of economics, which assume that people
act rationally and that markets are efficient. ... If people acted
as the efficient-market theory says they should, prices would come
down right away, not gradually over years, and these cycles would
be much shorter.
But something is definitely different about real estate. Long
declines do happen with some regularity. And ... we still appear
to be in a continuing price decline. ... Why does this happen? One
could easily believe that people are a little slower to sell their
homes than, say, their stocks. But years slower?
Several factors can explain the snail-like behavior of the real
estate market. An important one is that sales of existing homes
are mainly by people who are planning to buy other homes. So even
if sellers ... have no reason to hurry because they are not really
leaving the market.
Furthermore, few homeowners consider exiting the housing market
for purely speculative reasons. ... And they don’t like shifting
from being owners to renters... Among couples...,... any decision
to sell and switch to a rental requires the assent of both partners.
Even growing children, who may resent being shifted to another school
district and placed in a rental apartment, are likely to have some
veto power.
In fact, most decisions to exit the market in favor of renting
are not market-timing moves. Instead, they reflect the growing pressures
of economic necessity. This may involve foreclosure or just difficulty
paying bills, or gradual changes in opinion about how to live in
an economic downturn. This dynamic helps to explain why, at a time
of high unemployment, declines in home prices may be long-lasting...
Even if there is a quick end to the recession, the housing market’s
poor performance may linger. After the last home price boom, which
ended about the time of the 1990-91 recession, home prices did not
start moving upward, even incrementally, until 1997.
I just read a very good
article in Bloomberg about Bernanke's conundrum, i.e. rising long-term
rates even as short rates are kept near zero. I particularly liked this
comment by Mark MacQueen of Sage Advisory Services: “You can’t have
it both ways. You can’t say I’m going to stimulate my way out of this
problem with trillions of dollars in borrowing and keep rates low by
buying through the other. I don’t think that is perceived by anyone
as sound policy.”
Very simple and very common sense, indeed. But since the Fed and
Treasury can't have it both ways, what's the way out?
I understand (but do not applaud) the current monetary bailout reaction,
based as it is on America's deeply ingrained Great Depression phobia.
Countless economists and Wall Streeters have spent their professional
lifetimes studying and war-gaming the 1930's - Mr. Bernanke most of
all. Nevertheless, they are completely and totally, knee-jerk wrong;
throwing out more money (i.e. debt) will not resolve a problem that
was created by too much debt, in the first place. As this blog's masthead
proclaimed a while ago: "We hold this
truth to be self-evident: You cannot solve a debt problem by issuing
more debt".
Like other shortsighted generals in history, our monetary generals are
fighting the previous war -
furiously building static Maginot lines whilst
Guderian is warming up his highly mobile panzers.
Therefore, I strongly recommend that instead of engineering a massive
explosion of money supply through quantitative easing, the US should
regulate it very tightly. I have proposed
The Greenback, i.e. benchmarking
money supply on the growth of renewable energy. This scheme will most
likely lead to significantly higher short-term rates, at least initially.
But, is this so bad? I think not.
For one, higher short rates will promote domestic savings, sorely
needed in a period of massive budget deficits and the urgent requirement
to invest huge sums in sustainable energy*. For another, such a policy
will immediately restore confidence in the dollar and our commitment
to service our debt. It is likely, thus, that long rates will drop.
Let's recap: our current expansionary monetary policy is completely
at odds with present and future requirements in the
real economy, which is challenged by a combination of too much
debt, fewer and lower-paying jobs, resource depletion and environmental
destruction.
The bond market, those ever-present bond vigilantes, is already warning
us that we have got to bring monetary policy in line with reality soon,
as opposed to sleep-walking in a rosy dream state.
____________________________________________________________
*Of course, I take it for granted that the
borrow-consume-inflate assets Permagrowth economic model is completely
and utterly defunct, de facto.
But if one was paying only a teeny bit of attention, it would
be hard to miss the persistent, nay insistent efforts of the officialdom
to put the best possible spin on matters economic. The very fact
that Geithner said not more than once that the stress tests were
about restoring confidence was such a brazen admission as to be
breathtaking. But on another level, it was spin within spin, since
the idea that the authorities would openly talk of the tests as
a ruse to restore confidence (which is what predetermining the answers,
as Geithner also did) is tantamount to saying the skeptics are all
wrong, and all we need to do is drown them out for saner heads to
prevail.
While the "nary a bad word will be said", or to the extent it
is, it is countermanded by an even more positive take, has gotten
some notice in the MSM. But I cannot recall anyone taking issue
with it frontally. So an article today in the New York Times, "The
Economy Is Still at the Brink" by Sandy Lewis and William Cohan,
is a badly needed contirbution:
President Obama is conducting an all-out campaign to try to
make us feel a whole lot better about the economy as quickly
as possible...Mr. Obama thinks that the way to revive the
economy is to restore confidence in it. If the mood is right,
the capital will flow. But this belief is dangerously misguided.
We are sympathetic to the extraordinary challenge the president
faces, but if we’ve learned anything at all two years into the
worst financial crisis of our lifetimes, it is that a capital-markets
system this dependent on public confidence is a shockingly inadequate
foundation upon which to rest our economy.
Yves here. Put more simply, confidence is a necessary but not sufficient
condition for recovery. Indeed, many readers have argued that boosterism
will backfire when the policy measures come up short. This is, as
we have said repeatedly, an effort to restore status quo ante rather
than deal with serious, deeply rooted problems. Back to the article:
We have both spent large chunks of our lives working on Wall
Street, absorbing its ethic and mores. We’re concerned that
nothing has really been fixed. We’re doubly concerned that people
appear to feel the worst of the storm is over — and in this,
they are aided and abetted by a hugely popular and charismatic
president and by the fact that the Dow has increased by 35 percent
or so since Mr. Obama started to lay out his economic plans
in March. But wishing for improvement and managing by the Dow’s
swings are a fool’s game. (Disclosure: One of us, Mr. Lewis,
was convicted on federal charges of stock manipulation in 1989,
pardoned by President Bill Clinton in 2001 and had his lifetime
trading ban overturned by the Securities and Exchange Commission
in 2006; documents relating to the case can be found at sblewis.net.)
The storm is not over, not by a
long shot. Huge structural flaws remain in the architecture
of our financial system, and many of the fixes that the Obama
administration has proposed will do little to address them and
may make them worse. At another fund-raising
event, for Senator Harry Reid, President Obama said: “We didn’t
ask for the challenges that we face. But we are determined to
answer the call to meet those challenges, to cast aside the
old arguments and overcome the stubborn divisions and move forward
as one people and one nation .... It will take time but I promise
you, I promise you, I’ll always tell you the truth about the
challenges we face.”
Keeping that statement in mind — as well as an abiding faith
in the importance of properly functioning capital markets —
we have come up with a set of questions
meant to challenge a popular president, with vast majorities
in Congress, to find the flaws in the system, to figure out
what’s being done to fix them and to get to the truth about
the difficulties we face as we set out to restore the proper
functioning of our markets and our standing in the world.
Selected Comments
-
Bennett said...
-
Who is saying that the status quo "restoration" will be permanent?
This is analogous to Krugman's mistaken fearmongering that Obama
and reformers will only get "one chance" to fix things.
Yves, I believe that you fundamentally do not understand the
political process, and the long term strategic view that political
actors take.
I think Obama and company are keeping their powder dry; it's
as simple as that. They know as much as you and Bueler and the commenters
here do....they are waiting. "Gambling" if you will.
But any smart student of politics knows that you can only really
execute reform when *all options have been exhausted." I am sure
Geithner and Obama will cheer the day, believe it or not, when the
current course proves unsustainable - only then can the reform that
you desire become possible. IT's not possible now. That's why "nothing
has changed."
Look at how big bankers now are squealing about the tiny burdens
placed on them by the stress tests, or other regulations. You simply
cannot revolutionize things at once; it historically is an incremental
process. This is NOT 1932, it is not as dire as that. We cannot
have the changes on that scale so quickly.
So one should not think that Geithner and Obama are idiots, or
have their heads in the sand. That is simply ignorant and naive.
Their strategy may or may not be proved wrong - but that cannot
be determined now.
Finally, the guy in the above article is a damn felon! End of
discussion.
-
Tortoise said...
-
It is important to keep in mind that the economy is like a complicated
clockwork with lots of moving parts, some going up while others
are going down. House prices may be dropping and unemployment rates
may be going up and yet the overall economy may be improving or
about to turn the corner and head up. One thing I have learned is
that cycles follow their own internal logic and recoveries start
exactly when it seems that things are horrible and many logical
and analytical people are overcome by despair.
I am sure you have
heard the expression "It is darkest before the dawn". It is a truism
and yet ...
Though nobody can PREDICT the economy with certainty, the best
predictions (in terms of track record) come from leading indicators.
They seem to indicate that the worst is over and the economy is
about to turn up. Everything else may be just subjective evaluations
shaped by our emotions.
The latest data on insider selling shows little relief in the relentless
unloading of company stock by corporate insiders. In the
last two weeks insiders sold over $335MM in stock vs listed insider
purchases of just over $12MM. As has been the trend over
the course of the last few weeks the list of insider selling has been
long and the amounts have been staggering. The buy side, on the
other hand, is represented by low rated, low priced stocks whose insiders
rarely purchase over $500K.
One might think that with all of these “green shoots” the insiders
at major U.S. corporations would begin buying up their own shares voraciously.
