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Financial Skeptic Bulletin, April 2010

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[Apr 28, 2010] DIRTY DOZEN: Things That Could Upset the Apple Cart By David Rosenberg

Sovereign debt problems in Greece and spillover to Portugal and possibly Spain might be defining for the new stage of the financial crisis.

April 28, 2010

Wildly bullish sentiment readings. The latest Investors Intelligence survey is now up to 53.3% for the bulls (versus 51.1% the prior reporting week) while the bear camp has dwindled further, to 17.4% (versus 18.9% a week ago). Bullish sentiment rose for the third consecutive week and bearish sentiment has not been this low since January 12. As Bob Farrell’s Rule number 9 stipulates, when all the forecasts and experts agree, something else is bound to happen.

Uncertainty over the coming U.S. midterm elections in November.

A more hawkish Fed (futures pricing in 40% odds of a rate hike by the November meeting).

Tougher profit comparisons in coming quarters.

The fading of the fiscal and monetary stimulus. The tax credits expire on Friday, the Fed has already stopped buying mortgage bonds and the pace of new trial modifications under the Treasury’s Home Affordable Modification Program has begun to slow.

Fresh uncertainty surrounding banking industry regulation. Goldman is likely the thin edge of the wedge. A proposal is gaining ground on Capitol Hill to force banks to spin off their derivatives-trading operations, which would represent a severe blow to one of Wall Street’s most profitable businesses.

Higher tax rates to pay for the massive $1.4 trillion federal budget deficit. The Bush cuts that lowered taxes on high-wage earners and capital gains and dividends are set to expire at the end of 2010. The top marginal tax rate will jump to 39.6% from 35.0%, and the current 15% rate on capital gains and dividends will go back to 20.0% and 39.6%, respectively,

Huge overhang of unsold houses. As of March, banks and investment trusts had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.

Sovereign debt problems in Greece and spillover to Portugal and possibly Spain.

Ongoing commercial real estate, which have resulted in 55 bank failures this year.

Underfunded state pension plans.

A property bubble in China — the government is now considering introducing new or higher taxes on real estate, possibly a property tax, in order to cool down a booming property market now widely being described as a bubble (prices up well over 10% from a year ago).

[Apr 28, 2010] The whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase

Washington’s Blog

Nouriel Roubini says “in a few days there might not be a eurozone for us to discuss.”

It is tempting to assume that this is just a European problem. But that might be a very erroneous assumption. See this, this and this.

And as Megan McCardle writes:

The most terrifying words I’ve seen written so far about the growing crisis in Greece were penned by Yves Smith yesterday: “So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EU’s erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on.”

The Great Depression was composed of two separate panics. As you can see from contemporary accounts–and I highly recommend that anyone who is interested in the Great Depression read the archives of that blog along with Benjamin Roth’s diary of the Great Depression–in 1930 people thought they’d seen the worst of things.

Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria. The Austrian government, mired in its own problems, couldn’t forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread. To Germany…. It’s also, ultimately, one of the reasons that we had our second banking crisis, which pushed America to the bottom of the Great Depression, and brought FDR to power here.

[Apr 27, 2010] Investment Banks and the Financial Crisis, Goldman Sachs Chairman and CEO - C-SPAN Video Library

Unless these hearings result in much improved financial reform legislation, they are a modern version of kabuki theatre. Still there was an interesting line of questioning of Blankfein by Levin... This session was under oath. If anything said today is contradicted by what the SEC finds in discovery, that isn’t too pretty .

YOU ARE BETTING, KEEPING A BETTING INTEREST AGAINST THE SECURITY, IT'S NOT JUST THEY'RE...

"They're buying something from you, and you are betting against it. And you want people to trust you? I wouldn't trust you," Mr Levin told Mr Blankfein.

The firm's "misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system," said Sen Levin.

"And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse," he added.

[Apr 27, 2010] Notes on Senate Hearings on Goldman Sachs (Updated as of End of Hearings))

Enron was the prototype for our economy over the last few years.

April 27, 2010 | naked capitalism
...overall the disclosure of their practices and the refusal of the Golman representatives to take any responsibility for their role in the crisis will be very damaging to the firm’s reputation. The Senators laid out evidence that Goldman cleared their own book of risk by dumping it on other investors, that they knew that market was declining but continued to sell deals that had little chance of succeeding, that the reason they were selling these deals was not to meet investor demand but to get them out of MBS and CDO positions, that there were many obvious conflicts of interests utter lack of transparency which accrued to Goldman’s benefit and for which they got paid very well even as their “clients” were suffering massive losses from the same deals.
An answer that the Goldman representatives did not provide, but which seems obvious from the details the Senators discussed, is that the reason Goldman continued to sell these MBS and CDO deals in 2007 even though they strongly suspected the housing market would “not meet a happy end” was so that Goldman could get out of its unsold inventory and positions. This strikes me as a significant inversion of the notion of investor demand. The demand for these deals was from Goldman, so they could clear out their positions and they were willing to tolerate losses on them to accomplish this. This may not have been legally forbidden activity, but it seems quite likely that it will be the subject of additional regulation in the future and that Goldman’s ability to do this next time around may be much more limited. It also seems like a better solution would have been for Goldman not to have been long so much of this inventory in the first place, the accumulation of which probably helped obscure what the real demand for the product was.

Finance:

Nobody at the hearing has brought up that the $1 Billion to pay off Paulson came from the German and British Governments due to bailing out Royal Bank of Scotland (ABN-Amro) and IKB.

Just like the AIG bailout, it was funneled from governments to private players.
This time instead of Goldman keeping the money, Goldman passed it along to Paulson ( who had an unbeknownst involvement in picking the portfolio).

Questions:
1. Did Goldman/Paulson have CDS on ABN-Amro or IKG to get its $1 billion either way, if the firms couldn’t pay out?

Supposedly this is how Blankfein argues that the AIG bailout wasn’t really necessary, because they had CDS on AIG if it defaulted.

2. The ABN-Amro and IKG bankers shafted British and German taxpayers and walked away with millions as well. What about clawbacks?

3. Who are Paulson’s investors? Institutions, Goldman alumni?

Hugh:

Various observations in no particular order:

Unless these hearings result in much improved financial reform legislation, they are kabuki.

This is not to say they weren’t entertaining and damaging to Goldman’s image. Goldman may not have a fiduciary responsibility to its clients but its clients likely do have such an obligation, and it is a little hard to see how they can discharge that duty if they continue to trade with Goldman. Clients who deal with Goldman could open themselves up to suits for fiduciary failure.

Goldman is following the strategy of never admitting the con which I predicted.

Congressional hearings come in different varieties but have common weaknesses. Contrast the appearance of Bill Black, for example, with the Goldman boys. There is a huge and immediately obvious difference between witnesses who want to convey information and those who do not. It is like night and day. With witnesses who obfuscate and stonewall, you can still acquire information but negatively. It is in what they don’t say, the subjects that they will talk about versus those they refuse to, or choose to have poor memories or quibble about. Running out the clock, not answering the question, fumbling with notes and exhibits are all classic dodges. We saw a lot of that today.

The other aspect is the generally poor quality of the questioning. Yes, there is a lot of grandstanding and setting up the soundbite for the constituents back home. Even so the questioning was better than average today. Still there is the lack of follow up to really drive a point home. There was also a marked difference in response to untethered questions about Goldman’s operations as compared to Levin’s going through the exhibits with the witnesses.

The reason for that is that real evidence at hand increases exponentially the risk of perjury for the obfuscating witness.

rkf :

I agree with Yves on this sentence. It captures my feelings exactly: “These hearings aren’t a perfect way to deal with the problems in the market, and are laden with politics and grandstanding. But it is relatively encouraging to see the Senate finally address the types of questions that we’ve been asking on this blog…”

I was able to watch most of the hearings or listen in my car on C-SPAN radio. I think Lloyd did better than the rest of his minions, Sparks second best (too bad they let him go). I also felt the senators got many things RIGHT, many more than I would have thought going into this.

I heard lots of my co-workers whining that the Senators don’t understand it well enough. I have to say I’m sick of hearing this. Not many of the people INVOLVED in the business understand it all completely either! Considering Levin is 77 years old and not a life-long Wall Street banker (like Lloyd who’s been with GS for 20 years), I thought he did pretty well.

Although I WISH ELIOT SPITZER or BILL BLACK had been up there asking the questions. It would have been EVEN BETTER! Overall, the hearings allow the public to see the septic tank that is Structured Products and Financial Engineering on Wall Street. Will anything change? God help us if it stays the same!

onwee:

Is packaging a CDO market-making, underwriting, or something in between? That’s a legitimate question missed yesterday and in comments here. I think it’s in between and regulators now get to decide what duty a packager has to clients. Did GS have a duty to have a better model than S&P? What would the market have done if the banks said the top of a CDO should be rated BBB but S&P said AAA?

Goldman packaging up BS items to get them off its book? How is that different from selling items off its books? I’d say no duty to disclose. Again, that’s a question for regulation, but Goldman’s right that the market convention was for the “buyer” of risk to examine the portfolio and read the contract and make a determination that way. I never witnessed nor heard of a buyer declaring that they bought because they thought the packager was endorsing the collateral.

Blankfein made one good point: just because CDS can produce some good (hedging; reducing risk) does not mean it’s bads might not outweigh its goods. Regulators should pay attention to that notion. To the extent CDS is effectively leverage, and excess leverage raises systemic risk, perhaps the uses of and capital/positions behind CDS should be severely constrained.

Finally, perhaps ironically, there was a lot of attention paid to the potential that had the buyers of Abacus only known that Goldman/Paulson was short the collateral/equivalent then they would possibly not have bought (the disclosure issue). It’s worth noting that had the buyers bought the deal specifically because they had known Paulson/Goldman was long (assuming they had been) then the buyers would NOT have been doing appropriate due diligence and their management/clients should have been displeased. It was the buyer’s responsibility to evaluate the collateral independently of implied or imagined endorsements from others. That is also why GS expressed surprise that the rating agencies would have cared – what part of an agency rating is based on some investor liking a deal? By the same token, what part of due diligence depends on knowing somebody does not like a deal/collateral? There are always people who don’t like the value of any investment at any time. The senators seemed to think it’s a broker’s responsibility to like what they sell. Institutions should not care what brokers like.

[Apr 27, 2010] Albert Edwards Global economy to roll over in six to nine months’ time; bearish for shares - Credit Writedowns

As for investors, Edwards says:

[I]f the trend is your friend until it meets a bend, that trend is now the investor’s enemy

[Apr 26, 2010] Goldman wages PR fight to clear its name

Goldman's PR campaign, which runs counter to its long history of secrecy, is a bold yet risky move. Some analysts say a poor performance on Capitol Hill could worsen the bank's image problems and make it harder for it to attract and retain lucrative clients. If the strategy fails, analysts say, it could cost Blankfein and other Goldman executives their jobs.

[Apr 26, 2010] Is Capitalism a Rationalization for Rape, Robbery and Pillage

But what are alternatives ??? What they call "communism" as existed in the USSR (and still exits in parts of China) was in fact neo-feudalism (neo-theocratic regime to be exact). It did not provide people the same level of wealth as capitalism in Western countries. That's why it did not survive in xUSSR space. And comparing the USSR with the USA it is not difficult to come to conclusion that it is the USA that provide better environment for people of lower income brackets (ending probably at Wal Mart cashier level of salaries, below which probably there is not much difference).

zero hedge

Mercury:

The average American has the caloric intake of a Roman emperor, can expect to live into his/her late 70's on average, is generally free of physical danger, is free to pick up and move somewhere else and can, with a modicum of effort, work the system for all manner of goodies and handouts. By landing a government job he/she can essentially turn this into a profession.

Who's raping, robbing and pillaging whom here? and to what chapter of the history of the human condition is the recent plight of the common man in capitalist America being negatively compared to exactly?

Obama isn't going to ruin the country with too much love for capitalism (a term that I think means whatever Marx or anyone else wants it to mean) and certainly not with too much love for free enterprise.

chet:

Human society is hierarchical like most ape societies. Attempts to "level", such as communism, are incredibly un-natural for human beings, which is why they don't work, and just degrade into authoritarianism.

Capitalism combined with democracy is supposed to allow social stratification within bounds where everyone has rights and a reasonable "fair shake" at success. Capitalism and democracy are in uneasy balance with each other. They are yin and yang.

The problem is that over time the "fair shake" part starts to chafe on those who have the power (wealth). They like the parts of the system that support hierarchy and priviledge, but begin to loathe the parts which are meant to level the playing field, and they start to act against it.

Only so long as democratic institutions are strong enough to withstand the relentless influence of the powerful (i.e. wealthy) in support of equal rights and a level playing field, will the system persist in an uneasy balance. When there is an imbalance, as there is now, capitalism and democracy are in a tug of war and the outcome is uncertain. When it's over, the new center-of-balance is likely to have been jerked in one direction or the other.

A common misunderstanding is that democracy is strong, when in fact it is much more fragile than capitalism. This misunderstanding was reflected in the goofy expectation that democracy would "break out" in Iraq once we tackled their dictator. Democracy doesn't just "break out" anywhere. Dictatorship and rule by the strong is the natural order - ask a troop of baboons.

Capitalism, on the other hand, appears in one form or another everywhere throughout human history. On the streets of communist Cuba right now, there are citizens trading simple goods for money or a service. That is capitalism. It isn't fragile - it grows like English Ivy.

Given the relative imbalance in hardiness, our democracy and its institutions must first and foremost be defended at all costs, even if this means compromising capitalism in small ways.

[Apr 25, 2010] U.S. Trade- Wham-O Moves back to America

Calculated Risk

dryfly:

Josh wrote:

From the sound of this article, the IMF is calling for quite a bit of rebalancing between the developed world and the developing world. One of the natural ramifications if this call were adopted would seem to be manufacturers moving back to the U.S.

Been saying that oh for only about 20 years.

ResistanceIsFeudal:

Josh wrote:
the IMF is calling for quite a bit of rebalancing between the developed world and the developing world.

I hate to go all anti-, but the only way we're ever going to be able to exert true regulatory authority on MNC's is through a cooperative body of international law and finance.

Josh

dryfly wrote:

Been saying that oh for only about 20 years.

This stuff would seem obvious to most of the poster here I suspect. The article describes the IMF calling for older retirement ages, the rebalancing of currencies and manufacturing/consumption allocations, and a few other things. I read it as the IMF calling most of the developed world a house of identical Ponzi cards, but the article didn't actually use any of this terminology.

dryfly:

Josh wrote:

This stuff would seem obvious to most of the poster here I suspect. The article describes the IMF calling for older retirement ages, the rebalancing of currencies and manufacturing/consumption allocations, and a few other things. I read it as the IMF calling most of the developed world a house of identical Ponzi cards, but the article didn't actually use any of this terminology.

It isn't the end of the world for us - just the end of everyone in the US having their own mini-mcmansion.

RE:

Josh wrote:

For nations living the good life, the party's over, IMF says

Triffin dilemma - Wikipedia, the free encyclopedia

The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between domestic and international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency, to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: to maintain all desired goals, dollars must both overall flow out of the United States, but dollars must at the same time flow in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

dryfly: RE wrote:

Triffin dilemma - Wikipedia, the free encyclopedia

The USD as reserve currency is ending I'd guess - I can't imagine it continuing much longer.

I have no idea what comes next.

RE: dryfly:

The USD as reserve currency is ending I'd guess - I can't imagine it continuing much longer.

I have no idea what comes next.

As you know that's a big thing to chew on for the U.S. Huge political as well as economic implications. In the eyes of the public it would be the loss of American exceptionalism.

TJ and The Bear:

RE wrote:

In the eyes of the public it would be the loss of American exceptionalism.

IOW, reality sets in.

josap:

TJ and The Bear wrote:

IOW, reality sets in.

A good dose of reality is what people need to find the way out of denial. The very basiscs of our financial system have to change. It won't happen until people get wacked up side the head.

RE:

TJ and The Bear wrote:

IOW, reality sets in.

I agree but I believe it would be accompanied by pessimism. I remember how a very unpopular president tried to broach a difficult subject in a speech in 1979. It was soon called the malaise speech.

Carter's Brave Vision on Energy

"Ten days ago I had planned to speak to you again about a very important subject -- energy," Carter began. "But as I was preparing to speak, I began to ask myself the same question that I now know has been troubling many of you. Why have we not been able to get together as a nation to resolve our serious energy problem?"

He told us he had set his speech aside and talked to hundreds of individuals. His conclusion? Americans had lost confidence in our capacity to act decisively and collectively to address and solve our problems. Republicans quickly dubbed the address the "malaise speech."

I'm not certain that the public is ready for reality just as it wasn't ready for reality then. Carter was years ahead of his time and his realism (not just on this subject) made him one of the "worst" presidents in history.

It will take a brave or very desperate administration to let the dollar lose its reserve currency status.

sm_landlord:

Tags RE wrote:

As you know that's a big thing to chew on for the U.S. Huge political as well as economic implications. In the eyes of the public it would be the loss of American exceptionalism.

I'm not sure how the public as a whole would react. Certainly elements of the chattering classes would scream loudly.

But speaking for myself, it's not as if I expect to be able spend dollars at a store in Europe. I either convert some cash or use a credit card that does the conversion for me.

But it's hard to gauge public opinion from my perspective of having seen the dollar steadily debased for my entire adult life. Even here on CR's board, I frequently see people make comparisons of now versus then without accounting for inflation. So I would have to guess that the public, on average, is pretty much oblivious.

Mr Slippery:

RE wrote:

As you know that's a big thing to chew on for the U.S. Huge political as well as economic implications. In the eyes of the public it would be the loss of American exceptionalism.

IMO, the main exceptionalism of America is that we take in a lot of smart, hard working immigrants that come here and make it a better place. The dollar can't go on forever as the reserve currency. My best guess is a new SDR. Yogi's open source digital currency is too fair to little people to have a chance.

Rob Dawg:

RE wrote:

It will take a brave or very desperate administration to let the dollar lose its reserve currency status.

No administration will allow loss of reserve currency status to happen on their watch under any circumstance. Their own personal egos will not allow it. Empire does not go quietly into that good night.

Mr Slippery (profile) wrote (in reply to...) on Sat, 4/24/2010 - 8:13 pm Tags Rob Dawg wrote:

No administration will allow loss of reserve currency status to happen on their watch under any circumstance. Their own personal egos will not allow it. Empire does not go quietly into that good night.

I agree, but it will happen anyway.

[Apr 25, 2010] “A Monstrous System of Guaranteeing Deposits” The Big Picture

cognos Says:
April 24th, 2010 at 7:13 pm
God MEH, Patrick… do you guys understand nothing?

The “costs” of what you call “moral hazard” due to the FDIC system of guarantees is probably 1% of the information costs and frictional costs of trying to have EACH f-ing depositor figure out which bank is strong and hold 5 different accounts.

Follow dumb austrian and classical economists much? (So much money has been lost in that intellectual dump.)

The main quote in this post was cited by Obama in his speech on financial regulation Friday. To good and humorous effect. While I am not much for more regulation and wish the congress and regulators would reflect more on what they did wrong… the essential point is correct… stability will only mean MORE money for financial services companies. Its wierd that JPM, GS, C etc dont get this and arent out front on getting better regs, getting standardized derivatives into cleared exchanges, etc

crjdriver Says:
April 24th, 2010 at 10:22 pm
@ Cognos
While I find that informational costs, and a more stable financial system in the quasi medium term ( lack of runs on banks and lower total financing costs because of FDIC insuarance etc.. ) have had a unmistakeable positive effect the long term effects (Im thinking 100 years) is still very muddied.

With now effective 0% Reserves in the system, the system is only as good as the Admistrators that run the asylum and a relatively consitant exploding debt: income ratio since FDIC insuarance conception is anything but a ringing endorsement.

In the long run “Banksters” and the Bankster like corporations ( Investment Banks) are feeding at the trough of ZIRP and the consequences of every Government Insurance or Bailout, be it FDIC S&L /LTCM/ Asian Financial Crisis / Mexican Peso Crisis/Dot Com and now Housing has made every savings and checking account a defacto backing for mutliples layers of risk over the span of many decades.

All of this has conditioned the Banksters that Goverment /FED will come riding to the rescue. Look at the large number of banks that were ofering above market rates for CD’s last year just as this blew up trying to attact capital before the FDIC shut them down or they were forced to merge (Washington Mutual)

In the end Im not sure that this quote is all that far of base:
“They have invariably ended in failure and loss, if not in outright scandal and default. They have weakened the moral fibre of bankers and served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.”

alfred e Says:
April 24th, 2010 at 11:18 pm
@cognos: Was that really you? Or did someone steal your identity.

I’m not yet ready to say we agree on something.

All anyone has to understand to make it work is truth and honesty and integrity.

I am reminded of a questionnaire/ or coin either the Lions or Kiwanis gave my son.

Truth. Reagan said the truth is hard to come by. True.

Being honest? Equally difficult. Lying. Yeah. I think the Hebrew term is ganalf.

But the bottom line that sorts out statements is : “Who benefits?”

alfred e Says:
April 24th, 2010 at 11:32 pm
@BR: Almost forgot . Great post.

Reminds me of a statement I used to love to make. Humans, on the intellectual scale are someplace between bacteria and dogs. Dogs have no sense of time, and bacteria will multiply until they destroy their host.

And that worked for quite some until a fellow worker said he knew of some pretty smart bacteria.

[Apr 24, 2010] Econbrowser The Administration's February Forecast Compared to Current Expectations

Nemesis

Gentlemen (and gentle ladies...?), adjust the real GDP for gov't spending and personal transfers and what kind of "recovery" or "expansion" is there? The answer is that the US private economy is still contracting.

Bank charge-offs and delinquencies total 10-11% of loans, which not coincidentally is equivalent to 8-9% of private GDP or the incremental amount the federal gov't is borrowing and spending. Banks' net interest margin is roughly the rate of charge-offs (well below the margin-charge-off differential during the early '90s Kuznets Cycle bust), which combined with delinquencies means banks aren't going to be expanding lending for the foreseeable future.

And then what happens if or when the gov't is no longer borrowing and spending at 8-9% of private GDP and the Fed is no longer printing at 12-13% of private GDP? Again, the answer is that they cannot stop borrowing and spending, and the Fed is not going to execute a QE "exit strategy". If the gov't stopped borrowing and spending at 8-9% of private GDP, the natural tendency of the private economy would be to decelerate further, i.e., "multiple dips" for years to come.

Further, adjust GDP for growth of household debt service and gov't spending, and the private sector of the US economy has not grown in 30 years!!!

Then adjust the private GDP further for the growth of net fossil fuel import costs, and the US private sector has not grown since the early to mid-1970s!!!

What we have referred to as "growth" for 30-40 years is growth of private sector debt and gov't spending, as well as borrowing increasingly from fossil fuel energy stores from cheap labor product abroad in exchange for purchasing imported goods with credit.

But soaring private and public debt to incomes and private GDP combine for a MASSIVE claim on future after-tax incomes, consumer spending, business revenues and profits, business investment, and employment.

And the drawdown of energy stores from abroad with China's oil consumption on track to match US oil imports by the late '10s to early '20s virtually ensures structural constraints to global economic growth from rising energy import costs (falling net energy), increasing the risk of trade and diplomatic tensions and escalating war. And war in the current context of Peak Oil and fiscal constraints raises the risk of sovereign defaults and a complete breakdown of global trade.

Finally, if one has the personal or intellectual courage, I challenge anyone reading this to compare the current US situation to that of Japan after '97-'98, the point at which the peak Japanese Boomer demographic drag effects and price-deflationary effects took hold. Japanese bank loans fell 40% over 6-7 years; stock prices fell peak to trough 65-70%; the implicit deflator contracted; nominal GDP went nowhere; real GDP post-'90 trend decelerated from 2.1% in '96 and 1.6% in '00 to less than 1% to date; and despite the BOJ expanding the monetary base at a double-digit rate, M1 following the monetary base, and free reserves exploding, M2 barely grew at an average 2%, with the net incremental amount attributable mostly to the Japanese gov't running deficts/GDP of 5-6% and from ongoing liquidation of financial assets to cash.

The overwhelming consensus among the majority Keynesian economists is that we're not Japan, and "it can't happen here"; however, "it" is happening, and remarkably closely to the progression in Japan, with the US now aligned in time with Japan in '99-'00, and during Long-Wave debt-deflationary eras of the 1830s, 1890s, and late 1930s.

But the global economy during the previous debt-deflationary regimes of the various stages of capitalism's history did not face the global structural constraints posed by population overshoot and Peak Oil (peak drawdown or extraction of petroleum). The economics textbooks do not contain accurate description of today's systemic effects and related causes; nor do any of the conventional economic prescriptions offer any viable solutions.

And now with China maniacally on a suicidal course of unprecedented growth of consumption and resource drawdown, we face an increasing scale of intractable structural constraints to economic growth the world over.

Yet the vast majority of economists are virtually uninformed, if not woefully misinformed, about economy history; the inherent, self-contradictory flaws of capitalism; the reliance of socialism on capitalism's perpetual growth; the flawed colonial/imperial nature of Anglo-American "globalization" and the prohibitive costs of war to sustain it; the ecological limitations on perpetual growth; and the diminishing returns to increasing complexity and the growing risk of disorganization, disintegration, collapse, and unpredictable self-organization.

Yet, economists continue to espouse more gov't borrowing and spending (and larger claims on future private growth), more complex tax schemes, more redistribution and loopholes, more debt, more deindustrialization and financialization of the economy, etc.

Economics has become hardly more than a means for intellectual rationalization of militarist-imperialist oil empire and running cover for the rapacious rentier parasites on Wall St.

The best investments every economist could make today for the rest of us would be (1) a large mirror and (2) a new occupation.

And for any economics undergraduate or graduate students reading this, especially those toiling in post-doc purgatory, do us all a favor and quit. Do something worthwhile with your intellect and life, PLEASE!!!

Mars?! How appropriate for Anglo-American oil empire, increasingly overstretched and spending 10-11% of private GDP to fight endless wars for oil (and opium) and maintain 1,000 military facilities around the world, to be possessed of such self-delusion and hubris to set sights on a planet named for the god of war!!! That is just too much, gents!
You have got to be bloody kidding, yes?!

We are unquestionably on the road to eventual fiscal insolvency from Boomer elder transfer programs and imperial war spending, and we implement an additional Medicare drug transfer program under "Dumbya", and now under "Yomamma" pass another "sick care" entitlement and "cap-and-tax" anchor to hang securely from our necks.

If I were a bit more cynical I might conclude that the politicos and rentier Power Elite want the current gov't structure insolvent, and the sooner the better, so they can rationalize draconian cuts to social transfer programs, impose sick care rationing, etc., and demand a sovereign debt-for-equity swap resulting in the top 0.1-1% owning all current public and private assets.

Then the logical socio-political evolutionary extension of rentier capitalism could occur, ushering in the glorious private "state-less society". The rentier oligarchs don't need egalitarian, representative political institutions, "the economy", and growth; rather, what they really did is the uncontested control of all valuable resources and the means to keep it. The remaining 80-90%+ of us proles are just a bunch of envious, worthless bread gobblers whining about being losers and wanting something for nothing.

Nah, ya think?

And talk about "imbalances"! Is anyone aware that we now spend a record 4-5% of private GDP on net fossil fuel imports. And consider that net fossil fuel imports, total gov't spending, and household financial debt obligations per disposable income amount to an equivalent of 75% of private GDP!!!

Moreover, combined household debt service, total gov't, fossil fuel imports, and sick care spending total and equivalent of more than two-thirds of GDP and 105% of private GDP!!!

Growth? Only if gov't, debt, and sick care grow in aggregate faster than rising fossil fuel imports and deflating assets/debts.

And we now face Peak Oil or global peak extraction or drawdown of petroleum reserves with US supranational firms running as fast as they can to invest in China-Asia and encourage consumer marke that the Asians can "be like us": dependent upon shrinking oil supplies, hopelessly in debt, and unable to sustain living standards.

How in the name of bloody Hades can anyone one with a brain stem think that the US economy (or eventually the global economy) can grow, let alone fund endless wars for empire in perpetuity and go to a bleeping inhospitable planet 33 million miles away?!

Quem deus vult perdere, dementat prius.

Nemesis
http://imperialeconomics.blogspot.com/

[Apr 24, 2010] Net Speculative E-Mini Contracts Hit Greatest Short Exposure Since Lehman Failure

dparrot:

Who knows? The only thing this rally has proven is that crazy markets go absolutely bonkers before they regain some sanity. What else would explain markets approaching their pre-crash levels with absolutely nothing changing in the global economy except for sovereign debt levels moving from cumbersome to apocalyptic, and unemployment going from bad to worse.

[Apr 24, 2010] Goldman Email Describes ‘Frankenstein’ Derivatives; Tourre Brags about Selling Abacus to "widows and orphans"; SEC Confident;German Bank Drops Goldman

CCG:

Am I a heartless bastard for thinking that anyone who does business with these people is simply asking to be screwed, given that their duplicity and fraud have been exposed to the world since Michael Lewis wrote "Liar's Poker" and certainly since Frank Partnoy wrote "Fiasco"? As Lee Adler says, fool me once, shame on you, fool me 17 times and I must be a dumbass.

The people I'm sorry for are those of us who have no choice but to be screwed since these criminals run the government.

primefool :

Oh that is simple. Corporate profits are doing very well inspite of very high unemployment. I guess this says that all those unemployed folk are not too important to corporations. However the Fed will use the uunemployment as an excuse to keep rates at zero for a long long time. Great profits+Zero cost of money = explosive stock prices. Not too hard .

BS Inc.:

The math behind this sorta hit me a couple months ago, looking at unemployment by education level, which is a decent proxy for income. Higher education levels had (obviously) lower unemployment levels, so, yeah, to the extent that those who have lost their jobs weren't big consumers anyway, it's a non-issue in the bigger picture.

Still, that doesn't change the fact that valuations on actual earnings are quite high.

Fazzie:

This whole rally IMO, was just a technical bounce off the March bottom. Now the reflex rally is going to hit a huge wall of resistance and lacks catalysts to break out.

The whole thing was more about mass psychology and blind momentum, fostered to unprecedented high levels with this new age of blatant propaganda mongering by the govt and MSM.

The wall at 1222 is there and all the Summers, LIESmans, and corrupt FED members and their political lackeys in congress cant change that.

They have already pulled all the rabbitts out of their hats (and asses) they can for now just to jack it up to this level.

I look far an all out media blitz, fudged data, and outright manipulation of the capital markets in the very short term to try to breach that wall, but imo, Mr Market will call bullshit and shanannigans on the whole mess.

The parable of humpty dumpty comes to mind.

Stay tuned propaganda fans for "QE 2.0" "New and improved" version, and eventually qe3.0 etc until finally the real doom is here and things must be dealt with or else.

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geminiRX:

I hope what your saying is true, however I would not underestimate the power of HFT computer algos. The brilliance of these supercomputers could theoretically keep this going a very long time...

primefool:

It is indeed surprising that not one question has been raised about the possibility that the Lehman non-bailout ( one day after they were allowed to go bankrupt - the Fed opened its window to wall street) - was purposely done. That the collapse was possibly orchestrated. The motives are now clear. The story makes complete sense. Watch the Fuld testimonies - he gets a strange expression on his face when asked why Lehman collapsed. Like he knows but cant really say.

chancee:

To me all the questions being raised have to do with the stock market rally in 2004-2006. After all the blatant after-hours futures manipulation, CNBC propaganda, lies from buy side AND sell side analysts, manipulating of currency and commodities markets by the big banks... all in the name of pushing the stock market higher. It makes you wonder how much of this was going on back in 2004/2005 when people weren't really using the internet to compare notes. There was no zero hedge back then. Makes you wonder exactly how long this kind of manipulation has been a part of the goverment's playbook.

whatsinaname :

The manipulation was always there, but it picked up steam after 1982. Thats when the 401k / IRA programs started and middle class started pouring savings into equities. Look at historical graphs. Wall Street really got a sniff of it in 1993 with the Glass Steagall repeal.

Since then its been a never ending rollercoaster. Its now reached a point where the stock market is the ONLY barometer of the economy for a lot of commoners (even if things are horrible horrible in reality) !! Amazing aint it ?

DuganS1 :

The retail ETFs are right at 2007 highs, despite no personal income growth ex-govt transfer payments, no credit growth, continued declines in private sector employment, accelerating mortgage delinquency rates, no let up in consumer debt default rates, flat home prices, few mortgage refinancings, and declining savings rates. This rally in retail has only occurred because of 10s of 1000s of closed stores across the US and the federal govt issuing debt, the Federal reserve directly or indirectly buying the debt, the federal govt handing out the cash to consumers directly and indirectly to spend, Americans spending all that money, and US retailers hoarding the cash. But now the Fed is no longer printing to buy debt and the federal govt won't be handing out cash much longer. What happens then?

Fazzie:

What happens is things are supposed to be magically better now.

The govt is great for heavy handed reactions but never has an exit strategy just in case.

The muslim world is supposed to happy now having been "liberated", and no troops necessary any more.

The green shoots are supposed to be growing into sturdy saplings now and the economy should grow on its own.

There are no more druggies, thanks to the war on drugs which supposedly has worked as advertised.

UPDATE: Ummm..Drugs aint so bad now,since states tax coffers are emptying out fast. CNBC is pushing weed now in addition to being the propaganda arm of the fed!

[Apr 24, 2010] Jeremy Grantham- This Is Nothing But The Greenspan Legacy's Latest Bubble, America Is Now "Thorougly Expensive"

zero hedge

Yesterday we first posted Jeremy Grantham's latest letter which incidentally is a must read for everyone who still is stupid enough to think this market reflects anything remotely related to fundamentals, when instead all it is pricing in is the money printing Kommendant's daily predisposition to continuing his dollar decimation via ZIRP and shadow QE. Just like all those who are buying Apple at these stratospheric prices are in essence selling life insurance on Steve Jobs (sorry, someone had to say it), all those buying into the market here are betting the Fed is apolitical when it comes to monetary policy decisions: a proposition so naive and ludicrous, it is not surprising that only the momos continue to buy into the rally, which is driven purely by Primary Dealers recycling money they lend to the treasury which in turn is repoed back by the Fed, so that the banks can buy 100x P/E risky stocks with the same money used to keep the treasury curve diagonal. This is nothing but Fed-sponsored monetary pornography at its NC-17 best. Of course, those who grasp it are few and far between, while the rest of the population is ignorant in its hopes that S&P 1,500 is just over the horizon, without a resultant crash back to 0 on the other side of the bubble. So for all those who are still confused (this means you Kommendant Bernanke) here is a 6 minute clip in which Grantham tells it just the way it is: there is nothing more to this rally that free money and banks' last ditch attempt to lock in another year of record bonuses before it all goes to shit. And the implication - play with the big boys at your own peril. "Bubbles are when you should cash in your "career risk units" and do something brave to protect the investors. There is nothing more dangerous and damaging to the economy than a great asset bubble that breaks, and this is something that the Fed never seems to get. Under Greenspan's incredible leadership he managed to give us the tech bubble, and by keeping interest rates at negative levels for three years drove up the housing bubble, and finally the risk bubble. And Bernanke has happily picked up the mantle, and seems totally unconcerned about creating yet another bubble. He has interest rates so low banks can't possible not make a fortune. Savers are being penalized, anyone who wants to buy cash faces a painful experience, and so we are all tempted into speculating, which is apparently what he wants and we've just had one of the great speculative rallies in history, second only to 1932-33."

Some of Grantham's bubble observations:

Bubbles are when you should cash in your "career risk units" and do something brave to protect the investors.

There isnothing more dangerous and damaging to the economy than a great asset bubble that breaks, and this is something that the Fed never seems to get.

The current UK and Australia housing bubbles are no exception to the trendline: if they don't explode it will be the "first time in history that a bubble has not broken."

Other current bubbles: commodities and the emerging market equities.

In every bubble there is an element of greater fool, but nothing will stop the enthusiasm of the EM bubble due to the slow growth of the rest of the world, they have become the "only game in town."

"It is not usual that you will get three bubbles in a 10 or 12 year period. Normally one bubble will chew up 20 years because it leaves such a painful experience, people don't queue up to put their hands on the same stove and burn themselves again. "

The US market is now thoroughly expensive again.

[Apr 24, 2010] Economist's View 10 Things You Don’t Know (or were misinformed) about the GS Case

km4:

James:BTW, #10 just makes Barry look like an ass.

Bingo !

If Obama had listened to Stiglitz instead of Summers, Geithner, Bernanke we would not be in this predicament ( 'questionable' financial reform ) and taxpayers would NOT be on the hook for $700B.

02 Feb 2009 Let banks fail, says Nobel economist Joseph Stiglitz http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-banks-fail-says-Nobel-economist-Joseph-Stiglitz.html
the Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist.

1) Remember what Simon Johnson said in The Quiet Coup....
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

2) Plutocracy cycle in America must be broken
http://i173.photobucket.com/albums/w50/alix2304/charts%20II/largeextremeinequalitychart-1-1.jpg

1950's to 1980's viable middle class
1980's to 2005 asset inflated middle class
2005 + fast diminishing middle class

Elizabeth Warren, admits she's afraid of what the future holds for the economic well-being of almost all Americans.

Yup !

ephyr:

I find this to be an interesting case. I am certain that these guys were cheaters. Whether a court of law will find fraud, I have no idea.

I have had some exposure to these people and others like them, and I find it easy to believe that they really did intend to screw people with this deal (and many other similar deals). I think they viewed it like a big poker game, where bluffing and deception are ok.

Fines and penalties are probably all that will come of this. Jail time would be justice.

[Apr 24, 2010] New Goldman PR Disaster Execs Celebrated Subprime Implosion

naked capitalism
AndyC:

“We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately.”…

They LOST money period……they didn’t make any money because their “shorts” collapsed with AIG and they would not have received a payout on them if it weren’t for Geithners maneuvering and chicanery with OUR money

All these guys busted out flat and are still broke but every quarter we have to hear about how much they made in “trading gains” and by way of accounting gimmickry…..pay what you owe…get to break even from the previous collapse first and then you can talk about how much fabulous moolah you made.

Bustouts!!!

[Apr 24, 2010] Jim Rogers on the Goldman Sachs Bombshell

From CNBC by Ee Sing Wong entitled: Goldman Could Trigger Market Correction: Jim Rogers

"Some expert investors have described the market's reaction to the SEC's accusations against Goldman Sachs as a 'storm in a teacup.' They believe the fallout would be short-lived, and eventually present buying opportunities

However, billionaire investor Jim Rogers, Chairman of Rogers Holdings, feels slightly differently.

"Markets are overdue for a correction," Rogers told CNBC in a telephone interview Saturday. "Any market that goes up this much, this fast, this steadily without correction - it's not normal. When that sort of things happens, the market could be setting itself up for a 15 - 20% correction."

Rogers does not think the Goldman issue itself would cause a correction - it would be more of a catalyst.

"When the markets are ready for a correction, something will come along... the straw that breaks the camel's back."

The investment guru did not seem all that surprised by the SEC's actions, noting that these kind of investigations usually take place after major financial meltdowns (like dotcom).

Borrowing a quote from Warren Buffett, Rogers said "when the tide goes out, you see who's swimming naked. I'm sure there will be many many more skeletons to come."

Thoughts of more high profile lawsuits on Wall Street and a pending market correction may send some into a panic, but Rogers said it is important to stay calm.

"What I am doing is watching. If this is going to be the beginning of a correction. we will know how the markets does next week, by Thursday, I suspect. It's not time to sell in any significant way."

[Apr 24, 2010] 'Betting Against the American Dream'

The main danger for Goldman is not lawsuit itself, but the exposure that will come to light and all the shady dealings.

April 24, 2010

pavel.chichikov:

"German Chancellor Angela Merkel on April 24 said she would call for the adoption of taxes on banks in next week’s meeting in Berlin with representatives of key global bodies, including the International Monetary Fund and the World Trade Organization, DPA reported. Merkel targeted derivatives trading, saying that her government has asked the European Commission to ban certain financial derivatives, but did not specify which."

km4:

How can you make a post 'Betting Against the American Dream' without citing this masterpiece

YouTube - George Carlin ~ The American Dream

The game is rigged and nobody seems to notice. Nobody seems to care. Good honest hard-working people . . . white collar, blue collar it doesn’t matter what color shirt you have on. Good honest hard-working people continue, these are people of modest means . . . continue to elect these rich ***** who don’t give a ***** about you. They don’t give a ***** about you . . . they don’t give a ***** about you. They don’t care about you at all . . . at all . . . at all, and nobody seems to notice. Nobody seems to care. That’s what the owners count on. The fact that Americans will probably remain willfully ignorant of the big red, white and blue dick that’s being jammed up their ass everyday, because the owners of this country know the truth. It’s called the American Dream, 'cause you have to be asleep to believe it . . .”

Tommy Vu:

"The destruction of Ashanti Gold by Goldman Sachs was saturated with fraud and conflicts of interest: Goldman Sachs served as Ashanti's

[Apr 22, 2010] Scenes from a V-Shaped Recovery

As a sanity check for those of you who see the euphoria on Wall Street and wonder what you are missing, I bring you the following scenes from a V-shaped recovery:

"Families Still Struggle Despite Decrease In Unemployment" (WLWT)

FAIRFIELD, Ohio --

Unemployment numbers may be down slightly, but there are plenty of people still in need in the Tri-State.