Especially after a nice little run like we’ve seen lately. After
all, with stocks still 35% off their highs and a full blown economic
recovery (supposedly) on the horizon it would make nothing but sense
than to buy your own shares, right?
Although there were signs of life in early May the overall trend
in buying remains very low. As we’ve noted before it’s not the
mountain of selling that most concerns us, but the total lack of buying.
Insiders sell for many reasons, but they
only buy their own stock when they are confident that the price will
rise. As of now, insider buying remains incredibly
weak which is more than likely a vote of (no) confidence in future business
operations.
And it also seems likely that the unemployment rate will continue
to rise for the next 2 years or so since any recovery will probably
be very sluggish.
km4 ()
> And it also seems likely that the unemployment rate will continue
to rise for the next 2 years or so since any recovery will probably
be very sluggish.
Bingo !
Now couple this with Obamanomics where
1) The government champions funds
2) Funds champion corporations
3) Corporations champion markets and industries
4) The people ( American taxpayers ) get the tab which will fail
because America and Americans are swimming in debt and you have the
makings of a catastrophe ( like more severe and prolonged recession
or depression )
Most Americans had better start making the gradual to a lower standard
of living and suggest that most should also be recalibrating their American
dream
bobn (,
) wrote
We have assumed that the economic policies of the last 25 years -
globalization, regulation, free trade etc - have worked but there is
an alternative narrative which is that they had nothing to do with it
and it was all based on debt creation. Common sense would suggest that
if all these policies had in fact worked the amount of indebtedness
and debt service as percentage of income should be going down not up.
These policies did exactly what they were designed to do: make rich
people richer, and screw everybody else.
Econ Watcher ()
I don’t think what is going on right now is just a recession. I think
there is also an economic adjustment taking place. By that I mean an
adjustment because of the globalization of the world economies. We are
witnessing the rise of the middle class in China and India and the fall
of the middle class in America. It has been masked by the credit explosion
over the last 15 years but is definitely starting to surface. The GM
and Chrysler Bankruptcies are prime examples. No matter how you slice
it the wages here and abroad are going to have to be more closely correlated.
IBM and other Tech companies will keep shipping jobs to India until
we have an American IT workforce that can compete e.g., lower wages.
sportsfan ()
If you're unemployed, it's a good idea not to be unemployed for too
long.Sounds pretty basic, doesn't it?
But there seems to be a new twist. Lengthy unemployment can lead
to a lower credit score and thus to no job offer.
From the L.A. Times:
Trapped: It's hard to get a job if your credit is bad
Not only is the American middle class shrinking, a new lower class
is being created.
yuan ()
RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close
of the year, leaders in banking and industry throughout the country
maintain an optimistic attitude toward the prospects for 1930.
-January 1, 1930“The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
- June 1930
‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in
Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists
Point to Superior Credit Conditions Now, Holding Easy Money Points to
Revival.
-July 6, 1930
BIG BANKERS PUT UP $100,000 SAFEGUARD; House of Morgan Among Those
Required to Provide Protection for Investors. -August 3, 1930
“We have hit bottom and are on the upswing.”
James J. Davis, Secretary of Labor.
-September 12, 1930
“30% OF STOCKS SELL UNDER BOOK VALUES; Capital Is Above Market Price.”
-December 14, 1930
“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
- June 9, 1931
http://www.washingtonsblog.com/2009/06/economists-and-other-experts-are....
sportsfan ()
Where the new jobs came from I haven't a clue.
There weren't any new jobs created beyond the jobs that were lost:
http://www.latimes.com/business/la-fi-unemployment-california23-2009may2...
Although the often volatile unemployment rate dropped to 11% from
March's 11.2%, the Golden State still lost 63,700 jobs during the month.
Institutionally trained idiotism very similar to the USSR collapse...
The former head of the FDIC, William Seidman, figured
it all out back in 1993 when he was cleaning up after the S&L fiasco.
Here's what he said in his memoirs:
“Instruct regulators
to look for the newest fad in the industry and examine it with great
care. The next mistake will be a new way to make
a loan that will not be repaid.” (Bloomberg)
That's it in a nutshell. The banks never expected
the loans would be paid back, which is why they issued them to ninjas;
applicants with no income, no collateral, no job, and a bad credit history.
It made no sense at all, especially to anyone who's ever sat through
a nerve-wracking credit check with a sneering banker.
Trust me, bankers know
how to get their money back, if that's their real intention.
In this case, it didn't matter.
They just wanted to keep their counterfeiting racket zooming ahead
at full-throttle for as long as possible. Meanwhile,
Maestro Greenspan waved pom-poms from the sidelines, extolling the virtues
of the "new economy" and the permanent high plateau of prosperity that
had been achieved through laissez faire capitalism.
"Good, well-paid jobs involve the addition of high levels of value to
their output; some because of the high amount of invested capital in plant
and equipment and technology (e.g. jobs in manufacturing) and others because
they are knowledge-based (e.g. software). What we did in the US, instead
of safeguarding these precious jobs, was (and still is) trully moronic,
considering we did it willingly and without any outside pressure. From powerhouse
to fun-house, from manufacturing cutting-edge products to consuming bread
and circuses. "
Jun 4, 2009 | Sudden Debt
The Employment Situation report for May is scheduled for tomorrow.
So, the subject is.. jobs.
Every first Friday of the month we look at the headline numbers from
the Bureau of Labor Statistics: so many jobs were added or lost last
month; thus, we deduce the economy to be growing or declining. But this
is less than half of the story; we rarely- if ever- discuss what kind
of jobs are involved. I believe this to be superficial analysis and
highly misleading.
For example: a skilled auto worker making $30/hr is fired and gets
a job tending bar at $7/hr plus tips. Are these two jobs equivalent?
Of course not.
About two years ago ago I started looking at the wholesale disappearance
of goods-producing jobs in the US versus the creation of lower-to-middle
tier service sector jobs (leisure and hospitality, retail, healthcare
and education).
I have now updated the chart presented in the original post; I think
it speaks for itself (see below).
Data:
BLS
Good, well-paid jobs involve the addition
of high levels of value to their output; some because of the high amount
of invested capital in plant and equipment and technology (e.g. jobs
in manufacturing) and others because they are knowledge-based (e.g.
software). What we did in the US, instead of safeguarding these precious
jobs, was (and still is) trully moronic, considering we did it willingly
and without any outside pressure.
From powerhouse to fun-house, from manufacturing cutting-edge products
to consuming bread and circuses.
This is also the reason I am so upset with the continuing sole emphasis
of the administration on financial-sector bailouts. The trillions involved
are being wasted in keeping a terminal patient on life support, instead
of supporting the radical transformation of our energy and resource
sectors. And don't forget that these trillions are borrowed!
Sometimes I feel like our Pax Americana is ablaze and we are all
gathered round, poking the fire with our marshmallow sticks and laughing,
telling each other camp stories.
"Collapsing tax receipts mean that many states are and will be bankrupt,
and the job losses are still mounting at an unprecedented rate (just a bit
slower than the recent peak)."
Jun 3, 2009 | ft.com
Extract:
The bottom line is that we should come away from Mr Bernanke’s
testimony with at least two conclusions: the chairman seems more
cautious about the growth outlook when compared with other recent
public statements; and he wants to push fiscal sustainability issues
clearly away from the Fed’s domain and back where they belong, with
Congress and the administration.
- starstrike
The FED indebts the US government (creates the massive mess)
to apparently save the system then expects congress to sort
it all out.
If the USA cuts back now, it will go into a complete depression
death spiral.
Collapsing tax receipts mean
that many states are and will be bankrupt, and the job losses
are still mounting at an unprecedented rate (just a bit slower
than the recent peak).
There is no way fiscal sustainability can be achieved after
the events of recent months, not in a mans lifetime anyway.
6/06/2009 | CalculatedRisk
From the American Bankruptcy Institute:
Consumer Bankruptcy Filings up 37 Percent in May
U.S. consumer bankruptcy filings rose 37 percent nationwide in May
from the same period a year ago, according to the American Bankruptcy
Institute (ABI), relying on data from the National Bankruptcy Research
Center (NBKRC). The overall May consumer filing total of 124,838
was roughly level from the April total of 125,618. Chapter 13 filings
constituted 27 percent of all consumer cases in May, slightly above
the April rate.“As consumers continue to face increasing levels
of unemployment and rising foreclosure rates, bankruptcy filings
will continue to accelerate as families seek financial relief from
the tough economic climate,” said ABI Executive Director Samuel
J. Gerdano. “We predict more than 1.4 million new bankruptcies by
year end.”
NervousRex ()
Duke of Con Dao (profile) wrote on Sat, 6/6/2009 - 5:51 am
what explains the 2003 high? I know a change in the law in '06 was
the cause of that spike....
aren't we comparing apples to oranges a bit, let's say we walk back
the cat to the previous BK law,
wonder what the numbers would look like then, guesses?Two
things, it seems the personal BK peak generally would lag a recession
by a year or two (no link -- no data! but looking). Just due to
the inertia of the components.
If you cut 'n paste the new bankruptcy curve on the old one (skipping
discontinuous segments) we'd be something like 2x higher than now
(the Big Thumb method of interpolation). I know it's not comparable
but that would be 600k or 700k per quarter.