County-by-county information released by the Ohio Department of Job and Family Services Tuesday showed a drop in all Ohio counties in the News 5 viewing area.

Tri-County Assembly in Fairfield held its third "hope fair" Wednesday night and the organizers said if the economy is improving, they're not seeing it yet.

"We see more people needing help," said Bob Frymire, the Youth Pastor for Tri-County Assembly. "If unemployment is getting better, that's great. But maybe those jobs aren't paying what they used to or people are using that money to pay off other things."

Tim Payne and his family were among the dozens who attended the fair.

"I apply for probably five to six jobs a week and I can't find anything," Payne said. "Can't find anybody hiring. It's hard."

Payne said he's unemployed for the first time in his life and he's now relying on others for help.

"You don't know what to do," Payne said. "I had to move back in with my mom."

"Holding Down Only One Job May Soon Be the Exception" (The News Journal)

However, emerging economic data indicate the trade-offs for businesses and workers' personal lives will be no laughing matter.

According to the Bureau of Labor Statistics, the number of people who describe themselves as self-employed but work less than 35 hours a week more than doubled since the current recession began.

Employment experts say many of these self-employed Americans are short-term workers who use their flexible schedules solely for the purpose of gaining more time to look for or work at another job.

Their rising numbers are typical for the kind of economic crisis that eliminated millions of American jobs over the past two years and continues to threaten personal income and net assets.

Added to the new norm of lower wages and reduced worker benefits, full-time jobs with one employer as the single source of income could become a relic in the country's future work life.

"Rhode Island’s Homeless Rates Top Charts, Shelters Hit Limits" (Brown Daily Herald)

In the month of March, Rhode Island saw the largest number of people without a home since 1985, when it began keeping track, said Jim Ryczek, executive director of the Rhode Island Coalition for the Homeless.

Ryczek’s organization has noted a steady increase in the amount of homeless people checking into shelters over the past two years. Numbers are especially high during the winter months, when most shelters are open and people without a bed are in most need. In March 2010 there were 1,283 registered homeless in the state, up from 996 in February 2008, according to the coalition’s records. This is the highest level ever recorded.

“We would tend to see the lowest numbers in the summer months,” Ryczek said, but not in the past four years. This “is an indicator that there are more people in the system,” he added, since it is usually the newly-dispossessed who seek aid from shelters.

The considerable increase in the homeless population can partially be attributed to the recent foreclosure crisis, which hit Rhode Island very hard, Ryczek said. The subsequent rise in unemployment “has caused a lot of people to fall off the economy horse and enter the shelter system,” he added.

Indeed, the coalition estimated that shelter check-ins have increased by 300 percent because of the crisis, Ryczek said. Most of the shelters’ new members are not previous property owners, he said, but renters whose landlords have faced foreclosure.

In fact, while families have three days to vacate a housing unit after the notice of eviction, landlords are not obliged to notify these renters of the risk of foreclosure, he said. Ryczek noted that this has a very damaging effect, because people often do not have time to find alternate housing.

"With Swelling Shelters in NYC, Mayor Bloomberg Replaces Dept. of Homeless Services Head Robert Hess" (New York Daily News)

Mayor Bloomberg is replacing the head of the Department of Homeless Services as the number of homeless on the streets and in shelters continues to surge.

Robert Hess took over the agency four years ago after a successful stint in Philadelphia and vowed to "fulfill the mayor's commitment to ending homelessness as we know it within five years."

Since then, homelessness has surged as the economy tanked - and critics say Hess' plans to change homeless prevention efforts failed the people who needed them most.

Bloomberg pledged to reduce homelessness by two-thirds by offering new carrots and sticks to help the homeless live on their own.

Many of those who got out of shelters were unable to keep their new apartments, however, and ended up needing more city help.

New York counts more than 36,000 people in the shelter system, and had no place for all of them on some cold nights last winter when the number of homeless broke records.

That doesn't include an estimated 3,111 sleeping on the streets, up 34% from last year.

"Jobless Office Workers Move to Stripping" (WBBH)

It's a brutal economy, but one industry is hiring and paying well, flooded with applications from young mothers and women who have been downsized out of office jobs: Exotic dancing.

They are women who live in your neighborhood, woman you may have worked with at your office, working moms who had good careers.

Now out of desperation, they have become strippers to pay the bills.

One Detroit dancer says she lost her job at a local university.

"They did some layoffs like everyone else and I was one of the unfortunate people that got let go," she explains.

As a young mother, dancing for money was the last thing on her mind, but she was repeatedly turned down for other jobs, mainly because she was overqualified.

Out of work and with bills mounting she did something she never thought possible: applied to be a dancer at a strip club.

She got the job, and its more than paying the bills.

All I can say is, it this is a recovery, I can't wait to see what the next downturn will be like.

Posted by Michael Panzner on April 22, 2010

[Apr 22, 2010] The Financial Oligarchy in the US

If you do nothing else this week, read the transcript or watch this video.

I have a serious difference of opinion with the speakers with regard to Robert Rubin and his role, but they make up for it with their description of Jamie Dimon as close to the White House and one of the most dangerous men in America today.

And I thought it was interesting that Simon Johnson would say openly that the ONLY Senator who is speaking the truth plainly is Ted Kaufman from Delaware.

Other than that they are substantially putting out a very sound and realistic view of the root of the problems that created the financial crisis, and what requires to be done to rebalance the system and create a sustainable recovery.

BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?
JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

BILL MOYERS: And you write that they control 60 percent of our gross national product?

JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

BILL MOYERS: And what's the threat from an oligarchy of this size and scale?

SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

BILL MOYERS: So, you're not kidding when you say it's an oligarchy?

JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

The Financial Oligarcy in the US - Bill Moyer's Journal

[Apr 22, 2010] William K. Black's Testimony to the Congress on Lehman's fraud

April 21, 2010

The recent US financial crisis is always and everywhere founded in regulatory capture, dissembling, influence peddling, and fraud.

Posted by Jesse at 6:43 PM

[Apr 22, 2010] Wednesday Night Open Thread

The Big Picture

mcelus:

As a bear since John Hussman called the top in July 2007 (a “who’s who of awful times to invest”) I've been wondering how long this market can continue to “grow into its earnings” via primarily cost cutting and whether the “pig farm traders” will eventually care.

Rosenberg points out today in his short piece that the S&P500 is now overvalued by some 30+ % on a historical Shiller cyclically adjusted P/E basis. Are we putting client money to work at these levels in a fiction or non-fiction world, or does that not matter anymore with private debt continually being transferred to the public balance sheet?

vachon:

I’m wondering where the concern is about high speed trading. Or as it’s known in English: front running.

Just a thought.

jonpublic:

I’m wondering what the implications are for the following.

1.) local government / school district layoffs

All the school districts in my state are preparing massive layoffs. Fire and police are on the chopping block. I wonder what havoc that’s going to play in the economy.

2.) working class / middle class separation

All my friends with degrees have jobs, or find jobs if they apply themselves. All of those who are working class do not.

Robert M:

What has been bothering me is the disconnect between this administration and their political goals. I think this administration is totally in the bag w/ the financial institutions. There was no reason IMO to let them out of the TARP requirements. The law was clear enough the Secretary of the Treasury under the guiance of the President could do what they wanted. Thus they could order the firms to lever down-they are still at 30 to 1; they could raise the margin on all future products for speculators holding overnight, i.e. they could raise the cost of holding an oil future from 7% of its value to say 35%-why should you have to put up 50% for stock and report any holding over 5% of let’s say IBM, a company of considerable concern to the economy but be allowed to control over 5%of the world wide oil market for only 7%-because crude oil is of far greater concern to the entire US economy than IBM is. Why instead of going through the sanctimonious dance of HAMP didn’t they insist they would veto the bankruptcy bill in Mar of 2009 if it didn;t allow for primary mortgages to be subject to write/cram downs under the code the way the second and vacation homes are.

Lastly I finished to big to fail. I’ve never seen a book more perfect for an out house. it seems to me to have been written to give everyone a pass. How can Paulson consider merging the merchant banks w/ various commercial banks yet never give any insight into what FDIC Chr Bair thinks. It was like every morning she wakes up w/ a fait accompli and keeps on marching as though nothing happens. Worse there was no timeline and a lack of dates which makes the laymen believe these were all seperate events.

constantnormal:

@Mannwich 9:20 pm

I think that, similar to how ZIRP distorts traditional financial metrics over time, a persistent high level of societal corruption, wherein peeps of all stripes come to perceive corruption and ethical lapses as a “normal” thing, the level of actual crime necessary for a person to be charged and prosecuted for a “criminal white collar offense” must be up there somewhere around High Treason.

For people who grew up in a society where crimes were generally treated as such, the current moral climate can be rather disturbing. But when one considers how the very legal fabric has been deconstructed, muddying or eliminating the social regulatory structures that constrain “illegal” behavior, it’s not at all surprising.

Thus we have a government that is completely driven by lobbyists, a financial industry wherein anything goes, and a corpocracy wherein the primary aim of a CEO is the extract as much money from the company as possible, with actual performance of the company being a distant and unrelated goal.

Have a nice day.

constantnormal :

Barry, are you aware of any quantitative studies that have been done to provide an indication of how much a persistent low-interest-rate (i.e., with central bank rates less than 1% for an extended period) climate can distort traditional metrics of valuation?

There is undeniably an increased leverage effect for businesses that leverage debt to support their business operations, such that those businesses can take on increased amounts of debt, leveraging their performance (for good or ill, leverage being a 2-edged sword).

I’m wondering if there is any substantiation of my gut feel that PEs ride higher when in a persistent low-rate economic environment, and if so, is there any quantitative relationship that one can use to translate a “normal” PE of … let’s say 15 … during a period when central bank rates are running in the 5% area, to what (other things being equal, if that is even possible) would be an equivalent PE during a period when central bank rates are only one-fifth as much?

A linear relationship seems unlikely, but there ought to be some correlation that someone has investigated …

THAT’s what I’m wondering, these days.

(of course, I recognize that with low rates and the potential for easy increased debt leverage comes a commensurate increase in risk — that much is obvious)

constantnormal:

@jonpublic — like real estate, employment in the software industry is highly dependent on location. You wouldn’t think this would be true, what with everything being connected over the internet these days, but it is. Most companies are not comfortable with having a faceless entity on the other end of a network, and not under the watchful (albeit unknowing) eyes of local management.

And places where a lot of the IT work is concentrated in government (where most IT work is performed by contractors, and budgets for hiring contractors are nonexistent) are suffering, along with IT work in manufacturing, construction, etc.

The best places to be (where employment is a concern) are independent IT contractors who specialize in work related to industries that are awash in cash — health care, insurance, financial companies. Other places … well, as most IT work is involved in growing or changing the business, when the business shrinks in place, the IT contractors are the first to go, followed by the IT employees.

And the contractors are the first to be re-hired when business begins to expand beyond the ability of the skeleton crew to deal with. Canaries in the coal mine, that’s what contractors are (temps by any other name).

Luckily, in the IT world, technological change is a big enough factor that some level of employment is driven simply by the need to replace 20-year-old systems that nobody understands any longer with newer stuff that will be similarly forgotten in a decade or two. So long as one can keep learning, and is willing to go anywhere and do anything for a buck, you’ll have a job. But sometimes “anything for a buck” becomes a show-stopper.

LLouis:

Is the relatively high unemployment rate in U.S. solely due to the recession or is it also a structural problem, so many jobs have been eliminated from productivity gains, and other transferred to China and other countries.
There’s also a greater global competition for specialized/highly qualified/ professional workers now.

U.S. unemployment rate now exceeds those of the BRIC and many other countries (to my surprise as I don’t follow these matters closely)

http://www.tradingeconomics.com/World-Economy/Unemployment-Rates.aspx

This russian blogger, Stanislav Mishin, thinks ”American recovery is lots of puff but no substance”, he’s clearly not impressed by America, however incorrect or brawling he may be, his comments reflects popular views about America’s not so solid economy, also funny in his excessive harshness.

http://english.pravda.ru/opinion/columnists/112992-0/

xSiliconValleyEE:

Cognos, i liked your reply at 10:10pm.

I wish i understood this stuff better. My take is that, from the Econ 101 view:

Fiscal Policy: Screaming, with a $1 Billion difference between expenditures and taxes.
Monetary policy: Screaming, with a near zero short term rate, and 4+ percent long term rate.

Given the basic MV = PQ (monetary supply * velocity of money supposedly equaling Price(s) * Quantity of Product and services produced ). Or MV/Q = P in another view:

Money supply has to be growing with the incredibly fiscal and monetary policy going on. People are spending again so V has to be increasing. And the quantity of product and services produced are increasing, but no where near what the increases in M * V are. But P is not significantly increasing either, like the equation says it should. Why?
And, where is all the excess in M going?

Our measured P, i.e., inflation stats, are based mainly on products subject to intense international competition. So, our Fed will, and has, kept rates far lower than they should, because they don’t see inflation in P.

So, where does all this excess monetary supply go: ASSETS. Such as stocks and housing, resulting in inflation in those assets. Just as it did when the Fed made the same mistake in the late 90’s when the excess money liquidity went to tech stocks. Just as it did when the Fed panicked and loosened the monetary reins for the Y2K “problem” resulting in the final, bozo, tech stock run until the reigning in of liquidity resulted in the necessary crash in early 2000. Just as it did in the last decade when the excess money went into house prices, and to a lesser extent, stocks.

If the Fed saw this rise in asset prices properly as inflation, or at least saw it without an incredibly long time lag, they would substantially slow the growth in the money supply by making monetary policy far more restrictive. But, they won’t see this due to the flawed inflation measurement stats, thus they will leave interest rates far lower than they would do otherwise.

imho, use the Fed’s mistake to your advantage. Stocks will have much more of an upward bias, resulting in higher P/E multiples, than they should due to all this excess monetary liquidity.

———————————————————————————————–

Cognos: Thanks for your views. Short term, given how upset normal people are at these financial shenanigans and getting lied to by wall street financial advice (“Buy and hold, it’ll be alright”) twice in the last decade, they do not want to put money in the market, to put it mildly. Especially right now, given the SEC Goldman suit.

imho, I see your slight pullback. Maybe even the price stats in the morning may show a touch of increase. I don’t see your reliance on averages though, there is a mental block at the NASDAQ going through 2500, DOW through 11K-something, and S&P through 1200.

But, there are many stocks still very cheap in this market, i think one needs to look at stocks cheap on traditional metrics now, rather than just buying into market averages. imho, reasonably cheap stocks:

- Intel is crushing AMD, who’s failing in getting 45nm generation chips into production, whereas Intel is successfully implementing the next generation 32nm chips. Intel’s forward P/E ex-cash, or just annualizing the current quarter if you like, is 11. It should be 15 to 17.

- Cisco is similar, like a forward P/E of 13, where it should be at 16 to 18, and it’s yet to report the current quarter, where supposedly they are doing great and have a major new product cycle in big routers.

- Even annualizing Apple’s quarter, ex-cash, they are running at a 15 P/E. It should be like 20, given they finally have screaming growth internationally, and that the iPad wasn’t even in their previous quarter.

- Many regional banks, given that loan losses have peaked, are way undervalued on what their traditional metrics will look like in a half year. Some of the bigger banks are way cheap also, given that their lobbyists have captured the Democrats, along with their traditional Republican ball holders, so the financial regulation bill won’t hurt their profits as much as a proper financial regulation/breakup bill should. I guess housing stocks are even going up now, based on their balance sheet improvments and expected recovery over the next couple of years, i need to study this area more though.

imho, i wish i understood this stuff better.

[Apr 21, 2010] Richard Koo Says If Banks Marked Commercial Real Estate To Market, It Would "Trigger A Chain Of Bankruptcies"

Richard Koo's latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt." In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

anynonmous :

Just one short year ago the suspension of FASB 157 altered the perceived financial position of the banks - We are living in a disney economy and the markets are reflecting that.

Today on Bloomberg radio the host asked Byron (Blackrock) Wein how he reconciles his bullishness on the economy with his bullishness on gold. Byron responded he is concerned about the debasement of paper currencies.

Recovery3000 :

The non-clearing of the CRE market is the part of the clog in the economy'sintestines that desperately needs to be flush out. My bretheren in the business spend a lot of free time waiting for the capitulation in the CRE investment market that seems to never come.

Not only are banks lying about the values of their loans, but the Fed incentivize the banks to hold onto the assets due to the loss-sharing arrangements that lets the bigger banks take-over the weaker ones with a 80% loss protection plus the capital to float the bad loans for years. What a sweet deal!

Temporalist :

Bloomberg just showed a clip of Marc Faber saying that 90% of Wall St. is a fraud. Here is his interview but the comment was either before or after the interview:

http://www.youtube.com/watch?v=mLrFK1bBEm4

Buck Johnson:

"FASB-complicit 10(b)-5 fraud", thats exactly what all of them with the govt. help are doing. But it's okay because the govt. said so. The funny thing about this is the little things, like when GM went bankrupt and the govt. with help from the Federal judges threw out decades of bankruptcy law in order to make sure GM survived (the destroyed the ones that where first in getting money). Banks being bailed out by the trillions and the Treasury people saying they won't say where the money went, TRILLIONS. At the drop of a hat they gave out trillions to save banks but they can't find a few billions for this or that. The trillions they used could have been used to give everybody single payer healthcare. The banks themselves having the stock and bond markets manipulated in order to make sure they don't go under. You know, the "war" against short sellers (this became such a bad word or thing to do, UNLESS YOUR GOLDMAN SACHS OR PAULSON OR THE BIG BANKS.), instead of mark to market it's now mark to whatever the F**k you want as long as it keeps you looking solvent, and on and on and on.

This is the definition of a third world economy on the brink of insolvency. When you make ad hoc law in order to justify what you said was unlawful years or months ago, it shows your desperation. We are a desperate economy, both the US and Britain. I just thought of something, what if the new 100 dollar bill is being put out their not only to deter counterfeiters but to make where people have to recycle their greenbacks for these new ones as a precautionary measure. This will take time and that is what the Fed is wanting time and hope.

Once all the games are played and all the promises are broken, we will see a western economy that is blighted and destroyed.

[Apr 21, 2010] America’s disastrous debt is Obama’s biggest test By Roger Altman

April 19 2010 | FT

The global financial system is again transfixed by sovereign debt risks. This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina, Russia and Mexico. But the real issue is not whether Greece or another small country might fail. Instead, it is whether the credit standing and currency stability of the world’s biggest borrower, the US, will be jeopardised by its disastrous outlook on deficits and debt.

America’s fiscal picture is even worse than it looks. The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product – nearly equal to Italy’s. Global capital markets are unlikely to accept that credit erosion. If they revolt, as in 1979, ugly changes in fiscal and monetary policy will be imposed on Washington. More than Afghanistan or unemployment, this is President Barack Obama’s greatest vulnerability.

How bad is the outlook? The size of the federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20,000bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792. It is so rapid that, by 2020, the Treasury may borrow about $5,000bn per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defence budget. Unfortunately, the healthcare bill has little positive budget impact in this period.

Why is this outlook dangerous? Because dollar interest rates would be so high as to choke private investment and global growth.

It is Mr Obama’s misfortune to preside over this. The severe 2009-10posite: government paralysis and 10 years of fiscal erosion. Debt reaches 90 per cent of GDP. Interest rates go much higher, but the world’s capital markets finance these needs without serious instability.

History suggests a third outcome is the likely one: one imposed by global markets. Yes, there may be calm in currency and credit markets over the next year or two. But the chances that they would accept such a long-term fiscal slide are low. Here, the 1979 dollar crash is instructive. The Iranian oil embargo, stagflation and a weakening dollar were roiling markets. Amid this nervousness, President Jimmy Carter submitted his budget, incorporating a larger than expected deficit. This triggered a further, panicky fall in the dollar that destabilised markets. This forced Mr Carter to resubmit a tighter budget and the Fed to raise interest rates. Both actions harmed the economy and severely injured his presidency.

America’s addiction to debt poses a similar threat now. To avoid an imposed and ugly solution, Mr Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.

The writer is chairman of Evercore Partners and was deputy US Treasury secretary under President Clinton

[Apr 21, 2010] V-shaped explosion by Martin Hutchinson

Looks like those who still trade this market are mostly herd animals. Those who really think, seem to be already on the sidelines and many cut their long positions six month ago or longer then that.

April 19, 2010 | PrudentBear

Commentators, including the egregious Ben Bernanke, are increasingly claiming that the United States is in the process of a V-shaped recovery from the Great Recession. Certainly first-quarter GDP, to be announced next week, is likely to show a substantial bounce, albeit not quite the inventory-driven 5.6% annualized growth of the fourth quarter. Yet commentators should be careful what they wish for: a V-shaped recovery is likely to lead not to a prolonged period of healthy growth, but to an economic explosion and collapse.

This may seem counter-intuitive. You would normally expect a period of above-normal growth after such a deep recession, whatever the political environment. After all, even in 1934, a year in which the federal government was taking a hatchet to the banking system and capital markets through the Glass-Steagall Act and was micro-managing wages, prices and product specifications through the National Recovery Administration, U.S. GDP, it is now estimated, rose by an extremely healthy 10.9%. Indeed, 1933-34 form the principal supporting evidence for the efficacy of Keynesian “stimulus” – real federal expenditure rose by 23.7% in 1933 and no less than 34.2% in 1934, a public sector bloat rate of which even President Obama might be proud.

In the very short run, intuition may be right. Manufacturing numbers for the last couple of months have been good, while surging retail sales and the plunging savings rate suggested that the U.S. consumer has discovered yet another credit card in an old jacket pocket that he had forgotten about. Automobile sales too have rebounded nicely, and Ford in particular is looking solider than it has for several years. Tech sector profits seem to be “surprising on the upside” as they say with Google reporting sharply rebounding ad sales. With such growth, even the projected federal deficit may decline by $50 billion or so, still not quite a rounding error.

The recovery may be V-shaped in the next quarter or two, but it is very doubtful indeed whether it can continue to be so for long enough to define itself as a true recovery rather than merely an intermediate bump in a “double-dip” recession. On unemployment, for example, since 8.4 million jobs have been lost in the recession, a U.S. recovery that lasted two years from now would have to create 350,000 jobs per month to restore the jobs lost – and that would still leave unemployment much higher than in December 2007, at 6.5-7%, because over 5 million more people would have been added to the labor force between December 2007 and April 2012.

With an employed U.S. labor force of 139 million currently, job creation at 350,000 per month implies an increase in the work available of 0.252% per month or 3.02% per annum. Add the 2% trend growth in productivity, and you’re talking more than 5% GDP growth for two full years. A lovely V-shaped recovery if you could get it, but in terms of duration and extent, the bare minimum necessary for the recovery to qualify as a true economic expansion and not simply a bump in a prolonged recession.

So what are the chances of 5% U.S. annual GDP growth for the next two years and commensurate growth in international markets? To see the problems involved, consider the question of commodity and energy prices. In the last 12 months, while the global economy has been operating far below capacity, the OPEC benchmark crude oil price has risen from $50.20 to $81.52 per barrel, a 62.4% increase. Yet U.S. GDP, which bottomed out last April/May, has risen no more than 5% in the last 12 months, probably less. Thus two years of 5% GDP growth would imply energy prices rising at least as quickly as in the last 12 months, as Chinese and Indian growth continued rapid and U.S. oil consumption rebounded towards historic trends.

Two more years of 62.4% price rises would take oil prices to $215 per barrel. Given that $147 per barrel oil was a major contributor to the 2008 crisis, do we really think the U.S. economy capable of bearing $215 oil in 2012 without caving in on itself? I don’t think so. At least, not unless the dollar has collapsed and inflation has taken off to a level of perhaps 20-25% per annum, which is certainly a possibility.

Then there’s iron ore. The annual contract system appears to have broken down, with contracts settled at 100% above last year’s prices and the spot price running 50% higher still. Given the assumption of robust global growth and thus maintenance of this rate of increase, iron ore prices by April 2012 could thus be quadruple their current level, or $600 per metric tonne. Automobile production would have to shift entirely to plastic – except that being derived from petroleum, plastics prices would also have grown exponentially.

Then there’s copper. That’s also up more than 60% over the past year, and on the London Metal Exchange is closing in on its all-time record price, set in April 2008, around $9,000 per tonne. Existing copper mines deplete rapidly unless capital is invested in them, and with new investment having ceased for a year in 2008-09 there is now a serious supply shortage, not expected to be alleviated until major new capacity comes on stream in 2014-15. Again, if economic recovery is robust for the next two years, copper prices will continue rising at the same rate as in the last year, reaching $21,000 per tonne by 2012. Any bets on what that will do to the economy, or to inflation?

In short, rapid expansion at 5% per annum for the next two years, the minimum necessary for this to be termed a true V-shaped recovery and not just a blip, will run into one of two constraints. Either inflation will take off, reaching an annual rate of at least 20% by 2012 as commodity and energy prices continue their inexorable climb, so forming a larger and larger part of the consumer’s purchase basket. Or, alternatively, a collapse in the government bond market, panicking at the rapid acceleration in inflation, will choke off economic recovery, plunging asset prices including housing back into the depths of gloom and sparking off another banking crisis caused by yet another wave of home mortgage defaults.

In other words, a true V-shaped recovery is impossible, at least without some very unpleasant consequences indeed. Presumably in the latter stages of a rise in inflation towards 20-25%, even Ben Bernanke would be forced to recognize its existence and raise short-term interest rates from their present derisory levels – which would itself cause a crisis in the financial and housing sectors.

When considering the recovery’s future trajectory, there is another fairly benign possibility, that of a gamma-shaped recovery (the English language has no appropriate letters!) in which growth starts off at the V-shaped rate of 5% or so, but within a quarter or two from now slows down to a “soft landing” pace of 1-1.5%, at which the commodity price explosion levels out, inflation remains a potential problem but not an immediate danger and the global economic imbalances are allowed to work themselves out over time.. However, that would not allow U.S. unemployment to decline much – once the slow recovery had set in, productivity growth would prevent net job creation and so with the workforce expanding steadily, unemployment would remain stubbornly high, probably around 9%.

To achieve the optimal gamma shaped recovery, however, one policy change is absolutely necessary: the Fed must increase forthwith its federal funds target and other short-term interest rates from zero to a level slightly above the rate of inflation, perhaps in the 3-4% range, increasing them further if as is likely inflation trended upwards. That would remove the incentive for banks and hedge funds to borrow at negative real interest rates and invest in anything, such as commodities and energy, which seemed likely to maintain its value.

It would also remove two anomalies in the present market, which make healthy and sustained recovery impossible. First, it would remove the subsidy for banks to “borrow short and lend long” investing their balance sheets in Treasury securities and housing bonds, thus starving small business of funding. With commercial and industrial loans now down 25% from their October 2008 peak, small business is starving for working capital at the same time as the banks make record profits.

Second, it would remove the disincentive to saving that is driving the U.S. savings rate back down to the near-zero levels of 2005-07, making the U.S. financial system in the long run unsustainable. Japan can sustain public debt of 200% of GDP because of its enormous savings pool; blowout is likely in the U.S. at much lower levels because no such savings pool is available.

Higher interest rates would also reduce stock market speculation, returning the market to its sustainable level of around 8,000 or below on the Dow. It would also, by reducing bank enthusiasm for housing bonds, begin to remove the excessive subsidization of housing, diverting capital back into more productive channels.

A gamma shaped recovery may look fairly unattractive, but it’s a lot better than the alternative of rapid recovery followed by blowout. It could also be engineered so that the gammaization of 5% growth into 1.5% growth did not become apparent until after November’s midterm elections, thus allowing the Obama administration to present simple folk in the electorate with the impression of a vigorous and sustainable recovery.

However, with Bernanke at the Fed, the necessary rise in interest rates is unlikely to happen. So the wise investor will remain long commodities and energy – and brace himself for eventual inflationary collapse into a “double-dip” Greater Recession.

[Apr 22, 2010] THE OVER-UNDER ON VALUATION Coffee_with_Dave_042110

According to the Shiller P/E ratio, the S&P 500 is now 35% overvalued — a full one standard deviation event.

The April data was just updated and showed the inflation-adjusted normalized P/E, premised on "bird-in-the-hand" (as opposed to consensus earnings forecasts, which is historically more than 20% higher than we actually get — one reason why Wall Street banks are dubbed "the sell side") 10-year trailing profits, expanded to over 22x from 21x in March.

This is not nosebleed territory, but it is expensive; the historical average is 16.4x. So, this implies that the market is currently 34.7% overvalued benchmarked against the historical norm. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.

Valuation metrics are not meant to be timing devices. Assets, securities, and currencies can stay overvalued for extended periods of time, but inevitably Bob Farrell’s rule number one on the concept of "mean reversion" will come into play. The operative strategy is to buy low and sell high, not the opposite; and to be paid to take on risk as opposed to be paying for taking on the risk.

Defensive income-oriented strategies, at this point, make perfect sense from our lens.

The Shiller P/E ratio for the S&P 500 expanded to over 22x in April — this implies that the market is 35% overvalued when compared to the historical average

[Apr 21, 2010] Calculated Risk Shiller Mini-bubble in Stock and Housing Markets

Apr 20, 2010 | Calculated Risk

Jennifer Schonberger at Motley Fool interviews Professor Robert Shiller: Shiller: The Housing Recovery Could Be on Shaky Ground.

A couple of comments from Shiller, first on house prices:

Robert Shiller: Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices ... Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities -- and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed.
And on asset prices:
Shiller: We have had kind of a mini-bubble in the stock market and the housing market. It wasn't just because of rate cuts. It was also because of government stimulus and bailouts. So the question is: Are we at risk for even more price increases, and another bubble? I think we are at risk, but I'm not predicting it. I think it's more likely we don't do so well from here.

Rob Dawg:

Tagsbearly wrote:

Shiller shillin' for more USG stimulus ? I think so.

More likely he's warning us that methadone withdrawal is going to hurt as much as the heroin.

[Apr 21, 2010] Economist's View The SEC Accuses Goldman Sachs of Fraud

john c. halasz:

You're being obtuse as usual. The case was brought under the non-disclosure of materially relevant information proviso, admittedly a gray area, but indicative if GS didn't disclose either its or Paulson's interests in shorting the offering, rather than just mediating between different long/short interests in the transaction. (And, of course, Paulson and his gang are not being charged).

More generally, you're obfuscating the macro effects of the creation of synthetic CDO's. The whole apparatus of structured securitization required the creation of CDOs and CDO^2s to get rid of the relatively unmarketable mezzanine tranches of structure "bonds" after the desired "AAA" tranches were readily marketed. The chain of MBS, CDOs, etc, was Ponzi finance in Minsky's sense, if not a narrowly hatched Ponzi scheme, passing on the unsaleable risk to ever new customers, while present profits and bonuses were recorded and paid out. The creation of synthetic CDOs at the end of the cycle both magnified the amounts at risk fictitously, and narrowed the spreads on securitized bonds via connections between the securitized bond and CDS markets, at precisely the point when spreads would have blown out and the machinery of mortgage securitization would have shut down, thereby prolonging the bubble and magnifying its damage. Those synthetic and hybrid CDOs were the last leg of the Ponzi chain. And the shorts profited precisely by increasing the overall damage, rather than correcting the market via short positions.

Bruce Wilder:

Thank you for that; I find I'm struggling to understand what is going on, but your explanation was pretty good.

anne:

http://krugman.blogs.nytimes.com/2010/04/17/time-to-reread-akerlof-and-romer/

April 17, 2010

Time to Reread Akerlof and Romer
By Paul Krugman

Looting: The Economic Underworld of Bankruptcy for Profit. *

"Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations."

Obviously, Goldman wasn’t trying to run itself into the ground (although if there’s more like what we’ve just heard, it may have succeeded all the same). But creating securities that are bound to collapse in value, so that you can profit off that collapse, is in the same family of strategies.

And there’s nothing to get our analytical juices flowing like a good Sachs scandal.

* http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162

anne:

http://www.cepr.net/index.php/blogs/beat-the-press/it-was-the-housing-bubble-not-the-damn-cdos/

April 17, 2010

It Was the Housing Bubble: Not the Damn CDOs

The folks who got it wrong when the housing bubble was growing seem determined to prove to the world that they are incapable of learning anything. The latest tales of Goldman designing CDOs are fascinating in that they reveal the incredible level of corruption at Goldman and on Wall Street more generally, but it was not the CDOs * that gave us 10 percent unemployment.

Unemployment soared because demand collapsed. And the reason that demand collapsed is because housing bubble wealth disappeared. And housing bubble wealth disappeared -- well, because it was a bubble that was not supported by the fundamentals.

For the 87,865th time, the collapse of the bubble led to a falloff in annual construction (residential and non-residential) spending of more than $600 billion. The loss of $6 trillion in housing wealth led, through the housing wealth effect (this isn't radical -- it is as old an economics doctrine as you'll find) to a loss of close to $400 billion in consumption demand. That gives a combined loss in demand of more than $1 trillion and hence a really bad recession.

This story has nothing directly to do with CDOs. Insofar as CDOs and other games helped to drive the bubble beyond the levels it would have otherwise attained then they made the crash worse than it otherwise would have been, but the CDOs were not directly the problem. It was the bubble.

The folks who played games on Wall Street should be put safely behind bars for long periods of time, but it is important to know that the real story of this crisis was not the complex shenanigans of the Goldman gang. The real story was a huge bubble that was easy to see and guaranteed to burst. The fact that those involved in making and reporting on economic policy somehow did not see the bubble was a failure of immense proportions that should cost many many people their jobs.

* http://www.nytimes.com/2010/04/17/business/17nocera.html

--Dean Baker

[Apr 19, 2010] It's About Trust by Doug Noland

Apr 16, 2010 | PrudentBear

The bone I have to pick with the bulls relates to their view that buoyant markets are signaling the emergence of a sound and sustainable recovery. I see instead a desperate policymaker crisis response reigniting Credit Bubble excesses and fomenting only deeper systemic distortions. This week, Chairman Bernanke suggested that the strong market environment is confirmation of the soundness of policymaking and market trust that Washington will get its fiscal house in order. Fed officials are again deluding themselves and, in the process, indulging asset market inflation and destabilizing speculation.

But I’ve been to this movie before. I’m familiar with how the plot develops. And I have an abundance of gray hair and wrinkles as evidence of the number of reflations I’ve observed. I know how asset inflation fosters optimism in the bullish camp and discredit to bearish analysis.

Loose “money,” as has been the case throughout history, breeds excess and malfeasance. The Wall Street/mortgage finance Bubble was a fiasco, and today’s allegations are a reminder of how ugly things turned in the waning days of the subprime mortgage scheme. Clearly, there was way too much “money” sloshing around – so much to be made so quickly gaming the system and fleecing the less informed.

The destruction and inequitable redistribution of wealth are the hallmarks of financial Bubbles. Today, Trillions of securities are created globally on the basis of the creditworthiness of the borrowers coupled with perceived adeptness of policymakers. It is quite amazing how quickly Trust has been restored. A new bull market is celebrated, while another bout of Monetary Disorder has unfathomable amounts of “money” sloshing around for the taking.

At the center of it all, policymaking at home and abroad has distorted market perceptions and market pricing mechanisms. The unsuspecting again have little notion of the underlying risks they are accepting. Fleeing zero rates and chasing inflating securities prices, investors have been left again dangerously exposed to another financial Bubble and a postponed economic restructuring. It may never be called “fraud” or “misrepresentation. The outcome will be about the same. At the end of the day, markets are made or broken on Trust.

[Apr 19, 2010] Munis Risk Not To Be Taken Lightly

April 17, 2010 | Financial Armageddon

Author and financial industry veteran Rick Bookstaber has suggested that the municipal bond market could be ground zero for the next financial crisis. But he is not the only one warning about the risks of what many seem to believe is the best thing since sliced bread. In an excerpt from "Munis: Riskier Than You Think," the Wall Street Journal highlights several concerns that investors should not be taking lightly:

Since the start of the year, investors have poured more than $13 billion into muni-bond funds and exchange-traded funds — nearly twice the amount they have put into all domestic equity funds and ETFs, according to Lipper FMI.

But new investors could be setting themselves up for more pain. "Too much money has stampeded in," says Marilyn Cohen of Envision Capital, a fixed-income money manager near Los Angeles. She and others like Dean Barber, of Barber Financial Group in Lenexa, Kan., now fear that rising interest rates might reverse the stampede and push prices way down.

... ... ...

The recent rally isn't the only cause for concern. Many municipalities are struggling to balance their books, raising the chances of default in some places. Bond insurers, battered by the financial crisis, have fled the muni market. And if all of that weren't enough to frighten off investors, little-known tax traps might.

But munis aren't nearly as cheap as they were at the end of 2008. Back then, muni yields, which move in the opposite direction of prices, were equal to or greater than yields on comparable Treasurys despite their being tax-free. That reversed in 2009 when $78 billion flowed into all muni funds, almost as much as in the previous 10 years combined, according to Lipper. Now yields are hovering at about 85% of Treasurys, roughly the historical average.

Then there is the great unknown: the effect of deteriorating state and local finances. "Historically there have been far fewer muni defaults and much higher recovery rates than with corporates," says John Petersen, a municipal finance specialist at George Mason University. But with state and local governments more strapped than at any time since the Great Depression, there will be more defaults, he says.

[Apr 18, 2010] The End is Nigh How Goldman Sachs Triggered the Apocalypse by Benjamin N. Dover III on

“Blaming individuals [or a few institutions] is no substitute for acknowledging the failure of the whole system.” ~ ` BOE Mervyn King

Apr, 17 2010 | zero hedge

In case you’re wondering, that whistling sound you hear is the sky falling. When Erin Burnett stays late to host a special report on something, you know it’s a “game-metamorphosizer”. Why else would all bank stocks tank because a firm they’re not affiliated with was charged with non-criminal fraud in one transaction after months of SEC digging? Why else, at this very moment, are traders in Tokyo and Hong Kong counting down the minutes to when they can sell every last security on the planet ahead of the rest of the world this weekend? Why else would the price of gold – the ultimate refuge in times of uncertainty – be falling?

The simple fact that the market knows is that there is no uncertainty: Armageddon is upon us, and thus all the gold in the world has no value.

In its infinite wisdom, the always-rational, level-headed market knows that Goldman is finished once and for all. In fact, it’s already just a memory. A civil case whose maximum damages, including treble damages for fraud, are $3B could easily bankrupt a firm that had only $45B in revenue last year. Especially since there’s no chance this case will be settled without a trial for a small fraction of that amount. Why else would the only Google search term related to GS that’s more popular than “Goldman Sachs fraud” be “Goldman Sachs careers”? Everyone knows that the imminent liquidation will require lots of manpower and overtime. And even if, by some miracle, GS emerges from the SEC and inevitable investor litigation without resorting to Chapter 7, no one will ever do business with them again, which will cut their revenue to $0.00, which will require them to resort to Chapter 7.

And GS deserves to be destroyed for this particular transaction. To put their egregious behavior in the complicated CDO market in perspective, let’s break it down in terms of equities:

Let’s say a sophisticated investor – call him “Johnny the Jackal” -- tells an investment bank – call it “Dewey Goldmanthem & Howe” -- that he thinks a select group of stocks in the Russell 2000 index is a real dog. He asks the investment bank to create a new ETF that tracks the performance of the stocks he selected so that he can short it. The investment bank agrees, takes a fee, and unveils the newest ETF, the “Bow Wow 30” (ticker symbol: WOOF). Now let’s say a second sophisticated investor comes along – call it “Head-Up-Our-Ass European Bank” -- and says they believe the Bow Wow 30 represents the best companies on earth, and they want to go Hail Mary long. Even if DG&H doesn’t have a crystal ball, and even if it’s not sure which way the Bow Wow 30 is heading, it has a make-believe fiduciary duty under the pretend law to tell Head-Up-Our-Ass European Bank that there’s another investor who thinks the Bow Wow 25 is flea-ridden. Sure, Head-Up-Our Ass has analysts, lawyers, consultants and accountants who could do their homework on the companies in the Bow Wow 30, but it’s up to DG&H to tell them Johnny the Jackal knows better than them. That’s why every time you want to buy a security your broker sends you a list of all the people who've shorted it. GS broke the law because it didn’t provide the short list.

In addition to being the polite thing to do, this rule serves the important public policy of dissuading potential investors from investing whenever another investor disagrees with their judgment. The efficient functioning of the capital markets is all about no one buying when someone else wants to sell and no one selling when someone else wants to buy.

Not that politeness, public policy or capital markets matter now that the end of days is apparently Monday. (Unless you live in Asia, in which case it’s Sunday). Time for everyone to get their affairs and souls in order.

Selected Comments
swmnguy
on Sun, 04/18/2010 - 12:02
#306712

And a great "amateur-friendly" description of what went down. I had my wife read it and she understood immediately. Her take was that if GS' behavior wasn't exactly illegal, anybody who knows anything shouldn't ever do business with them again.

Of course, there's always someone who thinks he can beat the guy running the shell game, so somebody will always do business with the likes of GS. But for most of us, we'll take what's left of our dough and go elsewhere.

[Apr 18, 2010] Janet Tavakoli: Did Goldman Sachs Commit Fraud?

Highlights:

Yes. The only thing that was surprising how long the SEC took to do it.
The complaint does not go quite far enough. It was a blatant fraud, more than just a failure to disclose information.

And this may be the beginning of a lot of questions about a lot of investment banks. It has massive implications IF the SEC does its job right, which they have not done in the past.

Tavakoli Structured Finance

[Apr 17, 2010] Rabobank Merrill Committed Similar Fraud to Goldman With a Magnetar-Sponsored CDO

Competitors of squid also managed to make billions using naked fraud and manipulation. Now when some details become public and SEC was forced to react that probably means end of the rally in financial stocks.

April 17, 2010 | naked capitalism

RueTheDay:

Will Tea Party rage now start to target the private companies that caused the financial crisis or will they continue to just mindlessly repeat the Republican talking points they’ve been fed about the free market and continue to erroneously blame the government?

DownSouth:

RueTheDay,

The neoliberal package includes both laissez faire and bailouts, laissez faire being the policy which facilitates the accumulation of unmanageable private-sector debt, and bailouts being the means by which this unmanageable private-sector debt becomes public-sector debt.

Another key element of the neoliberal paradigm is the capture of government by the finance industry. Neither laissez faire nor bailouts would be possible, after all, if the populous retained sovereignty.

Now granted, the Tea Baggers (and by the way, polls show a full 1/3 of them claim to be Democrats) get only two-thirds of this equation right. They accurately see the government to be captured by the finance industry, and they accurately see bailouts to be part of the problem. However, they are foolishly and naively blinded to the deleterious consequences of laissez faire. This opens the door to their anti-government absolutism.

But to claim that the government is not captured by the finance industry, or that it did not play a key role in both laissez faire and bailouts, is simply not true.

The question is what to do about it. The Tea Baggers believe the solution is the elimination of government—-nihilism. I, on the other hand, believe the solution is the reform of government, the return of sovereignty to the people.

RueTheDay:

I agree that regulators are in large part captured by the financial industry.

However, let’s not give the Tea Partiers too much credit here. Most are not even smart enough to define “regulatory capture”. Their argument is nowhere near that sophisticated, it’s just the typical libertarian blather about how the government is the root of all problems and letting the free market be free is the universal solution.

DownSouth:

RueTheDay,

Not just regulators were captured, but lawmakers as well.

The NY Times had a piece yesterday (which featured Yves) and I found Lynn A. Stout’s comment most germane. As she points out:

Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.

By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.

http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/?hp

All this makes Kevin Phillips’ comments from a few years ago appear most clairvoyant, when in 2002 he wrote:

The result by 2000 was a Washington in which liberals found themselves muttering about “corruption” that was largely legal behavior—-decision-making lubricated by so-called “soft money” political contributions and resulting in flagrant tax favoritisms, bank bailouts, gutted regulations, and see-no-evil administration of the federal election laws.

–Kevin Phillips, Wealth and Democracy

It also rings of something Martin Luther King wrote of in his “Letter from Birmingham City Jail”:

We can never forget that everything Hitler did in Germany was “legal” and everything the Hungarian freedom fighters did in Hungary was “illegal.”

colinc:

While your comment, DownSouth, is not overtly incorrect, I’m sure that it is equally applicable to the neocons, the GOP (in general) and the so-called “libertarians.”

It should be apparent to anyone possessing even a modicum of neural and synaptic function that Congress no longer represents “we the people” but their own irrational self-interest and is reverential to “we the filthy rich.”

Note, I have no objection to anyone acquiring large amounts of money but I absolutely do not abide that acquisition by fraud, deceit, or outright theft… which is now pretty much “the American way.” It is a truly sad state of affairs when our alleged representatives enact “laws” making criminal activities “legal” exclusively for the moneyed interests.

Our Pecora Moment « The Baseline Scenario

Completely stunning how much damage these peeps on Wall Street and their cronies throughout the system have done to wreck quality of life for all. And squid attempt to defend itself is really funny: nobody believe that the total net of deals with Paulson was negative for squid. The fact the Paulson is not mentioned is strange and might be connected with the fact that he hired Greenspan, this pergament face defender of deregulation fraud. As Heidi Moore state (It's Not Just Goldman—It's the Clients The Big Money) Ironically, it was Bear Stearns that rejected the offer: "[Bear Stearns trader Scott Eichel] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team ... he felt it would be improper." Eichel told Zuckerman, " 'It didn't pass our ethics standards; it was a reputation issue, and it didn't pass our moral compass.'

naked capitalism

Either Blankfein knew what was going on – and is therefore liable before the law – or he was clueless and therefore incompetent. Either way, the much vaunted risk management and control systems of Goldman, i.e., what is supposed to prevent this kind of thing from happening, are exposed to be what we have long here claimed: bunk (as I argued with Gerry Corrigan, former head of the NY Fed and long-time Goldman executive, before the Senate Banking Committee when we both testified on the Volcker Rules in February).

“Too big and complex to manage” is actually the best defense for Goldman’s executives and they should offer to break up the firm into smaller and more transparent pieces as a way to settle the firm’s liability with the SEC. The current management of Goldman – along with the team that ran the firm under Hank Paulson – have destroyed the value of an illustrious franchise. Goldman used to stand for something that customers felt they could trust; now it is just a sophisticated way of ripping them off.

John Paulson obviously knew what he was doing in helping to create the “designed to fail” securities – and the consequences this would have. If he cannot be convicted of conspiracy to commit fraud, then the law in this regard needs to be tightened significantly. The Financial Crisis Inquiry Commission, chaired by Phil Angelides, is probably already planning to grill John Paulson about his taxes – the point Pecora made in this regard with J.P. Morgan junior was most telling and gripped the nation; it turned out that Morgan hardly paid any tax. I would respectfully suggest that the Angelides Commission also pull in Hank Paulson and pursue a similar line of questioning with him – when it focuses on how much money Hank Paulson made, and how little tax he paid, while building and overseeing an extortion scheme of grand proportions, America will scream.

We have something today that Pecora did not have – the pattern of behavior is already established, if not yet widely comprehended. Senator Levin’s recent grilling of WaMu revealed another layer of deliberate mistreatment of consumers within the mortgage industry. The Valukas report on the failure of Lehman exposed exactly how investors are misled by balance sheet manipulation in its most modern and insidious form. And we have learned more than enough about Goldman misleading investors over Greek debt levels.

Brooksley Born was right, a very long time ago, to fear the “dark markets” of over-the-counter derivatives and what those would bring.

Senator Ted Kaufman was right. Just a few weeks ago, he argued strongly from the Senate floor that there is fraud at the heart of Wall Street. Even some people who are generally sympathetic to his critique of modern financial practices thought perhaps that this specific notion was pushing the frontier. But now they get it – and today Ted Kaufman is more than mainstream; he is the public figure who made everything crystal clear.

When you deliberately withhold adverse material information from customers, that is fraud. When you do this on a grand scale, the full weight of the law will come down on you and the people who supposedly supervised you. And if the weight of that law is no longer sufficient to deal with – and to prevent going forward – the latest forms of very old and reprehensible crimes, then it is again time to change the law.

Selected Comments

Crel

Um… you are behind the eight ball. Did you miss that last election???

Under Bush 1, the R’s under Clinton and then Dubya we had the largest deregulation kick EVER; causing one of the biggest financial fiascos of all time. Dubya had a surplus coming in, he and the R’s spent more and caused the largest government growth spurt EVER in the history of the US. Taking away more rights (yes even yours) and denying rights of everyday Americans with God as their rallying cry.

Teabaggers or Tea-bagees are being used by the R’s. You have legitimate concerns about the economy, government and the direction of the country. Sadly most Tea-bagees didn’t care if the Country was being run into the ground under the the “President You Would Most Like To Have A Beer With” and a R run government. So I have no respect nor any sympathy with the Tea-bagees screaming now. You missed your chance and lost all credibility with your latest efforts.

The latest polling outlines the Tea-bagees as exactly what they are, old white guys and gals afraid that something is going to change with their God given rights to entitlements from the government.

jake chase

So, you think the problem with the CDO/CDS racket is disclosure? That Goldman is a nest of criminals only because some flunky in the documents department failed to mention in an unintelligible prospectus that one particular CDO was prepared to the specifications of a short seller? Do you know that these prospectuses are not delivered until after the deals are finished? That nobody but Yves Smith has ever read one?

This is not like indicting Al Capone for tax evasion; it is like indicting Al Capone for parking sixty-five minutes in a one hour zone.

When are you guys going to realize that investment banks have become criminal enterprises and nothing else, that the existence of the CDS market is an unmanageable problem, that financial insurance must leave the taxpayer ultimately holding the bag, that it is impossible to evaluate instruments of any kind so long as trillions and trillions of OTC derivatives create unimaginable off balance sheet exposures?

Incidentally, Pecora was a Rockefeller stooge, which is the reason he pulled JP Morgan’s nose during those hearings. The battle between Morgan and Rockefeller had been ongoing since about 1870. Thanks to his pal FDR, Rockefeller finally got the upper hand in the Thirties. Murry Rothbard tells the whole story in his Monetary Histroy of the United States.

lambert strether

I don’t like that “If the weight of the law…” phrase at all.

It seems like a pre-capitulation, to me. Bill Black has been raising the alarm on “accounting control fraud” for some time now — and I take the fact that mainstream pundits like Krugman never quote him as prima facie evidence that he has a strong case.

We managed to prosecute the perps in the S&L crisis. Ditto Enron. Why not now?

Prantha Trivedi

Excuse my humble ignorance (I am clearly not as sophisticated in these matters as you all), but didn’t the Bush Administration plant corporatist judges in Federal courts across the land – and in the Supreme Court?

If so, do y’all REALLY think that anything of substance will come of this litigation – when, if Goldman Sachs is found guilty, they appeal all the way to the SCOTUS?

(Sadly, as an ordinary person with no pedigree, I expect the SEC to find itself spitting against the wind in the end.)

Russ

I’d love for Simon’s optimism to prove correct, but the whole trend of the evidence is that this is just a scam.

The administration trots this out to coincide with the push for the Dems’ sham “reform” bill. By focusing on just one lower-level Goldman cadre they’re inviting Goldman to go for the “bad apple” defense.

If so they make a deal. They scapegoat that guy, while the Goldman brass are implicitly exonerated. Goldman gets a slap on the wrist, while Obama gets to claim a phony victory and hope it washes politically.

(But whether it’s a sham or is seriously intended, there’s always the likelihood that Obama will cave in. So I wouldn’t be surprised if there’s not even the wrist slap in the end.)

Here’s my own piece on this:

http://attempter.wordpress.com/2010/04/17/the-sec-sues-goldman/

Alex Bowles

That’s one possibility Russ.

Another is that Obama is actually very serious about reform, and knows full well that he’ll never get anything effective through the Congress we have today.

Given the rank corruption in his own party (I’m looking at you, Ben Nelson, and you too, Tim Johnson), compounded by the brain-dead “we’re-opposed-to-anything-that-moves” stance on the Republican side, his reform agenda is D.O.A.

And that’s bad for his re-election prospects. Meanwhile, getting it right gets him shortlisted for inclusion with the Presidential Greats.

A move like this solves several problems at once. By making GS even more politically radioactive, he forces Republican’s to think very carefully about their policy of total non-cooperation. Winning votes out from under McConnell is a giant source of credibility.

And by charging GS with a practice that others surely engaged in, he puts every other bank on notice as well. The message is clear: “I can’t trust Congress not to take bribes, so I have to threaten each and every one of you with certain death if you go on offering them.” Put differently, the next time Obama takes offense at what’s coming out of K St., he won’t be saying so with personal calls from his office. Displeasure will be expressed via guys with badges talking about jail time and disgorgement.

In short, the banking lobby has just been put on notice: their rating has just been downgraded from ‘architect’ to ‘observer’.

jake chase

If Obama were serious he might try a RICO prosecution or two. That doesn’t require Congressional help.

What he seems to be serious about is making speeches and giving his big contributors access to the vault.

No doubt you measure his greatness by the rhetoric. That is the usual measure, and in this case it is the only possible measure, since the man has never done anything else but shoot off his mouth.

[Apr 16, 2010] Short-Term U.S. Treasuries The Best Trade of the Next Five Years by Charles Hugh Smith

Non-wealthy folks are always seeking to increase their wealth via speculations, while the super-wealthy are mostly seeking to preserve the stupendous purchasing power and wealth they already have.

Seeking Alpha

Note how inflation destroyed 2/3 of the value of the stock market between 1965 and 1981. Dow 1,000 in 1981 was not a return to the purchasing power of Dow 1,000 in 1965; the market had effectively lost 2/3 of its value.

Buy and hold was a catastrophe for 16 long years. OK, that was an inflationary era; what if this is a deflationary Bear era? Then we can look to the 1929-1946 period for guidance; the DJIA was still about half of its 1929 peak 17 years later in 1946. Stocks didn't do that well in a deflationary era, either.

One way to contextualize any market is to ask: if I was managing (say) $600 million for a family that simply wanted to retain the purchasing power of their holdings, what would I do?

... ... ...

Non-wealthy folks are always seeking to increase their wealth via speculations, while the super-wealthy are mostly seeking to preserve the stupendous purchasing power and wealth they already have. And since as I have noted here many times recently, 43% of the financial wealth of the nation is held by the top 1% and 72% by the top 5% (The Contrarian Trade of the Decade: the U.S. Dollar March 22, 2010) then we can safely predict that what the super-wealthy decide to do will move the markets.

We should be mindful of this difference in perspective between the average financial pundit, small-time money manager, newsletter writer, financial blogger and MSM financial commentator and those who own the nation's financial wealth.

To summarize: in inflationary eras, stocks lose 2/3 of their value. Yes, yes, if you're fleet of foot and nimble and a brilliant trader, then you might be able to overcome this gargantuan wealth destruction by going long and short and leveraging your bets at just the right moments. But if you control $600 million, the problem is much simpler--just keep whatever purchasing power you already own.

Yes, gold is one potential avenue, but liquidity and other basic money-management issues such as diversification suggest that some of the super-wealthy funds would be happy to just earn a modest inflation-adjusted return.

The thing to avoid, for small-fry like myself and the super-rich alike, is wealth destruction on the massive scale of 2000-2002, 2008-2009, 1929-1932 or 1969-1981. So a modest "real" return is more than adequate for the super-wealthy.

Put together a generational trend of rising rates, demographic insolvency, population/resource imbalances, costly oil/energy and what do you get if you're trying to protect $600 millon? Short-term Treasuries. Yes, sovereign default of the U.S. is possible, but as Keynesians are ever-delighted to note, the U.S. can print its own currency. If that eventually results in inflation (something I don't consider likely due to the sheer size of assets losses-- Deleveraging and the Futility of "Printing Money" April 2, 2010) -- then the short-term T-bills will have to offer some real return lest they attract no buyers.

So the "smart money" will exit risk-laden, low-return equities and long-term bonds entirely for the safety of the short-term Treasury market. If we are in a deflationary era, then short-term T-bills will still offer wealth preservation, as prices will fall, driving the real (purchasing power) yield higher than the nominal yield.

If this is so, then we can expect the stock market to slowly drop to a mere shadow of its current euphoric self and the long bond to be destroyed as rates rise. By the time the financial punditry has caught on, the smart money will have already exited equities and long bonds. It's called distribution, and it's what we're seeing now in the stock market.

[Apr 16, 2010] The "Money On The Sidelines" Paradox: Difference Between Money Market Outflows And Asset Inflows Hits $100 Billion by Tyler Durden

04/16/2010 | www.zerohedge.com

The weirdness in fund flows continues: first Lipper/AMG has reported that for the past week equity outflows were a total of ($3.3) billion. We assume this is total domestic and global outflows because we know from ICI that domestic fund flows have been consistently negative for the past several weeks confirming yet again that the only people buying the market are Primary Dealers who are using ZIRP as a free capital to create stock market bubbles in selected stocks in the hope of offloading extremely expensive positions to gullible retail investors.

Still, total equity flows YTD are positive and even after this week's outflow, are up for the year by $18 billion. Once again, we are confident the bulk of this number is based on foreign equity flows.

Yet the most startling number is the ongoing pillaging in money market funds, which after losing another massive $35.6 billion in the past week are now down a stunning $327 billion for the year, or a 10.2% decline in total assets in just over three months. At this rate of redemption, the total holdings of money market funds will be cut in half by the end of the year. And even as investors have allocated the bulk of their money into bonds, primarily taxable and high grade, there is still nearly a $100 billion disconnect between total MM outflows and various asset inflows. As this money has not been reinvested, and certainly not into equities, and as deposit savings accounts offer about the same yield as MM, meaning it likely has not been funneled into deposit accounts, it has instead most likely been spent on various goods and trinkets. If one assumes that just half of the $100 trillion in Money Market withdrawals that has not been reinvested has gone toward various discretionary purchases, that would explain the "outperformance" of all retail sales year to date. The problem is that the Money Market outflow will moderate very soon as consumers realize that the boost to consumption has been entirely temporary and a function merely of depletion of existing MM cash, pushed out mainly due to Bernanke's insistence on keeping rates at zero.

In summary: Bernanke has succeeded in getting Americans to deplete their money market accounts. However, he has failed miserably in getting this money funneled into equities, which has been the plan all along. And the longer the market continues its relentless march upward with no respite, the more certain it is that no incremental money will be invested to chase skyrocketing prices. Once again, the Fed Chairman has been cornered, and will be forced to take equities much lower very soon. That in turn, would have material impacts on the Primary Dealers, who are levered to the gills with stock exposure. Any forced market correction will impair banks more than any other investor class at this point.

Forbes Says:

We initially had Yves Smith outing ZH many months ago about alleged shenanigans from ZH’s past and ZH’s use of a pseudonymous persona, ironically it turned out that Yves Smith is actually a “pen name” for a certain financial consultant named Susan Webber. In the process she lost one of her best contributors (Leo Kolivakis). Felix Salmon that mainstream media financial blogger also piled on, outing ZH for his alleged sins when ZH was a trader. Now we have Ritholtz (King of financial bloggers) trying to stir things up implying that ZH was some how directly challenging Matt Trivisonno commentary on payroll withholding, which is not the case.

If Matt has an issue with ZH`s writings I am certain that ZH would welcome a rebuttal within the ZeroHedge.com forum and if Ritholtz has an issue with ZH`s opinion perhaps he would do well to take him on directly either here or over at Zerohedge. To simply post another blogger`s (Trivisonno) rebuttal of another bloggers (Zero Hedge) writings is at the verputflows have been used to pay down consumer debts, cover existing cost of living expenses during unemployment (the 'ole emergency fund bit), or self-fund purchases that would normally be made by debt (such as larger ticket items)? It would be interesting to see the debt contraction (not credit limits, mind you, but actual debt contraction) numbers with these numbers side by side.

whatsinaname:

Well kind of like Japan ? Savings rate there has dropped mightily from a loft 20% + to almost 2.3 % now. Crime among seniors is almost at all-time high these days as they struggle in retirement. So much for low interest rates to stimulate the masses !!

Meanwhile dailyjobcuts.com shows why consumer confidence is plunging again. Job losses in March / April are severe especially in govt sector.

Astute Investor:

"as deposit savings accounts offer about the same yield as MM, meaning it likely has not been funneled into deposit accounts..."

Not necessarily true. Transferred signficant $$$ from MM account to ING Direct. MM yielding 0.20% tax free (0.32% pre-tax equivalent) vs. 1.25% on checking account funds ($100 k +). Plus I get the benefit of worthless FDIC insurance!

Cognitive Dissonance:

"As this money has not been reinvested, and certainly not into equities, and as deposit savings accounts offer about the same yield as MM, meaning it likely has not been funneled into deposit accounts, it has instead most likely been spent on various goods and trinkets."

I'm seeing this with my clients, who see/saw their brokerage MM cash as "available" for purchases they might have previously taken a loan for, such as a car, motorcycle, boat or even cash in the pocket for everyday expenses. I'm also seeing MM cash being used to pay down debt, the thinking being that since they are getting next to nothing for the money, they might as well use it to pay down that 15%-25% credit card.

And I agree that in many cases this is a productive use of idle cash that isn't earmarked for immediate future use. Money should be allocated to the highest returning asset while also controlling for risk and asset class. Sometimes cash is better used to pay down debt than to simply accumulate. People don't want debt hanging over their heads and I don't blame them one bit.

Finally, a few who are unemployed are using the cash to supplement their UI checks, again as expected.

Commander Cody:

And it is so true that the PPT must keep equities elevated or the banks will crash the most. Alas, we will have to bail them out once again. Wash, rinse, repeat, ad infinitum.

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chindit13:

Serious request:

With the possible exception of three folks on this site, most regulars are some combination of bearish or bewildered, even the ones who are long the madness. Thus most of us are seeing the same side of things.

If anybody is out there (here) who holds a positive view of the economy/debtstructure/financial system/future, would you be so kind to explain why. Please take into consideration the debt levels---public and private---, RE inventory, accounting "poetic license", jobless rate, world economy, moral hazard argument, etc. Please feel free to point out the aforementioned issues which you might find irrelevant.

I'm open to being shown what it is I am not seeing, but the arguments must be stronger than what CNBC offers, and must encompass more than just "liquidity". Thanks in advance.

by Anonymouse

Great request. Admittedly there is some marginally positive info. But it is just that, marginal, or more often just less bad. Now the reaction to that marginal or less bad news is decidedly optimistic, but the underlying news is not.

Or are we all blind to the obvious?

andy55:

Great post. However, it would seem one does not have to look far to find the aforementioned bulls. Whether it's Tom Keene's interviewees, most of the guests on any "major" news outlet, anecdotal evidence from connections in hedge funds, or the price action in the stock and debt markets, everyone but us appears to be locked-on to a sustainable recovery thesis (or at least continuing the 'moral hazard' trade).

So basically most of the folks here are either geniuses (ok, not me anyway), or our trades (or lack thereof) will leave us worse off. As convinced as I am of a massively looming crisis that lies ahead in the very near future, I can't help be frustrated at the CBs of the world successfully reflating key asset classes.

My biggest concern is that I am unable to explain how we are are able to clearly identify factors that we're saying are about to sink the ship while most others believe this recovery is healthy and on track. Now, I would argue that their belief that the recovery's foothold will grow into a full grip is a result of decades of conditioning of QE pushing present pain into the "distant" future, but it doesn't change the collective effects of their beliefs.

Could it be the case we are the ones too paranoid and close-minded to see a recovery that could last many years?

AnonymousMonetarist

Hey TD check this out...

This morning's King report ...

An astute money manager from across the pond informs us that buried in the JP Morgan earnings report on supplement page 4, JP Morgan admits that an accounting change shaved $4.5B off its equity and adjusted for this change JPM would have shown an earnings loss for Q1.

bugs:

Home town banks here in dallas area getting
a lot more aggressive about CD's and savings
accounts. I got cold called to open a bank
savings account last week.

Money market accounts are not competitive
and the right pitch from the local bank
will win the account. Most of this money
will ultimately wind up there especially
when equities turn and more muni's BK.

Hephasteus

If they are going to drive everyones pensions into gold they are going to have to pay a hell of a lot more than 1160 an ounce.

Hickory

ZIRP has moved a set of savers from a position in which they are spending income to one where they are spending capital. I don't know how large this group is, but gut my gut feel is that it's large enough to affect the aggregates. Is there a way to roughly quantify this, combining the data TD is using here with other sources?

Assuming that this shift affects a (former) saver's propensity to spend, the result would be an offset to the hoped-for boost to spending via QE in the here and now, and a similar offset to the tightening effect on the economy from any exit strategy that is ever put in place.

Anonymouse :

ZIRP has definitely screwed this saver over. A year ago, the interest on my deposits would fund about 25% of my expenses. Now with ZIRP I get almost no interest.

So I am definitely spending capital.

dead hobo:

Excerpt:

... using ZIRP as a free capital to create stock market bubbles in selected stocks in the hope of offloading extremely expensive positions to gullible retail investors.

reply:

-------------

My thinking exactly and thanks for documenting the flows so clearly.

Please notice that major (hedge fund) banks reporting so far would have lost megabucks if not for the suspension of FAS 157 and trading profits. Without savings being depleted for consumption and the Fed propping up the markets and subsidizing hedge fund profits via ZIRP, the rest of the economy would be closing in on the double dip. Funds flowing out of equities will likely make the investment pros even more shrill in attempting to make people who won't buy their products look like pussies. Perhaps this will be the modern method of making zombie banks?

BTW, what's the big deal at The Big Picture? Matt Trivisonno has a thin skin for criticism. In his post of a week or so ago he made a couple of math errors and went crazy in denial about them. Now BR treats the math error infested work as a credible reference and the author yelps like a yappy ankle biter about other views. WTF??

[Apr 15, 2010] More on oil prices and the economic recovery

Is a jobless and oil-less recovery a real recovery... Recovery from what? From unsustainable "regular" car fleet expansion with the implicit assumption of unlimited oil available ? What is the current percentage of hybrid cars in the USA fleet? Amount of oil consumed strongly correlated with GDP. Increasing energy efficiency in cars lately was pretty spotty with the notable exception of addition on 15% of alcohol to the gas.

April 15, 2010 | Econbrowser

Steve Kopits

As Jim indicates in the respective chart above, the US has tended to enter recession when crude oil consumption exceeds approximately 4% of GDP. However, it is not clear whether this threshold also applies during the periods of economic recovery (as opposed to at the end of a business cycle). Can an economy sustain a higher oil price when entering a new business cycle? An autopsy on post-1973 and post-1979 period could be instructive. It doesn't feel right now like the US is headed back into recession at current oil prices, which are pretty close to the 4% threshold.

However, it is not clear whether US oil consumption can grow at current prices. The March EIA data were pretty weak on the consumption side, with inventories growing across the board. This may be due purely to seasonal factors. Time will tell, but the historical data suggest that the US reduces crude oil expenditure when it exceeds the 4% threshold, and I think the evidence suggests this reality remains unchanged. At current oil prices, US consumption seems unlikely to grow materially.

If so, then this constitutes just one more constraint on recovery; that is, jobs must be recovered without using more oil in aggregate. In other words, we face an oil-less recovery. The specific, quantitive relationship between oil prices and growth in employment is not clear to me; this topic would be worthy of a bit of analysis in its own right as the administration contemplates energy and economic policy in a world of high-priced oil.

[Apr 15, 2010] Sitting on Bayonettes Safehaven.com By Bill Bonner

Blast from the past

May 28, 2004 | Bill Bonner
There is a time for everything.

Yesterday, we meant to tell you - perhaps we did - about our conversation with a young French analyst. "Dynamism," he said, "that is what separates America from Europe. You Americans are ready to take action. While we Europeans hesitate."

There is, of course, we explained, a time for action...and a time for reflection. One of the curiosities of life is that people - amidst the masses - tend to get mixed up. They tend to reflect when they should act, and act when they should reflect.

Dynamism is said to be the salvation of the U.S. economy. Yes, Americans owe too much to too many people. Yes, they spend too much. Yes, Asians will do their jobs cheaper. Yes, their stocks and real estate are very high. Yes, their incomes are going down. Yes, they have leveraged the entire country at artificially low interest rates...and yes, millions of them will go bankrupt when interest rates rise.

But no, there is nothing to worry about, because America has such a 'dynamic' economy.

Even the Europeans admire it. They think Americans are naïve and stupid. But they, too, believe the dynamic U.S. economy will not fail.

The burden of today's little essay is that not only will dynamism not save the U.S. economy...it will destroy it.

"You can do anything with bayonets...except sit on them." Our French Daily Reckoning correspondent, Philippe Bechade, quoted Talleyrand to make his point. The French foreign minister under Napoleon explained that seizing a city was a very different matter from holding it. For the latter, you needed at least a minimum of cooperation from the citizens. You had to sit down with them and make a kind of peace. And you couldn't sit on bayonets.

Then again, "Napoleon never ordered a bombing of a wedding on pretext that enemy soldiers were in attendance...certainly not based on dubious intelligence available," continued Bechade.

"Talleyrand would have declared, 'Sire, worse than a crime, you have committed a blunder.'"

There is a time for everything. A time to take action. A time to refrain from embracing foolish action. And a crime for every purpose under heaven.

George W. Bush and Alan Greenspan are the dynamic men history needs. They are the men for their time. America needs to be taken down a notch, and they are just the men to do it. George W. Bush's contributions to America's destruction are right out in the open: clumsy wars...and wanton new spending programs. Alan Greenspans's crimes are less obvious.

But following the collapse of the Nasdaq in 2000, and the recession of 2001, Mr. Greenspan did not sit idly by. He and his crew fixed bayonets and charged. But in lowering its key interest rate below the inflation rate, and holding it there for longer than ever, the Greenspan Fed has committed a grave error. It has enticed the consumer deeper into debt. It kept alive marginal business and investment projects (by making it easy for them to refinance old loans)...and encouraged new ones. (Once again, as reported this week, we have IPOs coming to market with neither profits nor products.) And it fueled huge new bubbles at home and abroad. Real estate in many areas of the U.S. is soaring. A report from the Federal Reserve shows the value of U.S. housing stock rising from about 60% of GDP in 1945 to nearly 140% today. Houses in Southern California have sprouted wings; new buyers can barely catch them before they take off. And in China, a bubble of capital goods consumption has set the entire nation into a smelly, noisy, dizzying construction boom...and driven up the price of oil and other raw materials all over the world.

Before the industrial revolution, a laborer in China, India, or Massachusetts enjoyed about the same reward for his efforts. But the introduction of machinery in the West gave the Yankee a huge advantage; soon an hour of his time was worth 10 times...or a 100 times...more than that of an Indian. Now, China and India are catching up.

Mr. Greenspan hoped his E-Z credit would lead to a rise in hiring and wages. He knows as well as we do that only if consumers have more money to spend will a real boom get underway. He got the increases he was looking for but not where he was looking for them. The new factories were built in China, not America...and Chinese workers gained the extra income.

Putting up its factories at a feverish pace, China develops more competitive capacity every day. This too, is what Alan Greenspan's low rates have wrought. Americans are more in debt than ever. They own less of their own houses than ever before. The average American worker earns 6%, in real terms, less than he did a quarter of a century ago. During the same time, the average Chinese salary increased 29 times.

Americans tried to compensate for the loss of real earnings by becoming more dynamic and carefree than ever. They rushed into the Information Revolution...believing that this new technology would keep them far ahead of the rest of mankind. Then, they rushed into stocks...and real estate...and borrowing more money...and spending more money. They seemed ready to do anything - including invading woebegone foreign countries - if they thought it would keep them on top of the world.

If he knew what he was up against, the average American would squirm; he has charged into debt...now he sits on his bayonet! He owes more than ever...works harder than anyone...or, at least longer hours. And now, he is faced with approximately 1 billion workers in Asia against whom he must compete, head to head.

If any man is to blame for this, it is Alan Greenspan. It is not all his doing, of course. But no man did more to help it along.

We write not in anger, but in resignation. Americans have come to believe that they can get something for nothing - forever. They don't think they will ever have to pay their debts. They imagine that they will forever earn 10 to 100 times as much as a man in China or India. They believe their economy is immune to the laws of economics...that it is so 'dynamic,' it can survive record debt and deficits forever. Mr. Greenspan has come along at precisely the right moment; he will show them otherwise.

...if you'll be in the New York area next week, don't miss Bill's address at the Institutional Gold Conference. It's the world's largest natural resource investment conference, attracting the biggest names in gold - portfolio managers, mining CEOs, analysts and financiers. Drop by if you can, it's free: The New York Institutional Gold Conference

Regards,

Author: Bill Bonner

Bill Bonner
The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

Empire of Debt: http://www.dailyreckoning.com/empireofdebt.html.

Copyright © 2002-2007 Bill Bonner

[Apr 15, 2010] Has the Rally Finally Lured 'Ma and Pa' Back to Stocks

As Keynes used to say; market can remain irrational (or manipulated) longer than you can remain solvent. But there might be a serious trouble looming for stock funds: negative outflow can became permanent feature as baby boomers start to retire. Demographics is destiny. Baby boomers probably are now more cautions and other retail investors don't have much money... Wall Street firms trading with each other managed to lift S&P 500 to 1200 so nothing impossible. wonders of HFT are similar to wonders of bayonet in old time. From another point of view as Napoleon (or was it Talleyrand?) aptly stated "You can do anything with bayonets... except sit on them.". But if downturn happens it might be very sharp as rats will jump the ship in synch.

MarketBeat - WSJ

The flow of cash into bonds pretty much continued unabated through 2009. During the fourth quarter, an average of 35.77 billion poured into bond funds each month. Still the pace has slowed somewhat, for instance during December ‘09 and January and February of this year, the average monthly inflows to bond funds are down to $26.63 billion.

Meanwhile, equity funds started the first couple months of 2010 with positive inflows, compared to the negative outflows of the last four months of 2009. In the most weekly recent data, for the week that ended April 7, inflows to bond funds were about $6.5 billion, still greater than stocks, which came in at $4.84 billion. But they’re getting a lot closer.

Paul:

Sorry, I guess I don’t live in your reality. Here in Oregon we still have extremely high unemployment and that recently-reported “surge” in productivity is brought about by salaried employees continuously working 50+ hour weeks (but getting paid for 40 hours). The folks I know who used to be investors (as opposed to traders) do not believe that this rally is sustainable. They and I will patiently wait for the next significant drop in the market to get back in.

Walter Guan

Well, cycle after cycle, repeat again and again in history, “Ma and Pa” are usually the final buyers of the trend, that is why they usually become long time investors ‘reluctantly’ when market turns or crashs shortly after they ‘invest’.

[Apr 15, 2010] Economist's View Fed Watch Consumers Come to Life

Tim Duy is cautiously optimistic:

Consumers Come to Life, by Tim Duy: Today's retail sales report should dispel any lingering concerns that American consumers remain huddled in their basements, clutching a bar of gold with one hand and a loaded shotgun with the other. Indeed, even a relative pessimist like me has to admit that recent trends (log differences) look pretty good

Chris:

These graphs don't take into account the high amount of unsustainable government spending (ie stimulus & bailouts) in determining the future trend.

For example, look at Nominal GDP growth compared to what it would be without the deficits: http://market-ticker.denninger.net/uploads/2010/Apr/gdp-real-yoy.png

Also this blog post says: "Bottom Line: The retail sales report was strong, pointing to both pent-up demand and sustainability"

Maybe I missed something but that's not what I read the Fed Beige Book reported. It reported it increased "somewhat"--hardly "strong" or with resounding confidence. Commercial real estate activity was was characterized as "very weak"...."Businesses were cautiously optimistic regarding future sales"..."Retail prices generally remained level, but some input prices increased. Where producers faced cost pressures on inputs, they were largely unable to pass those prices downstream to selling prices"

"Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported "softened" economic conditions." Beige Book
http://www.federalreserve.gov/FOMC/BeigeBook/2010/20100414/default.htm

I highly doubt retail sales continue a rapid recovery trend, unless the stimulus trend continues in earnest -- which it can't without substantially risking higher inflation and higher interest rates (despite some disinflationary pressures)

Note the emergency Fed meetings about a rate rise. This is "testing the water". Is this related to input prices rising? I don't know. Rates could very well rise at some point that will dampen retail sales growth below the past trend.

Also see:

U.S. foreclosure actions spike in Q1 despite aid
http://www.reuters.com/article/idUSNYS00791220100415?type=marketsNews

Major lender signals surge in local foreclosures
Data show Bank of America sends wave of auction notices to homeowners
http://www.nctimes.com/business/article_fa8b8a2a-0fc6-526a-b125-d86bec3d79c4.html

Unemployment likely to remain high for two more years, IMF predicts
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/14/AR2010041401899.html?hpid=topnews

bakho:

What is NOT sustainable about the Federal budget is the increasing costs of health care per person. However, the rate of health care cost is NOT sustainable for the private sector either. The budget ballooned because of one time emergency bailout funds. The budget ballooned because revenues fell off a cliff. The US does NOT spend an inordinate amount of money. If Bush had not cut tax cuts for the wealthy, we would have had a balanced budget instead of $5 Trillion in Bush debt. The wealthy would have had less money to waste inflating the housing bubble.

Revenue is the primary problem, not spending. If we control health care costs and reign in excess defense spending, the budget will be fine. To balance, we need to get rid of the unaffordable and unsustainable Bush tax cuts.

[Apr 15, 2010] Pack of Fools

http://www.amazon.com/Economics-Innocent-Fraud-Truth-Time/dp/0618013245

P.G. Waddilove

Lewis’s book has had us in tears of both laughter and intense dismay.

Reading today of JP Morgan’s staggering 1Q 2010 earnings, we wonder why no one seems to be asking where it’s all coming from. What sort of bonds are they buying and selling?

Another way to say this is: Noriel Roubini, Steve Eisman, Michael Burry, and Jamie and Charlie, and all their friends, where are you now that we need you AGAIN? What’s going on? What are the banks up to this time? How long until they all topple over?

Rickk

P.G. Waddilove wrote:

“What’s going on? What are the banks up to this time? How long until they all topple over?”

We are experiencing a Wile E. Coyote moment.

http://www.zewebanim.com/images/Looneytunes/wile-coyote-wallpaper.jpg

[Apr 14, 2010] US Military Warns Of Oil Shortages By 2015 With Significant Economic And Political Impact, Especially On Weak Countries, India And China by Tyler Durden

04/14/2010
A report issued by the US Joint Forces Command has a rather bleak view on US oil production, and on peak oil in general. In a foreword to the report issued by General James Mattis, he warns that "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day." Does this mean that oil, just like in the Bush administration, is about to become a "strategic interest", which coupled with the upcoming discoveries of non-existent weapons of mass destruction, would result in some additional geopoltical tensions particularly in the middle east? With nuclear tensions between Iran and Israel already at boiling hot levels, will Uncle Sam decide to make landfall in the Persian Gulg once again?

More from the General: "While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds.

Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India." Well, Mr. Chanos, there's your catalyst. We just hope that the negative carry of a five year short position is palatable to your LPs.

Small Business Optimism "Very Low and Headed in the Wrong Direction”

cat:

As a small business owner, what is hitting escape velocity is corporatism, fascism (defined as the state deciding who wins and loses) and the overlordship of the banking clan.

VegasBob:

@cat, I couldn't have said it better. We live in a society where true wealth creation has been replaced by fascist corporatism (epitomized by the FIRE economy), accounting trickery and outright accounting fraud.

Any small business person can simply look at store traffic and sales and see that the idea of economic "recovery" on Main Street is a complete travesty.

Gary Anderson:

It is too bad that small business, like small banks, will take the brunt of Wall Street greed. Small business and unions and households who own housing are all getting kicked in the chops, while more money gravitates to the top.

FatBear:

It is too bad that small business, like small banks, ... Gary

Hold it right there. Why do you mix in "small banks", which are bad since they practice FRL, with small business, which is not necessarily bad (depending on whether it uses the counterfeiting cartel)?

afrost:

Public sector unions are not getting kicked. These minor givebacks which have occurred in isolated instances are much less than the layoffs and cutbacks in the private sector.

Bernanke confident on recovery; warns on deficit - Yahoo! Finance

Cheerleading. or something with substance ?

Another government report showed that inflation remains tame. Consumer prices edged up 0.1 percent last month. Low inflation gives the Fed leeway to hold interest rates at rock-bottom levels to support the recovery. Despite a steep run-up in energy prices, inflation is under control, Bernanke said.

Fielding questions from lawmakers, Bernanke repeated the Fed's pledge to keep interest rates at record lows for an "extended period" to aid the recovery. Rates have been at super-low levels since December 2008.

"The economy is still very, very rough," said Rep. Maurice Hinchey, D-N.Y.

At some point when the recovery is firmly entrenched, the Fed will need to start boosting rates to prevent any inflation problems.

The soonest the Federal Reserve will begin raising short-term interest rates is the fourth quarter, according to 34 of the 44 economists polled in a new AP Economy Survey that debuted on Monday.

Businesses, meanwhile, have boosted spending on equipment and software at a solid pace and factories are benefiting from stronger demand for U.S. exports, Bernanke noted. Improved financial conditions are also helping out the economy.

However, problems still remain.

Bernanke said weakness in the housing and commercial real-estate sectors is putting "significant restraints" on the pace of the economic recovery. And, the poor fiscal conditions of many state and local governments have led to continuing cutbacks in workers, another force that will hold back the recovery, he said.

"You got some giant issues," Sen. Sam Brownback, R-Kan., told Bernanke.

On the jobs front, Bernanke was encouraged by the 162,000 jobs added in March, the most in three years. However, the moderate pace of the economic recovery means that the 8 million-plus jobs lost by the recession won't quickly return. Bernanke said it will take a "significant amount of time" to restore those positions. He didn't say how long.

The unemployment rate has been stuck at 9.7 percent for three straight months, close to its highest levels since the early 1980s.

Bernanke said he is especially concerned about that 44 percent of the unemployed in March had been without a job for six months or more. "Long periods without work erode individual's skills and hurt future employment prospects," he said. Younger workers may be particularly hurt if the weak labor market prevents them from finding a first job or from gaining important work experience, Bernanke said.