I know someone now teetering on the edge now. There are often
serious family and personal issues (like where to live) that go
along with bankruptcy. The idea of 700,000 people *entering* that
state every quarter gives me chills.
curious ()
Saw an interesting chart yesterday.Everything in blue
was created by Obama's economic team.
For me, that chat is a wonderful summary of the Obama administration's
economic policy. Lots of optimistic predictions with little attention
to reality.
typo edited--need some coffee
Even if DMOs cancel their holidays it'll be tough
to schedule all the looming sales, says Gillian Tett...
A few decades ago, when global financial markets rocked to a more
gentlemanly tune, many western governments took an informal break from
the business of selling their bonds during the summer.
For back then, it was presumed pension fund managers – or anyone
else with a penchant for government bonds – would spend August on the
beach. And the media-shy bureaucrats who typically work at government
debt management offices usually presumed they would have plenty of time
during the rest of the year to go about selling bonds.
As I have previously
pointed out, two top IMF officials and the former Vice President
of the Dallas Federal Reserve have all warned that the U.S. has been
taken over by an oligarchy.
Wednesday, the head of the
Federal Reserve Bank of Kansas City, Thomas Hoenig, agreed:
If we hesitate to make needed changes, we will perpetuate an oligarchy
of interests that will fail to serve the best interests of business,
the consumer and the U.S. economy...In discussing any aspect
of financial reform, one of the most significant changes that must
be accomplished is the end of "Too Big to Fail" . . . Institutions
must be allowed to fail, no matter their size or political influence...The
effect is to lower the costs to these firms and significantly raise
costs to the taxpayer and, ultimately, to fundamentally weaken our
financial system.
"the REAL TRUTHFUL losses are 345,000 + 220,000 + 220,000 = 785,000."
Duration of unemployment is 4 std dev above 25 year norm - that isn't good.
The “long-term unemployed” – those out of work for six months or more –
now exceed a record 4 million. Many of these “discouraged” people are not
counted toward the official unemployment rate. With consumer credit getting
dramatically worse ratail is suffering. Even Wal Mart. See also
Unemployment Rates, by Metro Area - Real Time Economics - WSJ
June 5th, 2009
While many view the decelerating job losses as signaling the end
of the recession, they appear to me as signaling the end of the panic
period of the credit crisis. We are now in an ordinary, as opposed to
historic, recession.
Selected Comments
- Stuart Says:
600K new filings each week and records
levels of continuing claims, 9.4% unemployment rate, a U-6 of over
16.4% and they post 345K lost. Who the hell is running the show
at the BLS? Baghdad Bob? They just nuked their last shred of credibility
with even bozo the clown.
Utterly worthless their releases are now.
- The Curmudgeon Says:
While your eyes were averted to the “green shoot” of less bad unemployment
numbers, the little ol’ US Treasury market is doing its own shooting.
Ten Year @ 3.82%, according to latest Bloomberg. And mortgage rates
at their highest this year (about 5.5% for 30 year fixed). Now we
just need some fertilizer to spread on the shoots…but that would
be expensive, since ag commodities are also shooting…my isn’t “reflation”
a wonderful thing? Green shoots everywhere.
- jqui Says:
More good news. Employers trimmed only 345,000
jobs and the unemployment rate is only 9.4%, the highest since 1983.
Time to buy stocks. I hate to be a wet blanket (actually, I love
to be a wet blanket. It’s my thing). Please look at the old birth/death
adjustment chart. According to the BLS
model, small businesses added 220,000 jobs in May after adding 226,000
jobs in April.
Isn’t that precious. In the midst of the worst recession since
1930 our beloved government agency is telling us that small businesses
are hiring like crazy. In two years they will adjust this data when
no one is paying attention, because it is WRONG!!!!!!
Small businesses are going out of business in record numbers.
I can guarantee you that small business subtracted at least 220,000
jobs in May.
Therefore, the REAL TRUTHFUL losses are 345,000 + 220,000 + 220,000
= 785,000. Do you think the market would be rallying if that number
was reported?
- Mike in Nola Says:
Keeping perspective: Graphs in this post.
http://www.calculatedriskblog.com/2009/06/employment-report-345k-jobs-lost-94.html
- TrembleTheDevil Says:
Didn’t you write a book about this or something? Why would anyone
want to buy your work if you’re not even going to examine what the
real numbers are?
All that’s going on is what technically counts for “unemployment”
is incredibly disconnected from reality, an article about April’s
number explains it:
-The 8.9 percent April unemployment rate was based on 13.7 million
Americans out of work. But that number doesn’t include discouraged
workers or people who gave up looking for work after four weeks.
Add those 700,000 people, and the unemployment rate would be 9.3
percent.
- The official rate also doesn’t include “marginally attached
workers,” or people who have looked for work in the past year but
stopped searching in the past month because of barriers to employment
such as child care, poor health or lack of transportation. Add those
1.4 million people, and the unemployment rate would be 10.1 percent.
- The official rate also doesn’t include “involuntary part-time
workers,” or the 2 million people like Noel who took a part-time
job because that’s all they could get, plus those whose work hours
dropped below the full-time level. Once those 9 million workers
are added to the unemployment mix, the rate would be 15.8 percent.
http://news.yahoo.com/s/ap/20090605/ap_on_bi_ge/us_becoming_a_statistic
~~~
BR: Also, Kennedy was shot.
Dude, you are 3 years late to this party.
I’m the guy who advocated using the
U6 over U3 in this report, as well as mercilessly mocking the
B/D report.
- jc Says:
From Big Picture almost 2 years ago
B/D is why we are smelling fish!
The Accelerating BLS Birth/Death Adjustment
Tuesday, July 10, 2007 | 07:20 AM
in Data Analysis | Economy | Employment | Real Estate
I’ve mentioned the B/D adjustment over the years, and how its
become an increasingly large portion of the reported BLS new jobs.
What I haven’t previously mentioned is that over the past year,
it is accelerating: the Birth/Death Adjustment has become an ever-large
portion of the reported NFP payrolls.
How much larger? Well, consider the following data points: Over
the five month period ending in June, BLS B/D adds was a total of
922,000 new jobs. During the same period, the actually head counted
Non-farm Payrolls (NFP) job creation was 709,000.
That’s right, fictional Birth/Death job adds have been outpacing
actually measured job creation by some 30%.
As they do every year, BLS Net Business Birth/Death Model deleted
jobs in January — in 2007, it was 175k. That means that year-to-date,
the net fabricated BLS new jobs was 747k — versus NFP growth of
871k — that’s 85.58% of NFP job growth.
Example of the absurdity of the new Birth/Death model — in place
since 2001 — can be found in the specific employment sub-sectors.
Construction jobs are an obvious error (housebuilders added 12,000
workers), big jumps in education while school is out for summer
is another, ‘Leisure & Hospitality’ B/D jobs are a multiple of the
net category jobs created.
Prior to 2001, the B/D adds were less than 20k per month. Now,
they dominate the Non Farm Payroll report.
Beneath the headlines, we see a far different reality. The FT
noted:
“Wall Street economists, meanwhile, were surprised by continued
hiring in the construction sector seen in Friday’s figures as despite
a prolonged housing market slump…The bulk of the hiring was in the
service industries, as employers such as banks, insurance companies,
restaurants, added 135,000 workers last month after hiring 199,000
workers in May. But they also pointed to signs of potential economic
weakness, as the retail sector cut 24,000 positions.”
Economists also said an unwelcome percentage of last month’s
hiring was attributable to state and local governments, which added
40,000 staff and are not viewed as good indicators of economic activity.”
I mentioned my incredulity over the fawning WSJ page 1 headline
this past weekend (How Good Was NFP Really?). That is the soft prejudice
of low expectations in action.
My favorite skeptic on BLS data is Bill King; Bill is even more
incredulous over the reaction to what was by all measures a mediocre
jobs report:
“And once again, The Street and their fin media stooges bray
about how bullish 132,000 NFP jobs are (CSFB’s chief economist called
the report ‘excellent.’) even though just a few years ago Street
Conventional Wisdom held that the economy must generate about 175,000
jobs each month just to absorb demographic growth.
Lehman’s economist said, “The labor market is one of the stronger
parts of the economy right now.” This is a Clintonesque, qualified
statement. It could imply that the rest of the economy really sucks.”
Sucks, indeed.
Here’s Bills’s chart of the past few decades NFP growth:
NFP with 1-year (12 month), 10-year and 40 year (480-month) moving
averagesNfp_20_years
Source: M.Ramsey King Securities
As the above chart clearly shows, the June NFP number is hardly
‘excellent’ or indicative of economic strength. With NFP yearly
average of 167,333, how can a release ~35,000 or > 20% less than
the yearly average be ‘excellent’?
The 40-year average NFP growth is 150,600 — and that is with
a national population considerably less than 300 million people.
Anyone asserting a NFP number ~15% below the 40-year average as
‘excellent’ or a sign of strength is a shill who has failed to do
the math . . .
UPDATE 3 July 11, 2007 8:20am
- I-Man Says:
OH I love it…
Not the fact that our labor conditions are still disgusting…
I dont like that.
But I LOVE that the bond market is finally calling out the bullshit
this morning. Just love it.
They can only spin and shine the data for so long, and then the
clear coat is gone.
Junk bonds have come back from the dead — and then some. Of all the
asset classes, you’d think the market for debt from financially fragile
companies wouldn’t fare well during a “credit crisis.” In fact, we’d
suspect it would be one of the last asset classes to recover. But no,
anything is possible in 2009… Check the chart of HYG, an ETF that tracks
the “distressed debt” market.