On other topics Bernanke said:

-- Rising oil prices are not a "serious threat" to the economic recovery. Oil was trading at about $86 a barrel at midday, but that was still down from record high of more than $145 a barrel in 2008.

-- He doesn't see any "significant impact" on mortgage rates with last month's ending of a $1.25 trillion mortgage-buying program. The program has lowered mortgage rates and bolstered home sales. If the economy were to weaken, Bernanke said the Fed could revive the program.

--China should let the value of its currency rise, a move that would support U.S. exports by making them cheaper to foreign buyers.

--The Fed doesn't see speculative bubbles forming in assets such as stocks, bonds or commodities, at this point but is closely monitoring the situation. Some worry that the Fed's low rates will create another bubble like the one in housing that burst and threw the economy into a recession.

[Apr 13, 2010] Mish Mailbag: IBM Abandons U.S. Workers

Here is an Email from "Voice in the Dark" about IBM and outsourcing. VID writes ...

Hello Mish
I read your blog every day. I do not comment much, but I think the MSM and most blogs are missing out on the greatest story not being told.

Large corporations are abandoning the US. I work for IBM. Here is a snapshot of IBM's US headcount:

2005 133,789
2006 127,000
2007 121,000
2008 115,000
2009 105,000
2010 98,000 estimate

These are all good paying jobs that can support a family and pay taxes.

Today, 75% of the total headcount is overseas. The overseas revenue is 65%. The company reported record profits last year. IBM decided to stop reporting their US headcount this year.

You know that many companies are moving their resources overseas. China is the new spot to build development centers. These incremental loses are adding up. But the saddest thing is that they are giving away the building blocks for innovation.

I just read a few weeks ago the Applied Material is planning to replace their US research center for a new one in China. That is another example of what is going on.

And no venture capitalist would attempt to build a solar panel factory from scratch in the US. The costs and the EPA will prevent that.

Please tell this story.

Sign me: Just Another Voice in The Dark

Hello "Voice in the Dark".
I covered the situation with Applied Materials in High Tech Research Moves From U.S. To China

Goodbye Silicon Valley, hello Xi’an China. Applied Materials will do new cutting edge research on solar panels in Xi’an. ...

Please see Brain Drain as a followup.
Two Drivers For Outsourcing

Outsourcing jobs has been going on quite some time. Let's address why.

For starters, global wage arbitrage is one huge factor in play.

Unfortunately, wage equalization and standard of living adjustments between industrialized countries and emerging markets will be a long painful process for Western society.

On that score, there is little that can be done except reduce wages and benefits in the public sector and stop wasting money being the world's policeman. We simply can no longer afford it. Besides, neither of those things ever made any sense anyway.

US Tax policy is another reason for outsourcing, and that can easily be addressed, at least in theory.

US corporate tax policy allows deferment of profits overseas, but profits in the US have a tax rate of 35%. This policy literally begs corporations to move profits and jobs, overseas.

[Apr 13, 2010] Why the Stock Market May Be Topping by Daryl Montgomery

5 Comments

Markets hit tops or bottoms when almost everyone shares the same opinion. Current conditions in the U.S. stock market are reaching an excess of bullishness and this indicates a top could be forming. Investors should proceed with caution.

When it comes to market opinion, the majority is usually right and investors should generally move with predominant view in the short term. However, when majority opinion starts to become overwhelming - say less than 20% of investors are bullish or bearish - then herd behavior has taken over and it's time to think about stepping aside. At extremes there is no one left to buy or sell, so there is no more fuel left to propel the market in the direction that it has been going. The U.S. stock market has probably already reached that state.

News media coverage is one of the best gauges of whether or not a market has overreached. When it starts to become too positive or negative, the end of the trend is usually near. News coverage for the recent market rally has indeed become extremely positive. When the Dow Jones Industrial Average closed above 11,000 yesterday (April 12th), it got a lot of glowing press reports. This new high for the rally was hit on volume that was below average - an indication of a lack of enthusiasm from market participants. Declining volume has been a serious problem for the rally for a long time now and will eventually do it in.

The dollar has had a significant sell off from around 82 to 80 in the last few days because of the Greek bailout. Money has flowed out of Europe during the crisis and into North America, helping to drive up the U.S. stock market as well as the dollar. A resolution to the crisis will reverse this flow and be bearish for U.S. assets. In reality, the problems in Greece are not over. While a bond auction held yesterday was quite successful in terms of selling the bonds, the interest rates Greece paid were very high - more than double the rates from the January 12th auction for similar debt. Greece's problem wasn't selling its bonds, but the high rate of interest it had to pay on those bonds. So far, the bailout doesn't seem to have fixed the actual problem. While money may no longer be flowing out of Europe, it may not be quite ready to return there just yet. When it does, the U.S. stock market will drop.

Yale professor Robert Shiller has just released an updated version of his historical PE chart for the S&P500. The current level, just below 22, is around the long-term market peak in 1966 and is higher than the PE before the 1987 crash. It is well below the 30 level reached in 1929 and the 44 level reached in 2000 though. Investors should assume that the current 22 number understates the actual PE ratio. Changes in accounting rules during the Credit Crisis have made corporate earnings much higher than they would have been, especially for the financials. The New York State Comptroller's office reported that Wall Street's earnings were three times larger in 2009 than they were in 2007, which itself was an all time record year for earnings. Investors should wonder how earnings could triple from historical highs during the worse economic downturn since the Great Depression. Disneyland accounting along with the federal government transferring money from the U.S. treasury into the coffers of bailout recipients is the answer.

As always, investors should pay close attention to the VIX, the S&P volatility index. A low number indicates investors have become too complacent and the market is likely to start selling off. The VIX fell to 15.23 yesterday and is testing levels last seen in May 2008 and October 2007. The 2003 to 2007 bull market peaked in October 2007 and stocks fell off a cliff in the fall of 2008. Investors were extremely optimistic during the 2007 VIX low, as they always are during a market top.

Disclosure: Long oil.

[Apr 13, 2010] The most ridiculous excuse ever no one saw the crisis coming by Henry Blodget

Apr 13, 2010 | Tech Ticker, Yahoo! Finance

One by one, the perceived villains of the financial crisis have been paraded in front of Congress. And, one by one, the perceived villains have invoked the defense that Doris "Tanta" Dungey at Calculated Risk once dubbed "Hoocoodanode" (Who could have known?")

In other words, don't blame us--because no one could have seen the crisis coming.

Whether any particular individual deserves the blame for the financial crisis is a different question. Based on the frequency and regularity with which such crises occur, the answer is probably "no." Everyone got caught up in it together, and, as is often the case, too many people extrapolated the recent past into the hereafter.

But for those who have spent their lives and careers around the financial markets, the "Hoocoodanode" defense is preposterous. There's never any certainty in economic or market forecasting. Ever. The quickest of glances at history, meanwhile, suggests that surprising pullbacks and problems occur all the time.

So for folks like Bob Rubin (former Treasury Secretary and Citi advisor) and Alan Greenspan (former Fed Chair) to suggest that the financial crisis was impossible to foresee is disingenuous. The particulars of the crisis--the when, what, and how--might have been impossible to foresee. But the idea that, someday, there might be a day of reckoning, and that this day of reckoning might catch people by surprise, is as basic as economic and market forecasting gets.

Ken Posner, a former financial-services analyst at Morgan Stanley and author of Stalking The Black Swan, says that what people need to do is prepare themselves for such crises and behave as though they might occur anytime. He also says that, when the crises do occur, people in power need to learn to see them faster--and react accordingly.

[Apr 13, 2010] THE $100 BILLION QUESTION by Andrew G Haldane, Executive Director Financial Stability. Bank of England

March 2010

Comments given at the Institute of Regulation & Risk, Hong Kong, 30 March 2010. I am grateful to Dele Adeleye, David Aikman, Marnoch Aston, Richard Davies, Colm Friel, Vaiva Katinaite, Sam Knott, Priya Kothari, Salina Ladha, Colin Miles, Rhiannon Sowerbutts and Aron Toth for comments and contributions.

THE $100 BILLION QUESTION

The car industry is a pollutant. Exhaust fumes are a noxious by-product. Motoring benefits those producing and consuming car travel services – the private benefits of motoring. But it also endangers innocent bystanders within the wider community – the social costs of exhaust pollution.

Public policy has increasingly recognised the risks from car pollution. Historically, they have been tackled through a combination of taxation and, at times, prohibition. During this century, restrictions have been placed on poisonous emissions from cars - in others words, prohibition. This is recognition of the social costs of exhaust pollution. Initially, car producers were in uproar.

The banking industry is also a pollutant. Systemic risk is a noxious by-product. Banking benefits those producing and consuming financial services – the private benefits for bank employees, depositors, borrowers and investors. But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises.

Public policy has long-recognised the costs of systemic risk. They have been tackled through a combination of regulation and, at times, prohibition. Recently, a debate has begun on direct restrictions on some banking activities - in other words, prohibition. This is recognition of the social costs of systemic risk. Bankers are in uproar.

This paper examines the costs of banking pollution and the role of regulation and restrictions in tackling it. In light of the crisis, this is the $100 billion question. The last time such a debate was had in earnest followed the Great Depression. Evidence from then, from past crises and from other industries helps define the contours of today’s debate. This debate is still in its infancy.

While it would be premature to be reaching policy conclusions, it is not too early to begin sifting the evidence. What does it suggest?

Counting the Systemic Cost

One important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking?

There is a large literature measuring the costs of past financial crises.1 This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP.

What about the present crisis?

The narrowest fiscal interpretation of the cost of crisis would be given by the wealth transfer from the government to the banks as a result of the bailout. Plainly, there is a large degree of uncertainty about the eventual loss governments may face. But in the US, this is currently estimated to be around $100 billion, or less than 1% of US GDP. For US taxpayers, these losses are (almost exactly) a $100 billion question. In the UK, the direct cost may be less than £20 billion, or little more than 1% of GDP. Assuming a systemic crisis occurs every 20 years, recouping these costs from banks would not place an unbearable strain on their finances. The tax charge on US banks would be less than $5 billion per year, on UK banks less than £1 billion per year.2 Total pre-tax profits earned by US and UK banks in 2009 alone were around $60 billion and £23 billion respectively.

But these direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis.

In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively.

Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisis-induced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate.3 If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost.

[Apr 13, 2010] SP Futures Reach Apex of Fraud As Earnings Season Arrives and Bank Accounting Dodgy as Ever, Doing God's Work

Misrepresentation of the facts and figures abounds. Through the years I noticed a common denominator amongst the kleptocracy and slippery sons of privilege: when the going gets tough, they cheat, even more than usual. And they become righteously indignant if you call them on it. As one pampered son said to me, "If the professors are not smart enough to stop me, why should you care?" That is how they got through university, and how they get through life. They cheat on their taxes, on their wives, their community, their civic obligations, their business dealings, their friends, and even themselves. And they spend a lot of time and money stuffing the hole in their being with possessions, both things and people, to create the illusion of substance and self-worth. And so often they have learned this from their parents either through abuse or example. There must surely be a special place in hell for anyone who twists such a pathetic half-life out of the gift of a child.

Jesse's Café Américain

Earnings season begins again this week in the States.

Investors remain skittish despite rosy predictions for earnings. This may be because of the suspicion that there are continuing misrepresentations of the true financial picture being permitted by the regulators, the ratings agencies, and the accountants.

For example, Bloomberg reports that if Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo were taking the appropriate reserves against loan losses, it would virtually wipe out all their expected profits for 2010. And I suggest that this loss estimate is likely to be conservative. But of course this is not going to happen in the land of 'extend and pretend.'

Reserves against losses? We don't need no stinking reserve, not while we have the Federal Reserve.

So don't get all short this market just yet, and provide grist for the mill as it might just grind higher. The good guys don't win until they get on their horses and do something. Wait for a key breakdown, probably triggered by some disclosures.

Misrepresentation of the facts and figures abounds. Through the years I noticed a common denominator amongst the kleptocracy and slippery sons of privilege: when the going gets tough, they cheat, even more than usual. And they become righteously indignant if you call them on it. As one pampered son said to me, "If the professors are not smart enough to stop me, why should you care?"

That is how they got through university, and how they get through life. They cheat on their taxes, on their wives, their community, their civic obligations, their business dealings, their friends, and even themselves. And they spend a lot of time and money stuffing the hole in their being with possessions, both things and people, to create the illusion of substance and self-worth. And so often they have learned this from their parents either through abuse or example. There must surely be a special place in hell for anyone who twists such a pathetic half-life out of the gift of a child.

[Apr 13, 2010] Morgan Stanley On The Mirage Paradox Of Goldilocks Strength by Tyler Durden

"...what is going on in the economy is a fool's rush (we would add predicated by momos who know nothing about reading financial statements but everything about dollowing a trend) and that MS' core advise to clients is to "sell into strength."

04/13/2010 | Zero hedge

Greg Peters, and other strategists from Morgan Stanley are out warning anyone who will listen that what is going on in the economy is a fool's rush (we would add predicated by momos who know nothing about reading financial statements but everything about following a trend) and that MS' core advise to clients is to "sell into strength." Here is how Morgan Stanley differs from the consensus. Also discussed are returns before and after the EPS season, and how to hedge surging implied asset correlations.

Exit strategy comfort (Fed on perma-hold)

A disconnect between ever-firming economic data, steep yield curve, higher back-end yields, a strong equity market with a so-called emergency Fed fund rate

Markets are susceptible to perceptions of a “policy mistake”
Watch inflation expectations very closely

Greece

OPA! We think not

Markets see this as idiosyncratic white noise – we fret about systemic risk implications

Core views remain the same

Sell into strength (admittedly it has been much stronger than we thought)

Higher rates, steeper curves, weaker EUR, stronger $, buy high quality companies with above average growth, but continue to “buy the junk” in HY

[Apr 13, 2010] Is the World’s Second Biggest Economy On the Ropes

naked capitalism

Mattay:

All of that effort, and yet you somehow neglected to mention that not only does Japan have a fiat currency with flexible exchange rates whereas Greece has a currency union with strict arbitrary fiscal constraints, but also that many people have been asking whether Japan is “on the ropes” for years, and that Japan has decidedly given the answer – no.

i on the ball patriot:

Everyone is on the rope’s, except for; the wealthy ruling elite, their central bankers, and the politicians they own that control the government’s they bought and paid for with your money. They got the world by the credit balls. Aided by sell out, scum bag voodoo economists, this is the biggest credit ball squeeze in the history of humankind!

Adam:

How did this article get posted on this site. The author obviously doesn’t know a thing about what he/she is talking about!

The fact that Japan has $1 trillion US dollars in reserves is meaningless. Why in gods name would it spend it to cover debts owed in Yen when printing presses can quite quickly handle that? I mean, its not like a nation mired in deflation is worried about inflation from covering costs associated with printing a fiat currency.

Reserves have no barring on debt owed in your own currency. They only matter when you have debt owed in another nations currency. It would be important for Japan to have a trillion dollars in US reserves is it owed 2 trillion US DOLLARS to someone, but since it owes Yen they can print all they need (and they don’t care if you don’t like that idea anyhow!!!).

scraping_by:

Japan’s economic nationalism has, perhaps, been too successful. By keeping social security payments within the country, they’ll eventually get it back. By keeping debt in the country, they’ll eventually get it back. Their import/export thing is no longer growing in leaps and bounds, but with enough money cycling around in the Japanese economy, within their borders, perhaps it doesn’t need to.

You’ll note the MSM story only mentions higher social security costs. It doesn’t note the rise in defense spending or the continued subsidies to business.

The conventional wisdom has been that Japan’s economy has been in the doldrums since the early 1990’s. But perhaps, they’ve simply taken up the Western idea of a steady-state system. Or the Taoist idea of balance. Maybe they’re doing exactly what they want to do, and to heck with the neoliberals.

[Apr 12, 2010] Breakfast_with_Dave_041210

Financial sector profits have soared 240%, which is unprecedented.

As it stands, everything from shipments to orders to auto sales to output to employment to housing starts to home sales are still nowhere near their pre-recession levels. And it should not be lost on anyone that the S&P 500 is still down 24% from the highs and has gone nowhere now for over a decade and so unless you are a gifted day-trader, all we are left with is three bull markets, two bubbles, two collapses and a heck of a lot volatility – and nothing to show for it except a lot of red ink and a lot of sleepless nights.

No doubt we have had a very flashy bear market rally over the past year but as we said in the past, the Nikkei enjoyed 260,000 cumulative rally points over the past two decades and the market is still 70% lower today than it was two decades ago despite all the tradable bull runs and temporary episodes of economic renewal.

Yes, yes, we are seeing a stimulus-led recovery in the statistics and the YoY data now appear boom-like in the USA as the data are calculated off the worst levels from March of last year. If truth be told, the level of retail sales in March was no higher than it was three years ago. Look at the charts below of the 5-year and 10-year trends in real and nominal GDP which includes the recession and expansion phase to "normalize" what the trend in economic activity really looks like.

The trend in "real growth" is around 2.65% and the trend in "nominal growth" is down to 5-6%. This is why assumptions over investment returns in pension plans that still rely on the magical 8% level are completely out of date – that worked only in the days of the 1970s and 1980s and perhaps part of the 1990s when there was inflation and very strong demographics spurring on nominal growth and total returns. Those days are long gone and insofar as investment returns mirror the trend in nominal GDP, those "expected" returns should be no higher than 6% -- likely lower.

From 1978 to 1992, the yield on the 10-year T-note was north of 8% on a consistent basis; today, to get that yield, you have to go into the single-B corporate bond market. That is a big difference in the amount of risk that has to be taken on today to try and secure that 8% return – the difference between going to AAA and B in the fixed-income market.

We are seeing a stimulus-led recovery in the statistics, but remember these data are calculated off the worst levels from last year.

[Apr 12, 2010] Dow = 11,000. Discuss

I think individual 401K investors are jumping in. And eventually will be royally fleeced. "The stock market is a zero-sum game, and when the markets are booming and the economy is not (based on real disposable income), there is a money pump chugging away, separating the sheeple from their money. Perhaps they deserve to be shorn, I cannot say, but that is where the market’s rise is coming from."

The Big Picture

HEHEHE:

BR I’ll spell out this decade for you: collapse, QE1, “recovery”, End QE1, collapse, QE2, “recovery”, End QE2, collapse, QE3 ….WWIII and/or hyperinflation.

There is no capitalism in the United States except on the small business level. The major corporations own our government and they work for each others benefit. Hence to big to fail.

You take a huge chunk of my bad debts from me and give me treasuries in exchange, allow me to claim that my assets are worth more than they are, allow me access to 0% credit loans that I can then lend out at 5%, plus dump a trillion plus $ into the economy and I’ll show you a good time too:)

End of day, the technicals take us higher while the fundamentals deteriorate. You tell me if you remember a time in the past where that recipe worked out well?

If we had some real antitrust laws in this country and had broken up the Wall Street/defense industry/pharma cartels, let the big three fend for themselves, and cut government spending and THEN we reached DOW 11,000 I’d concede your point because it would have been natural growth.

Whomever brought up the Bonds/McGwire steriods analogy the other day was spot on.

Mannwich :

I vote “giant charade”, but one that can well go on for a lot longer than many of us think, just like the last two “giant charades”. Party on.

Clem Stone

It all reminds me of the best quote from a good book about traders….”The smarter you are, the dumber you are.”

cognos:

BR –

Check out prices on mortgage credit (ABX for example) all have ACCELERATED there increases over the past month and are headed straight up. ABX.HE.AAA series 07-2, 07-1, 06-2 are each up about 20% in 1 month (mainly back to around 50pts). The 06-1 series is up 10% to about 87 pts.

There are main reasons similar increases are likely to continue. This stuff is broadly trending and it was priced down due to extreme fear and regulatory MTM selling pressure 1 year ago. Now reason it doesnt continue up through 70 and then earn its way to 100. I dont follow it as closely as I used to but I dont think there is a “realized losses” story. The “short-case” was alway built on a “ytm increase to about 15%”.

So then – big picture – IF mortgage credit is being marked up. This means ALOT for bank earnings, bank capital strength, and the final turn of the credit cycle.

jac:

I personally think it is too far, too fast.

Due to the fast nature of the rise, it will awaken the sleeping individual investor. Get him invested at Dow 11K and keep adding capital for another 5% or 10% and then his shirt will be taken. The great individual investor will wait for breaking even for another 3 years and the impatient one will take money out in the next sell off for a loss.

Professionals enjoy the volatility and continue to put fiduciary duties in the closet and take big pay checks.

It sounds very fair. Everyone is playing to their strength. Isn’t it?

Who is watching your back? No one or a pro with a knife to stab you?

constantnormal:

Dow 14K by December!

(and Dow 1400 by the following December) :-)

It’s all good, folks … the wave of new orders will result in a tsunami of hiring, with rising wages enticing those living on the dole and loving it back into our highly efficient and honest free market system.

@schmoo — mixed up the word order … I’ll fix it for you: Well, this will end.

I honestly have no clue (nor, I suspect does anyone else) as to how long we can continue to squeeze assets from the lower 98% of the economic ladder into the wallets of the uppermost 2% (or 1%, or 0.1% … pick your own “elite”), but so long as that continues to work, the markets will rally upward, as that is the visible sign of the asset pump in operation. The stock market is sure as hell no longer an indicator of a broad and vibrant middle class.

The stock market is a zero-sum game, and when the markets are booming and the economy is not (based on real disposable income), there is a money pump chugging away, separating the sheeple from their money. Perhaps they deserve to be shorn, I cannot say, but that is where the market’s rise is coming from.

As we continue to downsize the economy, with a smaller population of retailers picking up the business from their fallen peers (and thus prospering not from a growing economy, but from scavenging in a shrinking economy) we are seeing a shrinking number of winners who are getting more prosperous, while the overall size of the pie shrinks.

This cannot go on forever, as an expanding economic pie is needed to be able to pay back (or simply service) the exploding debt without ramping up taxation and choking off economic growth in a more forceful manner.

[Apr 11, 2010] Auerback The Central Bank as “Dealer of the Last Resort”

naked capitalism

As Mehrling noted, when the system was working, that counterparty was typically an investment bank (like Bear or Lehman) acting as a swap dealer, taking the opposite side of your trade for a fee: “They were willing to do this in part because they were committed to supporting the CDO market more generally. But they were not crazy. Ultimately they were market makers, willing to buy or sell the index at a price, but quite careful about their own net exposure.”

This meant that sustained pressure on one side of the market would be met by falling prices, and that is exactly what happened in the early stages of the crisis. The freefall happened when the failure of Lehman and AIG took a key market maker, and the key ultimate seller of insurance, out of the system. Had someone else, perhaps the government, stepped in to do what Lehman and AIG had been doing, even at a high price, the freefall could likely have been stopped in its tracks and the extent of the subsequent global financial fallout considerably mitigated.

Mehrling’s ultimate conclusion: Have the central bank become “Dealer of the Last Resort”, in effect backstopping the system by being the ultimate market maker or “insurer of last resort”.

Here’s the idea, which Mehrling delivered in his presentation dealing with the Anatomy of the Crisis. In essence, he proposed a modern day version of the old “Bagehot Rule“ — lend freely, but at a high rate, in a crisis. Mehrling argued that simply floating the system with money market liquidity, which is what the Fed initially did, failed to mitigate the intensifying financial crisis, because it wasn’t getting to the capital markets. That’s why we need a credit insurer of last resort, to put a floor on the value of the best collateral in the system. In Mehrling’s view, the 21st century equivalent of the Bagehot Rule should be: Insure freely but at a high premium.

Selected Comments

i on the ball patriot says:

There is NO viable policy response without ‘political will’.

There is no ‘political will’ because the electoral process is a bought and paid for scam that produces an endless stream of sell out politicians who are not responsive to the will of the people but rather to Wall Street (read the pawns of the wealthy ruling elite).

Securitization is a problem because there is no serious regulation because there is no serious government. Got it?

You can create remedial plans until the cows come home but without first demanding honest government that is responsive to the will of the people you might as well be creating designer farts for Barby Dolls.

“Mehrling’s ultimate conclusion”, of having the central bank become “insurer of last resort”, is just another Barby Doll designer fart. The good professor needs to get real and demand an electoral process that will be responsive to the will of the people and stop trying to con everyone into fighting the factional wars of vanilla greed against pernicious greed.

Pernicious greed has clearly won. Vanilla greed is gasping for life and its only real hope is to align with all of those it has been screwing all of these years and turn the reigns of credit over to the people and honest transparent regulation.

Deception is the strongest political force on the planet.

DownSouth:

i on the ball patriot,

You hit the nail squarely upon the head.

I would just add that Andrew Bissell’s “stop bailing people out” or “let a few AIGs go” alternatives are just as much “designer farts for Barbie Dolls” as is Mehrling’s “getting insurance right” alternative.

The conversion of private debt to public debt (bailouts), as anyone who has studied the trajectory of neo-liberalism in Latin America knows, is as core to the neoliberal paradigm as is gaining control of the sovereign. As long as the crooks and thieves are in control, credit risk will be underpriced, and the crooks and thieves will be bailed out for their bad bets.

One must realize that economists operate in a reality-free universe. Perhaps Jonathan Schell put it best:

The advocates of laissez-faire declared the independence of economics from state power. (The eventual coining of the word “economics,” identifying a distinct realm of human activity subject to its own laws, was one sign of their faith in that independence.) The market worked best, the worldly philosophers of the late eighteenth century believed, when the government kept its hands off it. Classical economics, in fact, “had not place for the nation, or any collectivity larger than the firm.”
–Jonathan Schell, The Unconquerable World

Reinhold Niebuhr has called this Shangri la that exists only in the minds of classical economists a “paradise of innocence.”

DownSouth

Skippy,

As much as economists live in a reality-free world, and in spite of my unrelenting attacks upon this defactualized universe, some of our greatest philosophers, such as Nietzsche, have argued that some level of delusion and deception are necessary for human functioning. As George A. Morgan explains:

…Nietzsche thinks of our present mental structure as a solidification of transmitted experience. In this sense we—-an entire line of life down to the present—-have created “the world which concerns us.” The world in which we consciously live, with its colors, lines, shapes, things, causes and effects, is part product of our mental activities. And since it was built with creative “errors,” “the world which concerns us is false.” Its various levels of simplification are rooted to various depths in our past. For example the “judgments” involved in sensori-motor coordination belong to the stage, chiefly pre-human, before the invention of language. The oldest “errors” are now so deeply “assimilated” that we cannot think differently and live. Such are the so-called a priori judgments: being oldest, they are unusually false, “necessary” for us now but not for all life or for the nature of things. They shape all incoming experience and require that new “knowledge” be adapted to fit them.

But man has survived with his fictitious world: does that not prove it true? Not at all, in Nietzsche’s opinion. Man, indeed, has been an incorrigible pragmatist, like other animals, ever maintaining the truth of those beliefs which seemed to help him live. Because of the age-long selective process, surviving modes of interpretation probably do stand in some favorable relation to real conditions—-just favorable enough for survival. “We are ‘knowing’ to the extent that we can satisfy our needs.” That truth is always best for life, however, is a moral prejudice. Falsification has been shown to be essential; truth is often ruinous, and sheer illusion helpful, as experience testifies. And of course there is no certainty about even the pragmatic value of our beliefs; there is merely the fact that we have survived so far. Beliefs not immediately harmful may yet be fatal in the long run.
–George A. Morgan, What Nietzsche Means

RueTheDay:

“But if we do insurance right, we can make securitization functional again”
———–

Bullshit. Insurance for credit risk is an absurdity. The interest rate on a fixed income security (e.g., an MBS or CDO) is supposed to reflect, among other thing, the risk of default. The theoretical insurance premium in such a case should be equal to the credit risk premium portion of the interest rate. There is no free lunch. “Doing insurance right” is simply code for “underpricing risk”. IOW, “if we could only get markets to start underpricing risk again, by having another AIG-like entity write insurance policies via a CDS-like mechanism that they have no intention or ability of ever making good on then everything will be ok”. No thanks

gigi:

Bingo. Agree 100%. Everyone everywhere is looking for a free lunch and there is no such thing. If you can get insurance on a bond that makes it as safe as a Treasury (which itself is no longer safe but that is another discussion) then it will provide the same interest rate as a treasury.

Insurance is a pooling of unpredictable risk against small (for the pool) uncorrelated adverse events. These conditions must hold or the purported insurance is fraud.

Auto-insurance works because:
- Each accident involves a small fraction of the insured
- The accidents are mainly unpredictable

Health insurance is a scam because:
- Incident risk is skewed by the participants age and there are ongoing/never-ending incidents (preexisting condition)

For Flood/hurricane insurance:
- The events and their magnitude are uncertain
- If an event occurs, it is likely to devastate the region and regional insurers are likely to go under
- Unless the risk can be spread out over a large number of regions that may be affected at different times, the insurers will not be there to pay when you need them or the premiums will be exorbitant because of the requirement to hold massive capital against potential loss

Financial insurance is a scam because:
- The financial health of the issuing entity is evident when the bond being insured is issues/traded, i.e. difficult to argue unexpected events
- Correlation of failure is likely to be high, i.e. recessions/financial crisis breaking many companies/entities at the same time leaving the insurer unable to pay or cost of insurance being exorbitantly high to compensate for the tied up capital
- This is financial engineering to split the risk from the current purported zero risk interest rate (treasury). This should lower the return below the treasury if priced for profit for the insurer.

As for making the Fed the insurer of last resort, why is it important to find some way of dumping garbage on the taxpayer? People making such suggestions are either incredibly naive or have an axe to grind. They are definitely not performing their civic duty (what a concept)

Yearning to Learn:

Unfortunately, I side with the naysayers on this one.

The last crisis showed us that it is not practically viable to lend on good quality with a penalty interest rate.

For example, the Fed couldn’t even apply this rule to a tried-and-true mechanism… the discount rate was lowered to just barely above the Fed Funds Rate. No penalty rate to be found.

If they’ve already shown themselves incapable of following Bagehot’s rule why should we expand their authority to not follow that rule in other settings?

In the end, the problem is that we’ve seen that theory is trumped by reality again and again.

In theory the Fed could have raised the Fed Funds Rate earlier in the recovery. In reality they didn’t because people always squawk about killing a “real” economic boom.

In theory the Fed could have gone in and regulated these banks and looked at their leverage ratios etc. In reality they didn’t.

And in theory the Fed could lend at a penalty rate on good collateral, but in reality they don’t.

There is the crux of the problem. Theory vs reality. Just like my childhood dreams of growing to 6′7″ and dominating in the NBA, I’ll have to abandon these Fed-as-solver-of-our-problems fantasies.

kevinearick:

Shortly after the introduction of the Internet, the current proprietors recognized that they would run out of supply to feed the legacy ponzi schemes that they were managing, but they were just smart enough to bankrupt the entire global economy one last time, bypassing natural new family formation with economic slave formation, at the end of a demographic surge, which is exactly what they have done. All kinds of people warned them against that policy, and we all made our bets accordingly.

Suddenly, they realize that there is no place left on this planet to hide. What else can they do, given their mentality, but extend and pretend. They need a bailout for their behavior, (which was reinforced by significant participation) but cannot bring themselves to ask for one. Instead, they keep bailing out the ponzi schemes as a buffer between themselves and others. Their entire lives are a lie, of unfortunate choices. Expert systems are invalid. No group of 5 or 30 or 500 or whatever can direct an economy of 7 billion, even if the entire 7 billion acquiesce to their control. The Fed is still arguing that it needs control to direct the economy.

Greenspan appeared to be recovering, and then he went back on the bottle. Hard to stay away from those parties if your life is built around them. But then again, why was anyone expecting a financial alcoholic to pull away the punchbowl.

So, we have this pyramid of ponzi schemes that needs to be transformed … and the governments, corporations, and cartels involved are not competent to do the job …

The Internet opened the door, but it provides no map and no roadway. Despite the commercials, there is no insurance. A looking glass is just a temporary bridge. Maybe a real education system to replace the existing compliance/certification system isn’t the first step, but every journey begins with a first step, and nothing incremental is going to save the old system. That first step is a jump, across a gap.

If History is employed as a guide, the only specification is that the bridge must increase democracy at the quantum amount required to span the gap. As more individuals make the jump, bigger groups are going to want a bridge.

[Apr 11, 2010] The main difference between democrats and republicans

"Democrats" tax and spend. "Republicans" borrow and spend.

[Apr 11, 2010] The Public Eye Pension promises threaten California cities, counties

I would rather pay pensions to retired police officers, teachers and firefighters then bonuses to banksters. The problem with this is that banksters own the place and they are pretty good in divide and conquer" strategy trying to ...

Sacramento News
This year, the city of Roseville will spend about as much to fund its pension plan as it does on parks and recreation. San Luis Obispo County will spend five times as much on pensions as it does prosecuting criminals. And Stanislaus County's pension costs will be nearly double its $23.5 million general fund budget deficit. The initial logic of increasing retirement benefits to retain quality employees has been turned on its head: Paying for those benefits is forcing local governments to lay off employees – and cut programs.
"The old joke is that General Motors is just a health insurance company that makes cars on the side," San Luis Obispo County Supervisor Adam Hill said during a pension presentation at a recent board meeting. "My concern is that the county government is becoming a pension provider that provides government services on the side."

Yet today's escalating annual pension payments barely touch the looming shortfall: $28 billion in unfunded liabilities – the difference between what pension systems have and the pension benefits their employees have earned – at the 80 largest city and county governments in California, according to an extensive Sacramento Bee review of pension plan valuation reports. -- [ What returns this calculation presuppose ??? -- NNB]

On top of that, those cities and counties owe about $8 billion in pension-related bond debt – all in a time of shrinking budgets. In many areas, the total pension shortfall is more than the annual payroll; in some, it is more than the general fund budget. Spread that debt evenly, and it comes out to about $4,000 per household in those cities and counties. Already, Californians feel the impact of the rising costs.

Local governments are cutting unrelated programs – everything from parks to public safety – to help pay for pension plans. Downsizing likely will continue both because pension contributions often are legal mandates, and, even with a recovering economy, because much damage already has been done. A very few places are whispering about the nuclear option: bankruptcy.

The Bay Area port city of Vallejo already went this route, largely to break its agreements with its employees. It wasn't supposed to turn out this way. When local governments passed enhanced retirement benefits at the turn of the millennium, the stock market was humming. Government leaders could just sit back, watch their employees smile and let the market do the heavy lifting. "We're not creating an unfunded liability," then-Fresno County administrative officer Linzie L. Daniel vowed in 2000, when the county approved better retirement benefits to be offset by expected investment returns. Since then, unfunded liabilities have increased from less than $100 million to $800 million in Fresno County.

... ... ....

This month, Stanislaus County leaders reversed the enhanced benefits they gave to workers in 2002, but only for workers who are hired after the end of this year and who aren't represented by unions. The county has 413 unrepresented workers, mostly managers and elected officials.

Low, the employee advocate, predicted that unions will bargain on pension issues in good faith. But, he said, it's unfair to view them as the linchpin for fixing local government finance problems. Regardless, asking employees to pay down a city's pension obligations is a little like trying to cut down a tree with a knife. About one-third of the 80 cities and counties examined by The Bee – including Merced, Orange and Fresno counties – now have unfunded liabilities that equal or exceed the size of their annual payroll. So even if governments told their workers, "Sorry, but your entire salary will be diverted to pay off pension debt for the next year," there would be debt to spare.

That leaves taxpayers. The pension bill facing them likely will balloon in years to come. Currently, 15 percent to 30 percent of local governments' annual payroll goes into their pension system – a quarter or so for every dollar spent on paychecks. That adds up. Together, all local governments in the state paid $11 billion into their pension plans during 2008, or about $900 per California household, according to U.S. Census Bureau data. Millions more went toward paying off pension bonds. Dwight Stenbakken, deputy executive director of the League of California Cities, predicts that contribution rates will expand to about 30 percent or 40 percent of payroll in most places. CalPERS officials partially agree, saying that, due to retirement and market projections, contributions will rise for the next decade. It's a hard sell – cutting fat pension checks while cutting government services – that has exhausted many local government leaders. "We're trying to maintain credibility with taxpayers," Stenbakken said, "but, right now, I'm not sure this is defensible."

jrsmom

I am growning tired of the CalPers pension plan being the new evil government giveaway. Here is what should happen. Make police and firefighters work until they are 55 before they receive their pension. The elected people- Administrators must work 20 years prior to receiving any pension just like the lowest paid employees.

The highest paid people should only receive a fraction of a pension. They are rich and don't need the funds.

Keep funding the lowest paid.

sacbee2209

The average police officer in Sacramento county makes more than the average lawyer if you look at the total compensation package. You hit the lottery...lucky you

dkeepyourslfincheck

For the most part, private sector defined benefit plans were eliminated in order to boost the bottom line, and thereby shareholder value...and most of all - management compensation. That's what they teach in business schools, the never ending quest to increase profit, workers be damned.

Public employee pension plans are now under attack in the midst of a major economic crisis because big business cannot abide functioning defined benefit plans when they have convinced their own employees that they are unworkable.

401k plans are designed primarily to benefit Wall Street. Fees and commissions regardless of what the market does.

carterofca2

Wow....I wish we could form committees with some of you people. Your knowledge and intelligence blows me away. I agree with all of those who say we need to stop whining and start figuring out a way to deal with the problems. Unfortunately, none of us are elected folk who control what is being done...which is nothing but digging a deeper hole. Thank you to all of you who are commenting. I learn so much from all of you regardless of party, age, knowledge or experience.

dangermouse:

Last year Roseville put nothing aside for its future pension obligations, yet they gave $3 million dollars to the Automall and $6.5 million to the Placer County SPCA. You see in Roseville dogs are more important to the city council than its employees.

Roseville has also put $20 million aside to build a new convention center, but still they can't afford to put one extra penny aside to meet their legal and contractual obligations to their employees. And by the way, the $111 million they say they will need to meet those obligations is only that much if they don't put money aside for the future and pay as they go.

37 years ago Roseville employees took a seven and a half percent cut in pay to pay for their future health care. Roseville has known this obligation has been looming for more than 37 years, yet in all those years instead they spend on corporate welfare instead of being responsible and doing the right thing.

Read more: http://www.sacbee.com/2010/04/11/2670020/pension-promises-threaten-california.html?pageNum=7&&&&&&mi_pluck_action=page_nav#Comments_Container#ixzz0kqM4q2Ww

SEASpook:

More than anything we need better education in this state. The obvious number of ill educated peoople is evident by these forum. People grab a tidbit of fact and run with it as God's own truth. FOOLS!!!

Public safety pensions are 3% at 50 with a cap of 90% of final pay rate. Very few would get over 100K per year at that rate and a minute (I know many will see this as a unit of time not measure) number will get above 200K.

Be smart and check facts and source before believing what you read and it's impact. Unions came into being because of tent cities and company stores.

You want to go back there? If you don't understand that reference read history books. Read more: http://www.sacbee.com/2010/04/11/2670020/pension-promises-threaten-california.html?pageNum=7&&&&&&mi_pluck_action=page_nav#Comments_Container#ixzz0kqMNb5G6 ;

MovedfromSF:

We just need to raise taxes and we will have plenty of money for the pensions, just a few modest tax increases like a 10% sur tax on all income over $100K, a 1% surtax on $1 million + homes and a $1,000 a year tax on gas guzzeling SUVs will balance the budjet.

gbaker:

The union did not kill GM-poor car design, poor long term planning with regards to the SUV craze and entrance into the credit market. Those were made by upper management..not the the average union worker.
the fire protection, police, etc. provided by companies owned by her corporate cronies. You will be swiping your credit card for any public service that doesn't get paid for with taxes that YOU and I both pay. Then you will be complaining about that..but you will get what you have wished for.

Ladmo:

"The government has learned long ago how to set us upon one another by creating special interest groups and then facilitating each of them to believe the others are getting more or better, etc" --- Special interest groups have existed since Neolithic times. In this particular case, one group, government workers (especially public safety) are a heckuva lot smarter than taxpayers generally. The game isn't over yet, and I'm afraid for the public at large that the unions are still well ahead. The way the contracts are written, contract law generally, the increasing difficulty for public entities to declare bankruptcy, sophisticated PR campaigns, etc. just show how hosed taxpayers really are.

wickedvision:

Replying to Ladmo (04/11/2010 10:29:50 AM):

"keepyourslfincheck wrote on 04/11/2010 10:22:16 AM: It is painfully apparent that there is a concerted effort by the corporate media (and corporations in general) to attack defined benefit pension systems wherever they are found. --- Nonsense. 99% of the hullaballoo concerns *government* pensions, which appear to be built out of pixie dust. Corporate pensions have mostly been whittled away through the years due to a lot of things...an aging population, the value of labor...":

Why don't we just kill all the boomers and take what they have? The reason defined benefits disappeared in business is because Uncle Sam wanted a new way to force money into wall street while giving their buddies in business a huge break.

The government has learned long ago how to set us upon one another by creating special interest groups and then facilitating each of them to believe the others are getting more or better, etc. They have really

Ladmo:

"dave66 wrote on 04/11/2010 10:30:03 AM:

"The attack on the Public employees has begun again. This is clearly coming from the same Wall Street bankers who got us into this mess to begin with. "

I'm afraid to say that 'Wall Street bankers' equals 'CalPERS'. They're the same creature. Modern American is built on the concept of something for nothing. A combination of borrowing and radically pushing up the value of paper assets is what passes for wealth. I hate to imagine how much money public unions have extracted from the economy via shuffling paper around.

Ladmo:

dave66:The large public pension plans in the country are the bane of existence for Wall Street.

How do you figure? They are major players on Wall St. Since they are betting public money, with a taxpayer backstop, they can make any silly wager they want. CalPERS is not dissimilar to a wealthy scion in Vegas.

dave66:

The attack on the Public employees has begun again. This is clearly coming from the same Wall Street bankers who got us into this mess to begin with. The manipulate the commodities market right under the nose of the CFTC, they manipulate the stock market right under the nose of the SEC with the Presidents Plunge Protection Team. They successfully destroyed the private pensions of the country and got everyone on a scam called the 401k. How's that working for you? All the while they make BILLIONS in bonuses in the year of the worst crash in 80 years.

Now they are after the last chunk of money in the country. Governement Pensions. Is 80,000 a year really that much money anymore?

The FBI should be investigating Wall Street, The Federal Reserve and the US Treasury. We should not be crucifying the little people because of this criminal banking cabal.

Ladmo:

keepyourslfincheck wrote:

It is painfully apparent that there is a concerted effort by the corporate media (and corporations in general) to attack defined benefit pension systems wherever they are found.

Nonsense. 99% of the hullaballoo concerns *government* pensions, which appear to be built out of pixie dust. Corporate pensions have mostly been whittled away through the years due to a lot of things...an aging population, the value of labor decreasing, shorter times in service. They mostly disappeared more than a decade ago, most of the exceptions are similar to the government case where unions hold monopoly power over the companies (think UAW, teamsters, etc. they actually make pretty good travelling companions with .gov unions). It's just going to get worse.

It's just now occurring to the boomers that the two tier system is real, but it's not new vs. old hires. It's a world made up of retired bureaucrats in gated communities and tent cities for everyone else. The truly rich will use helicopters to get away from both groups. Large Latin American cities are a great working model of this.

[Apr 10, 2010] Is Debt Repudiation a Good Thing or a Bad Thing

Corporations strategically repudiate debt all the time through bankruptcy filings. So do real estate developers.

Washington’s Blog

Preface:

I hesitated in posting on this subject, as I thought it might be too “radical”.

But after reading what economists Steve Keen, Michael Hudson and Murray Rothbard said about debt repudiation, I decided to post it.

This essay rounds up arguments for debt repudiation, because that side is rarely heard. But feel free to post comments on why debt should not be repudiated – the issue is still an open question in my mind.

As I noted in November:

Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too bigto fail banks. See this, this, and this.

Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that – if the bank can’t produce the mortgage papers – then the homeowner can stay in the house.

Portfolio manager and investment advisor Marshall Auerback argues that a debtor’s revolt would be a good thing.

And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.

Walking away from home mortgages has actually become mainstream, being trumpeted by:

CBS

CNBC

The New York Times (and New York Times Magazine)

The Wall Street Journal

MSN

NPR The Arizona Republic

Many others

In addition, as I pointed out in February:

There is an established legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people.

Matt Taibbi wrote Monday:

As powerful as these Wall Street banks may seem, they are also exquisitely vulnerable. Right now virtually all of them are dependent upon the government keeping accounting standards lax enough for all of them to claim to be functional businesses. It is generally accepted that if the major banks on Wall Street were forced to mark all of their assets to market tomorrow, they would all be either insolvent or close to it.

Thus their “healthy” financial status is already illusory. So imagine what would happen if large numbers of those dubious loans on their balance sheets that they have marked down as “performing” were suddenly pushed ahead of time into the default column. What if Greece, and the Pennsylvania school system, and Jefferson County, Alabama, and the countless other municipalities and states that are wrapped up in these corrupt deals just decided to declare their debts illegitimate and back out?

I think it’s an interesting question and would like to hear what knowledgeable people in the field have to say about it. But the big picture, to me, is that these companies are almost totally dependent not only upon the continued good faith of aggrieved debtors, but upon the government recognizing the (sometimes fraudulent) loans made to those debtors as fully performing.

Similarly, Gregor MacDonald argued in February 2009:

The private sector debt in the United States exerts the same power over the banking system as the public debt of the United States exerts over our international creditors. Collectively, the debtors are in control. Not the creditors. This is why the the Creditors, not the Debtors, will be making most of the concessions in the years ahead. Whether the US public debt is inflated away, rescheduled, or repudiated–or some combination of all three–it doesn’t matter much. The process is already underway.

Former Managing Director and board member of Wall Street investment bank Dillon Read, president of Hamilton Securities Group, Inc., an investment bank, and former government servant Catherin Austin Fitts wrote Tuesday:

Look up “fraudulent inducement.” My position as the former Assistant Secretary of Housing-Federal Housing Commissioner and then as lead financial advisor to the U.S. Department of Housing and Urban Development is that the majority of the mortgages originated in the United States after 1996 were fraudulently induced.

The way to deal with criminals is to treat our contracts with them in a manner reciprocal to how they have treated their contracts with us.

Will a growing movement to abrogate contracts with institutions who have broken the law be disruptive? Yes. Will that require painful adjustments? Yes. That is the price we pay to deal with the challenges we face. This includes the fact that the banks have sold criminally originated debts to our pension funds and retirement accounts as well as to allies and institutions around the world.

It is much less painful, however, than the price we will pay if we continue to operate by a double standard whereby large institutions and a small group of people are permitted to live and operate above the law. So let’s address the lawlessness in the financial sector, face the national security issues involved in using our financial markets for economic warfare and begin the transformation.

Austrian economist Murray Rothbard wrote in 1992:

I propose … out-right debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from “normal” public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a … ruling elite who contracted these debts at our expense?

***

Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840’s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830’s. Most of these securities were financed by British and Dutch investors.

During the deflationary 1840’s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840’s, nine were in the glorious position of having no public debt, and one (Missouri’s) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.

***

The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870’s and early 1880’s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.

Ambrose Evans-Pritchard wrote in 2009:

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Economist Steve Keen is also calling for a debt jubilee, stating:

We should write the debt off, bankrupt the banks, nationalize the financial system, and start all over again.

We need a twenty-first century jubilee.

[We’re going into] a never-ending depression unless we repudiate the debt, which never should have been extended in the first place.

If we keep the parasitic banking sector alive, the economy dies. We have to kill the parasites and give a chance to the real economy to thrive once more and stop the financial [crooks] doing what they did this time around ever again.

And economist Michael Hudson – who also calls for a debt jubiliee – wrote yesterday:

The only way to resolve the [European debt crisis] is to negotiate a debt write-off…

The most cynical (but not necessarily inaccurate) view of debt I’ve seen is that banks loan out imaginary money they don’t really have, which money is “collateralized” by capital they do not really have, which is, in turn, based upon central bank printing presses which create money out of thin air which the central banks don’t really have. But then when debtors have trouble repaying onerous loans, the bankers seize real assets. See this and this.

Indeed:

In First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).

Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.

But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book …

The judge voided the mortgage, since he found that the bank hadn’t given any real consideration, but simply created money out of thin air.

In other words, according to the most cynical view, the entire debt-money system is a scam … and should be repudiated.
craazyman:

Corporations strategically repudiate debt all the time through bankruptcy filings. So do real estate developers.

Not sure why the issue would be “radical” if the little guy does it. Not sure why morality is deemed to be different for the little guy than for a collection of little and not-so-little guys called a “corporation”.

Actually, I am sure, but my ramble on that theme might bore the board to snoring and stray seemingly far off topic.

Debt repudiating homeowners will have to face the legal and financial consequences, just as debt repudiating corporations do. Each pathway forward has pros and cons.

Good run down, as always, George. Thanks for your efforts.

[Apr 10, 2010] When Risk-Return Makes No Sense How To Deal With An Overvalued Market

Avoid the "boredom trades"

zero hedge

SocGen's Dylan Grice points out, we have gotten to the point where the Shiller PE demonstrates S&P valuations are now back in the highest valuation quintile: in other words the market is now more expensive than during 80% of the time. The risk-return at this point makes little sense, because as Grice points out the 10 year return using this quintile as an entry point is just 1.7%, compared to 11% for the lowest quintile.

So what should one do: "Go take a holiday if you can. Avoid the "boredom trades"."

[Apr 10, 2010] For Warren Mosler: A Primer on the Difference Between Honesty and Fraud

Warren Mosler is "an economist specializing in monetary policy and running for Senator Dodd's Senate seat in the November elections." He has written the following piece for the Huffington Post. He is so incredibly off the mark that I thought a bit of correction to that spin might help his thinking before he hits the campaign trail.

Mr. Mosler. I have been following this case closely. No one at GATA, or anyone else looking at the state of the regulatory climate in Washington and the quality and tarnished reputation of US markets, is complaining about the normal sort of trading that has been going on 'for thousands of years.' Most of the people with whom I have spoken and questioned are seasoned traders with a profound understanding of the commodity markets, and equity markets, and derivatives.

What many people are complaining about is fraud. In this case fraud can loosely be defined as doing something and then lying about it. Saying you did not do something, or disguising the nature of what you have been doing, can turn even a prima facie benign action into a fraud, depending on the intention and degree.

Many people around the world are not complaining that the US has lent out its gold, and the 'depositories are filled with paper,' which may some day be replaced by gold again. Although they do point out that it will be replaced at MUCH higher prices if their suspicions are correct. They are pointing out that government officials have said repeatedly that they have never lent it out in the first place but refuse to submit to audits and transparent accounting. And if it did occur, such lending may be of questionable legal status, which is why so many have denied it has occurred. Only the Congress can allow for the attachment of binding claims to sovereign assets. Have they? And if, in exercising some new presidential prerogative, the executive has done so, where is the public disclosure? Where is the law?

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:
"If you hold gold, lending it is a way to make extra money with very little risk."

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.

In the end the Fed had Paulson come running to Congress pleading for $780 billion in taxpayer money with no strings attached, or face a complete and utter meltdown, riots and martial law. Oh well, and tra la, today is a new day, and back to gorging on risk again, eh? Not to worry.

At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings." John F. Kennedy
So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

[Apr 10, 2010] Cal. Munis Rated Worse than Kazakhstan; Students Forced to Buy Healthcare; Rents Drop 1.5%, Record Vacancies; 33 States Exhaust Unemployment Reserves

Mish's Global Economic Trend Analysis

LordHuggington:

“As much as some of the talking heads say we need to avoid going down the same road as Japan, it would seem we're doing a pretty good job of following in that country's footsteps. How long before these price reductions by WalMart trigger a race to the bottom with its competitors?

It reminds me of when places like Don Quixote and Trial stepped on the scene in Japan (among other retailers) with ridiculously cheap prices. The various department stores and supper markets have been in a constant battle to have the lowest prices ever since, helping to contribute to deflation over there.

I have a lot of trouble seeing how deflation could be avoided in the West. With aggressive price reductions chasing a populace pinching its pennies, it's hard to imagine things going any other way.

Liberal John:

Mish -- starting a new client. Let's say me say that their EBITDA was in the $70 million range in 2007. It is now practically negative. This is a business that touches everything. The last few months were worse than last year and at a run rate they have never seen before.

Snow Dog:

The wal-Mart comptroller has taken notice of how little cash is actually flowing into their registers. In it's place are foodstamps and foodstamps are drivers of one thing : lower prices.

The tyranny of credit cards is that they drive higher prices as CC users have apettites that are larger than what their wallets can handle.

Finally, if either analysis of CC or foodstamps fail, there remains an indisputable way of funding a discount campaign : cut costs, i.e. labor. Employees who make a low enough salary thus qualify for, what else, foodstamps. Taxpayer subsidizes the alleged goodwill of retail tyrant Wally.

No real other reason to be seen near a Wal-mart facility except a price discount, Wally is buying their additional sales and paying for it with J6P's tax dollars. The pols are happy to comply, as it presents the appearance of a recovery.

The economists? Thy're not sure what to think, but believe the discounting is acting as a circulation accelerant. More paper moving around a tad more rapidly is the new "growth".

[Apr 10, 2010] 33 states out of money to fund unemployment benefits

Hat tip to Mish...

April 8, 2010 | Yahoo!Finance

A total of 33 states and the Virgin Islands have depleted their funds and borrowed more than $38.7 billion to provide a safety net, according to a report released Thursday by the National Employment Law Project. Four others are at the brink of insolvency.

Debt-challenged California has borrowed the most, totaling more than $8.4 billion, followed by Michigan and New York, which have loans worth more than $3 billion. Nine other states have borrowed at least $1 billion from the federal government.

"The nation's financing system for jobless benefits is under unprecedented stress," said Andrew Stettner, deputy director of the New York-based advocacy group for the unemployed. "While the recession has certainly made things worse, this funding crisis has been developing for years."

At the onset of the recession, only 19 states met the recommended funding level, which is one year of reserves equal to the highest amount of unemployment insurance paid out during prior recessions.
Financing experts suggest that states build up their jobless benefit coffers during strong economic times so that they can draw from them during downturns.
Federal and state governments collect money for unemployment benefits by taxing employers on a small portion of their employee wages. While total wages and weekly jobless benefit levels have been rising, governments haven't increased the taxable base wages at the same pace.

Instead, they adopted a "pay as you go" approach, keeping taxes and fund levels low during good times and raising taxes and cutting benefits when strapped for cash. That left many states with insufficient jobless funds to weather the recession.

Of the 13 states that will likely be able to fund jobless benefits without borrowing from the feds, 10 of them followed the recommended financing tactic. That readied them for the recession, the National Employment Law Project concluded in its study.

"The current crisis should compel policy makers to forge a new path to forward financing of the unemployment insurance program," Stettner said. "As the broke funds of 33 states makes clear, unemployment insurance reserves need to be stocked up before recessions hit so that states are prepared."

[Apr 10, 2010] Where Is A Spectacular Implosion Most Likely

The Big Picture

Brendan:

Some people around here have a pretty liberal definition of implosion. Europe is hardly imploding by historical standards. Greece’s problems are a hiccup in the grand scheme of things.

If I were to guess, I’d say none of them truly implode, but that’s not the question; the question is which one is most likely to implode. In that case, I have to say China. In reverse order of the list:

The unwashed masses have to participate for there to be a true implosion. The average American has about as much faith in his or her currency as they do in God. I don’t see us all becoming “Atheists” anytime soon. Uncle Sam will keep finding ways to manipulate things without most knowing for at least another decade.

Japan has problems, but has also known about them for a long time and are acting accordingly. So while they aren’t going to do a perfect job, they also aren’t going to implode.

India has so much growth potential that threats to it’s economy can quickly be steamrollered by growth. See China during the ’00’s.

The EU quickly discovered that being #1 isn’t necessarily a good thing, so they’ll keep happily chugging along, with plenty of bumps in the road but no implosion. Energy will probably be the biggest issue, and they are ahead of the curve on that.

China is the only one that has serious underlying issues that could create the kind of environment that causes implosion. People there will become more aware of their government’s cover-ups about, well, just about everything, and that could cause the kind of lack of faith in their currency to cause implosion. As much as we complain about backroom deals here, transparency in the US is still way better than that of China.

sinomania:

Ten years ago everyone said China was overheating and ready for collapse and revolution without Deng Xiaoping. Ten years before that same story. Ten years before that….every year since 1949 when we “lost” China, we say China is ready to break apart, implode, explode, collapse. By 2020 China will be TBTF, if it’s not already.

Out of that list my money is on Japan – fundamentals, debt, demographics, the overall anomie of the people, and rising anti-Americanism don’t bode well.

perra:

1. EU
2. US
…
75. China

[Apr 10, 2010] Worst Post WWII Recession

As a twist on Mark Twain’s saying, “Rumors of my death have been greatly exaggerated!” I’ll say that rumors of our economic recovery are also greatly exaggerated.

The Big Picture

Marcus Aurelius:

constantnormal:

For the sake of accuracy, it should be called the Great Corporatist Depression.

As a twist on Mark Twain’s saying, “Rumors of my death have been greatly exaggerated!” I’ll say that rumors of our economic recovery are also greatly exaggerated.

I know spring is in the air, the flowers are blooming, the critters are acting funny, and hope springs eternal, but wanting to see economic green shoots where there are none is premature and foolish.

There’s still a bunch of completely unresolved dreck under the rug, and even more in the pipeline. Business fundamentals are bad, government spending way up, tax revenues way down, home foreclosures and delinquency rates are going full steam, bankruptcies are up, and state and municipal finances are in tatters.

The US economy is diseased, but in temporary remission. It’s terminally imbalanced. Our industrial base is gone, saturated debt, and dysfunctional from any reasonable regulatory standpoint.

Let the WSJ write any analysis it wants to — after the fat lady sings.

constantnormal:

@rktbrker

not only do we still have additional waves of foreclosures ahead, if you look at the chart of bankster leverage over at Jesse’s Cafe Americain

http://jessescrossroadscafe.blogspot.com/2010/04/derivatives-exposure-among-us.html

and you’ll see that we still have insanely dangerous amounts of institutional leverage in play (GS derivatives exposure @ 457X assets at year-end … as I recall, LTCM only needed 100X a far, far smaller asset base to blow itself to Kingdom Come and threaten Western Civilization).

And employment is not increasing in any remote approximation of the amount needed to crawl our way out of the muck — when the census winds down later this year, and the million-or-so workers employed there lose their jobs, we’ll see unemployment take another jump up.

Tottering pension funds, states and municipalities scrambling to avoid default (and not quite succeeding), the international bond market looking more and more like a house of cards with each passing day …

I think that 2H2010 is going to be a very exciting time to be alive … provided we survive it. Perhaps we should begin keeping diaries, with the intent of writing the next Crash bestseller in a few years …. I’ll bet that Barry is building a file of notes for just that end …

Nightmare on Bailout Street.

[Apr 10, 2010] Why So Glum History Suggests

NYTimes.com

I looked back at the recoveries after seven recessions from 1950 through 1982 and found that, on average, such a strong three-month performance of the household survey, defined as a gain of at least 0.8 percent in the total number of existing jobs, came seven months after the recession had ended, with a range of two to 13 months.

If the 2007-9 recession ended in August, as the index of coincident indicators would seem to indicate, the lag this time will have been seven months.

The lag was 28 months after the 1990-91 recession ended, and an amazing 42 months after the 2001 downturn concluded. Those really did deserve the title of “jobless recovery.” But they were very different from what appears to be unfolding now.

The stock market’s recent performance may be sending a similar message. Prices have been rising, but there is not much volume. Why? A lot of money managers are fully invested, but many investors remain fearful and are not putting cash into mutual funds. To judge from anecdotal evidence, some of the buying now is short-covering by hedge funds that expected the economy to be much weaker than it is, and thought corporate earnings reports would devastate investors. Instead, they are hearing from companies that business is stronger than expected.

Some Americans are in deep trouble, to be sure, and the days of paying for second homes by refinancing the mortgage on the first will not return soon. But many Americans — both individuals and businesses — who cut back sharply when fear was at a peak a year ago are now finding that they overreacted. The businesses need to hire to meet demand, some of it coming from individuals who are less fearful now of losing their own jobs.

Selected Comments

AnnS

You must stop. You really must stop comparing coconuts to rocks as if you are comparing apples to apples. The reasoning - & assertion that 'history' supports your argument - are both incorrect & false. You insist upon ONLY looking at things that have occurred within your adult lifetime & then assuming since the symptoms are the same, the illness is the same. If you took sudafed, asprin & fluids for aches, pains, a stuffy head & a fever, it worked if what you had was a cold. If the same symptoms are caused by ebola, your diagnosis based upon having had a cold before a& the same treatment will not work.

(1) This is NOT a recession caused by
(a) Production which exceeded demand - 1958 & 1991 recessions
(b) Interest rates being high AND external shocks to the economy (gas prices) - 1973 recession
(c) Interest rates jacked to astronomical levels - 1982 recession
(d) Speculative bubble that had limited impact on the real economy (dot.com crash) - 2001 recession

(2) This is a GLOBAL financial crash. This time it IS different.

In the past 200 years, there have now been 5 GLOBAL financial crashes. 3 were triggered by the outbreak of wars (Napoleonic, WWI & WWII) & ended when the wars ended. The 4th crash took 10 years to end - & was ended by WWII for the US by the vast amount of money poured into war production by the government. 2007 is the 5th.

(3) Financial crashes since WWII have been either national or regional - never global. It took an average of 4.8 years for the affected countries or regions to get back to where they had been before the crash. They did it by EXPORTING their way back to a functioning economy. One country (Japan) had a national crash but couldn't export its way out of it because now it was competing with China for the same customers.

The US has been a negative net exporter for decades. SO we are going to export what? And how are we going to export more than we import? We did export some stuff in the '00s called SIVs and CDOs and credit default swaps --- and blew up the world. Can't do that again as no one is stupid enough to buy that stuff.

Oh & the stock market is a useless indicator. Historically the equities markets (stocks) recover in 3 years from the crash.

(4) Recover based upon WHAT? Can't get by selling each other houses or junk from China anymore. Tilly & Jake out there on Main St are broke - flat tapped out & busted. There is NO MONEY to spend. Mortgage debt increased 216% from 1995. Household consumer debt (credit cards, cars etc) increased 75%. Household incomes barely increased 40%. They are DROWNING in debt they have to pay off -- and no one but no one will lend them money either with credit cards or the house ATM to go shopping.

There are 4 major drivers for an economic recovery.

(a) Consumer spending. Forget it. They are up to their eyeballs in debt & their earned incomes are falling.

(b) Residential construction. Sorry but have an excess supply of houses as it is & the prices are STILL too HIGH for the typical household with its median income of $54000.

(c) Commerical construction. Nope. We don't need more hotels, shopping centers etc. Vacancies in strip malls are the highest ever. Hotels are closing. Purchasers are walkng away from underwater office buildings with 20-30% vacancies. Businesses do not need space when they don't have enough customers & the customers are history.

(d) Exporting. Export WHAT which will be more than imports?

(5) And since you haven't deigned to notice, check out the BEA income data.

(a) 2009 was only the 2nd time since WWII that total personal income FELL. Last time it happened was 1948 & it bounced back in 1949. It is not bouncing this time. The only thing keeping total personal income from falling further are the 'transfer payments' - Social Security, unemployment etc.

(b) The Wages and Salaries data is very very grim. Total wages/salaries have fallen back in total dollars to late '06/early '07 and are still falling.

(c) Proprietor's Income (what business owner's make) is worse. Total PI is back to the same amount as in 2004.

So you are shocked that people aren't all happy and giddy about Wall St? ROFLOL!! Not only are the real $$ in wages & incomes back to '04 or '06, but in the meantime there has been inflation of 15% ('04 to now) to 8% (06 to now) & the population has increased by 4-6%. They have little or no savings, incomes/wages are less and the amount of credit they are using is less.

OF COURSE they are pessimistic. They are broke. They owe mind-boggling amounts of money on their debts. They aren't making anymore than they did 4-6 years ago & in the meantime inflation has driven price up 8 -15%.

(6) Record number of long-term (6 months ++) unemployed whose profiles are educated professionals over 40.

DO have the NYT spring for a copy of "This Time Is Different: 800 years of Finacial Follies." You will learn something.

Huge Glen

Perhaps the sad reality that the rich get richer and the poor get poorer with the aid of our elected Senators, Congressmen and Presidents is depressing. Perhaps the fact that the United States is a plutocracy has dimmed people's hopes for the future. Perhaps the fact that America doesn't really have a sense of community or true social fabric woven into its core is upsetting. Perhaps we're all upset that the herculean Wall Street thefts of the rich always seem to be legal while petty stealing is worthy of immediate incarceration. Perhaps the duplicity of life is a bit sickening to those with a sense of right and wrong.

Patrick

I can't tell you why economists or politicians are shy about claiming the recession is over, but personally I believe the average American will remain dubious because they no long trust or believe elected officials--top to bottom--and most are still suffering from this downturn.

The same federal officials who boast that the recession is definitely over are the same self-proclaimed experts who tell us there is no price inflation. Anybody with half sense and one eye who has shopped for anything in American during the past year knows the current inflation rate is at least 15%. So let's give the average American credit for being savvy enough to be wary of any news coming out of the federal government's sunshine mill.

mtroll

I think people are cautious because we were informed that this financial collapse was much larger and more widespread than any since 1929; that many financial institutions continue to misrepresent their balance sheets; that there is a huge oversupply of residential and commercial property that will take years to resolve; that many governments (e.g., Iceland, Greece, Portugal, Spain) have severe financial problems; that unemployment (including those no longer looking) in the US and other countries is large; that state and municipal governments are making unprecedented cutbacks; that manufacturing is well on the way to moving to China; that US infrastructure needs are not being met; that the US Government debt is at dangerous levels.

These seem to be serious problems not mollified by fluctuations in the stock market or 0.8% rise in employment, most in low-paying dead-end jobs.

I think Obama is being realistic, and that he is correct if he thinks more stimulus is needed.

Miriam

I don't believe it. Experts who insist on comparing this recession to previous recessions since 1950 are missing a key point. In the 1950s through the 1980s, the U.S. economy was still largely a closed system. The supply/demand pressures existed within our borders. The huge difference now is that we are part of a global economy in which labor is far cheaper in other countries. Our lost income will not come back until American labor is competitive with foreign labor. No industry is exempt. World economic pressures dictate that American wages MUST fall. We will gradually see decreases in our standard of living until we are in equilibrium with world markets.

The U.S. economy has undergone a sea change since 1990; "experts" who insist on using the cycles of the now-extinct American economy to predict what will happen in the 2010s need to look up from their textbooks.

mlLos

There are NO JOBS in many areas, except for temp work (very temp, at that). The young my age put in anywhere from 50 to 150k getting their educations and came out with massive debt, and even if they had a previous full time work history and resume (I did), couldn't get a job, and can't still. I'm one of the phony census hires, so I'll have 6-8 weeks more of work, and that's it.

After two years of unemployment one of my friends got a job for 10-15 hours a week, and it is thrilling for her to work in any way at all. This does not touch on the burdens of the unemployed middle aged to pre-retirement aged worker (employers have literally put my older aunt on the shelf), or our retirement aged parents who are lending us money, and shouldn't have to. This does not touch on the people who don't have parents or relatives or friends and are homeless and destitude. There are no luxury items either; just minimum payments on bills, and food. Everyone I know has applied to McDonald's, to Target, to wash dishes, and are registered at countless temp agencies. (And like your article of last week described, I've done a full time "unpaid internship.")

But someone says we are in recovery. Wow - that makes it ALL different. Absolutely we need a new stimulus package. Because to call millions of people getting seasonal work every year or two a "strong recovery" is madness.

John Cheevers:

There is an important element which is being ignored in the examination of the present crisis that was not present in the previously cited recoveries. That is the national debt here and the looming sovereign debt crisis abroad. The United States debt when calculated to include mandates and entitlements for which we have no money going forward is well over $60 Trillion. Some estimates place it at close to $100 Trillion. Add to this the likelihood that one or more states will need to be bailed out by the Federal Government or face default and we have a staggering fiscal crisis.

No one wants to talk about it really. But the fact is that we as a country are dangerously close to broke. We have been running the Treasury like a giant ponzi scheme for decades. It is as if Bernie Madoff was the Secretary of the Treasury for every administration going back to the 1980's. Today we owe so much money that there is no way it can be paid back. The American people will not stand for the sort of tax increases needed to even dent the deficit much less start paying down the principal on the debt. Nor is there the political willingness to take a meat cleaver to the Federal Budget. Yet both need to be done in a hurry.

I believe that this is all a giant house of cards that has been built on sand. For decades we have been playing shell games with the budgets and living on the national credit card. The only problem is that at some point the bills have to be paid. There is too much debt in the world. Other nations are busy trying to stimulate their own economies and are competing aggressively for the same money that we want to borrow.

Our debt is too high and we are rapidly approaching the point where our creditors are going to start cutting us off. And then we will be in very serious trouble as we will have no means of servicing the debt. Interest rates on US Government Bonds will skyrocket. And with no one willing to throw good money after bad we will be faced with either default or monetizing the debt. The former would send shock waves through the world and wreak havoc on any who bought government bonds. It would likely precipitate an economic crisis that would make the crash of 2008 pale by comparison. The latter would spark devastating inflation and wipe out the savings of millions of people. It could crush the value of the dollar and cause a massive depression in its own right.

Anyone who has taken a look at charts showing the increase in the base money supply over the last decade would instantly grasp the danger. Numerous economists and historians have warned that when nations start borrowing 40% of the annual budget they are dangerously close to the tipping point. Likewise when national debts exceed a certain percentage of GDP the danger of default and or hyper-inflation becomes extreme. In both cases we are near that point. Our debt to GDP ratio is at its highest level since the Second World War.

Some have pointed to that fact as an argument that we can get by with the debt. But they ignore the fact that during the war and for fifteen years after it, the income tax in the United States was painfully high. The top tax brackets during the Eisenhower Administration were upwards of 90% as we frantically worked to bring the debt under control.

If history is any guide the hard choices that need to be made will be put off until the full force of the disaster is upon us. The unhappy fact is that national governments are run by human beings who suffer from all the usual temptations. Including the temptation to run up huge deficits and let someone else worry about the bills. The usual recourse of nations too deep in debt is to debase their currency. And since the early 1970's our currency has been especially vulnerable to this. Our money is backed by nothing. It is just colored pieces of paper printed by the government that we accept as being worth something because the government says they are. But what will happen when the number of $100 bills in circulation increases by a factor of ten, or twenty as we print money to pay off the debt?

The answer of course is ruinous inflation.

Unless you have a great deal more confidence than I do in our elected officials I would be very cautious about making any investments in securities backed by the government or even denominated in US dollars. If you feel a need (most people should) to keep a reserve of cash on hand for possible emergencies; I would encourage you to keep at least a part of that in a stable foreign currency or something that can not be debased with a printing press, such as gold or silver.

Good luck.

pdxtran:

Talk about Manhattan elitism! I noticed back in the 1980s that the stock market had nothing at all to do with the way the economy felt out in the real world west of the Hudson. In fact, Wall Street has always seemed to love mass layoffs and get nervous about high employment causing inflation.

I have never known so many unemployed and under-employed people in my life. I'm self-employed, my business is way down, and the clients I have aren't willing to pay as much as they used to.

That's REALITY, something New York Times writers often seem unacquainted with.

bwshook:

I'm glum; and I'm an Economist. The pundits are saying that we are in "recovery" and that it will be a "jobless recovery". As an Economist, I can tell you that there is NO such thing as a "jobless recovery". If you doubt me, just ask anyone who is unemployed.

When I last checked, the "true rate of unemployment" in the USA was 21.9% and climbing; not the government"s and media reports of 9.7% and holding near steady. We're due for a second, deeper dip in the economy (which is the opposite of all the political "experts") are telling us. If you've got two bucks in your wallet, hang on to them!

Dan Lourie:

Ummm...because no one but the fat cats are making money?
Because 18 million are unemployed?

Dutton:

I'm very optimistic about my short term financial prospects because business has been good for my company throughout this recession and is actually picking up even more this past month. However, I can't say I am optimistic in general about the overall economy, or consequently about the long-term prospects for my business, because I think the ponzi nature of the world financial system has been revealed and there isn't going to be another bubble to insulate us from the fundamentals for another span.

Fundamental 1 - In a global economy, the US standard of living is too high and therefore unsustainable. Companies simply will not hire American workers for $30/hr whenever they can hire a foreign worker for $5 an hour, and technology is enabling more and more jobs to be done anywhere in the world.

Fundamental 2 - a stock market based on perceptions of ever accelerating growth is absolutely unsustainable within a world with finite resources that have an authentic value pegged to achievable incomes for most people. We can't have a world with 20 billion people and a life sustaining environment, and so we can't have endless growth of production and consumption.

Fundamental 3 - Those who have good credit right now have the good sense not to overspend. Those who have bad financial habits are too broke to do themselves anymore harm, and no one is going to lend to them, and they can't afford to go bankrupt to start over so that 5 years from now their credit will be good again.

I could go on, but I think the picture is clear. We have a sense of impending doom because we have yet to see a change in the trajectory. When we start seeing a fundamental restructuring of how we approach the idea of developing "prosperity" we will have due cause to feel optimistic about our futures.

RoyFlorida:

The author’s optimism is noted and quite commendable…

However, while the politicians try to put a positive spin on the economy, the fact remains that the Chuck Princes, Robert Rubins and Alan Greenspans of the financial world continue to “pass the buck” and look to place blame elsewhere but on themselves – not admitting that they aided and abetted the financial “train wreck” that most Americans are suffering from. Goldman Sachs continues to run the world’s largest casino, arrogantly denying any culpability for America’s financial plight - while reaping windfall revenues for itself (Not clients) based on fixed bets, death pool positions & sweetheart bailout loans (Loans on the backs of the American taxpayer).

Conversely most average American workers are likely to be:

Unemployed (Facing a job hunt with limited prospects, an ultra competitive landscape & then only to find managers looking to hire on the cheap)

Underemployed

Employed in a frenetic, tenuous work environment because their company is under pressure to produce/survive (Squeezing as much as it possible can out of every live employee to make up for all of the bodies that it previously shed)

microsrfr:

As Joseph Stiglitz indicates in his book "Freefall" --aggregate demand is not strong enough to ensure full global employment

Our economy is on life support, being kept alive by federal stimulus and other deficit-financed spending.

We must focus on increasing the discretionary purchasing power of the middle class before it is too late.

“This is America’s middle class, we’ve hacked at it and pulled at it and chipped at it for 30 years now, and now there’s no more to do. We fix this problem going forward, or the game really is over.”

Elizabeth Warren on “The Daily Show with Jon Stewart”, 26 Jan 2010

One hopes that we will somehow muddle through but another oil shock, bank failure or major inflation piled on top of where we are now could very well put our very democracy at risk.

What is particularly devastating is that rich industrialists such as Rupert Murdoch and David Koch are financing foment. Don't they realize that industrialists financed both Hitler and Castro with dire consequences. The Teaparty movement doesn't have a leader, but once one emerges, watch out. Eric Hoffer in "The True Believer" wrote that the leader of a movement of those who have lost self-respect need not be rational, but only promise a better life, blame scapegoats and be totally consistent. With TV and radio media, facebook, youtube etc. his power will be greatly magnified.

Our country can only rise again if led by increasing middle class purchasing power.

Cathy:

The reason that the stock market is up is because it is impossible to get any return on investment with more conservative investments, thanks to Bernanke. This forces individuals and funds to put money in the market. There is no real underlying economic growth.

Joel Weymouth:

The "growth" is on the government side - and the government does not create anything. All the money is running out from the stimulus packages, there was a jump in joblessness and oil will hit over $100 a barrel - down she goes again. What the left will never realize is that the poor and middle class DO NOT create jobs - it is the rich - and they have no incentive to create jobs. Secondly, America is not "creating" anything but gadgets and toys (electronic).

There hasn't been a major technological discovery or innovation that "produces" anything. We have become stagnated. We have been seeing national decline over the past 40 years. The decline has accelerated to an alarming rate under Obama.

If they really want to "jump" start the economy - why not revive the space program - the scientific research will yield "green" energy, improvement in Computers, food production, and manufacturing innovation. All the things needed for someone to survive on Mars or the outer planets will require the "ingenuity" that America has always had. And as in the Moon program of the 60's, it will bear fruit in ways we never expected. R&D always does.

syntheticzero:

People don't believe it because human beings tend to look at the present and the immediate past to assess things, and they don't look to long-term trends. When the housing bubble was inflating everyone thought things were hunky dory --- the few who predicted doom were greeted with derision. Then the crash happened and the government went full tilt into trying to stave off disaster by injecting large amounts of capital into the financial system and spending money on a stimulus package, both moves likely staved off a far worse depression.

But people can't compare what "might have been" with what is, so now the Tea Partiers and others rail against the "bank bailout" even though it is likely to come close to breaking even in the end, and worry about the deficit when it's precisely a time like now when we SHOULDN'T be worrying about the deficit and SHOULD be stimulating the economy. And now that all of this has managed to start what is likely to be a fairly robust recovery, people are still looking to the immediate past rather than projecting the likely future.

We keep making the same mistakes over and over again, but we don't learn from them. The way things have been in the immediate past isn't necessarily the way they will continue to be forever. Bubbles don't inflate forever and crashes usually recover. Obama, on balance, has been doing a pretty damn good job. Yes, we need to pass financial regulation, etc., but I'm not going to count Obama out on that one just yet. People thought health care reform was dead and he pulled that one off, too. (And no, health care reform isn't a government takeover of health care. That's a whole other song and dance of folly.)

Wesley:

Why don't we believe it?

Because we know it is a mere shell game, and President Obama has simply borrowed from the future to prop up today's economy. With our debt now reaching nearly 90 percent of our GDP, we've got big trouble not too far down the road. The American people aren't as simple as the pollsters and politicians think. We know that you can't spend with reckless abandon like Obama has done since day one of his presidency, without paying a major price sometime soon. A day of economic reckoning is coming, and that is what has folks still skeptical of this faux recovery.

Guy William Molnar:

Because the University where I teach has announced a significant budget shortfall next year, with an even larger shortfall the year after, and is considering elimination of my department. I landed this job after a year of unemployment; I had lost the previous job due to budget cuts.

Because the number of available jobs for which I could apply is a small fraction of the number of such jobs "normally" advertised.

Because yesterday one of my best friends was informed of a 10% pay cut, effective immediately.

Because thanks to Wall Street and Washington and the insatiable, shortsighted greed of politicians and corporate barons, I can't help believing strongly that IF there is a recovery, the benefits - at least for a long, long time - will go to a very few who are already at the top of the pyramid.

Mikee:

I think most of us have lost confidence that our corporate, banking and manufacturing leadership have any capability of recovering. Supposedly smart people ran the auto industry into a ditch. Supposed masters of the universe designed and traded their way into a monetary house of cards. Trusted realtors and builders created a bloated housing bubble that bore no relation to the realities of cost and demand. Politicians now want to starve the beast and make everyone worse off. No we aren't just glum, we are also angry...

MDD:

The Economy is getting better, and with all of the harmful information in the news and Internet it is a wonder. I am unemployed at this time, but can see where there are positive changes. BNSF is hauling containers at full capacity and Union is catching some of the overflow.

That is clear information, unrelated to what the Republicans want it to sound like.

lyrazel:

I have not seen any new jobs in Maine. No new factories are being built, most stores even big box ones are in trouble. The largest sector of workers are the self-employed. Libraries are cutting hours, government employees and teachers are getting pink slips; state and townships have lost all state trooper deputies. The one insurance company in the state wants to raise premiums by 20%. The worker-base that used to support social security, pay taxes, are unemployed or on some kind of public assistance. Those boomers who reached minimum retirement age are now on SS because they have to be for some kind of income--they have no retirement savings and never could earn it.

Getting better? For minimum wage workers possibly. Watching my 50yr old neighbor bag groceries on a part-time basis after a 30year career in a now closed printing shop is where America is now.

MCJ in NYC:

Wow I read most of the comments. Very interesting points of view. Let me harp on one that was made by another commenter.

Americans have unsustainable lifestyles and salaries in comparison with our cousins overseas. To boot, we are extremely behind in terms of overall education\skills. Particularly, with regard to the hard sciences that are in heavy demand.

The train wreck is US. The people. We are as bad or worse then the politicians. No one is forces us to spend well beyond our current or foreseeable means. It's absolutely moronic, the amount of debt that so many of my fellow citizen CHOOSE to carry.

I on the other hand, have zero debt and a sustainable lifestyle/career. I should be in some radical extremist movement. But I'm not because its ineffectual and impotent. The best defense against this global economy is to develop the new age skillsets that are paying the bigger money.

So many want to blame Obama or Bush or anybody else besides themselves. No politician can help us or bail us out and no rhetoric will heal our broken psyches. We have to upgrade our skills and demand that our government assist us at the federal level to make education and technology the educational thrust of this country. Then we have a chance, maybe. We are still way behind the rest of the super powers in our arrogance and delusions of superiority/entitlement. Get it together folks as individuals.

Jon Allen:

MJC in NYC,

You are right on the mark, sad to say.

We do expect to sustain the highest buying power per person, without the best education, the best on the job training, the best continuing education, or even the time to pursue any of this. It is the highest form of arrogance, with unparalleled delusions of superiority & entitlement in the world, or unparalleled ignorance.

dee clary:

I'm not optomistic because our system has not been reformed. The problems that caused the meltdown have not been addressed. Now today I found out Citibank and Chase are down in Peru issuing credit cards with high limits and no background checks. So the banks are still doing their dirty tricks and will have to be bailed out again by the taxpayer. Something is seriously wrong with this picture!

[Apr 10, 2010] Breakfast_with_Dave_040910

"There is no doubt that this last leg of the rally has been breathtaking, and is a big surprise to yours truly … But the primary trend remains one of deflation or disinflation and this means an ongoing emphasis on income-generating securities and assets are critical..."