“I think that high-yield bonds have moved up way too far, way too
fast,” says Strategic Short Report’s Dan Amoss. “Like low-quality
stocks, many of these bonds are pricing in a return to the bubble economy,
when that is clearly not going to happen. I agree with NYU professor
Ed Altman — creator of the Z-Score and an expert in distressed debt
investing — that the high-yield bond market will not bottom until defaults
peak. Defaults will probably not peak before late 2009 at the earliest.
The recent rally in junk stocks and bonds was primarily a function of
the Fed’s hyperinflationary policies, which have served as rocket fuel
powering any risky asset class with momentum, regardless of fundamentals.”
It's pretty funny that Republican deadenders still try to argue,
despite the fact that their ideology now firmly belong to the dustbin of
history. "Ferguson represents a strain of intellectual Toryism bedeviled
by the haunting fear that someone, somewhere may be getting social insurance.
... Their solution to the problem of large deficits always seems to be to
cut entitlements and never to raise taxes."
The Bond War, by Daniel
Gross, Slate:
In a nutshell, Ferguson and his allies believe that the rising bond
yields prove that markets are worried about the inflation that will
inevitably result from the fiscal policies of the Obama administration
and the Fed. ... Ferguson's fears have been echoed by the planet's leading
inflation-phobe German Chancellor Angela Merkel and by influential Stanford
economist John Taylor. Turn on CNBC, and you're likely to hear talk
about bond-market vigilantes, the mass of traders who sell bonds and
push interest rates up in order to warn governments not to spend freely.
Krugman and his fellow travelers couldn't disagree more. Far from
being a sign of failure and impending disaster, they say, the rising
bond yields actually signal success and impending improvement. ... Clear-headed
as always, Martin Wolf of the Financial Times
notes: "The jump in bond rates is a desirable normalisation after
a panic. Investors rushed into the dollar and government bonds. Now
they are rushing out again. Welcome to the giddy world of financial
markets." This line of argument makes sense...
In ... this instance, the Fergusonians lack credibility. H.L. Mencken
tagged the Puritans as people possessed of the "haunting fear that someone,
somewhere, may be happy." Ferguson represents a strain of intellectual
Toryism bedeviled by the haunting fear that someone, somewhere may be
getting social insurance. ... Their solution to the problem of large
deficits always seems to be to cut entitlements and never to raise taxes.
As for the bond vigilantes, have you noticed that they seem to surface
only when a Democrat is in the White House? Stanford's John Taylor didn't
write many articles about the inflationary aspects of rapidly expanding
deficits when the Bush administration and Congress were turning surpluses
into huge deficits, massively increasing government spending, and creating
a new Medicare prescription drug entitlement. He was working in the
Bush Treasury Department. ...
Federal Reserve Chairman Ben Bernanke, seemed to split the difference
yesterday. "However, in recent weeks, yields on longer-term Treasury
securities and fixed-rate mortgages have risen," he
told Congress. "These increases appear to reflect concerns about
large federal deficits but also other causes, including greater optimism
about the economic outlook, a reversal of flight-to-quality flows, and
technical factors related to the hedging of mortgage holdings."
Selected comments
Mattyoung says...
To the extent that we believe the yield curve is too steep, then
we believe that long term rates will drop or short term rates will rise.
Is the yield curve too steep?
Bruce Wilder says...
The bond market isn't telling us anything.
Niall Ferguson and John B Taylor, like Barro, Cochrane, Mulligan,
et alia, are telling us, loudly and clearly, that they are not to be
trusted -- that they are conservative partisans, eager to tout their
preferences, or the preferences of their plutocratic patrons -- and
are perfectly willing to sow doubt and confusion for their cause.
bakho says...
"bedeviled by the haunting fear that someone, somewhere may be getting
social insurance. ... Their solution to the problem of large deficits
always seems to be to cut entitlements and never to raise taxes."
Indeed.
Bruce Wilder says...
And, yes, Krugman is a partisan, too, with all that implies about
the blindspots inevitable to having a point-of-view.
Having a point-of-view entails blindspots and the distortion of perspective
-- the metaphor is informative that way -- but the symmetry ends there.
The difference, aside from the different point of view, is that Krugman
actually tries to be honest about both his preferences and the evidence.
Much of what comes from the Right is bluster and confusion -- intended
to obfuscate and mislead.
In the end, the politics is about the distribution of power and income.
Krugman is willing to say clearly that he wishes for greater egalitarianism.
When the Right is willing to clearly state its preference for richer
rich people, we might get more light than heat, from political debate.
OhNoNotAgain says...
"When the Right is willing to clearly state its preference for richer
rich people, we might get more light than heat, from political debate."
Exactly. I'd have half-an-ounce more respect for those on the right
if they wer explicit about their allegiances. Instead, they confuse
people into thinking that it's in their interest to cut the taxes of
millionaires and above, and fund a huge military-industrial complex,
and then blame the social safety net when the (expected) huge holes
start showing up in our budget.
mmckinl says...
Could be the over~supply coming to market to pay for the massive
deficits ...
The answer is of course " Greenbacks" ...
Money printed, not borrowed, underwritten by higher taxes on high
income, capital gains, dividends, estates, carbon and financial transactions
...
For the health of the country taxes on sugar, carbonation and trans
fats would be great too.
Lincoln used the "Greenback" to pay for the Civil War when confronting
usurious interest rates that would have bankrupted the country were
demanded by American and British Banks ...
roger says...
RE Bruce W.'s points on the real interest of right wing economists.
There's a wonderful example of that butter-won't-melt-in-my-mouth
hypocrisy on the Freakonomics blog today. Gary Becker was asked by Steve
Levitt what he thought the goal of economics is. According to Levitt,
this son of the freshwater school, who never saw a CEO salary that couldn
't be made higher, a union that should n't be broken, or a regulation
that didn't interfere with the "market", claims his fifty years of economics
work is “to understand and alleviate poverty.”
As Leavitt points out, Becker is a lifelong republican. And as he
doesn't point out, the American poor vote heavily democratic. From which
I conclude that either Becker is right, and the poor are deluded about
their self interest in voting Democratic, which means that the model
of rational self interest upon which Becker has based his career is
wrong - or Becker is wrong, and he is either individually deluded, or
hypocritical in the extreme.
But of course, the way around this is to always point to some other
poor group. He must be working for the poor in China, or in India, or
in Africa. Of course, if he was, he'd be questioning the business practices
of Monsanto in India, he'd be looking at the Jacqueries in the countryside
of China and the pollution in the cities and calling for a number of
programs by the state to buffer increasing costs to the Chinese workers
and poor. But this is to take bad faith naively, like the Right's love
affair with unions - as long as they were Solidarity, in Poland - in
the 1980s. The man works to make the predator
class richer. That is that. End of story.
Fred says...
Bonds aren't rising so much as returning to normality after a panic-driven
dip. Back in December, the TIPS to nominal spread was predicting zero
inflation or deflation for the next decade, which was absurd. Now the
spread is predicting something like 2% inflation, which is far more
reasonable.
The real news with regards to bonds is that Mankiw is now openly
urging 6% inflation, at least for a few years. I suspect all the hoopla
about inflation is to provide some cover for the Fed to permit such
inflation without spooking the long-term (30 year) market.
A steep yield curve combined with 6%
inflation is a great way to:
a) recapitalize the banks
b) screw the elderly (fixed pensions, savings accounts, annuities, etc)
c) screw the foreign bondholders
d) take some pressure off corporations facing huge pension fund shortfalls
e) push down the dollar to help American competitiveness
I know the view of some on this forum is that deflation is benefitting
the plutocracy. Maybe that used to be true, but I think they are now
running scared of what the alt-A resets might bring. Mild inflation
together with a steep yield curve is a lot more positive for most stocks
than deflation and widespread bankruptcies (the private student loan
lenders are the exception, since they need not fear bankruptcy). What
the banks lose on their holdings of long bonds, they'll recoup in spades
via the wide interest rate spread.
Also, I think the plutocrats are starting
to realize that screwing the workers is less important from here on
out than screwing the elderly. Who cares if you have
to pay workers 6% more to keep up with 6% inflation? The main thing
is to wipe out the pension liabilities as much as possible.
A steep yield curve means adjustable rates won't follow the fixed
rates up, so housing affordability remains the same.
The second phase of the housing bloodbath can thus be postponed until
the economy is stronger and the Fed finally releases the front end of
the curve.
James Benjamin says...
Forget about partisan paradigms. Sheesh! It's like arguing if the
deckhands deserve double or triple time on the last night of the Titanic.
Bond markets are totally saturated globally. Central banks are stuffed
full of them as some kind of reserve for their currency. How can one
country's certificate of consumption - which after all is what the US
has been using the bond market for for the past 20 odd years - is beyond
me.
With out some kind of limit to the amount of credit that can be issued
by a sovereign state, bond markets are simply in limbo waiting for oblivion.
Keynes was right after all, now it remains to be seen if Marx was
too.
anne says...
Good Grief, when short term Treasuries have near zero interest rates,
there is no way down and only up eventually. On June 3, 2009 almost
all classes of investment-grade bonds were at important highs in price
for the year. Bondholders 2 years and 10 years ago and 1 year ago have
done wildly well, while understanding the nature of duration makes losses
on bonds temporary and only short term.