MARKET THOUGHTS

There is no doubt that this last leg of the rally has been breathtaking, and is a big surprise to yours truly and underscores the old adage about how markets can stay overvalued a lot longer than people realize and we have seen many times in the past blowoffs that take equity valuation to extreme highs. Our overall macro and valuation views have not changed and this market could well see the technicals and the momentum take it even higher in the near-term, but that does not mean that investors who have adopted a cautious or prudent view of capital preservation should abandon this strategy. The primary trend is what is important; not the noise around that trendline. That primary trend is one of private sector credit contraction, excess supply of finished goods manufacturing, retail space, houses and labour, which are all deflationary. This means an ongoing emphasis on income-generating securities and assets are critical.

We realized that our call for either deflation or disinflation is rather controversial and flies in the face of the improvement in many economic indicators — which we view as a statistical bouncing of the ball down the staircase. Wal-Mart is the largest retailer in the world and is now embarking on a strategy of "cutting prices on thousands of products in an aggressive campaign to reinforce its reputation as a discount leader, as the company seeks to reverse months of slowing U.S. sales." Wal-Mart is the price setter for much of the retail sector, so this is very encouraging news from a disinflation perspective — see Wal-Mart Bets on Reduction in Prices on page B1 of the Wall Street Journal.

The U.S. economy has received tremendous support from government handouts — every penny of the $243 billion of "income" that has accrued to the household sector in the past year has been transfers from Uncle Sam — as well as the cash flow that has been released by the wave of strategic mortgage defaults (a case where the banking sector writedowns have translated into immediate interest rate relief for formerly stressed-out homeowners). None of this is organic — private sector wages are still deflating and credit is still contracting, but not until this shows through in a more conservative spending pattern will Mr. Market see that there is no "V"-shaped recovery and that there will be a day of reckoning ahead even if the Administration has managed to buy some time with its massive fiscal program.

A similar fiscal program by FDR, called the New Deal, may have prevented a bad situation from getting worse but ultimately the largesse was paid for by the upper-income earning class as top marginal tax rates surged from 25% to 80% by the end of the 1930s. Taxes in the U.S. are destined to soar in coming years because too much of the spending is nondiscretionary; indeed, this is already happening at the State and local government level.

To repeat, what has driven consumer spending in the past year (retail sales up 9% YoY in March?) at a time when household credit contracted $235 billion and 2.3 million jobs were lost were the following:

Government income assistance: $243 billion

Tax reductions: $63 billion

Government wages: $27 billion

Decline in savings rate: $22 billion

Strategic mortgage defaults: $120 billion (courtesy of Gene Balas from Columbia)

That is a cash flow boost of $475 billion, or equivalent to 5% of consumer spending, and offsets the negative impact from lost private sector wages by a factor of nearly 4 to 1! No wonder the retailers are ripping! But the question remains one of sustainability.

As for valuation, we updated our 12 equity models for the S&P 500. The median fair-value estimate is 1,055, which suggest a degree of overvaluation bordering on 15%. The range of the models’ results is between 955 and 1,200, which means that there is currently more downside than upside; however, as we said above, the technicals may be taking over at this point. The Canadian market is far less overvalued, as a reminder. And the Shiller P/E is at 20.6x versus the historical average of 16.4x, so this estimate would suggest a 30% overvaluation for the S&P 500. Remember, buy low, sell high.

We see that the folks at the Bespoke Investment Group also see that three of every four stocks in the S&P 500 right now are in overbought terrain. Bullish sentiment in the investment surveys has risen now in seven of the past eight weeks. This has been and remains a dangerous time to be excessively long this market, especially in the U.S.A. where valuations are more stretched than in Canada. We acknowledge that this will only be clear when we look back on this period several months from now when the economic and earnings landscape fall short of delivering that "V"-shaped expansion that is now very clearly being priced in. In fact, our models suggest that at current S&P 500 levels, the U.S. equity market has gone ahead and discounted 5% real growth in the coming year.

According to our models, the U.S. equity market is about 15% overvalued

[Apr 09, 2010] Dash for trash officially started

Ritholtz started to advocate momentum trading as in Chuck Prince famous quote “As long as the music is playing, you've got to get up and dance” . A new strong competition to Cramer. Pretty funny...

I did an extensive interview with Wall Forbes of Forbes magazine. You can see the whole thing at Forbes.com, but here is a brief excerpt:

Forbes: So what kinds of things are you recommending at this point?

Ritholtz: I’m going to give you three groups of investments, one of which makes sense, and the other two are really counterintuitive. Or maybe it’s not counter-intuitive, it depends on how you think of it.

The first group is what I call our bailout bet. And that’s all the companies that I think are horrible companies and I hate their managements. They’re terrible corporations, and we should throw them into the ocean. But we had to hold our nose and buy them, because they were going higher. And that’s Citigroup, Bank of America, and Fannie Mae.

Forbes: Interesting.

Ritholtz: Three giant disasters. This is what I would call a trade, not a put-it-away-for-the-future. They’ve all moved significantly higher. Citigroup, over the past few months, has gone from $3 to $4, which in terms of percentage basis, it’s a big move up. Fannie Mae has an absurd amount of momentum behind it. I think people are saying, “Well, the government now can’t let them go belly-up because they’ve thrown so much money at them.”

And Bank of America seems to be trading fairly well. I don’t like any of their management teams; I don’t like any of these companies. You know, this is the sort of thing that would make a Warren Buffet or Peter Lynch type of investor nauseous.

Selected Comments

SavetheWhales:

I am going to do it: This is the top. Right here. Right now.

Sunny129:

”Anyway you look at it, the chances of another panic are increasing. Not to worry though. In America, Dow 11,000 is coming, retail sales are up by decade high percentages, and happy days are here again.’

http://www.creditwritedowns.com/2010/04/fitch-downgrades-greece-to-bbb-with-a-negative-outlook.html

call me ahab:

well- so much for “The Big Picture”-maybe you should change your blog- any ideas? Here’s one- “The Quick Trade”

Todays subject -- “The Dash for Trash- and how you can win big” moving up in the world there BR- I am sure they are warming a seat for you over at Fast Money

Europe:

Isn´t that the same investment strategy that non professionals use? If something goes up, buy buy buy.

If there is more momentum to the upside, buy more and speed up…..isn´t this IT-bubble investment strategy? You do not like Citygroup, you are almost sure that they are insolvent and have been cheating and cooking their books for a long time. You hate the management…….and then you invest in the company…..?

“The rise of Junk”-theory?

I just lost faith…..

call me ahab:

“isn´t this IT-bubble investment strategy?”

wrong Europe- the IT companies didn’t have the full faith and credit of the United States supporing them-that was a real bubble w/ a real crash- and no rebound- but I bet if the USG would have injected $$$ into the dot coms and threw a Trillion or or two around after the bust-BR would be talking about Pets.Com right now

bobabouey:

People bitching about this post, or oversimplifying the point Barry is making, need to spend some good, serious reflective time reading Barry’s prior post, which is one I will be saving in my permanent file….

http://www.ritholtz.com/blog/2010/04/10-thoughts-on-psychology-valuations-adapative-investing/#comments

Mannwich

The new bubble is clearly the TBTF’s. Clearly they’re all going to infinity.

call me ahab :

TZ-

couldn’t care less what BR invests in- and kudos to him for admitting he is investing in a company he lambasted for as long as I have been frequenting this site-

but where is the “fusion IQ” and “Big Picture” to this trade-

“dash for trash” is well documented even for the worst of traders

Transor Z:

One man’s dash for trash is another man riding the prevailing wave for treasure, I guess.

dead hobo:

My best recollections of TBP are trading advice put into the proper context (BR setting a out a strategy, others saying here’s what they’re doing at this time, newbies and rubes trying to figure stuff out) and other pieces that add depth and reasonable analysis to the crap that passes daily for news and current events.

My best marketing advice is to continue with that approach, but make the line a little brighter. Yes, there’s lot to be made if you are astute and can appreciate the risk in relation to your personal situation. And never forget to respect that everyone (your readers) comes from different places and have different situations and different responsibilities. You can tell your story without hurting someone else because they’re not as smart as you because they didn’t do something you claim to have done.

There’s a lot of thieves and crap masters who want your money and will say anything to get it. Walk that line and try to appease both sides and suffer a total humiliation by 10000 cuts. Rise above it and try to find a truth of some kind and become a legend.

Either way I’ll still be a smart ass because that’s just me.

Marcus Aurelius

:BR:

In an effort to maintain the value of my respectable nest egg, I’ve made pretty good money (of course it’s a paper gain until I sell).

I didn’t buy anything I didn’t like, and it’s all been relatively low risk. I’d say I’m up around 40% over the past 3 years.

I’m very conservative, risk averse, and aware of what the corporatists control, and how they can fine tune the outcomes of the markets, globally, to make it for them, while taking it from you/us. I hate risk, and I refuse to buy it.

This is a very risky market, generally speaking.

[Apr 06, 2010] Why Do Some Investors Perceive This Market As Cheap

At least 75% of the mythical “anyone” , is Goldman Sucks, and a few other IBs and mutuals that have agreed to put a bid under everything to prop the market.

Mannwich Says: April 6th, 2010 at 12:39 pm

Because the perception out there is that the Feds will always do anything and everything to prop up all assets ALL the time, so just buy every piece of junk paper you can or be “priced out forever”. P/E ratios? Please.

flipspiceland:

At least 75% of the mythical “anyone” , is Goldman Sucks, and a few other IBs and mutuals that have agreed to put a bid under everything to prop the market.

A quick look at the volume of trades these few firms are responsible for illustrate that the rest is made up of a few mutual funds.

There is no broad support for this ‘cheap market’. One sideglancing blow and look out.

The pros of a few supporting the market are that

1) they have no need to panic, they can buy and sell for a few cents one way or the other to each other,

2) they have the citizens of the unUnited States as underwriters and co-signers if things go disastrously wrong for hat is their payoff for keeping Ben and Timmay in their jobs to accomplish whatever it is that rulers of the world behind the curtain who are handing Timmay and Ben their marching orders.

rootless_cosmopolitan:

Where does the average of 16.7 for the operating P/E-ratio in the lower left panel come from? I suspect this number is total bogus. I have a time series for the P/E-ratios, based on reported earnings, available going from 1936 to 2008, which I pulled from the S&P-website once. The average P/E-ratio over the whole time span is about 16. If I calculate the average P/E-ratio from 1936 to 1995, excluding the data from the bubble years, the average is only 13.8. On average, operating earnings are higher than reported earnings. I estimate by 5 to 10% (I would have to calculate this). So the average P/E-ratio for operating earnings should be 5 to 10% lower than the one for reported earnings, i.e., about 14.4 to 15.2 over all years, or about 12.4 to 13.1, when the bubble years are excluded. Thus, even if one accepts forward operating earnings as a valid metric that contains more information than just how wishful thinking looks like, it doesn’t look so cheap anymore, either.

rc

Mannwich:

@flip: I’ve already assumed that’s where we’re headed.

KidDynamite:

but aren’t “operating earnings” themselves a bit like “core” inflation – taking out all the stuff that hurts you?

i always used to laugh when companies would write off their massive “one-time” expenses and losses that would be ignored by the market… only it happened EVERY QUARTER!

Julia Chestnut:

Uh, I may not be a genius, but when I see betas like the ones I’m seeing, I am not thinking “cheap.” Where the heck are the future profits coming from, when the business is currently cannibalizing all excess capacity to post quarterly profits?

Sorry, but when Hussman says anything along the lines of “insanely overbought,” I’m unlikely to believe the likes of JP Morgan. Ok, I never believe JP Morgan.

M Says:

Amusing that you post this on the same day that dshort posts this: http://dshort.com/charts/guest/SP-and-PE10-with-resistance.gif

What flavor tea leaves do you prefer?

dead hobo:

I’m not sure I would say cheap.

Easy and cheap is better. Good for a fast ride. Happy to tell you you’re the best, please come back for more. Pay me now, I promise to make it worth your while, honey.

dead hobo:

Followed, later, by “I don’t know what happened, dear. She seemed so honest and sincere.”

scharfy:

Look heres 50% of the market cap of the S&P 500, individual weighting followed by a cumulative total.

If you take out the financials (who are earnings protected by the Gov) – I see many solid companies that actually make and sell things – quite well. Further, more so than ever – these companies have growing international sales components. Oh yea and they pay dividends of 2.2% and growing. Until I can earn 5% in cash I’ll take my chances.

What I am implying is that Apple, Exxon, Kraft, Intel etc.. can be profitable in the face of reduced domestic demand more than they ever could in the past. They are getting leaner and have additional markets to tap into should domestic demand stay low as households retrench. Its a decoupling. Different than before. Global.

And sure – if collectively the American public wakes up one day and starts demanding better value in terms of mulitples – then hell yes we tank. But we just went down that path for 10 years (massive accounting fraud) and people still love them some stocks… So that ship has sailed in my eyes.

But as always – you pays your money and you takes your chances…

1 ExxonMobil 3.00 3.00
2 Microsoft 2.08 5.09
3 Apple 2.02 7.10
4 General Electric 1.84 8.95
5 Procter & Gamble 1.73 10.68
6 Bank of America 1.70 12.37
7 Johnson & Johnson 1.68 14.05
8 JPMorgan Chase 1.68 15.73
9 IBM 1.57 17.30
10 Wells Fargo 1.52 18.83
11 Chevron 1.45 20.28
12 AT&T 1.45 21.73
13 Cisco Systems 1.40 23.13
14 Google 1.29 24.41
15 Pfizer 1.27 25.69
16 Berkshire Hathaway 1.25 26.94
17 Coca-Cola 1.18 28.12
18 Hewlett Packard 1.18 29.30
19 Intel 1.16 30.46
20 Wal Mart 1.10 31.57
21 Merck 1.09 32.65
22 PepsiCo 1.01 33.66
23 Oracle 0.93 34.59
24 Philip Morris International 0.93 35.52
25 Goldman Sachs 0.85 36.37
26 Verizon Communications 0.83 37.20
27 Citigroup 0.78 37.98
28 Abbott Labs 0.77 38.75
29 ConocoPhillips 0.74 39.49
30 Schlumberger 0.73 40.22
31 McDonalds 0.68 40.91
32 Occidental Petroleum 0.67 41.58
33 QUALCOMM 0.67 42.24
34 United Technologies 0.65 42.90
35 Disney 0.64 43.53
36 United Parcel Service 0.59 44.13
37 3M 0.56 44.68
38 Amgen 0.55 45.24
39 Home Depot 0.52 45.75
40 Boeing 0.51 46.26
41 Comcast 0.50 46.76
42 Kraft Foods 0.49 47.25
43 American Express 0.48 47.72
44 U.S. Bancorp 0.47 48.20
45 Medtronic 0.47 48.67
46 CVS/Caremark 0.47 49.13
47 Bristol-Myers Squibb 0.43 49.56
48 Amazon 0.42 49.98
49 Altria 0.41 50.39
50 Ford Motor 0.40 50.79
51 Colgate-Palmolive 0.39 51.18

Mannwich:

If only these people could just use their food stamps to buy stocks, then they too could be “rich”.

http://globaleconomicanalysis.blogspot.com/2010/04/food-stamp-usage-hits-record-39-million.html

flipspiceland

Is it off topic to add to the quote for the day?

If not I’d like to complete it:

“In the old days a man who saved money was a miser; nowadays he’s tortured”.

adamj:

I hate it when people show charts regarding valuations that only go back to 1990 and then label a certain number as AVERAGE. Almost the whole period was historically OVERVALUED and the long term returns were equally subpar. Might I recommend reading http://www.hussmanfunds.com/wmc/wmc070820.htm and expecially pay attention to the chart http://www.hussmanfunds.com/wmc/wmc070820e.gif as you can see a forward PE of 15 is associated with the most overpriced markets 1986-87 and the whole 60s.

jswap:

Look how cheap the market was in 2007; I’m kicking myself for not having bought more, uh, waitaminute…

Gaucho:

Any idea what the impact of stimulus is on earnings? Stimulus will fade in the second half of the year. Earnings and profit margins are still at historical highs, I wonder how sustainable that is, in view of consumer lending collapse.

Clem Stone:

I found this fascinating interview with Leon Cooperman from August 2007 where he claims, “my outlook for the next 12 months has not changed. I believe there’s limited downside risk in the U.S. stock market from current levels, and returns over the coming year should be in the low double digits”, based on P/E ratios among other things.

Sample jaw-dropper: “it’s hard for me to believe that Bank of America stock won’t outperform ten-year government bond returns over the next decade — the company raised its dividend 14% in July. ” Of course the decade isn’t over yet but this was with BAC @ $50.

http://money.cnn.com/2007/08/07/markets/cooperman_market_analysis.fortune/index.htm

scarlo:

I don’t know how relevant historical p/e ratios are anymore. I mean yes, they certainly mean something, but it’s all context. Some things to keep in mind:

Over the past couple of decades p/e ratios have expanded because of increased equity investments by the general public, foreign investors, pension funds, etc. It’s possible that the common folk will continue to pull money from equities and pour it into fixed income, but with the market going up its highly unlikely. With interest rates set to go up (even if not soon), bonds will fall at some point and some of that money will be moving somewhere.

P/E ratios should be highest in an economy coming out of a recession – just after companies have cut some fat and are ready to capitalize on better margins and returning sales.

A p/e of 15 means to me that a company is earning a return on my investment of 6.67%. If the company is reinvesting this money with a positive ROE then the returns on my money are increasing annually. 6.67% growing annually versus … ?

In my mind, there are still many attractive equity positions on the market. Take for example one Dow Index member I have in mind. Currently priced at a p/e of around 15, they recorded their first sales decline in 76 years in 2009. They have a bullet proof balance sheet and their bonds yield less than the US Treasury. The div yield is approx 3% and they have a very good habit of creating solid positive ROE for shareholders. Is there a reason that this is not attractive as an investment compared to alternatives? With a 50% payout ratio (they are less) and even assuming a paltry 10% ROE (this is likely to come in higher due to cost cutting and an assumed increase in sales for 2010) we’re talking 8% return on my money.

If deflation happens, the gubmint prints more moolah. If we have low growth then I’m happier than bonds. If inflation happens, then I’m happier than if I was in bonds. If stagflation hits, then I’ll release my golden parachute for a softer landing.

cognos :

Its interesting that there are a bunch of ad hominem comments, negative with no subtance.

And then the 2 or 3 substantial comments conclude current valuations are quite rational and, in a recovery, likley headed much higher.

In the negative comments there are a bunch of blatant mistakes:
– average of 1930 to 1995 is said to be BETTER than average PE since (wtf?!?)
– operating vs net earnings (currently there is very little gap. the major diff is simply “goodwill” writedown which are just an accounting fiction. what is the opposite of goodwill write-downs? Why not include this as a huge positive in eps?)
– where is the earnings growth going to come from? (duh! recent Qs have had 50% to 300% YoY earnings growth. Earnings look set to continue growing 30%/yr the next two years of recovery.)
– balance sheet asset quality and CASH is at the highest levels ever

Good luck with the negative trade. I’ve been saying it for more than 6 months… SPX will post more than $80/shr in earnings in 2010 and close to $100/shr in 2011. New highs will be reached in late 2011 (which has some nice symettry — flat indices on 4-yrs and 11-yrs).

Again, I’ve been saying it the last 3 months — the credit cycle has turned… look at the financials: RF, ZION, MTG, BAC, GE, C, WFC, etc…

Kudos to the guy who pointed out that many MAJOR blue chips — AAPL, MSFT, HPQ, PG, PFE, XOM, GS, etc — have sub 15 PEs and nice +2% divs (or great eps growth, like aapl), large cash balances, and consistent profitability… many never had a losing Q.

rootless_cosmopolitan:

cognos,

“In the negative comments there are a bunch of blatant mistakes:
– average of 1930 to 1995 is said to be BETTER than average PE since (wtf?!?)”

What’s your problem? You don’t understand the math? There is no mistake there.

The P/E-ratio averaged over 1936 to 1995 is lower than the P/E-ratio averaged over 1936 to 2008. For reported earnings, it’s about 13.8 vs. 16. This is due to the extremely overpriced stock market during the bubble years.

The 16.7 for the average P/E-ratio based on operating earnings, which is shown in the graphic, must be bogus, made up, fantasy or calculated using a period that isn’t long enough to get a reliable normal for the stock market. Since operating earnings are systematically biased upward compared to reported earnings, the average P/E-ratio based on operating earnings can’t be higher than the average P/E-ratio based on reported earnings. This is all quite simple math. Think about it, if you don’t understand it.

rc

Eric Davis Says:
April 6th, 2010 at 10:34 pm

You know that the market and participants are in a constant state of “Institutional Memory”, The only thing they know is based on the Empirical, Not the Statistical or historical or Scientific.

It’s the same mistake the Folks of the CDO made. “it hasn’t happened in our lifetime… therefore it’s impossible.” Every Knob, throws together a chart with the past 30 years of data, and assumes it’s going to be correct, and it almost never is.

A 3+ standard deviation event “Boomer stock bubble”, and somehow Forward PE’s should normalize to 17x FPE When a 15PE is a standard historic “Strong Growth” environment.

Let alone, when we have the “Come to Jesus” about the headwinds over the next 20 years.

[Apr 06, 2010] Breakfast_with_Dave_040610

"This is not a time to be tempestuous and impatient. More than ever, it is a time to be exercise discipline and not to be tempted into chasing performance. The marginal buyers have been the pig farmers, namely the prop traders at the big banks buying and selling to each other at everinflated prices as if they were all in a room at a Sotheby’s auction."

I have long been from the Bob Farrell camp from the first time we touched base over a decade ago when I joined Merrill Lynch Canada as Chief Canadian Economist and Strategist. Bob was the dean of Merrill research for about five decades and still publishes today and his latest missive really hit home with us ( Will April Flowers Bring May Flowers). To wit:

“Huge gains in short time periods like this are not necessarily bullish. In fact,the biggest declines typically generate the biggest reflexive rallies (with retests to follow) … the duration of this largely uncorrected rally since March 9, 2009, is already in extreme territory and any extension from here should be watched for ending characteristics such as catching up of laggards and the development of sentiment extremes.”

This has been a rally done on extremely low volume because nobody is selling — same thing yesterday as the major indexes bounced to new 52-week highs (and there were three advancers for every decliner) but volume was lower on both the Nasdaq and the NYSE. The marginal buyers have been the pig farmers, namely the prop traders at the big banks buying and selling to each other at everinflated prices as if they were all in a room at a Sotheby’s auction. This is an assertion, but it makes perfect sense because the fund flow numbers do not add up to a 75% rally from the lows, even including share buybacks. The lingering question is: what is the catalyst for the inevitable corrective phase?

Very likely the answer will be related to sovereign credit risks. Here is the way we look at the situation: it’s about earnings and the variability around the earnings outlook. We are in a world where the government sector has been the primary provider of economic impetus and it is becoming clear that the tolerance among bond investors for more public sector largesse is growing thin. The future is more uncertain than normal coming out of a cycle that was gripped with credit contraction and asset deflation.

As for the earnings that have actually been accrued, we are talking about a $57 trailing four-quarter trend in S&P 500 operating earnings per share (EPS). The last time the S&P was rallying towards the 1,200 level in late 2004 that trend in EPS was $68, or 20% higher than it is today, and back then, we had solid and sustained employment growth, low and falling unemployment rates and high and rising capacity utilization rates — not to mention that credit was abundant and available to everyone at an extremely low cost. Housing and commercial real estate were rising to new heights and household balance sheets and wealth were hitting new all-time highs.

So, no matter how we slice it, whether on a Shiller P/E basis, a one-year forward basis, a Tobin Q basis or a historical profit basis, the market is anywhere between 20% and 30% overvalued. Nothing says it can’t get more overvalued or that this overvalued state cannot linger for longer. But reversion to the mean suggests that we will in fact, at some unknown point in the future, embark on the Farrell retest phase. Now wouldn’t it make more sense to buy on that opportunity than after a 75% virtually non-stop rally? This is not a time to be tempestuous and impatient. More than ever, it is a time to be exercise discipline and not to be tempted into chasing performance.

[Apr 06, 2010] Guest Post- Rental Prices … Up or Down-

"I am not convinced that pensioners are going to get paid 100% of what they were promised. Same with social security benefits."

The chief economist for Standard and Poor’s is now confirming the importance of national demographics:

But I don’t think [a lost decade in the U.S. is] as likely over here. For one thing, one of the problems in Japan was the demographics. And we don’t have the problem of a declining population to deal with, although the labor force is going to slow down considerably as soon as the baby boomers retire.

In other words, America’s age demographics aren’t as bad as Japan’s, but they aren’t helping, either.

Seniors have less income from wages, but have had longer to save money and invest. However, a report by the Center for Economic and Policy Research shows that most baby boomers have accumulated little to no wealth.

No wonder:

David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age.

In addition, pensions are getting killed, and because the states are already experiencing massive budget deficits that cannot cover education and other expenses, something has to give. I am not convinced that pensioners are going to get paid 100% of what they were promised. Same with social security benefits.

Does that mean people will receive drastically reduced benefits compared to what they were promised, that taxes will skyrocket, or both? Any way you look at it, the American population is quickly greying, and a high percentage of seniors won’t have much to spend on housing.

[Apr 06, 2010] Oil Surges, But Is Rise Sustainable - The Source - WSJ

I still remember times when oil above $60 was considered by economists a sure couse for a long recession...

Crude oil prices have surged this week after fresh U.S. data suggesting economic recovery is taking hold. However, the advance isn’t supported by market fundamentals.

First came the latest employment figures last Friday, which showed U.S. employers added 162,000 jobs in March, the largest gain in three years.

Then came figures from the U.S. Institute for Supply Management on Monday, revealing the service sector was expanding at its fastest pace for four years.

In response, both Brent and West Texas Intermediate, the two main oil-futures contracts, breached $86 per barrel on Monday, the highest level since October 2008.

The 17-month high has little significance in itself, particularly since these prices were last seen during a slump. Crude oil prices were in free-fall at the time after hitting record highs above $147 per barrel three months earlier in July 2008.

[Apr 06, 2010] The 2010 Recovery - WSJ.com

This mixed jobs picture is symptomatic of the larger economic recovery, which has been underway for nine or so months but has felt less than dynamic. The stock market is doing well, which is one portent of future growth. Corporate profits have been increasing smartly, which is also helping stocks, as has productivity as firms squeeze more output from each worker. Thanks to China and India in particular, global manufacturing has rebounded.

... ... ...

The larger policy context is that the U.S. recovery has been built on an enormous reflation bet, both fiscal and monetary. The stimulus and its many sister subsidies (housing tax credits, cash for clunkers, etc.) have flooded the economy with government-directed cash and credit. We think marginal-rate tax cuts would have done much more for growth, as in 1983 and 2003.

The Federal Reserve has also kept and maintained an historically easy monetary policy. This was necessary for a time to offset the decline in monetary velocity in the wake of the credit panic, but the near-zero interest rate has also made it easier for banks to make money on interest-rate plays rather than actual lending. It is also contributing to higher commodity prices and distortions in the dollar bloc overseas. The Fed is fortunate that the mess in Greece has made the dollar seem a better reserve currency than the euro.

[Apr 06, 2010] Greenspan Signals Warnings for Bubble Maniacs

Stock market manipulation as an economic policy instrument was Greenspan's invention.

"In the United States the central mechanism for inflating the stock market and fueling the powerful recovery in junk bonds was Bernanke’s shift to the radical “quantitative easing” (QE) scheme, in which the Fed printed $1.75-trillion of high powered money, channeled the excess cash into the coffers of the Oligarchic banks on Wall Street, which in turn bid-up the prices of high-grade corporate and junk bonds, thus narrowing yield spreads with US Treasuries. "

While Greenspan said he sees little threat of inflation now, in the long-run, inflation will pick up unless the Fed withdraws the massive stimulus it has pumped into the economy. “We are still by any measure in a disinflationary environment.” However, “unless we sterilize or unwind the big monetary base we’ve built-up, inflation will begin to take hold.” The size of the Fed’s balance is “not sustainable” and will eventually have to be reduced to “something just north of $1-trillion,” he said.

Seeking Alpha

“I guess, I should warn you. If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said,” former Federal Reserve chief Alan Greenspan was fond of saying when he controlled the Fed’s money spigots. For many Fed watchers, it was a great relief when “Easy” Al finally retired from the Fed, since there is nothing more vexing than correctly interpreting Greenspeak.

“Everything depends upon proper listening. Of ten individuals who listen to the same speech or story, each person may well understand it differently, - perhaps only one of them will understand it correctly,” an eighteenth century theologian observed. So it was of great interest, listening to a March 27th, interview presented on Bloomberg TV, with the maestro, Mr. Greenspan, who is settling into the twilight years of his lifetime. This time, Greenspan spoke more clearly, about such arcane subjects such as “Asset Targeting,” and the manipulation of markets.

When asked about his outlook for the US economy, Greenspan answered by saying everything depends upon the direction of the stock market:

Ordinarily, we think of the economy affecting stock prices. I think we miss a very crucial connection here in that this whole economic recovery, as best as I can judge, is to a very large extent, the consequence of the market’s bottoming last March, and coming all the way back-up. It is affecting the whole structure of the economy, as well as creating the usual wealth effect impact.

Imagine for just a moment that the Dow Jones Industrials has become a key instrument of national economic policy, and that by “actively managing” its direction, the government could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. By ramping up the growth of the money supply, and slashing interest rates to zero percent, in order to inflate market bubbles, the Fed could in theory, fuel an economic rebound.

Greenspan generally pursued an “asymmetric” monetary policy, in other words, always quick to slash interest rates and flood the markets with liquidity whenever the stock market was tumbling, but was very slow in draining liquidity or raising interest rates, when stock markets were booming. There was always an inherent bias towards asset bubble inflation, under the Greenspan Fed’s policies.

For big-time risk takers in the US stock markets, speculators could usually rely on the safety net of the “Greenspan put,” or a quick easing of monetary policy to cushion the market from steep losses when risky bets turned sour. Under the tenure of the Fed chief Ben “Bubbles” Bernanke, speculators have celebrated the easiest monetary policy in history, which earned Mr. Bernanke the designation of Time magazine’s “Man of the Year” for his creativity in running the printing press.

According to Greenspan, the aggregate value of stock markets worldwide have increased by $15 trillion, with the US stock markets recouping $5.4 trillion of lost wealth. “We’re going to get a significant rise in employment,” he predicted. All this was accomplished in coordination with the G-20 clique of central bankers that pumped more than $5 trillion of liquidity into the money markets over the past year, along with another $9 trillion of state guarantees for bank debt and deposits.

In the United States the central mechanism for inflating the stock market and fueling the powerful recovery in junk bonds was Bernanke’s shift to the radical “quantitative easing” (QE) scheme, in which the Fed printed $1.75-trillion of high powered money, channeled the excess cash into the coffers of the Oligarchic banks on Wall Street, which in turn bid-up the prices of high-grade corporate and junk bonds, thus narrowing yield spreads with US Treasuries. In Greenspeak, the blossoming of finance is the massive monetization of debt, and carry trades borrowing at near zero percent to lend longer-term, at higher interest rates.

Thanks to the booming stock market there were $311 billion of new stock offerings on Wall Street, including IPOs and secondary offerings, in the second half of 2009. Junk bond sales worldwide reached a record $38.3 billion in March 2010, as rising profits and ultra-low interest rates attracted swarms of yield hungry buyers who are fed up with zero rates of return on CDs and money market funds.

US companies have slashed 8.4 million jobs over the past 27 months, cut wages and medical benefits, but boosted their profitability. US corporate profits jumped $109 billion in Q’4 to $1.4 trillion, up 31% from a year ago. S&P 500 companies have increased their cash hoard to a combined $1.2 trillion, while simultaneously impoverishing the American middle class to levels of three decades ago.

Yet there is great optimism on Wall Street that a virtuous cycle will soon begin, in which cash-flush S&P 500 companies would start to hire new workers. However, the vast bulk of hiring over the next several months would be for temporary workers by the US government, for the census report. According to the Census Bureau, about 17,000 temporary workers were hired in the first quarter, with an additional 181,000 hires planned for the three months from January to March. The remaining hires for 971,000 temporary workers are scheduled for the April-to-June period.

At this critical juncture, with the Dow Jones Industrials index bumping against the psychological 11,000-level, Greenspan was asked about the longevity of the “green-shoots” rally. What worries Greenspan is the slumping Treasury bond market, which has been trending lower for the past 15 months. Yields on the benchmark 10-year note are climbing dangerously higher towards the key resistance level of 4 percent. “It is a canary in the mine at this stage,” Greenspan warned.

“The way I would look at it, if the markets are working well, the short term outlook is one of increasing momentum. You can see it developing,” he said.

But if the 10-year note and the 30-year bond yields begin to move up, in other words, if the ten-year note begins to move aggressively above 4-percent that is a signal that we are in some difficulty. There is basically this huge overhang of federal debt which we have never seen before. It is going to have a marked impact eventually unless it is contained, on long-term rates. That will make a housing recovery very difficult to implement and put a dampening on capital investment as well.

Greenspan is describing a “dangerous divergence” that is developing between a high and rising S&P-500 stock index, and a slumping US Treasury bond market. They are moving in opposite directions, and at a certain point in the future, if the Treasury bond market begins to tumble sharply lower, lifting yields sharply higher, either under the weight of massive new supplies or Chinese dumping of T-bonds ahead of a probable revaluation of the yuan against the US dollar, the divergence between the asset classes would grow even wider, to the breaking point. That triggers a stock market slide or crash of unknown magnitude.

However, among today’s stock market bulls, there’s an unshakeable faith in the magical powers of the “Plunge Protection Team,” (PPT), convinced that the Fed and Treasury can prevent 10-year yields from spiraling above 4-percent no matter how much supply hits the debt market, and prevent a replay of the Greek tragedy. For now, the Fed is putting a safety-net under the T-bond market by promising to keep the fed funds rate pegged near zero percent for an “extended period of time,” hoping to attract yield starved investors to the long-end of the curve.

“The economy continues to require the support of accommodative monetary policies,” Bernanke told lawmakers on March 25th. "If it were positive to take interest rates into negative territory I would be voting for that,” said the radical inflationist, San Francisco Fed chief Janet Yellen on Feb 22nd. Yet the Fed is winding down its year-long, $1.75 trillion monetization scheme this week, which could make it difficult for Washington to finance its massive budget deficit in the months ahead.

Instead, there could be a torrent of T-bond sales by Beijing if the US Congress can marshal a veto-proof majority for a fast track bill in May to slap tariffs on Chinese imports, if Beijing continues to keep the yuan “misaligned” with the US dollar. “My belief is that China will not do anything unless they’re required to, and every day we wait is a day we lose wealth, we lose economic advantage, we lose jobs,” said New York Senator Charles Schumer on March 23rd.

Senator Lindsey Graham, a South Carolina Republican, said he agreed quick congressional action was needed because China’s currency reforms are frozen in suspended animation. “I think our pressure is going to make a difference, not only to China, but to the administration,” Schumer said. “At the end of the day, China is too big to be allowed to have this under-valued currency advantage. The only thing they seem to respond to is pressure,” Graham said.

“The US internal and external deficits remain large, and its unemployment rate is extremely high. Since US politicians don’t want to blame themselves, the best available scapegoat is China and its exchange rate,” said Fan Gang, of the People’s Bank of China on March 26th. Yet Fan conceded that "China may resume a managed float of the yuan, once the uncertainty of the overall post-crisis economic situation diminishes." Yet a stronger Chinese yuan could fuel a generalized rally in the commodity markets, and ignite a whole new round of inflation worldwide.

Another headache for the “Plunge Protection Team” is the high and rising price of crude oil, which has hitched a ride to the global stock market rallies, and is now trading above OPEC’s implied target zone of $70-to-$80 /barrel. The OPEC cartel has tried to slow the surge of crude oil by boosting its output to 26.8-million barrels per day (bpd), or roughly 2-million bpd above its self imposed quotas.

OPEC slashed its oil output quotas by 4.2-million bpd in December 2008 to stop the slide in oil prices at $35 /barrel. However, although OPEC’s compliance with the quotas has dropped to 53%, oil prices have continued to climb sharply higher, helped by stronger demand of roughly 900,000-bpd by China and India, and rapidly depleting oil output by Mexico’s giant oil company – Pemex.

Any significant rally by the Dow Jones Industrials above the psychological 11,000-level could be matched by a similar rise in the price of crude oil into the $85-to-$90 /barrel region, which in turn could strengthen the Canadian dollar, Mexican peso, and Russian rouble, and the precious metals. In order to avoid another “Oil Shock” to the global economy, Washington and its European allies might ask Saudi Arabia to boost its oil output further, since Riyadh has about 2-million bpd of spare capacity that it can unleash on the market at a moment’s notice.

While Greenspan said he sees little threat of inflation now, in the long-run, inflation will pick up unless the Fed withdraws the massive stimulus it has pumped into the economy. “We are still by any measure in a disinflationary environment.” However, “unless we sterilize or unwind the big monetary base we’ve built-up, inflation will begin to take hold.” The size of the Fed’s balance is “not sustainable” and will eventually have to be reduced to “something just north of $1-trillion,” he said.

“My concern is that legislation or other actions on the part of Congress may prevent the Fed from withdrawing the stimulus,” Greenspan added. Such actions have already taken place in Seoul, where the government has completely hijacked the monetary policy of the Bank of Korea. Texas Representative Ron Paul, a Republican, is leading an effort in Congress to repeal the Fed’s immunity to audits of monetary policy, which could expose any clandestine intervention in the stock index futures market by the Fed and its agents on Wall Street.

Still, there’s a deep-seeded suspicion in the gold market that at some point the Fed will resume its massive money printing operations in order to prevent a surge in Treasury bond yields, sparking the next big round of inflation. Greenspan mostly lingered far behind the inflation curve when he was Fed chief, and never saw a bubble he didn’t like. According to the commodities markets, the break-out of inflation has already begun and is buoying gold above $1,100 /oz.

[Apr 05, 2010] Tired of Bears

The Big Picture

I’ve been meaning to note this commentary from Josh Brown at the Christian Science Monitor:

“For some reason, people saying bearish things always sound smarter than those with more bullish leanings. Many of the bears are sharp guys. They often have great insights and the courage of their convictions. They write very well and much of what they say has been incontestable.

But investing based on their conclusions this year, as satisfying as they may have been on a purely cerebral level, would’ve kept you out – or even short – during one of the greatest face-melting rallies in history.

So how did we reconcile the factual erudition of the bears with the blatant and definitive reality of green quote screens all year? Well, we relied on a small but worthy cadre of voices who gave us the Intellectual Cover we needed to be bullish. I give props to four of them below…”

The foursome includes me + Jeff Saut of Raymond James, Barron’s Michael Santoli and Bob Doll, of BlackRock.

Selected Comments
b_thunder:

“Smart bears ” vs. Bernanke’s printing press and Geithner’s “Robin Hoon in reverse” policy of robbing the prudent savers and shoveling cash to the mega-banks? For those sane and (relatively) honest believers in capitalism what has happened since march 2008 with the government and Fed’s policies is simply incomprehensible and unconscionable! Would a sane and prudent person ever think that after 2 bubbles in less than 10 years the entire gov’t policy would be to inflate the 3rd, and much bigger bubble?

So, here we have it: In the red corner: “the bears”. In the “green” corner: The incredible Geithner/Bernanke money printing machine, plus their inside-info knowledgeable cronies-cheerleaders, PPIP beneficiaries, and the millions of followers who **believe** that they will be able to find a greater fool when $%^& hits the fan. If history is any guide, some will become obscenely rich by feeding off the Fed (but they for the most part already are quite wealthy and very well “connected”), but the majority, however, will be left holding the bag again, this time the biggest “bag” ever!

A little extra on the “insider” theme: the special mention (place in Hell?) goes to Bob Doll, one of the insider cabal led by BlackRock, PIMCO, Buffett, Paulson/GS, all of them not only in possession of non-public Gov’t information, but who actively INFLUENCED and shaped the Gov’t policies in their own favor. They didn’t have to be prudent, ’cause they personally directed the bailouts… Could anyone compete with them in the short-term?

I suggest not counting chickens just yet… Let’s measure performance peak-to-peak or trough-to-trough of the econ. cycle. Because March 2009-March 2010 is only 1/2 the cycle, trough-to-peak. The picture will be very different at the cycle’s completion.

Yes, nobody will take away Appaloosa Tepper’s $4B “carried interest” (btw obscenely taxed @15%) , but we shall see about his investors, especially the late-comers….

DC:

“The market climbs a wall of worry.”

I now suspect that the wall of worry is a creation of the Street in order to further fleece the retail guy. It is clear that a year ago the smart money concluded that the fix was in and that all the backstops (government) were in place to ensure a rally.

Meanwhile the bulk of media kept folks like me on edge. Rising unemployment, endless “Obama will kill the market” blather, housing still in the tank — how exactly is the average guy supposed to summon the courage to go all-in under those circumstances?

Congrats to those who had the nads. I didn’t. Caught some of the move up but bailed mostly in April and May, then again in late summer. Better than a poke in the eye and it took what little nerve I had left to do even that much.