Bond specialists are not the least worried about this market, having
long ago learned how to use relatively constant duration to protect
themselves against interest rate increase of inflation.
anne says...
The Vanguard government insured mortgage fund, GMNA, has a yield
of 4.13% and a duration of 1.8 years. An increase in short term interest
rates of 3 percentage point would lower the price of the portfolio by
5.4%, but the interest income for the fund would increase to 7.13%.
Over the course of the duration of 1.8 years, the investor would have
a return of about 4.13%.
SavvyGuy says...
The bond market is responding to "dilution" of existing holders,
caused by an over-issuance of Treasuries to fund all the deficits. This
is the real cause of the recent bond-market crash, plain and simple.
Jun 05, 2009 |
FT Alphaville
Freight volumes are still trending lower. The year-on-year deficit
has widened from minus 14 per cent at beginning of March to minus 18
per cent at the beginning of Apr, minus 21.6 per cent at the beginning
of May and and then minus 23.5 per cent at the start of June.Markets
and commentators alike are prone to lurching from one extreme to another,
notes Kemp, moving from over-optimism to doom-laden pessimism. Reality
is almost always more prosaic - economic history is about “muddling
through”.
Financial history is about the highs and lows, exuberance and panic.
Social and economic history is about the middle ground, continuity as
much as change. At the moment, markets are seized
by the excitement of “green shoots” of recovery. Not for the first
time, participants are in danger of losing perspective.
While the pace of decline has slowed in North America, Western Europe
and Japan after the free-fall contraction of Q4 and Q1, manufacturing
activity is activity is still shrinking. Even if the economy hits the
trough in the next 1-4 months, as expected, and a recovery begins, it
is likely to be fitful and uneven.
-
Carlomagno
Jun 5 15:36
@praxis: I haven't seen updated data for the last month, but
the US inventory to sales ratio has been quite elevated (about 1.4)
by historical standards up to very recently. So unless sales pickup
substantially, I would question the claim that "inventory has been
sold off". My underlying point is that this recession is not a normal
inventory correction cycle.
-
Stony
Jun 5 13:49
Obviously the cup is half full if you are a green shooter
and empty if you are a bear. But one cannot help but see that
whereas 07 and 08 data exhibit a generally flat trendline for
the months from Jan to May, that fro 2009 seems to be pointing
down. The green shooters should also note that a similar trend
is exhibited by air cargo data from UPS. Green shooters of course
can argue that air cargo is a much smaller part of the industrial
production. But I am sure green shooters would have a different
interpretation anyway.
-
Brick
Jun 5 11:13
The most significnt fall looks to be in metal ores which
reflects construction and car production coming to a halt.
Perhaps an opportunity to short US steel producers. What
is worrying is the continued fall in coal and coke movements
as I think this more closely reflects the US economy. What
would be interesting to see is the rail traffic into Canada
and Mexico as I suspect this is still falling off a cliff.
What I did expect to see was grain continuing to fall due
to credit problems, so there is some good news in there.
Empires are not easily change. Ideology poisons no only rich but commoners.
They usually decline to the point of no return under the load of debt and
military expenditures: "A diminished future
for America is an inevitability of having exercised imperial hegemony for
far too long."
naked capitalism
PIMCO’s founder Bill Gross is out with his latest monthly missive.
Five more years of those 10% of GDP deficits will quickly raise
America’s debt to GDP level to over 100%, a level that the rating
services – and more importantly the markets – recognize as a point
of no return. At 100% debt to GDP, the interest on the debt might
amount to 5% or 6% of annual output alone, and it quickly compounds
as the interest upon interest becomes as heavy as those “sixteen
tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal
miner. “You load sixteen tons and whattaya get? Another day older
and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to
stay even and that describes the potential fate of the United States
as the deficits string out into the Obama and other future Administrations
... ... ...
In the end, one can only conclude that the U.S. is indeed likely
to deficit spend for a considerable period and that this is going to
have negative effects on its credit rating and relative standing in
the global economy. A diminished future for America is an inevitability
of having lived beyond its means for far too long. Accepting this
fact is likely to provide a better outcome than resisting it as the
U.K. did
when its tenure as king of the hill came to an end.
Source
Staying Rich in the New Normal - Bill Gross, PIMCO
-
Selected Comments:
-
-
frances snoot said...
-
"You are aware that a question has arisen as to the right of the
warden to the income which has been allotted to the wardenship.
It has seemed to me that this 'right is not well made out', and
I hesitate to incur the risk of taking an income to which my legal
claim appear doubtful."-Septimus Harding, The Warden,1855 (Anthony
Trollop)
"It was only with the advent of capitalism and annual
productivity gains that entrepeneurs, investors, and risk-takers
with luck or pinpoint-timing could jump to the head of the pack
and accumulate what came to be recognized as a fortune. Still, the
negative connotions persist."-Bill Gross, 2009
Negative connotations usually cling to amoral actions.
-
Stevie b. said...
-
"A diminished future for America is
an inevitability of having lived beyond its means for far too long."
Exactly!! And not just for America, but the whole of the developed
world. And just as well, cos were it even remotely possible, the
world could not take another coordinated global boom at this juncture,
so the developed world needs a meaningful pause anyway.
-
-
And maybe "diminished" is a bit harsh. Most of us will still be
a helluva lot better off than most in the developing world, so it
wont be a diminished future - just a more realistic one. And after
all, happiness is really just having a good sense of perspective.
-
DownSouth said...
-
You gotta give Bill Gross credit for one thing. He is one slick-talking
dude, a master of sophistry. Surely no more self-serving argument
has been made since Nero insisted that the Christians enjoyed being
thrown to the lions because it permitted them to become martyrs.
The ancient regime was a system where kings and popes wielded both
political and economic power. Gross would have us believe that we
now live in a “free, capitalistic” society where those who wield
great economic power--people like him--have no more political power
than someone, say, like me. It is only by “luck or pinpoint-timing,”
he tells us, that someone like him can “jump to the head of the
pack and accumulate what came to be recognized as a fortune.”
Those armies of lobbyists, those untold
millions of dollars in campaign contributions, those exorbitant
salaries and bonuses lavished on ex-regulators, those public relations
campaigns designed to misinform and confuse the public, none of
those exist in Gross’s make-believe world. Nor do they have anything
to do with his or his breed’s success.
The ideology becomes manifest in his argument that "the U.S.
is declining relative to the rest of the world and this spells trouble
for the megarich as much as it does for the average American." This,
at its very best, is a half-truth. For
the plight of the megarich relative to average Americans will not
depend so much on macroeconomics. Instead, it will depend upon who
has political power. Under the right power distribution, the rich
prosper even in an economy that stinks, while everybody else sinks
into the abyss of povery. Take the case of Latin America for instance:
Taking Latin America as a whole, between 1947 and 1973--the
heyday of state developmentalism--per capita income rose 73 percent
in real wages. In contrast, between 1980 and 1998--the heyday of
free-market fundamentalism--median per capita income stagnated at
0 percent. By the end of the 1960s, 11 percent of Latin Americans
were destitute, defined as those who live on today's equivalent
of two dollars a day. By 1996, the total
number of destitute grew a to a full third of the populaton. That's
165 million people...
[Much of the wealth] passed into the hands of either multinational
corporations or Latin America's "superbillionaires,"
a new class that had taken advantage of the dismantling of the state
to grow spectacularly rich.
In Mexico, even as the average real minimum wage plummeted, the
number of billionaires, according to Forbes, increased from one
in 1987 to thirteen in 1994 and then nearly doubled the next year
to twenty-four.
~
--Greg Grandin, Empire's Workshop
-
-
Gross opines that the "obvious solution to both dollar weakness
and higher yields is to move quickly towards a more balanced budget
once a sustained recovery is assured." But why wait? Why not now?
There's a quite simple way to relieve much of the budgetary stress,
and that is to make the megarich pay
their fair share of the taxes. And the sooner we stop digging this
deficit hole, the quicker we get out of it.
-
Hugh said...
-
For me, the whole upper echelons of
the financial industry are quite simply financial terrorists.
Now no doubt many would find this extreme. To them, I would say
look at what Osama bin Laden and al Qaeda have managed to do in
the way of damage to our country and then look what the Bill Grosses
(fill in your own list of culprits here) have done. Yet look at
the difference in response between the two.
-
For the one, we start (or use as cover
to start) expensive, senseless wars. For the others, we give them
trillions, allow them to walk free, refuse to investigate them,
and let them peddle their self-serving bombast from the 16th hole
of whatever where they measure the state of the country only in
how many billionaires have or have not joined their feudal ranks.
-
asphaltjesus said...
-
But, as he suggests, trillion-dollar deficits ARE the new normal
indeed.
This is where the deficit hawks chime in and offer your observation
as living proof there is no consequences to running deficits. It's
very difficult to argue with them.
Switching gears, running deficits is clearly beneficial in every
political process. Debt accelerates consolidating power.
Whatever Bill observes as 'troubling' has been happening for
over a decade at the level of mere American mortal. He's going to
come to the rude awakening that he's running out of American customers
to sell his book to when it is much too late.
That's my crackpot rant of the day.
A more useful question remains, what
is a safe basket of currencies to convert my dollars?
-
Tortoise said...
-
Edward Harrison: "A diminished future for America is an inevitability
of having lived beyond its means for far too long."
Please rephrase
to read:
"A diminished future for America
is an inevitability of having exercised imperial hegemony for far
too long."
-
jerrydenim said...
-
Maybe Bill Gross sees something coming down the pipe more long term
("decades") that I can not
extrapolate based on observations of current trends, but where does
he get off saying :
"Of one thing you can be sure however: over the next several
decades, the ability to make a fortune by using other people’s money
will be a lot harder. Deleveraging, reregulation, increased taxation,
and compensation limits will allow only the most skillful – or the
shadiest – into the Balzac or Forbes 400."
Now maybe I can see a situation where the whole of America outside
of a tiny class of oligarchs is impoverished, employers stop offering
retirement benefits and everyone's 401k has been seized by the government
so the vast pools of capital the financial class has been feasting
on drys up. The financial class is really no different from any
other parasite that feeds on the blood of its host and if the dog
runs out of blood the ticks will die. Ok maybe, but given the current
economic environment it seems the only people who can get rich ARE
STILL the one's playing with other people's money but now with the
added benefit of a government guarantee. Socialized risk, privatized
gains. I definitely consider taxpayer money "other people's money"
and I would also consider free money from the Fed to fall in this
category as well.
Even more puzzling is Gross's prediction concerning government
regulation and taxation. What f*#king regulation? The only thing
I have witnessed over the last nine months is layers of consumer
protections and regulatory controls being stripped away as Washington
colludes with Wall Street criminals in an attempt to keep the dirty
casino open. (i.e. FASB rule changes, PPIP, bailout conditions,
no high profile prosecutions, etc.) As far as excessive taxation
keeping people off of the
Forbes 400? In what parallel dimension? I make about $75,000
a year and barely get to take home half of my pay check.
If I were a hedge fund manager or leveraged buyout shark I could
make billions of dollars a year by dismantling the real economy
for personal gain and keep 85% of my earnings/plunder thanks to
a tax loophole that Democrats haven't got the balls or the inclination
to close in the three and a half years since they took control of
Congress.
Sure I agree the middle class is going to get taxed out of existence
(If you think a single man living in a major US metropolitan area
making $150,000 a year is the 'super-rich' I've got some real estate
in Iraq I'd like to tell you about.) but Bill Gross thinks a 15%
tax bracket for people like Steve Swartzman threatens America's
presence on the Forbes 400?
Some months back with all of the AIG bonus fervor raging you
would have thought that a gesture like closing this loophole would
have been a nice concession to the angry mobs, but no. If not this
past winter when will the public outcry against the excesses of
the financial classes be met with a modest demonstration of fairness
and common decency? My answer: never,
or least not under our current system of governance.
-
-
Otherwise his observations appear to be right on, but then again
if you're reading financial blogs like this one, you already know
Mr. Gross has hardly done anything besides regurgitate the conventional
wisdom of the day.
-
-
The bit about the changing nature of wealth and the wealthy was
surprisingly candid for a person benefiting so handsomely from government
largess.
Columbia Business School and the University
of Pennsylvania's Wharton are basically satellites of Wall Street.
Half the students have memorized the partnership roster
at the Blackstone Group the way I once knew the lineup of 1970s-era
Cincinnati Reds. An MBA from Columbia or Harvard or Wharton is basically
a leveraged bet on a student's ability to make it in finance.
You pay a ton of money, most of it borrowed, so that you can land
a really high-paying job with one of the big investment banks or private-equity
firms that visit campus.
By their second year, most MBA students at Wharton are already scoping
out the Hamptons for the second homes they know they'll be able to buy
in a few years.
But with the gilded pipeline to Wall Street temporarily shut down,
the rising MBAs are suffering the kind of existential crisis more generally
associated with comparative literature majors. The New York Times last
month ran an article about students at Wharton who were suddenly at
sea. Some were considering working for nonprofits!
Jun 01, 2009 | guardian.co.uk
... ... ...
The media have obviously abandoned economic
reporting and instead have adopted the role of cheerleader, touting
whatever good news it can find and inventing good news when none can
be found. This leaves the responsibility of reporting
on the economy to others.
Any serious examination of the data shows
that recovery is nowhere in sight. The basic story of
the downturn is painfully simple. We have seen a collapse of a housing
bubble which has devastated the construction sector and also caused
consumption to plunge.
The construction sector is suffering from the enormous overbuilding
during the bubble years. Measured in months of sales, the inventories
of both new and existing homes are close to double their normal levels.
This inventory will ensure that construction remains badly depressed
at least through 2010, if not much longer.
The plunge in house prices has sent consumption plummeting.
The problem is not consumer attitudes, as
many commentators seem to believe. Rather, the reason that most homeowners
aren't buying a lot right now is the same reason that homeless people
don't buy a lot of things: they don't have the money.
The decline in house prices since the peak in 2006 has cost homeowners
close to $6tn in lost housing equity. In 2009 alone, falling house prices
have destroyed almost $2tn in equity. People were spending at an incredible
rate in 2004-2007 based on the wealth they had in their homes. This
wealth has now vanished.
Housing is weak and falling. Consumption is weak and falling. New
orders for capital goods in April, the main measure for investment demand,
is down 35.6% from its level a year ago. And, state and local governments
across the country,
led by California, are laying off workers and cutting back services.
If there is evidence of a recovery in this story, it is very hard
to find. The more obvious story is one of
a downward spiral, as more layoffs and further cuts in hours continue
to reduce workers' purchasing power. Furthermore, the weakness in the
labour market is putting downward pressure on wages, reducing workers'
purchasing power through a second channel.
- steve3201
01 Jun 09, 10:52pm As a resident of
the USA, it is far worse than what the article above suggests. The
mainstream USA news media are horrid at best, in collusion with
the Government and financial banksters... or knowingly twisting
data wrongfully at worst. The average American is not educated and,
as such, are like sheep to slaughter. If you have USD holdings now
is as good a time as any to bring your money back to your country
(or buy gold).
Geithner was literally laughed at by Chinese students today when
he claimed that Chinese investments within the USA are safe. Need
i say more?
- BrasilMercosul 02 Jun 09, 12:05am
Very interesting piece and comments, as usual the best on country
"x" is always another country "y" with presumably less vested interests.
The poor and the decadent in the USA have become invisible and that
seems to be official policy by those in power . Until those poor
become too many and then, what next ? "Change, they can believe
in!.." The paradox is that the economy was what turned the tide
for Obama to win that "election" - Obama had obviously been well
chosen and promoted by the world media of WMD in Iraq - and lose
the economy and his face. Nice republican gift .
Unless something happens, like a new 9/11 , false-flag or not
. I would not be surprised . The press lords and thier masters have
serious plans, that is obvious .
The stolen first Bush "election", 9/11, anthrax scare, Iraq,
afghanistan, WMD, axis of evil, nukes, MIC, Fed , Obama , "change"
.... oh dear ... Plus ça change... , really .
- Beckovsky 02 Jun 09, 12:20am
Good article. But what
is missing from Baker's article is exactly what Ellis says:
"Too much of society's wealth is
funnelled off into esoteric savings, foreign investments and luxurious
consumption.
Workers can no longer afford to buy their own products and services
the demand for which is therefore, rapidly declining with the result
that their products and services are no longer required and they
can, therefore, afford to buy nothing.
This downward cycle is not in the
slightest way interrupted by bank bailouts and only marginally slowed
by most 'stimulus' spending."
Stimulus and all the tax credits are just a bandaid. They will
not fix the economy. The stimulus will probably not do much of anything
(a bit more debt, a few jobs, some new bridges).
We have an economy that is out of balance. Starting with the
early 80's property class offensive (known in silly circles as Reagan-Thatcher
"revolution"), most of the society has been empoverished by lower
incomes and mad global competition of all against all. The real
consumption has been temporarily substituted by consumption on credit.
Mathematically that can only go so far. We seem to be at the end
of the credit safety valve.
What our societies need is higher incomes to support what people
actually need to consume. No more credit bandaids, no more "stimulus"
one-time injections, no more hoping that the credit fever will somehow
re-start. The only way incomes for consumers
can go up is if the balance of power shifts. That
means restrictions on trade with super-cheap mercantilist economies
(I am looking at you Red China), restrictions on unlimited immigration.
Until that happens we are just re-painting the chairs on the
Titanic. If we don't have the clarity of mind to take back the power,
we would be better off just getting drunk in the bar...
- endnote 2 Jun 09, 8:20am (about 19 hours ago)
Basically, since the 1970s we have had
managed stagnation. Policy makers have been either
unwilling or unable to allow a widespread devaluation of capital
sufficient enough to pave the way for a new boom. Because the overall
rate of growth in terms of per-capita GDP in the US has declined
in the 1973-2003 period (compared to 1950-1973) with only temporary
cyclical upswings the world's economy never recovered from the 1970s
in the way it did after the Great Depression.
As a result we have had a general inertia in the economy punctuated
by debt-fuelled asset bubbles. These have been brief and unsustainable
(e.g., dotcom).
It seems like policy makers are responding to this crisis with
more of the same, keeping the previous regime of accumulation intact.
But we are stuck between the Scylla
of widespread capital devaluation (massive unemployment, social
unrest, international tension) and the Charybdis of more debt (an
unsustainable boom leading to another crisis).