From here count me among the wait-and-see crowd. Tomorrow I turn 51 and truth is I am looking at every possible investment alternative to this stinking, rotten, corrupt, broken stock market.

[Apr 04, 2010] Obama Should Channel Teddy Roosevelt

Economist's View

Thus, while reducing the size of banks is important from a political economy perspective, and also from a market power perspective, it is not enough. We need leverage limits, limits on connectedness, limits on the concentration of risks, etc.

I do not believe we can guarantee that a financial bubble will never happen again. It will. We can make it harder, and do our best to prevent bubbles, reduce their frequency, etc., but the next bubble is inevitable. It's simply a matter of time. Thus, while I very much agree with the thrust against bank size for all the reasons outlined above, I do not want that thrust to come at the expense of other important changes that must be made in the financial industry, changes that insulate the system from a large fallout when the next bubble hits. We must rein in bank behavior as well as bank size, and in my view the current legislative proposals come up short on both fronts.
Bruce Wilder:

Johnson and Kwak are pressing a political thesis about the power of an elite faction in shaping the ends of public policy, and not an economic thesis about the particulars of financial industry structure or regulation, except insofar that they implicitly hypothesize that the interests of the bankers and financiers in the way the financial system functions, is at odds with the general, public interest.

I have to admit I think exhorting the President, who appointed Summers and Geithner and Emmanuel (and chose Biden), seems like a futile endeavor. Class warfare is the logical political frame, for instituting a thorough-going policy reform, which, if it is economically effective, will greatly reduce the incomes, wealth and power of the financial elite. Obama's personal political strategy appears to be to offer his personal brand and inspiring but cerebral rhetorical leadership style as proof against revolution, not its instrument. He's a symbolically, not substantively, progressive President, who has built a coalition of conservatives and progressives, thoroughly dominated by conservatives, while leaving the opposition a mad rump of reactionaries and authoritarians and the ruthless opportunists ready to lead them.

It is the progressives -- the left of the Democratic Party -- and not the President -- who are powerless and passive in the present configuration of out politics. The President, enjoying the support of Jamie Dimon and friends, is very powerful, indeed. Obama successfully embodied many sincere and genuine and admirable wishes, of people across the political spectrum, but wishing Obama was a fantasy version of Teddy Roosevelt (who, in reality, was far more conservative, even by the standards of his own day, than Obama is, by the standards of ours), is not a sensible exercise of political power.

The kind of class warfare stance that Johnson and Kwak recommend to Obama would require that Obama assemble quite a different governing and electoral coalition, one that combines populist-authoritarian appeals with progressive ones, while hazarding the hostility of not just the banksters, but the whole of the corporate elite, including the corporate-dominated Media, at a time when other centers of organized political power are at full ebb. Unions, the professions, "independent" media, academia, small business -- it is all pretty pathetic.

A lying jerk with a video camera was able to destroy ACORN with a single YouTube -- stampeding Congress to enact a bill of attainder in the process! No sensible politician is going to take a flyer on siding with the poor in class warfare, in these political circumstances.

Glen:

Very good analysis, but short of any real reform, this leaves Obama with the kick the can down the road technique for dealing with the very real problems in our economy. Do you really think he can kick the can down the road for two terms?

I don't.

It took thirty years for Raiganomics to gut the forty years of New Deal prosperity after WWII, but the middle class now stands at the brink of the clift.

The slash and burn pillaging of middle class wealth is over and no amount of Fed housing market propping up or Wall St shadow banking voodoo economics can resurrect the middle class.

Obama cannot kick the can down the road far enough to avoid further economic calamity on his watch.

Bruce Wilder :

I agree with you that the country appears to be at a sclerotic extreme, the economic paradigm launched by the New Deal completely exhausted and in ruins.

In some ways, we are embarked on an unnatural experiment, a Great Depression Redux, as imagined by conservative economists like Robert Barro and Ben Bernanke: the plutocracy preserved, government its handmaiden, and wages forced down, ever down.

Preserving the present high degree of wealth/income concentration requires a great burden of debt on the middle class and poor, as a conduit for the upward distribution of income. That, in turn, implies a long period of high unemployment and domestic stagnation for most of the country. The top 10% or so, might do fine, buoyed by globalization and all that.

It is a depressing prospect, but is it unstable? It is pretty to think it would be. I look at approaching deflation, and wonder if it will set off another deflationary spiral. Will instability in China or the periphery of Europe upset the cart?

Right now, I think I'll be voting Republican in 2010 and 2012 and hoping for the worst.

paine:

"the plutocracy preserved, government its handmaiden, and wages forced down, ever down" repeat final blast of doom: "wages forced down, ever down"

For top corporates i think wage stag if not full out ewage decline has been and still is a necessary local bi product ... but today as always this wage crunch like the credit crunch on small fry is not a self sufficient on going corporate goal....

For multi national corporates rising real wages might become a necessary local bi product of a continuing china boom -- though i suspect it still isn't --

a " dark core of the matter" viewing of the class struggle gets itself too easily off loaded onto vision quests and prophetic rantings if taken to be the 24/7 mission of the tower trolls

I believe we are in an era of corporate state reformation. Things can't go on like they have so they won't --vide recent crisis-- and corporates will acceeded to reforms meliorative reforms yes white hat party time as bw points out Obama now has the Wall Street golden touch on his side

What a simple theatre we produce if we continually perform the old soap opera greedy exploiter vs the 'umble mass of "real" producers

This panoramic eternal battle over shares of national "income" ala the left ricardians gets well ...exceedingly unenlightening as social tableau

Such grapple-tooning hardly captures the fuller phenomenology of all this including the stage by stage shifting of the battle ground at various localities on market earth

Bruce Wilder:

The Progressive Movement changed the role of the Federal government, and Roosevelt sometimes championed their causes. The typical Roosevelt speech was a masterpiece of equivocation, though, not a polemic for the People.

Roosevelt was a member of an hereditary aristocracy, living on inherited wealth. He privately questioned the propriety of electoral democracy, even as he played the role of popular hero. He was markedly less protective of blacks than his predecessor Republican Presidents.

Here's a description from Wikipedia of another encounter between Morgan and Roosevelt, in the Panic of 1907:

"The Panic of 1907 was a financial crisis that almost crippled the American economy. Major New York banks were on the verge of bankruptcy and there was no mechanism to rescue them until Morgan stepped in personally and took charge, resolving the crisis. Treasury Secretary George B. Cortelyou earmarked $35 million of federal money to quell the storm but had no easy way to use it. Morgan now took personal charge, meeting with the nation's leading financiers in his New York mansion; he forced them to devise a plan to meet the crisis. James Stillman, president of the National City Bank, also played a central role. Morgan organized a team of bank and trust executives which redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. A delicate political issue arose regarding the brokerage firm of Moore and Schley, which was deeply involved in a speculative pool in the stock of the Tennessee Coal, Iron and Railroad Company. Moore and Schley had pledged over six millions of the Tennessee Coal and Iron (TCI) stock for loans among the Wall Street banks.

The banks had called the loans, and the firm could not pay. If Moore and Schley should fail, a hundred more failures would follow and then all Wall Street might go to pieces. Morgan decided they had to save Moore and Schley. TCI was one of the chief competitors of U.S. Steel and it owned valuable iron and coal deposits. Morgan controlled U.S. Steel and he decided it had to buy the TCI stock from Moore and Schley.

Judge Gary, head of US Steel, agreed, but would there be antitrust implications that could cause grave trouble for US Steel, which was already dominant in the steel industry? Morgan sent Gary to see President Theodore Roosevelt, who promised legal immunity for the deal. U.S. Steel thereupon paid $30 million for the TCI stock and Moore and Schley was saved.

The announcement had an immediate effect; by November 7, 1907, the panic was over. Vowing to never let it happen again, and realizing that in a future crisis there was not likely to be another Morgan, banking and political leaders, led by Senator Nelson Aldrich devised a plan that became the Federal Reserve System in 1913.[15] The crisis underscored the need for a powerful mechanism, and Morgan supported the move to create the Federal Reserve System."

TCI, the company purchased by U.S. Steel, we might note in passing, was a major employer of black slaves (convict labor -- effectively re-enslaved thru the penal code).

I, personally, admire Teddy Roosevelt and consider him one of the near-great Presidents, as well as a remarkable individual. I recommend Edmund Morris' superb three-volume biography.

Roger:

Just as private vices can become public virtures, a la Mandeville, the private vice of the men who become president - their greed for fame and power - gives us a lever over them. Roosevelt came to power in the age of the muckraker. They created the pressure - the Upton Sinclairs, the Ida Tarbells. There was also the magazines like McClures, and a taste in the press for sensation that, for a brief moment, actually focused on the conjunction of sensation and American capitalism. Sensation has now become entirely subordinate, of course, to American capitalism and it has turned politics into political entertainment - by, among other things, personalizing policy.

Teddy Roosevelt, once he was out of office, chose to start campaigning again - this time from the left - not because he was any kind of leftist, but because he was greedy for power and wanted Taft's seat. It was under Taft, after all, that the income tax was enshrined in the constitution - and Taft continually had to battle the progressive left wing.

The down side is that the progressive culture actually distrusted demoncracy, which was rule by the immigrants and proles that were supposed to be the object of charity and management. And, petit bourgeois to the max, they loved the idea of creating professional guilds, for doctors, lawyers, etc., and getting rid of quacks - thus encumbering us with a professional guild system to this day - one of the great reasons we have runaway healthcare costs and laws written to keep the lawyer industry at full steam.

So, part of the progressive inheritance has now become reactionary. But another part - the still viable progressive part, with it distrust of wealth and speculation, and its suspicion of letting the guardians of the industrial system be the ones who profit most by its abuses - has still not been realized.

Roger:

demoncracy? O spirit of Freud!

Bruce Wilder:

Lately, in 2010, we use "progressive" as a synonym for FDR's "liberal" label, which is confusing us about the past.

The Progressives were all about embracing modernity, which is quite a different political vector from a concern with social oppressions and class warfare. Some of the most enthusiastic progressives of the Progressive era were plutocrats par excellence, or reactionary conservatives on important issues.

George W. Perkins, a partner of J.P. Morgan, a founder of U.S. Steel, International Harvester and some other near-monopolies was a deep believer in the "Good Trust" and he also was a key financier of Roosevelt's 1912 Bull Moose Party.

Nelson Aldrich, the progenitor of the Federal Reserve and the Income Tax, grandfather of Nelson Rockefeller, was also major investor in Leopold's Belgian Congo slave empire.

Woodrow Wilson, Democratic Progressive elected President over Roosevelt and Taft in 1912, a Southerner by birth, re-segregated the District of Columbia and sponsored many gross breaches of civil liberties during World War I.

Roger :

Bruce, very true! Although it is also true that even back then, progressives were divisible into a left and a right. With the left having a penchant for managerial solutions, and the right having a penchant for recruiting among managers. The intellectual ancestors of Larry Summers are among the progressives. And, of course, Roosevelt's brain trust looked back to the progressives for their own agenda. It is an easily established geneology.

Teddy Roosevelt spoke as a militarist, but never engaged America in War. Wilson ran on a peace platform in 1916, yet of course led the U.S. into WWI and invaded Mexico. We should judge the 'leaders' on their actions.

As for today's progressives, well, their organizations are still dependent on millionaire money.

anne:

Bruce Wilder:

It is the progressives -- the left of the Democratic Party -- and not the President -- who are powerless and passive in the present configuration of our politics. The President, enjoying the support of Jamie Dimon and friends, is very powerful, indeed. Obama successfully embodied many sincere and genuine and admirable wishes, of people across the political spectrum, but wishing Obama was a fantasy version of Teddy Roosevelt (who, in reality, was far more conservative, even by the standards of his own day, than Obama is, by the standards of ours), is not a sensible exercise of political power.

[Interesting.]

ken melvin :

Little doubt of Obama's grasp of the minutia and details, but I see no evidence that he and his grasp the scope of what is going on in US and global economics.

Hal:

I fear that if the economy improves much more, reform will be completely dead. Once the fear of disaster evaporates, why change things much?

Fred C. Dobbs:

Both Roosevelts, to their historical credit, were serious radicals. Obama is working very hard to prove he is not.
Best we can expect is a Truman-like administration, perhaps along the lines of what Adlai Stevenson MIGHT have done.

Fred C. Dobbs said in reply to ken melvin...

TR was indeed a loose cannon, but still a radical compared to presidents before & after, shook the GOP to its roots.

yuan:

The cognitive dissonance of "neo-progressives" amuses. Obama has far more in common with Reagan than with Roosevelt.

Bruce Wilder said in reply to yuan...

Obama has far more in common with the real Roosevelt than the Roosevelt of historical imagination, although he eats food far more sensibly.

the buggy professor:

The following three links should give anyone who doesn’t know much about Theodore Roosevelt a very good summary of his life and political activity and legacies. Easy to read, they would also be a good refresher of this man’s fascinating life and impact on American politics and society for those who want some up-dated readings.

None, though, dig deep into Roosevelt’s complex personality --- constantly active, always on the move and seemingly everywhere at once, the scion of a rich family who went to Harvard with a servant and blackboot and emerged as the leader of the Progressive movement and attacks on big business and big finance, the first president to invite a black man to dinner (Booker T. Washington) and appoint a Jew to his Cabinet, a voracious reader and writer who distrusted intellectuals and professors, a big game hunter who led the conservationist movement as president, and a fervent exponent of expanding American power in the world and a former head of the Rough Riders in the war with Spain (he served in Cuba after quitting public office to raise funds for and leading the US detachment) who simultaneously won the Nobel Peace Prize.

1) The following long review of a couple of books on Teddy Roosevelt appeared originally earlier in the last decade in the American Prospect
http://goliath.ecnext.com/coms2/gi_0199-1386373/Theodore-Roosevelt-Books-in-review.html

2) This a long, balanced, easy-to-grasp wiki article on Teddy Roosevelt’s life and political activities and legacies. What it doesn’t do is probe the polar-tugs clashing in his complicated inner life.
http://en.wikipedia.org/wiki/Theodore_Roosevelt

3) This wiki article focuses on Roosevelt’s presidential period.

http://en.wikipedia.org/wiki/Presidency_of_Theodore_Roosevelt
…

Bruce Wilder said in reply to the buggy professor...

MG: "the first president to invite a black man to dinner (Booker T. Washington)"

It is kind of interesting how events get distilled into myth. Roosevelt rather casually invited Booker T. Washington to dinner, when the celebrated educator was in D.C. -- he loved to invite famous people to dinner and lecture them. The Democratic press got wind of it, and it became a scandal that Roosevelt had sullied the White House -- the "White" House! (yes, people said that for real.) Roosevelt basically apologized, insisting it was a purely private dinner, and never repeated the offense.

A major premise for the "outrage" expressed in the press was that this was the "first time" any President had invited a black man into the sacred precincts of the White House. This was not, of course, true, since blacks had visited the White House as prominent politicians and leaders in the Lincoln Administration and afterward. Finally, the claim was rather grudgingly narrowed to "eating dinner" there -- thus, associating the offense with one of the new taboos of segregation, which was still advancing and being promoted across the country. Establishing and reinforcing the segregation taboo was, arguably, the main political purpose and Roosevelt did nothing to defeat that purpose.

There were far more serious public scandals involving race than dinner at the White House for a black supporter of segregation. Public lynching was an epidemic across the greater South, reaching, sometimes into states like Indiana and Delaware. Republican Presidents were expected to denounce these practices, which Roosevelt did, though tepidly. Roosevelt participated personally in the summary dismissal without trial of three companies of black soldiers in the infamous case of the "Brownsville Raid", a trumped-up case in Texas, effectively ending for a time, service by African-Americans under the arms of the United States.

the buggy professor:

What President Obama's philosophical outlook on international relations and "evil in the world" has in common with Theodore AND Franklyn Roosevelt . . . truths, it seems, that conflict with the worldviews of the chronic monopolizing posters here at Economist's Views.

And a further truth that collides head-on even more with the shared group-think pieties: The belief in the overall benign use of power in world affairs of the USA . . . or horror of horrors! Obama, seen apparently, as not only a sell-out to The Oligarchy, but a covert member of the scheming Neo-Conservative Conspiracy in American foreign policies!

And not much different on those scores than post-FDR Democratic presidents --- Truman, Kennedy, Johnson, and Clinton, with Jimmy Carter the odd-man-out. Clinton, you might remember, the initiator of American military power in Bosnia 1995, in Iraq (1998, several hundred cruise missiles launched with an aim to decapitate the Saddam political and military leadership), and against Yugoslavia in 1999.

Oh my God! What in the world has been going on??? The Progressive Theodore, the warrior Wilson, the even greater warriors FDR, Truman, Kennedy, Johnson, Clinton, and now --- how could it happen! how could it be! --- Obama the bellicose jingoist who didn't bring Finnish-style pacifism to American foreign policy.

From President Obama's 2009 acceptance speech for the Nobel Peace Prize.

"...We must begin by acknowledging the hard truth: We will not eradicate violent conflict in our lifetimes. There will be times when nations -- acting individually or in concert -- will find the use of force not only necessary but morally justified.

I make this statement mindful of what Martin Luther King Jr. said in this same ceremony years ago: "Violence never brings permanent peace. It solves no social problem: it merely creates new and more complicated ones." As someone who stands here as a direct consequence of Dr. King's life work, I am living testimony to the moral force of non-violence. I know there's nothing weak -- nothing passive -- nothing naïve -- in the creed and lives of Gandhi and King.

But as a head of state sworn to protect and defend my nation, I cannot be guided by their examples alone. I face the world as it is, and cannot stand idle in the face of threats to the American people. For make no mistake: Evil does exist in the world. A non-violent movement could not have halted Hitler's armies. Negotiations cannot convince al Qaeda's leaders to lay down their arms. To say that force may sometimes be necessary is not a call to cynicism -- it is a recognition of history; the imperfections of man and the limits of reason.

I raise this point, I begin with this point because in many countries there is a deep ambivalence about military action today, no matter what the cause. And at times, this is joined by a reflexive suspicion of America, the world's sole military superpower.

But the world must remember that it was not simply international institutions -- not just treaties and declarations -- that brought stability to a post-World War II world. Whatever mistakes we have made, the plain fact is this: The United States of America has helped underwrite global security for more than six decades with the blood of our citizens and the strength of our arms. The service and sacrifice of our men and women in uniform has promoted peace and prosperity from Germany to Korea, and enabled democracy to take hold in places like the Balkans. We have borne this burden not because we seek to impose our will. We have done so out of enlightened self-interest -- because we seek a better future for our children and grandchildren, and we believe that their lives will be better if others' children and grandchildren can live in freedom and prosperity.

So yes, the instruments of war do have a role to play in preserving the peace. And yet this truth must coexist with another -- that no matter how justified, war promises human tragedy. The soldier's courage and sacrifice is full of glory, expressing devotion to country, to cause, to comrades in arms. But war itself is never glorious, and we must never trumpet it as such.

So part of our challenge is reconciling these two seemingly inreconcilable truths -- that war is sometimes necessary, and war at some level is an expression of human folly. Concretely, we must direct our effort to the task that President Kennedy called for long ago. "Let us focus," he said, "on a more practical, more attainable peace, based not on a sudden revolution in human nature but on a gradual evolution in human institutions." A gradual evolution of human institution..."

Michael Gordon, AKA the buggy professor

Fred C. Dobbs:

On the other hand, TR's role advocating for Japan after the Russo-Japanese War set the stage for that country's ascendancy in the Pacific region and ensuing infamous events. He also got the Nobel Peace Prize for his efforts.

http://www.nytimes.com/2009/12/06/opinion/06bradley.html

[Apr 04, 2010] What Do We Have to Show After a Year of “Extend and Pretend” By Gonzalo Lira

naked capitalism

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.

Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.

rootless_e:

Oh come on, Obama/Geithner found themselves on a much larger keg of gunpowder than Volker and on a much more fragile base economy. The banks are bigger, a lot bigger. Their accounting is more screwed up. And they don’t have the IMF available to squeeze blood out of the creditors. Do you really advocate that the US population endure a lost decade of massive impoverishment like Latin America was made to endure http://www.uiowa.edu/ifdebook/ebook2/contents/part1-V.shtml ? What kind of economics is that? Let’s fix the banks by turning 1/2 the US population into prostitutes and chiclet salesmen?

Furthermore, 30 years of right-wing dominated economics has hollowed out the non-bubble economy. I don’t think that many financial analysts understand what the 60billion auto bailout bought. For the life of me, I cannot understand the appeal of the Volker credit squeeze for supposedly “left of center” analysts or the desire to “analyze” on the basis of the supposed character flaws of the famous actors.

The fact is that the collapse of Wall Street banks now would be endured by the “main street” economy far better than 2 years ago. And that’s why only now do we see, e.g. Fannie/Freddie start to return crappy paper to the banks.

Yves Smith :

With all due respect, are you old enough to have been reading the financial press and statistics in 1980 and 1981? Read William Greider on this (I happen to have lived through it). Volcker nearly did break the financial system with his short term rate increases. He had to back off because he looked at risk of not only taking out the US banking system, but countries with dollar denominated debt (meaning the Latin American banking crisis was one aspect of even wider spread pain and dislocation).

And you are incorrect re the merits of forbearance. The IMF released a study of 124 banking crises. “Forbearance” which is regulator-speak for extend and pretend, results in higher ultimate costs of banking system resolution (the banks abuse their privileges and continue to make risky investments) AND increase real economy costs too.

The economy stronger now? Really? With 17% U6 unemployment and small businesses, the engine of hiring, starved for credit?

This economy is running on government life support. The equity markest are heavily manipulated right now (I hear this from virtually every institutional investor I know, including ones at the top of large and respected firms). The bond vigilantes are demanding a cutback in the Fed/fiscal welfare programs. Kicking the can down the road a couple of years has merely wasted the opportunity to address some of the real problems. I hate invoking Rahm Emanuel, but this crisis went utterly to waste, and the next phase will not be pretty.

DownSouth:

I actually agree with what rootless_e says, up until his conclusion.

Neoliberalism has been compared to a parasite. First it infects its host, but eventually ends up killing its host, along with itself.

But another appropriate metaphor would be that it’s like a drug. There is the adrenalin rush of that first credit injection. But successive injections don’t give the same high. And even though there are still highs and lows, the trend is one of lower highs and lower lows—-the curve is inexorably downward.

For someone living in Chile, Lira’s analysis is parochial. “Volcker gambled, and won,” Lira tells us of Volcker’s early 1980s performance. Well the US may have “won,” temporarily that is. And US banks might have “won.” But the rank and file people of Mexico certainly didn’t “win,” nor did those of Argentina. A careful reading of Mexican and Argentine history shows the crisis of the early 80s was pivotal in the march to the neoliberal inferno. But Argentina and Mexico are now about sucked dry. When your economic paradigm is predicated on rape and plunder, as is neoliberalism, there is only so much you can suck out of your victim until it dies, falling into social chaos.

So if we look at the global organism, and not just the US organism, the disease of neoliberalism is far more advanced now than it was in 1980. The global economic body is much weaker. Mexico is a basket case, and neoliberalism is looking for other organs—-Greece, Spain, Portugal, Italy—-to exploit and destroy. So Lira’s implication that what worked in the 1980s, when the patient was still relatively healthy, could work now, may not be true.

But rootless_e’s conclusion—that the cure for neoliberslism is just a stronger injection of the neoliberal drug—-is absolute insanity.

rootless_e says:

I don’t think I was arguing for any neo-liberalism at all. What do you mean?

rootless_e :

Let’s try again because I was probably unclear.

1) Part of the resolution of the Latin American debt crisis as far as I know was due to a massive impoverishment of Latin American working people via IMF imposed “austerity”. Banks recovered partially by forcing cuts in social welfare programs and taking food from the mouths of the poor. Of course, we could do the same here, and that is the Republican plan, but is that really what you propose? Do you disagree that IMF “austerity” helped recover bank $$$ from the LA crisis?

2) I believe the IMF like Stiglitz does – which is to say NOT. They are the collections agency for international banks and they have a viewpoint totally focused on the revenue needs of financiers.

3) If the Obama team can kick the can down the road long enough for US manufacturing to revive, their position is far far stronger than in a 100% Ponzi scheme economy which is where we were headed. You may argue that the crisis was wasted, but what we have out of it is the largest public works program in 50 years, and a major public investment in green energy, and a government funded restructure of the auto industry to rescue it in the last stages of being bled to death by finance. The ability of the Obama/Ravitch team to tell the bondholders of GM/Chrysler to take a hike was a welcome surprise. I do not think there is a financial regulatory way out of the mess unless the “real economy” starts breathing again.

Finally, I’m always puzzled by veneration for “mark to market”. The market is irrational and often perverse. Especially for long term mortgages, market valuation has been shown to range from manic to panicked and to ignore long-term revenue. People made a lot of money buying securities and debt that had a low market value. Valuation often depends on herd thinking, on the forecasts of wall street analysts which have been proven to be nonsense, and on the economic theories of right wing ideologues.

rootless_e:

Of course, I meant “squeeze the blood out of the debtors”. Good night.

psychohistorian:

Nice posting but I want [to know] what this guy is smoking….How is it that extend and pretend is ever a good idea?

Maybe it is because all the rich have all their money sheltered now and arrangements are complete to screw the public thoroughly. Good shit filtering out of that smoke!

attempter:

Speaking of the politics of terms, I wish people would stop using the term profits for what are obviously only fraudulent “profits”.

The intelligent but otherwise uninitiated reader may get confused when he sees the banks referred to as “insolvent” and yet still said to have “profits”. It’s bad enough that the MSM systematically progagates that Big Lie; the blogs shouldn’t temporize with it as well.

How can banks still be insolvent yet report “profits”? Every explanation (I do like the true “every bank is now a hedge fund” frame) must start and end with, “They are not profitable, they are bankrupt, but they’re looting taxpayer money to play casino games and give themselves bonuses.”

Meanwhile, mark-to-market is yet another example of the fundamental falsity of the whole system right down to its intellectual basis, since we see how anything and everything is always heads-I-win-tails-you-lose.

Mark-to-market is great while the bubble is inflating. Then everybody including the vile academics supported it. But the second the bubble pops, it’s suddenly terrible and has to be abolished.

Always remember, regarding anyone who supports anything about this system, every single word he says, every idea, is nothing but a lie.

i on the ball patriot:

Ah yes, the ‘Orwell Watch’. Well let’s get to the nub of it. Its not a ‘banking system’. Its a ‘control system’. It controls; exploitation, enslavement, distribution of resources, and who gets to live or die.

And, under the distribution of resources category, it controls the loudness of its own Orwellian voice, always making sure that it overpowers, and attenuates by divisiveness, the miniscule voices of those that it controls.

Beyond all of the Orwellian voodoo economics crapola what needs to be recognized is that it is not only all about control but how well planned and intentional it all is.

The control masters (the bankers for those who do not speak Orwell) are elite scum bags who would fuck their own mothers and then sell them for pennies.

Deception is the strongest political force on the planet.

Rick:

This is excerpt for article entitle; “Timothy Geithner is a Sniveling Scamster”, by Mike Whitney.

“being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.”

The backdoor:

Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump….Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. (Bloomberg)

What does it mean? It means that Obama’s mortgage modification extravaganza has touched-off a gold rush in toxic paper. Subprime securitizations, which had been worth next to nothing, are now the hottest trade on Wall Street. It’s a subprime bonanza! The investment sharpies are scarfing up all the crummy MBS they can get their hands on, because they know they can trade it in for Triple A FHA-backed loans when the program get’s going. It’s another swindle cooked up by Treasury Secretary Timothy Geithner to keep the brokerage clan in the clover. Here’s how a Wall Street veteran explained it to me:

“It looks like the investors in securitizations will be swapping underwater real estate for govt-insured paper… I think the scam here is just to provide some cover so the hedge funds and other high net worth individuals can trade their low grade paper for Triple AAA mortgages insured by the FHA at the taxpayer expense.”

That’s it, in a nutshell. The faux-foreclosure prevention program has nothing to do with helping homeowners. That’s just diversionary gibberish to confuse the public. The real objective is to create a government landfill (aka–FHA) where the banks and other financial institutions can dump their toxic MBS-sludge and walk away with gov-backed loans. Get a load of this:
(Bloomberg) — The Federal Reserve’s completion this week of its program to buy $1.25 trillion in mortgage bonds probably won’t mean significantly higher U.S. home loan rates as investors return to the market, replacing the Fed…

“What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds,” said Christopher Sebald, chief investment officer for Advantus Capital Management in St. Paul, Minnesota..”

Gonzalo Lira:

That’s the bankster’s line: “Sorry! We can’t write off these bad assets! No one will buy them!”

But actually, there IS a market for all this toxic garbage—just not at the prices the banksters want. If the banksters sold this garbage at market prices, they would inevitably incur a huge loss. In fact, the losses would squeeze their reserves, past the point of insolvency—but that was exactly the point of the Volcker Call in ‘82, and the suspension of FASB 157 last year: To give the banks leeway, so they could write off dud assets.

However, the banks—rather than write off the dud assets and take the losses—churned out huge profits off of Uncle Ben’s easy money, while at the same time refusing to write off ANY of the bad assets. If the banksters did write off or write down these non-performers, their “profits” would be wiped out—and so too their bonuses.

That’s why the banksters aren’t writing off these dud assets—if they write off the assets, they destroy the banks’ “profits”. If there are no profits, there are no bonuses.

Kid Dynamite:

“But actually, there IS a market for all this toxic garbage—just not at the prices the banksters want. If the banksters sold this garbage at market prices, they would inevitably incur a huge loss. ”

yes – i agree completely. The plan is clearly, as you explained in the 3rd paragraph of your comment, to crank out easy profits, filling the insolvency void, and THEN take the writedowns later, slowly.

just to clarify – i certainly didn’t mean to imply that the excuse was ““Sorry! We can’t write off these bad assets! No one will buy them!””

as you wrote, it’s “sorry, we can’t sell these bad assets for as much as we’re pretending they’re worth”

MichaelC:

Except they’re not “filling the insolvency void”. They’re paying bonuses on the ‘profitable’ positions rather than retaining the ‘profits’ to fund the undisclosed losses. Same as it ever was. The feverish trading is the big final chance to grab everything that’s not nailed down. This is just grabbing the appliances before mailing in the keys.

fiscallibera:

Not only the lack of accounting reality, we still seem to be living with the facinaiton that the bankers know what they are doing.

A case in point, it looks like we are going to do nothing about derivatives. I would hope that Yves would give us a update on her thinking regarding derivatives. I have evolved to the thinking that if it is a form of insurance, we are covering up the fact they are not doing a good job of risk evaluaiton, or in the case of Goldman, selling fraudulent products and then betting against them.

So – it seems the best we can hope for is some form of consumer regulayion to stop the fraudulent loans being made. Stiglitz used the term: no drama Obama which translates to the Bush term, all hat and no cattle. Can we realistically think things are going to get better?

doggyDish Partyd :

”speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.

”Masters of the Universe, instead of what they really are—scum of the earth dressed up in really nice suits.

”extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary—all I know is that it’s gonna really suck.”

eurostoxx:

we can all be pessimistic about the end of the world but frankly no equity manager loses his job because he underperformed the markets in a crash. We all lose. But when the markets turn upwards, everyone has performance anxiety. Every one knows this.. and add in decent valuations on almost every asset class and 0% interest rates and its not hard to explain the recent rally…

If there is a 2nd coming of this great depression (which I am less sure of now but still consider it a very real possibility) who knows “where” it is best to hide (gold? but even that looks bubblish) and “when” it will come. Therefore its best to join the party. Frankly waiting for it to happen will ruin the rest of your life if you are wrong (a possibility as well)and make you depressed. Much easier to be stupid and play cyclical rally. Just wish I was a little less cynical

UrbanDigs:

Why no mention of the Whole Loan Marks on the books that are not subject to M2M acct rules? Where are these marks that are held in hold books on banks balance sheets? Perhaps this is one big cloud that will linger for many years when everyone knows whole loans from 2004-2008 are probably not worth face value.

Also, its clear the intentions now are for a fed engineered carry trade environment to slowly allow the banks to recapitalize themselves. Wall street is simply riding on the back of all these fed guarantees and liquidity is finding a home in high yielding assets, all in a search for yield. So, why would these trade not unravel given the rise in the dollar in past months?

The carry trade that’s on now has nothing to do with the FX carry of old. It’s that a US bank can have illiquid assets on it’s books at 40 when they are worth 10. They just make $10 a year for 3 or 4 years and write down the investment a little bit more each time around while still able to show a profit. So long as nothing drastic happens eventually they’ll have it written down to market. That’s why even if you bid 15 for it you can’t get them to sell it. The thinking on the street goes —> Yes the carry trade is on, but if banks can earn their way out then who cares?

[Apr 04, 2010] Breakfast_with_Dave_030810

As we mentioned on Friday, the State and local government in the U.S. remains in a state of fiscal disarray and is a significant hurdle in the way of a sustained economic recovery (this sector is 50% larger than the federal government in terms of GDP share). The latest strategy to deal with the budgetary mess is to have schools resort to a four-day week. See the front page of the WSJ for more. And those who think that the new era of frugality is over just because luxury retailers enjoyed a decent February should have a look at the adjoining article titled (Hard Times Turn Coupon Clippings Into the Newest Extreme Sport).

It is rather difficult to figure out what the equity market is really telling us here. Since the market bottomed last March, the economy has shed 3.3 million jobs. We have never seen the S&P 500 rally by this much (50% from March) with nonfarm payrolls falling 3.3 million. The last time we saw anything close to this was back in 1945 after the war: employment was down 3.1mln (in an 11 month period) and the S&P 500 was up 30.3%. So, if the equity market can rally so much with jobs being destroyed, why should it really matter to the market if we are on the cusp of seeing jobs being created? Perhaps this is just an ongoing case of "less bad" being "good". All we can say is that a 70% rally off the lows had to be pricing in something. I wonder if we told folks a year ago that we were going to still be losing jobs at this juncture, and by a total of 3.3 million, which is far more than what is ever generated in a classic recession, how many would have believed that Mr. Market would take the major averages up roughly 70%? It is as amazing as it is dangerous.

From our lens, the big picture is that the economy is 11 to 12 million jobs short of being at full employment. It will likely take seven years for the gap in the labour market to close and something tells us that the next recession will occur long before that happens. This in turn means that we are likely to experience a recession at some point without the economy operating at full capacity, which in turn suggests that at some point we will again confront a deflationary shock. This is exactly what happened in the last cycle — for the first time in the post-WWII era, we had a downturn before the economy had a chance to reach full employment, which is why deflation emerged as the primary trend.

[Apr 04, 2010] Dollar illusions by Doug Noland

Mar 30, 2010 | Asia Times

The markets are not oblivious to our structural debt problems. Yet a view has taken hold that it's more of a longer-term issue; nothing imminent to fret too much about. After all, the distressing scope of our federal, state and local, and household debt problems virtually ensures the Fed will maintain extraordinarily loose financial conditions for some years to come. This view supports asset market reflation, underpins debt market confidence and, most certainly, stokes speculative fervor. It's textbook bubble dynamics, and such a backdrop has been supporting the dollar while also underpinning risk markets globally. Moreover, European debt fragilities are perceived in the markets as one more reason to be confident that the Fed, European Central Bank, People's Bank of China and the Bank of Japan will cling to extraordinarily loose monetary policies.

Ten-year Treasury yields jumped 16 basis points (bps) last week to 3.85%. It is my view that a significant jump in Treasury and agency yields would prove problematic for US recovery. But at this point I would tend to view last week's backup in yields as more a "normalization" of yields. Bond yields had diverged too much from the reflationary realities evidenced by inflating equities prices. The bond market must look at stocks - and central bank dovishness - with rising apprehension. But at least thus far, rising Treasury yields have not incited a widening of credit spreads.

I believe US reflation will be in jeopardy when a jump in yields occurs simultaneously with increasing risk premiums and waning credit availability. And I wouldn't be surprised if such a scenario unfolds in response to renewed dollar weakness. Considering the backdrop, call me a King Dollar skeptic. I wouldn't be at all surprised if the prevailing sanguine view regarding US policymaking and structural debt issues proves rather ephemeral. At the end of the day, the soundness of the US currency will be determined by the health and sustainability of our economic structure and the size of our debt load. A restoration, albeit temporary, of King Dollar doesn't appear constructive for either.

[Apr 02, 2010] CRE Crush Set To Increase Bank Failures By 30% This Year

Apr 1, 2010 | Business Insider

Commercial Mortgage Backed Securities (CMBS) are in such bad shape that they might bring down 30% more banks in 2010 than 2009.

Data from the analytics firm Trepp shows that CMBS delinquencies shot up to 7.61% in March from 6.72% in February. Delinquencies of this size could bring many mid-size and regional banks down due to exposure to the market.

This isn't just impacting commercial real estate in markets like Southern California or Detroit though. In New York, esteemed Plaza District office 9 West is half empty.

The Plaza District in New York, which stretches from Third to Seventh Avenue between 42nd and 59th Streets, had its rate of vacancy double in 2009 to 14.7%.

[Apr 02, 2010] New royalty with supersized egos and bad manners

Some of them probably can be considered as legitimate competitors to Enrons. Some are reckless like in "damn the torpedoes full speed ahead." The later was not so funny in 2008, but Fed saved their skin in 2009 (can we consider Fed to be an accomplice of looters ? "Yes we can" ;-) Those players on the money river who defraud 401K plankton should probably be investigated to the full extent of law.

The Big Picture

Here’s your top 10 list:

Top Earning Fund Mangers

1. David Tepper, Appaloosa Management
Est. 2009 personal earnings: $4 billion

2. George Soros, Soros Fund Management
Est. 2009 personal earnings: $3.3 billion

3. James Simons, Renaissance Technologies
Est. 2009 personal earnings: $2.5 billion

4: John Paulson, Paulson & Company
Est. 2009 personal earnings: $2.3 billion

5: Steve Cohen, SAC Capital Advisors
Est. 2009 personal earnings: $1.4 billion

6. (tie): Carl Icahn, Icahn Capital
Est. 2009 personal earnings: $1.3 billion

6. (tie): Edward Lampert, ESL Investments
Est. 2009 personal earnings: $1.3 billion

8. (tie): Kenneth Griffin, Citadel Investment Group
Est. 2009 personal earnings: $900 million

8. (tie): John Arnold, Centaurus Advisors
Est. 2009 personal earnings: $900 million

10. Philip Falcone, Harbinger Capital Partners
Est. 2009 personal earnings: $825 million

Selected Comments

jjay:

I would be intersted to know how much those 10 pay in income taxes out of all that money.
They all seem to set up “foundations” and “charitable trusts” and pay nothing at all.
No wonder 400 families own everything.

theorajones:

Insane salaries like these are only possible when you have some kind of rentier activity. Yes, I’m sure these boys are being terribly clever at their jobs and I’m sure they’re contributing to our economy. But they’re not contributing so much to justify this kind of return. It is only possible to earn this kind of money when you have some kind of systemic barriers to competition and a capital market structure that is characterized by clannish insiderism as opposed to free and open market practices.

What I’m saying is that when you have money like this for people who are allocating capital well, you will, by definition, have outlandish salaries for people who totally failed. Because absolutely insane paydays like this indicate you’re operating in a capital market system that is more focused on rewarding the people who move capital than the people who own it.

That is, when a single person can earn 4 BILLION dollars in a year, it is clear evidence that too many investment activities are more about skimming than they are about returns.

Pay like this is a canary in a coal mine.

chicagosean:

“The majority of this comp is based on performance fees, plus investment returns on their own money.”

I think it should be noted that these men weren’t PAID this amount of money. The majority (or at least a significant sum) of these totals came from returns on their own money invested in their funds.