- endnote 02 Jun 09, 2:14pm (about 13 hours ago)
It is
wrong to look at the stock markets for clues to economy recovery
- not in the short-term at least. Stock
markets are examples of fictitious capital. They don't produce wealth
themselves, but represent a claim on income produced by something
else. However, they are bought and sold as if the
former were the case. In this way, gains can be made but only speculatively.
We are seeing a minor rally in stocks at the moment, but as long
as there is an underlying crisis in profits - ie so long as the
actual means of production of goods and services, income from which
stocks are a legal title, aren't making any money - as long as this
is not happening we are just looking at a new bubble.
Profitability will only return once there has been sufficient
devaluation of capital to lead to a new boom.
Policy makers have some leeway but ultimately the problem resides
in the instability of capital itself.
NB, the stock rally is only coming about because short -term profits
cannot be made through the usual channels, eg the commercial paper
money market mutual funds.
- Whitt 02 Jun 09, 5:45pm (about 10 hours ago)
For most of us here in the US, the signs of recovery ("green
shoots" seems to be the current buzz phrase of choice) are much
like the Emperor's new clothes -- everyone's talking about them
so they must be real, right? But when you actually look close, instead
of green shoots all I see are brown patches.
The stock market is booming, but it seems utterly divorced from
reality. Take yesterday for example. GM, the flagship of the US
auto industry and one of the largest employers in the country, files
for bankruptcy. At least 20K jobs will be lost directly from the
shutdown of various plants and up to another 100K jobs will be lost
indirectly at parts suppliers, dealerships and such around the country.
Tens of billions of dollars in bail-out money is now gone, not to
mention that shareholders and bondholders have been all but wiped
out. The stock market's response. It _soars_.
There will be a real recovery at some point, but what no one
in the government or business or in the workforce wants to face
is that recovery will not mean a return to the way things were a
few years ago. We were living in a spend-free
credit-fueled frenzy where the bills would never come due because
of ever rising real-estate and stock values. But those days are
gone and will not return. We've hit the wall, debt-wise,
and the rest of the world is no longer willing or able to continue
to give us the credit we previously enjoyed. The recovery, when
it comes, will mean living with less and we'd better start getting
used to that.
"When a fellow says it ain't about the money but the principle of
the thing, it's the money." —Kin Hubbard
Yesterday, I
lamented that “So far, the Obama administration approach
to bailouts has been to keep running Bush Economic term III.”
The reference was to the continuation of the Bush policies, and
many of the people involved in the prior ruinous approaches to the
many bailouts.
Now, we find out if Team Obama is “Change we can believe
in,” or business as usual. In mid-June, the administration
is set to release a series of regulatory overhauls — call it “Re-Regulation”
— of the entire financial system:
“All that — and more — is on the table as the Obama administration
prepares to overhaul the regulatory apparatus that failed to
prevent the gravest economic crisis since the Depression. Under
consideration is a new agency to regulate mortgages and credit
cards, as well as tighter federal oversight of hedge funds and
insurance.” (NYT)
As you might have surmised, I have a few questions:
• Will WH advisors Summers and Geithner convince President
Obama to cave in to the banking industry lobbying efforts?
• Are Derivatives going to be properly regulated, mandated
as exchange traded products, and required to have reserve requirements?
• Will Investment banks and Commercial (depository) banks
be separated?
• Will non-depository loan originators be brought under
full Federal Reserve banking supervision?
• Will iBank leverage be forced to return to historical norms?
• The excessive deposit concentration, with the majority
of US checking and savings accounts held by just a few mega-banks
be allowed to continue?
• Is “Too big to fail” going to remain the
operative policy? when will too big to succeed be recognized
as a major problem?
• Can the Fed continue its unprecedented power grab?
• The FDIC is the regulator with the best track record in
this crisis — will they expand their authority?
• Is the SEC ever going to receive adequate funding and staffing
to do their jobs? an we reverse a decade of regulatory neglect
at the agency?
Here’s where the rubber meets the road . . .
Those jerks undermined trust. that means there can be no quick and
painless recovery. Nobody now trust banksters... And this rally
will eventually die when those who are poring money into it run out
of options: chances are they will run out of options sooner then regular
investor would reinvent their 201K (former 401K). "when trust, authority,
or legitimacy are damaged they are not readily ‘repaired’ by setting
new rules."
If I wanted to take the economistic approach, I could say something
about moral hazard at this point. But I don’t want to take that
path. The idea that people can commit egregious misdeeds at the
expense of other people, yet cannot be criticized by our own government
– the body that is supposed to represent our interests – violates
a simple, common sense notion of justice. At least the one that
I hold.
Selected Comments
- Boris
It strikes me that a
utilitarian non-moralistic approach to economics works for a
long time, but not forever. This goes to the idea of a rationalist
approach to economics versus one that involves the emotional
reactions people inevitably bring to economic decision making.
In the end, as more and more people reach the same conclusion
James has reached here (I have spoken with many others in the
same position recently), the bottom-line variable that has clearly
been affected is trust.
Behind every transaction at all
levels of our economy is trust. With that severely damaged,
we are supposed to just move forward and forget how these people
screwed us over? I don’t think so.
The majority of the world’s leading investors do not believe
the recent strong performance of stocks and other risky assets is
sustainable, according to a report by Barclays Capital released
on Monday. The report shows that just 17.5 per cent of the 605 investors
interviewed for BarCap’s quarterly FX investor sentiment survey
- including central banks, asset managers, hedge funds and international
corporate customers - think risky assets have further to rise, the
FT
said.
This entry was posted on Monday,
at 4:52 and is filed under
Capital markets. Tagged with
Recession,
recovery.
It's fair to call Wall Street, as Robert Kuttner does, the Democratic
Party's most powerful interest group.
Along with former Federal Reserve Board chairman Alan Greenspan,
Rubin and Summers compose the high priesthood
of the bubble economy. Their policy of one-sided
financial deregulation is responsible for the current economic catastrophe.
--
Dean
Baker
Obama has essentially brought in the same crowd of people or
ideological fellow travelers who helped hatch the Clinton era manic
finance fest that the Bush administration made worse.
Selected Comments
Not necessarily...
Not giving money to Wall Street does not preclude many things.
It would not exclude doing due diligence on Citigroup's books.
Nor would it exclude Galbraith's demand that they examine the
loan tapes to get a better overview of the big four's solvency.
This type of examination to determine their true state
and determining a course of action in regard to them that is
not just throwing them cash would be something a diligent and
non ideological Treasury Secretary might want to undertake -
no?
Reestablishing Glass/Steagall
and the repeal of Rubin and Summers' masterwork Financial Services
Modernization Act is not precluded by not giving Wall Street
money. And the fact that such actions are not on the agenda
is troubling.
Plus there is the recognition that Wall Street is not real
small business and doesn't necessary help those closest to the
ground, so to speak.
It would not exclude the government forming partnerships
with smaller local and regional banks to extend credit to
local businesses, small and midsize, and to help ease local
personal credit. That would help the liquidity problem in America
faster then the current system.
Nor does it stop the development of new governmental grants
and loans for technological R&D for educational institutions
and small business. That is not giving money to Wall Street.
It does not mean doing nothing.
It means stop throwing money at the people who caused the
problem and now refuse to change and live by their own standards
(if you can't afford to lose don't invest your money in Wall
Street for instance). For me it
is like watering the lawn with the broken sprinkler that sputters
and doesn't move, so that most of the lawn withers and dies.
Which is something we have been doing for long before the sprinkler
started losing its parts. Instead you remove that sprinkler
and use your hand to make the water spray while moving your
arm back and forth. Then you keep doing that until you
can get the sprinkler cleaned, repaired and refurbished. IOW,
you make sure the lawn actually gets watered.
by
borregopass
on
Sun Mar 22, 2009 at 11:53:12 AM PDT
"Larry Summers appears to have a less than operational moral compass."
In an interview for this article, William Black, a former bank regulator
who exposed the $160 billion Savings & Loan scandal and its ties to
powerful U.S. Senators, remarked, “Summers wasn’t hired [by Revolution
Money] for his expertise because he doesn’t have relevant expertise
in this kind of credit card operation.”
Larry Summers appears to have a less than operational moral compass.
The former Treasury Secretary, now head of the National Economic
Council (and presumed Fed chairman if Obama decides against recommending
Bernanke for another term) was in the employ of hedge fund DE Shaw
to the tune of
$5 million for sixteen months while working with actively on
Democratic economic policy, with the clear expectation that he would
have a policy role. In other words, Summers is already way too cozy
with the financial services industry.
And now we have the latest, from Mark Amos (hat tip reader Marshall).
I’ve put up some excerpts, and strongly recommend you read the entire
piece.
Amos points out that a number of very big Wall Street firms made
an unusual investment in a start-up, one Revolution Money, a “PayPal
meets Mastercard” in the Steve Case “Revolution” sphere. Weirdly,
the company says Summers was on the board, and Summers certainly
was talking up to the media, but filings suggest otherwise. But
while the exact nature of Summers’ relationship is unclear, he was
certainly promoting the venture.
While Summers did terminate his relationship with the Revolution
Money before the big players invested, fundraising and getting to
closing documents is generally a lengthy process, so it is reasonable
to surmise that Summers’ salesmanship and relationship with the
company played a meaningful role in these banks’ decision to invest
in a company with lousy performance, dubious prospects, and no obvious
synergies. Amos notes the investees got off better in the stress
tests than their brethren did. That may be happenstance, but it
was reported that the stress tests were tougher on loans than on
trading portfolios, and the investors in Revolution Money all had
big capital markets operations.
The Amos piece is provocative, but it’s certain no explicit payoff
was made. But the flip side is it is highly likely the banks invested
to curry favor with Summers. Even if the only payoff was privileged
access to him, that alone would be troubling,
From
Amos:
Is Larry Summers taking kickbacks from the banks he’s bailing
out?
Last month, a little-known company where Summers served on
the board of directors received a $42 million investment from
a group of investors, including three banks that Summers, Obama’s
effective “economy czar,” has been doling out billions in bailout
money to: Goldman Sachs, Citigroup, and Morgan Stanley. The
banks invested into the small startup company, Revolution Money,
right at the time when Summers was administering the “stress
test” to these same banks.
A month after they invested in Summers’ former company, all
three banks came out of the stress test much better than anyone
expected — thanks to the fact that the banks themselves were
allowed to help decide how bad their problems were (Citigroup
“negotiated” down its financial hole from $35 billion to $5.5
billion.)
The fact that the banks invested in the company just a few
months after Summers resigned suggests the appearance of corruption,
because it suggests to other firms that if you hire Larry Summers
onto your board, large banks will want to invest as a favor
to a politically-connected director…
According to filings obtained for this story, Summers first
joined the board of directors of Revolution Money back in 2006
(when it was called “GratisCard…Revolution Money/GratisCard
was a startup headed by former AOL chief Steve Case. Revolution
Money billed itself as the Next Big Thing in online payment,…
In September 2007, Revolution Money announced that it had
raised $50 million from a group of investors including Citigroup,
Morgan Stanley and Deutsche Bank. Some found the investment
strange even then, because normally big banks don’t get involved
in seeding small startups — that’s the domain of venture capitalists,
not mega-banks. Especially not in September, 2007, when these
same megabanks were Chernobyling their way into full-fledged
balance-sheet meltdown.
What seems clear is that at least
part of Revolution Money’s success in raising funds is due to
their star-studded board of directors — which included not only
Larry Summers, but also the notorious Frank Raines, the former
Fannie Mae chief whom Time Magazine named to its “25 People
To Blame For The Financial Crisis” list. Raines is still a board
member.
Over the next year and a half, Revolution Money didn’t quite
live up to its promise of competing with PayPal or Visa/Mastercard.
At least some of this could be attributed to the difficulty
of starting up an online credit card company in the middle of
a triple-cluster credit crunch, banking crisis and recession.
But there is also evidence that the company wasn’t run well.
Another one of Steve Case’s “Revolution” brand startups, “Revolution
Health,” (which also features a star-studded board of directors
including Carly Fiorina, Colin Powell, and several future-Obama
Administration officials) essentially folded last autumn when
it was sold to Everyday Health last September and merged into
that company’s operations.
In spite of all of this, on April 6, 2009, Revolution Money
announced the happy news: it had just successfully raised $42
million dollars in the most difficult market since the 1930s.
The investors? Goldman Sachs, Citigroup and Morgan Stanley —
bankrupt institutions that Larry Summers was transferring billions
in bailout funds to.
At the very same time that these three megabanks were pouring
millions into Summers’ former company, Obama’s economic team,
starring Larry Summers, was subjecting these same banks to a
“stress test” to decide how deep in shit these same banks really
were. The banks wanted the government to fudge the results for
obvious reasons — who wants the world to know how deep of a
hole you’ve dug for yourself?
When the stress test results were finally released, the banks
all came out with glowing reports that beat expectations and
caused plenty of skepticism.
In an interview for this article,
William Black, a former bank regulator who exposed the $160
billion Savings & Loan scandal and its ties to powerful U.S.
Senators, remarked, “Summers wasn’t hired [by Revolution Money]
for his expertise because he doesn’t have relevant expertise
in this kind of credit card operation.”
“He’s not a techie. He doesn’t have business expertise,”
Black said. “So this is solely someone hired for the name and
contacts because he’s politically active and politically connected.
And that’s made all the more clear by the fact that Frank Raines
was put on the board at a time when he was pushed out in disgrace
from Fannie Mae. Why? Because of his political connections.”
And it worked, as the recent investment shows.
“That’s the pattern of this entity,” said Black, “Which hasn’t
been doing well financially and desperately needs to get money
from others, and has been able to get money from banks at a
time when [these same banks] largely stopped lending to productive
enterprises. But with this politically-connected entity [Revolution
Money], they’re happy to dump money.”
According to a company spokesperson, Summers resigned from
the board of directors at Revolution Money this January, just
three months before the banks invested. On one of Revolution
Money’s main websites, Revolution Money Exchange, you could
still see Summers’ name still listed as a director when this
story was filed…
Whatever the case, Summers was pushing Revolution Money as
recently as last September, in an interview with Portfolio magazine:
“I’ve enjoyed being involved with a number of smaller companies
such as the Revolution Money venture….”..
His involvement wasn’t just incidental—if you look at the
press releases, Larry Summers’ name is always touted as part
of its selling point — one press release in 2007 refers to Summers
as “Legendary.”
Moreover, Summers’ longtime chief of staff, Marne Levine,
who also served as Summers’ chief of staff when he was in Treasury
under Clinton and again at Harvard, joined Summers at Revolution
Money, serving as “Director of Product Management.”
Black pointed out another sleazy
aspect of Revolution Money’s pitch: it proudly boasted in late
2007 that it would make it easier than ever for people with
low credit ratings to find access to lines of credit. In other
words, Revolution Money billed itself as the ultimate ghetto
loan shark.
According to a 2007 press release, the same one boasting
of “Legendary” Larry Summers, “Unlike most bank credit card
issuers who are limited to a narrow scope of credit approval
guidelines specific to their bank, RevolutionCard seamlessly
utilizes multiple partners to achieve unparalleled consumer
approval rates.”
Nineteen months later, Larry Summers, now in control of the
economy, told Meet The Press, “We need to do things to stop
the marketing of credit in ways that addicts people to it and
so that our households are again savings, and families are again
preparing to send their kids to college, for their retirement
and so forth.”
So once again, Larry Summers creates a problem that the rich
profit from, then is put in charge of “fixing” it after vulnerable
Americans have been picked clean.
Whether or not the three bailed-out banks’ investment in
Revolution Money last month represents some kind of bribe or
kickback or even the appearance of corruption is almost secondary,
because the shameless cronyism is the problem, and this is the
reason why America is in the horrible mess today.
“Polite society was supposed to impose social pressures to
make sure this wasn’t tolerated,” Black said. “Like the old
phrase about hogs being slaughtered. But now the hogs get even
wealthier, even fatter.”
Similar conflicts arise when individual rewards depend on relative
performance. This payoff structure, common in financial markets, helps
explain why those markets sometimes fail catastrophically. Wealth managers'
salaries depend primarily on how well their investments perform in relative
terms. Funds offering higher returns immediately attract cash from rival
funds. If the invisible hand functioned as Alan Greenspan and other
modern disciples of Adam Smith imagined, there would be no problem.
Investors would be fully compensated for any additional risk they took
in search of higher returns. But human brains forged by natural selection
don't work as assumed in economics textbooks.
As our brains were evolving, immediate threats to survival loomed
everywhere. Natural selection thus favoured a nervous system keenly
sensitive to immediate relative payoffs, much less so to distant ones.
Anyone disinclined to seize immediate gains at the risk of having to
incur costs in the future would experience low relative rewards in the
short run. And when competition was intense and immediate, such individuals
often didn't survive to see the long run.
In market settings, a nervous system biased in favour of short-term
relative reward is a recipe for disaster. When the price of an asset
like housing is rising steadily, unregulated wealth managers can create
leveraged investments that generate enormous rates of return. Even in
the early years of this decade, many experienced analysts were warning
that several mortgage-backed securities were poised to tumble. But investors
faced a tough choice: they could earn high returns by continuing to
invest in them, or they could move their money elsewhere. Many rejected
the latter strategy because it would have required watching friends
and neighbours pass them by.
Wealth managers felt compelled to offer the risky investments, since
many customers would otherwise desert them. Managers also knew there
would be safety in numbers when things soured, since almost everyone
had been following the same strategy. The resulting collapse was inevitable.
Adam Smith's invisible hand is a truly extraordinary insight. But
when rewards depend on relative performance, it doesn't always deliver.
RW says...
Selectionism is an excellent metaphor for any theoretician interested
in how population traits of just about any kind -- from genes to
neurons to memes as it were -- become favored but it is unfit (and
I use the word advisedly) as a metaphor for human society, for imagining
our own coming into being and for imagining the ways we could work
together.
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Review : Insufficient Retirement Funds as
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-- the impact hits their whole household,
and to a lower degree their colleagues/friends/family.
People are saving because they need
liquid assets on hand to cover expected
employment losses now that the credit
of recent history is unavailable. It
is rational if you set up the problem
correctly, and jawboning will only increase
the spending of government credibility.
There is also the matter of extinguished
liabilities counting as income/savings
(which nets out with the corresponding
writeoff in the GDP calculation)
dead hobo Says: 
tawm Says: 
June 26th, 2009 at 11:23 am
“Why is this?”
Because we are going to see a double dip - the bond market is predicting this before equities, as usual.
June 27th, 2009 at 10:27 pm
“that inflation will remain subdued for some time due to ’substantial resource slack’? ”
There is substantial evidence that exists that contradicts this correlation.