Just sayin:

~~~

BR: True — its a paper gain that they compound by leaving the capital it in their own funds . . .

RandyClayton:

To jjay — Mr. Tepper can pay only the long term capital gains rate (15%) on those $4 billion in earnings due to a big hole in the tax code. Pretty nice, eh?

Mannwich:

The asset strip mining of the U.S. continues unabated. What real value do these sharks add? At least guys like Jobs offer an actual tangible product?

cognos:

The real farce is the low capital gains (15%) loop hole… that needs to be 20% immediately. A real trajedgy. And its even lower than 15% effective… because its deferred.

I am all for making money, and I bet my old boss (great guy) is on the list in 15-25. But taxes need to be flat… close the loop holes, the big deductions, equalize capital / income taxes, make FICA 3% on all income, and I even dont like the medical and charitable deductions (remember these skew mainly to the super-wealthy).

Everyone should pay there fair 25-33% share above say $50k… (even if they give it to charity!). That’s a good basic social bargain.

Mannwich:

@cognos: I’d go even further. Scrap the entire tax code and start over. Will never happen though. Far too many jobs in this country depend on the increasing complexity of things like our tax code.

Pat Shuff:

All this reminds me of an old saying by the renowned short seller Jim Chanos of Kynikos Associates Ltd. “Short sellers are the financial markets’ real-time detectives, while financial regulators all too often end up as market archaeologists,” Chanos likes to say.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a6dpE_UaA1gg

As in Soros & friends takedown of the BoE ‘92, currency raiders and hedgies are just interested
in debating honest money and authentic valuations. It’s a dirty job but someone’s got to do it.
Like Markopolos says, to improve the cop on the beat you got to hire the best at the SEC, pay them
top dollar and give them a cut of the recovery.

Mannwich:

Exactly Pat. I’m SURE these guys are all so altruistic. They’re just looking out for society and their country? What a farce.

WFTA:

I would be interested to know: to the extent that the earnings came from investments made with other people’s money, how much is being taxed as long term capital gains.

I’ll vote for the flat tax when you make it a percentage of net worth, not earned income or consumption.

jjay:

If they dump the money into some charitable trust or foundation, they don’t even need to pay the 15% I believe. Then like Soros, they can promote their own personal agenda with essentially taxpayers money. I thought all those trusts had to be distributed and taxed after the third generation. The Ford and Rockefeller Foundations are still ongoing, when do they pay cash out and pay up? Any tax attorneys out there?

alfred e:

@cognos: Well, we do agree on something, but not totally.

Why is it a wage-earning family can quickly find themselves in the 35% tax bracket, and these billionaires pay 15% or less?

It was not all that long ago the top rate was 70%. But that was never a rate charged to the elites, just a sop for those that confused the tax code and those that knew how to play it.

Those that enjoy their jobs and can’t/don’t want to hire attorneys and accountants get picked clean. See you in tax court.

Other than that. These hedge fund people are thieves and looters. It’s a zero-sum game. There’s no REAL contribution. It’s all nothing more than a big casino. And the owners always get their cut.

What these frogs are doing to commodities prices that come out of every little guys pockets should be deemed immoral, unethical and illegal.

But not here in the good ole US of A. We set the moral standard for the world.

RIGHT?

mtlippincott :

I work for fund that invests in 3 of these guys, the overwhelming majority of this pay has to be the growth from the reinvested performance fees from years past…it’s not like Tepper’s salary was $4 billion this year. We don’t bitch about Buffet’s huge salary if BRK happens to go up 50% in a calendar year, it’s not that different.

Now, being able to roll performance fees back into your own fund and thus avoid income tax rates is absurd. Not even Buffett can do that.

Also, remember, this pay comes from the pockets of his investors, like my fund, not by rentier extraction or something. The only people getting fleeced are people like me who invested with. Here’s a rough estimate to show what might make up Tepper’s $4 billion:

Assume Tepper has no money in his own funds, and he is the only person at the fund to start. The article states his fund grew 130% in 2009 (that is about right based on the figures I have) but lost 27% in 2008. The article also states the fund currently has about $12 billion in assets. Assuming no inflows/outflows during that time period (huge assumption), you have the following:

$12 billion end of 2009
$5.21 billion end of 2008
$6.63 billion end of 2007

So, to arrive at 2009, pay you first have to assume the high water mark for most investors is the 2007 value of $6.63 billion. So the fund earned roughly ($12 – $6.63)*20%=$1.07 billion. Plus the 2% AUM fee (using average of end of 08 and 09 values), ($12 + $5.21)/2 * 2% = $.172 billion. That means Tepper’s fund earned $1.25 billion in fees in 2009.

So, if Tepper had no money and kept all fees to himself he would have earned $1.25 billion, way less than the $4 billion in the article. This means, of course, most of that came from capital gains on his previous wealth. In fact, the more I think about it, he must be the overwhelming majority as it appears his wealth great by about $3+ billion alone, meaning he started with about $2 billion or so himself. And it’s redundant for him to pay performance fees to himself.

Also, Phil Falcone is still below his high water mark of years past so the overwhelming majority of his pay must be gains on his own investments. That’s just not earnings in the sense we think about it. I hate these articles, I think they mostly misinform.

mtlippincott:

Bad math, sorry folks. Make that $7.14 billion at the end of 2007.

That would make the performance fee $.97 billion and overall fees about $1.14 billion. So it’s even less that I posited.

Point is, this article might as well be titled: David Tepper, worth about $2 billion, grew his $2 billion in personal wealth via investing to $5+billion.

That’s a lot different than: David Tepper paid $4 billion.

DeDude:

None of them did anything of use to society as a whole. They raped and pillaged other investors who were less sophisticated, and the pensions and hard earned salaries of people who were to busy doing something constructive to defend themselves against these vultures. I say: “off with their heads”.

cognos:

You cannot have public financial markets without investors who “price” those markets. Those who “price” these markets very effective will make loads of money.

This basic function is “supply capital” to good investments and “take capital” from bad investments.

This is NO DIFFERENT than the venture capitalist… its just a different stage in the lifecycle of companies.

It is one of THE most important functions in the system and we just need more of it. (Ah, bc its so vital is exactly why its so well compensated. Duh!)

Are you guys saying — 1) “we shouldnt have a stock market”? Or 2) that “no one should be allowed to invest with” — Soros, Tepper, SAC, me? Or 3) “that no one should be allowed to be successful when you arent?”

It sounds like the 3rd point is the most true. It sounds like there are alot of people looking for someone to be angry with — besides themselves (for not investing better, not studying hard, not selling their house in 2006, etc).

Mike S Says:

Griffin is probably the worst trader out of the bunch. I wonder how much money that guy has made over the last decade on his own ideas, rather than just running a bunch of successful managers that he fires once they lose a penny.

cognos:

Mike S:

ANSWER – Griffen hasnt made much money at all in the last 10-years. He lost close to $10B in 2008, and while he was up 50% in 2009… he still needs another 33% to be above high-water.

Considering redemptions and fees. Citadel may be negative in total $ pnl to investors the last 5 years.

If they have 12 mediocre months or a 10% drawdown… they will fold.

comet52:

PIIGS.

DeDude Says:

April 1st, 2010 at 5:09 pm
You could easily get rid of these leaches without getting rid of public financial markets and the limited service such markets do to society. You could simply do as we do with speculation in the housing markets; if you hold it less than 2 years you get taxed on the profits. With commodities we could get even stricter and tax any sales of futures, if the person did not take possession of the corresponding commodity within a reasonable time. The speculators claim to do a service to society by ensuring quick and efficient “price discovery” yet there is no indication that this “quickness” and “efficiency” does society much good, let alone is worth the absurd amount of money that it drains out of society (companies and other investors). The individual’s “success” is not an issue; the question is whether their “service” to society justify the amount of GDP they are sucking into their own pockets.

Andy T:

“I have no problem with anyone making absurd amounts money of who actually earned it through their skill or creativity or business acumen. If you create something (Search engine, iPhone, etc.) or if you are an being outstanding investor or stock picker or trader, so be it.”

Then you should have no problem with John Arnold on the list. He doesn’t have any more investor money in the “fund.” It’s basically all his money as well as the other traders. The guy is quite simply the greatest Natural gas trader in the world. It’s why the UNG fund longs will never ever make much money.

Andy T:

DeDude at 5.09pm

Is that commentary an April Fool’s joke? You cannot be serious about questioning the role of speculators in commodity markets.

DeDude:

Andy, I am very serious. The money that commodity speculators harvest on their activities are coming right out of the pockets of consumers and other people who spend their days doing something useful for society. It may just be a dime per gallon at the gas station but all of us with a real job pay those bastards real money whenever we purchase a product whose price have been inflated by speculators. I still say “off with their heads” or at least tax the sh!t out of them

mathman:

Driving home today i saw two Amish kids, maybe late teens, radiant smiles on their faces, clip-clopping along in their black wooden carriage pulled effortlessly by a beautiful dark brown muscular horse, work clothes rumpled and spattered, headin’ for some farm up the road.

http://gallery.photo.net/photo/4594241-lg.jpg

philipat:

Absolutely agree Barry. What people do with their own capital, and that of “Like-minded” individuals is entirely their own business. Whether they make or lose Billions is entirely at their discretion and is the way free markets are supposed to work. It is when Public Companies start taking similar risks with Pension Fund money and other OPM in general without adequate disclosure that problems arise.

I still feel that, beyond the re-installation of Glass Stiegel, Investment Banks should operate as LLP’s not as Public Companies.

Andy T:

DeDude

It’s very difficult to take anything you write seriously with comments like that at 5.34 pm

What should we do? Just set a price for oil? Cap it at $50/bbl and call it good? Where should the floor be? $20/bbl? Who would decides such things absent speculators and hedgers in the marketplace setting the market clearing price?

Your ignorance is mind-numbing….

alfred e:

@Andy T: Agree with DeDude.

The old rule used to be only producers and manufacturers could play commodities. Even then it was something of a rigged game.

If there were not a natural bias toward higher commodity prices today, speculators might be OK.

But that is not the case.

Just look at the oil run-up. That was pure greed. Too many players with no intention of taking delivery of a single drop of oil.

Capitalism requires regulation and a moral sense that transcends pure profit motives.

El Viejo:

Hmmm! Let’s see:

1. Long Term Capital Mgmnt was having an effect on the worldwide markets.
2. So after they failed minimal, if any, regulation resulted.
3. At least 50 hedge funds cropped up in LTCM’s place.
4. The Dot.Coms made us forget about LTCM. Damn the torpedoes full speed ahead.
5. 401k’s were almost imperceptibly injecting a large amount capital at a regular clip.
6. Naturally, rates are gonna go down.
7. Banks are squeezed and forced to become volume dealers on big ticket items. Blue Light specials on condos!
8. Greed begets leveraging and politicians grease the wheels with tax cuts for the rich saying that the
rich create jobs, but the rich just walked down the street to their local hedge fund. Employees are a pain.
9. Round and round we go till someone big screwed up and leveraged just a little too much.
10. When you are having too much fun and set the houseboat on fire, well there is just no place for the rats to run. It’s a closed system.
11. So now, rather than be a party pooper, we resist regulation still and say, “maybe bubbles are good”.

Free Market Capitalism Forever:

Peter G. Peterson 10 years ago, in the book Gray Dawn, said that the demographics big monkey should start arriving this coming decade. He mentioned early arrivers: Japan, Spain and Italy. (Mexicans may save us)

With the blue hairs (like me) demanding their expensive medication and out-voting our children what will the next reces… er business cycle be like? A perfect storm perhaps. The last perfect storm in `29 begat WW II. At least I’ll be too old for the draft.

gbgasser:

I saw a stat where over 98% of financial market business is purely speculative gambling. Casino activity that is not putting capital to use generating wealth and creating job opportunities. This is not what the financial markets were originally designed for. They were a way to link the savers with the creators and generate new potential growth businesses. The gambling should not be rewarded as much as it is. If its not creating new business opportunities, tax the shit out of it. Its wasted capital. Too many people are homeless and starving to have billions being bet on whether or not Greece is going to be able to make a bond payment.

I have no problem with someone getting rich but when their incentive to get rich requires them to be pulling for someone else to experience misery so they can profit off it something has gone badly off the tracks.

~~~

BR: That is wildly incorrect — do you have a source? Otherwise, I am throwing a yellow flag, and calling bullshit.

DeDude:

Andy; I never suggested we should cap the price, just chop the cap off those who manipulate the price. Those people are stealing from the consumer who ends up paying higher prices at the pump than they would otherwise have done.

This kind of subversive act undermining society and stealing other peoples money should not be allowed just because the thugs doing it are calling it “free market forces and capitalism”. We could also start calling bank robbery “free market forces and capitalism”, it should still be illegal and punished as such. If it hurts society more than it helps society it should be curtailed, so a ban (or tax) on commodity speculation is a no brainer. Then without the manipulation from the speculators, the market will find and set a price for oil determined by supply and demand.

DeDude:

gbgasser; the 98% is probably hyped over the top. But with CDS estimated at 60 Trillion and the worlds GDP being about the same, I would believe a statement that the majority of financial market business is purely speculative gambling. We need to stop money and human resources from being wasted on things that benefit certain individuals with outright harm to other individuals or society as a whole. We do so with all other human activities, why not with financial activities.

DeDude:

And just as we finish this debate a hearing expose how JP Morgan and Goldman Sachs are manipulating gold and silver markets wit huge short positions. Media interviews with the person exposing this are arranged – and immediately cancelled, after those to Wall Street thugs make a few phone calls. Make no mistakes about who is running the world.

DeDude:

Should have given a link for that last piece:

http://www.fourwinds10.com/siterun_data/business/currency/news.php?q=1268333738

The actual hearing conveniently suffered a camera “malfunction” so I cannot give a link to that.

Thor:

Hah, sounds like someone used to work for Enron.

[Apr 02, 2010] Economist's View Corporations, Social Insurance, and Unchecked Power

When thinking about corporations, I think it's useful to keep this in mind:

David A. Moss, a Harvard Business School professor ... explains that the first application of social insurance in our latitudes actually was aimed ... at ... supporting the growth of modern capitalism. Its main instrument to that end was the legal sanction of the principle of limited liability of the owners of corporations.

Prior to this form of social insurance, the owners of a business were legally liable with their personal wealth for damages the business might have inflicted on others. With limited liability, the corporation’s shareholders are liable only up to their equity stake in the company. ... Beyond that, someone else in society — often the taxpayer — bears the financial risk for damages attributable to the corporation.

One wonders how many business executives and members of chambers of commerce ... realize that the limited liability of shareholders is social insurance

In return for this protection, it's not unreasonable to impose regulation on corporations that, should they fail, impose large damages on society that do not have to be paid be the owners and managers. (As is the case with too big too fail financial institutions, e.g. do you think the behavior of banks might have been different if the bank managers' personal assets were at stake in a bank failure, with a high likelihood that bank failure would leave the managers penniless? In the current financial meltdown that was so costly to society, many managers paid little penalty when the firms they managed failed.)

For a managers and owners, if failure in the future is likely, the game here is simple. Transfer as much wealth as possible as fast as possible from the corporation to managers/owners where it will be safe from creditors and others who face costs if and when the corporation fails.

I'm not suggesting an end to limited liability -- though clawback provisions that return assets to the corporation are needed to give managers an incentive to maximize long-run rather than short-run gains and to prevent the looting of troubled firms. Only that the regulation of firms that benefit from substantial amounts of implicit social insurance is needed to align the incentives of managers with stockholders and, more generally, society at large.

Bruce Wilder:

I wouldn't end limited liability; I would end the payment of very large salary and bonuses to top corporate and financial managers.

Limited liability for corporations ended a variety of practices that permitted a corporation to call on its "owners", the equity shareholders, for additional capital, and made practical, having a marketable share capital. Market liquidity makes possible Fisher's Separation Theorem -- another one of those curious results of Financial Economics, but a critically important one to the success of business corporations as a form for the application of bureaucratic hierarchy to solve problems of economic organization.

Limited liability makes possible a marketable equity capital, which makes possible the separation of investment decisions from the idiosyncratic needs of equity "owners".

http://en.wikipedia.org/wiki/Fisher_separation_theorem

"Norms as a Substitute for Laws"

"I think the title is missing a word. The word is 'poor'."

Economist's View
What's the the right balance between norms and laws? Rajiv Sethi argues that the optimal balance is difficult to determine, and that economists need to devote more attention to this question:

Norms as a Substitute for Laws, by Rajiv Sethi: In a fascinating post on joke-theft in the world of stand-up comedy, Kal Raustiala and Chris Sprigman describe the manner in which social norms backed by informal sanctions can accomplish what copyright laws cannot:

...Comedians have rules of their own about joke-stealing. And they impose their own punishments on thieves... Why do comedians do this? In part, because they live in a world where intellectual property law – in particular, copyright – does not help them much when a rival comedian steals a joke... lawsuits are simply too expensive and uncertain to work as an effective response... Today’s comics are intent on enforcing ownership rights. Yet they do so via social norms – informal but nonetheless powerful rules enforced by comedians on their peers... Comedians maintain a small list of commandments that every comic must follow – or risk being ostracized, boycotted, and sometimes worse. These norms track copyright law at times... More often than not, however, the norms deviate from copyright: for example, copyright protects expression but not ideas, but comedians’ norms protect expression as well as ideas...

Raustiala and Sprigman recognize that the prevalence of such phenomena undermines one of the standard arguments for copyright protection:

What does this all mean? The story of stand-up tells us that... the law is not always necessary to foster creativity. Using informal group norms and sanctions, comedians are able to control joke-stealing. Without the intervention of copyright law, comedians are able to assert ownership of jokes, regulate their use and transfer, impose sanctions on joke-thieves, and maintain substantial incentives to invest in new material.

This presents a challenge to the conventional economic rationale for intellectual property rights. Absent legal protection, the usual theory goes, there will be too few creative works produced — authors and inventors would be unlikely to recoup their cost of creation, so they won’t bother creating in the first place. As we have described, there is no effective legal protection against joke theft. Yet thousands of stand-ups keep cranking out new material night after night. In the absence of law, we find anti-theft norms providing comedians with a substantial incentive to innovate. Which leads to an important and fascinating question: Where else might creativity norms effectively stand in for legal rules?

In fact, one could ask an even broader question: in which other areas of economic and social life might norms (backed by decentralized sanctions) operate as effective substitutes for legal institutions?

This question lies at the heart of the lifelong work of Elinor Ostrom, co-recipient of the 2009 Nobel Memorial Prize in Economics, whose contributions I discussed in in a couple of earlier posts. Using an eclectic mix of methodological approaches, including case studies, laboratory experiments, and game theoretic models, Ostrom managed to overturn conventional wisdom regarding the "tragedy of the commons." She demonstrated the possibility of self-governance when a well-defined group of users with collective rights to an economically valuable resource were at liberty to develop their own rules, and to ostracize, expel, or otherwise sanction each other for violations.

While Ostrom's focus was on natural resources such as forests, fisheries, and pastures, her basic insights have more general relevance. For instance, institutions of self-governance are critically important in the case of urban communities that lie largely outside the reach of the formal legal system in the United States. There are parts of the country where residents do not have recourse to the courts to adjudicate contractual and other disputes. Given the very high costs of violence as an enforcement mechanism, norms backed by limited community sanctions can therefore play a crucial role.

Sudhir Venkatesh provides a number of vivid examples of this phenomenon in Off the Books, his first-hand account of a Chicago community that functions with limited direct reliance on the police, courts, banks or government agencies. In order to do so, it must draw upon on its own informal substitutes for formal institutions. There is extensive use of barter and in-kind payments for wages and debt settlement, reciprocal lending agreements for insurance, and informal mechanisms for the resolution of disputes and the assignment of property rights. As in the local commons studied by Ostrom, norms sustained by the threat of sanctions allow a broad range of mutually beneficial transactions to occur without formal contracts backed by the power of the state.

The kinds of norms and enforcement mechanisms identified by Ruastiala and Sprigman (and Ostrom and Venkatesh) are pervasive. Many more examples may be found in an extraordinary volume edited by Daniel Bromley. Included among these is a study of sea tenure in Bahia by Cordell and McKean in which the authors describe a system of ethical codes "far more binding on individual conscience than government regulations could ever be." Such codes also crop up in James Acheson's work on the lobster gangs of Maine, E. Somanathan's account of forest resource management in Central Himalaya, and literally hundreds of other studies, enough to fill a two volume bibliography and more.

Norms not only accomplish the goals of laws, they can often do so more efficiently. The erosion of norms (or the prohibition of the sanctions that stabilize them) can therefore be costly, even if formal laws are enacted to take their place. Since laws can sometimes undermine and sometimes reinforce informal codes of conduct, finding the right balance between norms and laws is not an easy task. I suspect that legal scholars are acutely aware of such tensions, but (to my knowledge) these trade-offs have received limited attention in economics.

Selected Comments

reason:

When you started on about comedians I thought this must be an April fools joke - BUT it seems genuine.

The problem is of course that norms only work when the enforcement mechanism is adequate, and tend to break down over time. If people succeed via cheating, then cheating will become the norm.

Luis Enrique:

How much of this is "policy relevant"? I share the enthusiasm for norms where they exist, but what about where they don't exist? If you have a situation where things are going wrong (fisheries being exploited etc.) how do you use norms to solve the problem? Policy makers cannot command norms into existence.

Darren said in reply to Luis Enrique...

Policy makers can't command norms into existence, but they can destroy existing norms.

That said, I don't think the enforcement mechanisms needed for norms to work would scale up to national size very well. Norms also don't survive contact with other cultures very well, it seems to me. In this modern age of communications, "contact with other cultures" is ubiquitous.

bakho:

Those that live in gated communities are difficult to reach by those who enforce the social norms. They are also in a position of wealth and power and can fight back. In those cases, we need laws as an extension of the enforcement of social norms. Stupid laws that don't have the backing of social norms are often not enforced.

Doc:

"As we have described, there is no effective legal protection against joke theft. Yet thousands of stand-ups keep cranking out new material night after night. In the absence of law, we find anti-theft norms providing comedians with a substantial incentive to innovate. "

I think that the commonality of the language being used to tell the jokes is important and overlooked here. This analogy is stretched way too far IMO.

jonboinAR:

I imagine this works in tightly knit, somewhat insular communities. I also imagine the norms are in place in order to protect members of the community, not so much members outside of the community.

M.G. in Progress:

Few months ago I wrote a post about "Social norms versus market norms: how to screw the economy up".

http://mgiannini.blogspot.com/2009/03/social-norms-versus-market-norms-how-to.html

In the world of economics, particularly in finance, the problem is when social and market norms collide, thus troubles set in.

If you want to earn extra profit (excess returns) automatically you have to disregard social norms. The copyright law is something to let the owner earn more money than actually would be the case should only social norms be enforceable. Formal law and market norms are there to justify profits in excess of "socially" acceptable or simply to maximize those.

At http://www.predictablyirrational.com/?page_id=129 we can read "When social and market norms collide, trouble sets in. Take sex again.

A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. They go out a third time, and he’s still springing for the meal and the entertainment. At this point, he’s hoping for at least a passionate kiss at the front door. His wallet is getting perilously thin, but worse is what’s going on in his head: he’s having trouble reconciling the social norm (courtship) with the market norm (money for sex).

On the fourth date he casually mentions how much this romance is costing him. Now he’s crossed the line. Violation! She calls him a beast and storms off. He should have known that one can’t mix social and market norms-especially in this case-without implying that the lady is a tramp.

He should also have remembered the immortal words of Woody Allen: “The most expensive sex is free sex.”

anne:

So much for norms as opposed to laws:

http://www.nytimes.com/2010/04/01/business/01hedge.html

March 31, 2010

Pay of Hedge Fund Managers Roared Back Last Year
By NELSON D. SCHWARTZ and LOUISE STORY

The recovery of big banks not only benefited bankers. It also created huge paydays for hedge fund managers, with the top 25 taking home an average of $1 billion in 2009.

Bruce Wilder:

Economists bring the libertarian attitude that norms are "efficient" and substitutes for law (aka government).

Norms can be shaped by the actors involved, and may be tools of oppression or inefficiency. A lot of businesses try to establish a norm in favor of employees working late, without expecting overtime pay. "Working late" is treated as a signal of dedication and ambition, and is rewarded with status promotion (and shockingly, higher status "professional" and "management" employees are not "eligible" for overtime pay!)

And, of course, unions may do just the opposite: try to establish norms that discourage competition that would reveal too much about the productivity potential, encouraging workers to slack and so on.

A criminal gang may seek to establish a norm against snitching to the police about crime. The police may establish a norm against snitching among themselves about their own crimes.

There's something wrong with a "science" in which, every time one of its practitioners notices a feature of the social world around him, goes all Dr. Pangloss and Invisible Hand.

anne:

http://www.nytimes.com/2007/03/20/science/20moral.html

March 20, 2007

Scientist Finds the Beginnings of Morality in Primate Behavior
By NICHOLAS WADE

Some animals are surprisingly sensitive to the plight of others. Chimpanzees, who cannot swim, have drowned in zoo moats trying to save others. Given the chance to get food by pulling a chain that would also deliver an electric shock to a companion, rhesus monkeys will starve themselves for several days.

Biologists argue that these and other social behaviors are the precursors of human morality. They further believe that if morality grew out of behavioral rules shaped by evolution, it is for biologists, not philosophers or theologians, to say what these rules are.

Moral philosophers do not take very seriously the biologists' bid to annex their subject, but they find much of interest in what the biologists say and have started an academic conversation with them.

The original call to battle was sounded by the biologist Edward O. Wilson more than 30 years ago, when he suggested in his 1975 book "Sociobiology" that "the time has come for ethics to be removed temporarily from the hands of the philosophers and biologicized." He may have jumped the gun about the time having come, but in the intervening decades biologists have made considerable progress.

Last year Marc Hauser, an evolutionary biologist at Harvard, proposed in his book "Moral Minds" that the brain has a genetically shaped mechanism for acquiring moral rules, a universal moral grammar similar to the neural machinery for learning language. In another recent book, "Primates and Philosophers," the primatologist Frans de Waal defends against philosopher critics his view that the roots of morality can be seen in the social behavior of monkeys and apes.

Dr. de Waal, who is director of the Living Links Center at Emory University, argues that all social animals have had to constrain or alter their behavior in various ways for group living to be worthwhile. These constraints, evident in monkeys and even more so in chimpanzees, are part of human inheritance, too, and in his view form the set of behaviors from which human morality has been shaped.

Many philosophers find it hard to think of animals as moral beings, and indeed Dr. de Waal does not contend that even chimpanzees possess morality. But he argues that human morality would be impossible without certain emotional building blocks that are clearly at work in chimp and monkey societies.

Dr. de Waal's views are based on years of observing nonhuman primates, starting with work on aggression in the 1960s. He noticed then that after fights between two combatants, other chimpanzees would console the loser. But he was waylaid in battles with psychologists over imputing emotional states to animals, and it took him 20 years to come back to the subject.

He found that consolation was universal among the great apes but generally absent from monkeys — among macaques, mothers will not even reassure an injured infant. To console another, Dr. de Waal argues, requires empathy and a level of self-awareness that only apes and humans seem to possess. And consideration of empathy quickly led him to explore the conditions for morality....

Min:

"Norms as a Substitute for Laws"

'Scuse me, but this is backwards. Norms come first, historically, sociologically, and logically. It is a sign of the weakness of a society when laws substitute for norms.

Do you want to see echoes of a time when social norms were stronger in the U. S.? Watch reruns of 1950s TV. Today in a TV interview when someone is asked if what they did or are doing is right, they reply that it is legal. Not then. People knew the difference.

Peter T:

Interestingly, laws are more complicated than norms. A norm varies only in being weaker or stronger, and covering a small or large part of behaviour - but it's basically a general feeling about appropriate behaviour.

A law can be the formal expression of a strong norm (as in laws against theft), an attempt to impose or cultivate a norm (eg a prohibition on duelling), a ritual expression (say, English laws against homosexuality), a relict of a past norm (laws still on the books against two-piece bathing suits), an administrative rule or guide, a weapon in political or social conflicts (eg Jim Crow laws) and probabaly more.

I think it's a mistake to push classification of these systems too far - it's never laws in general, but these laws at this time, in this place, for these people. The sociologist Michael Mann used the term "promiscuous" for this kind of multi-purpose social construct.

[Apr 01, 2010] Corporations, Social Insurance, and Unchecked Power

James Madison was not a fan of corporations:

Early Americans had a far more comprehensive and nuanced understanding of corporations than the Court gives them credit for. They were much more comfortable with retaining pre-Revolutionary city or school charters than with creating new corporations that would concentrate economic and political power in potentially unaccountable institutions. When you read Madison in particular, you see that he wasn't blindly hostile to banks during his fight with Alexander Hamilton over the Bank of the United States. Instead, he's worried about the unchecked power of accumulations of capital that come with creating a class of bankers.

More here: What the Founding Fathers Really Thought About Corporations, by Justin Fox. [See also: The Founders were deeply skeptical of corporations, by Michael Giberson.]

When thinking about corporations, I think it's useful to keep this in mind:

David A. Moss, a Harvard Business School professor ... explains that the first application of social insurance in our latitudes actually was aimed ... at ... supporting the growth of modern capitalism. Its main instrument to that end was the legal sanction of the principle of limited liability of the owners of corporations.

Prior to this form of social insurance, the owners of a business were legally liable with their personal wealth for damages the business might have inflicted on others. With limited liability, the corporation’s shareholders are liable only up to their equity stake in the company. ... Beyond that, someone else in society — often the taxpayer — bears the financial risk for damages attributable to the corporation.

One wonders how many business executives and members of chambers of commerce ... realize that the limited liability of shareholders is social insurance.

In return for this protection, it's not unreasonable to impose regulation on corporations that, should they fail, impose large damages on society that do not have to be paid be the owners and managers. (As is the case with too big too fail financial institutions, e.g. do you think the behavior of banks might have been different if the bank managers' personal assets were at stake in a bank failure, with a high likelihood that bank failure would leave the managers penniless? In the current financial meltdown that was so costly to society, many managers paid little penalty when the firms they managed failed.)

For a managers and owners, if failure in the future is likely, the game here is simple. Transfer as much wealth as possible as fast as possible from the corporation to managers/owners where it will be safe from creditors and others who face costs if and when the corporation fails.

I'm not suggesting an end to limited liability -- though clawback provisions that return assets to the corporation are needed to give managers an incentive to maximize long-run rather than short-run gains and to prevent the looting of troubled firms. Only that the regulation of firms that benefit from substantial amounts of implicit social insurance is needed to align the incentives of managers with stockholders and, more generally, society at large.
Curmudgeon:

Why aren't you suggesting an end to limited liability? Ending limited liability for senior management and voting shareholders would curtail many corporate abuses against the general public.

Darren:

Yes, but then who would be willing to invest or manage? It would be like driving a car with no insurance.... most sane people would rather not.

Not to mention that liability would still be limited ... to the net worth of managers/shareholders.

Limited liability plus regulation seems both necessary and sensible to me.

Bruce Wilder

:I wouldn't end limited liability; I would end the payment of very large salary and bonuses to top corporate and financial managers.

Limited liability for corporations ended a variety of practices that permitted a corporation to call on its "owners", the equity shareholders, for additional capital, and made practical, having a marketable share capital. Market liquidity makes possible Fisher's Separation Theorem -- another one of those curious results of Financial Economics, but a critically important one to the success of business corporations as a form for the application of bureaucratic hierarchy to solve problems of economic organization.

Limited liability makes possible a marketable equity capital, which makes possible the separation of investment decisions from the idiosyncratic needs of equity "owners".

http://en.wikipedia.org/wiki/Fisher_separation_theorem

Jim Ketcham:

If 'equity stake' was redefined to include salaries, bonuses, benefits, stock, or other corporate assets transferred to individuals then no one would be liable for more than they received. That would certainly be fair for any corporate executive and arguably for any shareholder.

Bruce Wilder:

There's a long and fascinating history to the use of the "corporation" as a legal form for businesses.

In the deep recess of history, "corporations", in Roman law, emerged originally as a way to legally distinguish a business association from a conspiracy against the state.

In the Middle Ages, lawyers trained in Roman law, revived the corporation -- adding the special flair of an engrossed parchment charter (very impressive to an illiterate society) -- as a way to invest what we would think of as inherent state powers in a more or less perpetual association, instead of a person -- an innovation badly needed in the midst of the crumbling system of hereditary and personal fiefs. It became a way for the artisan and merchant guilds of emerging cities to band together, and gain a degree of independence from the feudal kleptocracy, and create a little kleptocracy of their own.

The first important business corporations with a marketed share capital were the East India companies -- the English East India Company and the Dutch East India Company (founded in the first decade of the 1600s), most prominently. They needed the corporate form, in large part, because they needed a delegation of the state power to make war -- establish forts and arm ships and so on -- in order to carry on a "trade" that was at least 50% conquest and pillage. The Dutch conquered Indonesia and the English conquered India (the Dutch "VOC" was, by far, the larger business success of the two, though, after 200 years, it went spectacularly bankrupt.) They were also attenuating the risks associated with trade -- the risk, for example, of arriving safely in port with a valuable cargo the day after a rival ship also arrived and finding prices fatally depressed, but missing the opportunities of very high prices, when a random storm sank a shipment; they established warehouses and efficiently self-insured the voyages of their ships, and operated as bureaucracy with a professional management.

The corporate form was typically used, whenever some venture or enterprise required a delegation of state power, including, but not limited to, a state grant of monopoly. Some of the British activity in North America was organize by chartered corporations, including several of the American colonies. The Massachusetts Bay Company or the Hudson's Bay Company -- with very different histories -- might be given as examples. One could well argue that American democratic self-government grew out of business corporations, not the other way around.

The Bank of England and the South Seas Company (of the infamous bubble) were incorporated to manage parts of the British national debt -- the Bank of England basically took over the larger South Seas company after the bubble. Delegation of the state power to issue paper currency to banking corporations was once common. (I believe some British banks, other than the Bank of England, retain that power to this day, at least in theory.)

Canals, railroads and aqueducts often needed the power of eminent domain, and corporate charters were a way of granting that delegation of state power.

Legislative battles over the granting of, or renewal of, business corporate charters, were unseemly, and, sometimes, catastrophic events. Andrew Jackson's triumphant campaign to kill the Second Bank of the United States ushered in a lengthy economic depression. Granting railroad charters occasioned some of the grandest scandals of the 19th century.

Large-scale commercial and industrial business enterprises (other than railroads) emerged during the Second Industrial Revolution of the 1870s and 1880s, to operate the new industrial technologies and exploit the national markets created by railroads. Often formed by mergers among local and regional family and personal enterprises, many famously used the Trust form to consolidate ownership. General Electric was the first major industrial corporation organized as a corporation with a stock listed on the New York Stock Exchange, but was quickly followed in the 1890s, by many others.

This occurred even as the market has barely had a single down day in the past two months. Year To Date the outflows have now hit a massive $3.5 billion, surprising when considering the performance of the actual stock market, which continues being bid up into the stratosphere by Primary Dealers, or as Rosenberg affectionately calls them, Pig Farmers, using free Fed money, as they merely trade with nobody but each other in a disappearing volume game of musical chairs in which each and everyone is just focused on the exit strategy and getting the market to a sufficiently high level where a 30% "bidless" drop doesn't destroy too many.

Domestic Equity Fund Flows Again Negative For Week Of March 24, $3.5 Billion In Outflows Year To Date zero hedge

Apr 01, 2010 | zero hedge

The broader public, where the first baby boomers begin retiring this year, continues rotating out of equities and into the safety of bonds. The ICI just disclosed that fund flows for domestic equity mutual funds turned negative for the week of March 24 to the tune of almost $1 billion, after a substantial spike the week before. This occurred even as the market has barely had a single down day in the past two months.

Year To Date the outflows have now hit a massive $3.5 billion, surprising when considering the performance of the actual stock market, which continues being bid up into the stratosphere by Primary Dealers, or as Rosenberg affectionately calls them, Pig Farmers, using free Fed money, as they merely trade with nobody but each other in a disappearing volume game of musical chairs in which each and everyone is just focused on the exit strategy and getting the market to a sufficiently high level where a 30% "bidless" drop doesn't destroy too many.

SheepDog-One

Quite a show watching the tumbleweeds roll across the trading floors as theres only 1 direction for the daily chart, always up. And when there is any drop at all like yesterday, its immediately recovered plus a bit upon the next days open.

I dont care what the crystal ball gazers and chicken bone readers say, this certainly doesnt end well as history clearly shows!

Biff Malibu:

This doesn't make sense to me, the investing public is still staying conservative after a huge 60%+ rally?? I would think that they would be falling over themselves to get into the market. I mean I usually get my stock tips from my cab driver, my dentist, and at the barber...I don't know what to do if they aren't talking about their stocks!

This thing won't end until we see record 'INflows' from the public.

OBRon:

The "investing public" follows a Rayleigh distribution (of approx. beta = 0.5) from clueless to semi-conscious. After the March '09 lows, most of those at the low end - who's investing strategy is usually buy high, sell low - lost whatever $ they had left and are thus unable to jump in when normally expected. The semi-conscious with a few remaining $ got back in after the July lows and are now bailing in fear over the same fate that occurred to the lower end of the curve.

An odd side effect of the Lehman collapse is that it cleared most of the idiots out of the markets. And as reported several times on ZH, that raises the question of just who is now going to buy this market when it rolls over. Kind of like killing the family cow...

Cognitive Dissonance :

This outflow from equity funds is comparable to a 1/2" garden hose draining the basement while the fire department is blasting gasoline from six 5" fire hoses into the living room to keep the fire going. Yes, you heard that right. After all, according to Fahrenheit 451, the fire department is supposed to set fires, not put them out. Get used to it.

http://en.wikipedia.org/wiki/Fahrenheit_451

http://www.amazon.com/Fahrenheit-451-Ray-Bradbury/dp/B000HB2G5O/ref=sr_1_3?ie=UTF8&s=books&qid=1270139007&sr=8-3

A Man without Q:

Obama has told the boyz to get the market back up. He knows if the baby boomers start cashing out, 30% underwater, the spending power of the US consumer is shot to shit.

The banks are not totally comfortable, but they have no choice, and anyway, they will make their money and get out of town before it blows up. What we are talking about is personal wealth versus public indebtedness, but what Barry doesn't get is that wealth is a relative concept. It's not how many Dollars you get per week, it's what you can afford with it that counts.

All I know is this is not going to end well. We have 18 months at the most before the whole house of cards comes crashing down, unless they manage to find massive amounts of oil in Alaska, that is, then we're probably good for another decade or so...

SheepDog-One:

We know what theyre doing, extend and pretend, but to what end? How does it benefit them to pump up futures daily, just to live to pump another day?

Does anyone have an endgame scenario theory as to WHAT theyre actually doing besides my theory, simply stuffing as much debt sausage as possible into 401K's and pensions, then pull the rug out?

I cant figure any other possible endgame they have, unless its just Mr Bernanky 'What's this "housing bubble' you speak of' actually being this stupid, having no other idea what to do simply and kicking the can a few feet ahead till tomorrow where they can live to print and pump another day.

Jeanbon:

This is a beautiful chart. If we look at 2009, the more money was pulled out of equity funds, the higher the market went. Just when we saw the first inflows, the market turned south. And just when the crowd pulled money out of equity funds again, the market soared.

On the other hand, we had the crowd jumping into bond funds, since the beginning of 2009, and since then, bonds are falling.

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=516647

It is important, that during the next 3 month (the expected distribution phase), the crowd starts to be bullish and equity funds see heavy inflows

So I believe, we could be at the beginning of a distribution phase for equities that will last until summer. During this period, I expect the S&P to break 1150 and fall to 1100 - 1120. The only ingredient for a first correction is the market sentiment, that is to bearish for a strong pullback. On CNBC, the bullishness is rising fast, so it will translate to the crowds mind in the coming weeks.

The liquidity rally was over in February. Since the first correction this year, people are starting to buy the better than expected earnings and are chasing dividends. This is the second leg we had now and it took us up here. This last leg should be Wave 5. It looks like the market absolutely want's to know what happens if we go above 11000 in the Dow.

Of course, there is a probability for 2010, that both asset classes will start to fall. At a certain point, yields will be to high for equities to rise further.

Than could be the moment in time, when there is no place to hide. This is when the real crisis starts.

miker :

Bernake is inflating the money supply through the stock market. He obviously can't inflate it through credit creation anymore. He has to inflate it to counter strong deflation pressures. If the US/world goes into a deflationary spiral, everything's toast.

Assetman:

Well, it appears that Bernanke is allowing the equity market to bubble as a poorly planned exercise to restore confidence in the economy. Of course, the MSM is doing their best to provide the assist. Actually, for now, it's going pretty well.

The problem with that is way too many investors-- even the retail ones-- are (correctly) suspecting massive manipulation, and refuse to throw their marbles into the ring. The other problem is that the only way to really get investors involved through this echo boom is through credit creation and expanding the money multiplier.

It ain't happening.

As we move forward, expect to see more of the same "cheerleading" spin on economic data. The continued manipulation of the spoo's will allow dredges like the Mortgage Insurers another round of equity issuance, but that door will soon close.

The real action will be in the bond pits-- and at the Treasury auctionhouse. If the Fed continues to monetize, it they will have their fingerprints all over the upcoming auctions. Where else is Timmy going to find his willing buyer?

SheepDog-One:

Yep miker, but what gets me is who the hell is fooled by any of it? Its REALLY just a worldwide game of musical chairs? Its obvious to all that is what's going on, so today Bernanky is just like a little kid who covers his eyes and believes he's now invisible and no one else in the room can see him? Seems really thats all we've got, extend and pretend no one can see us, hell I dont know XD

kwvrad :

this kinda reminds me of large equipment auctions I attended with my well off friend, in that racket theres alot of arch enemies bidding, I watched him purposely runup a price on a package of equipment on this guy he disliked... the auction went to the moon , finally my buddy just stopped bidding...and walked away laughing.. the guy he was bidding against,(that desperately wanted the stuff a 120k bid worth only bout 60k) well it took few minutes to sink when he realized he'd just been bent over big time!!

He paid almost nearly double of what the stuff was worth... but it was too late the gavel fell and he got royally screwed... it was actually funny to watch how much of a frenzy some folks get into when they try TOO HARD... and this my buddy did just to get even with him from a measley 5k deal that guy had shafted him on...gotta love those auctions , you really see how greed works... me thinks this too will end up the same way... time will tell

Buck Johnson :

The market keeps going up and up by 10, 40 or 70 points each day under lack luster volume. The Pigs are using the skills to make the market look like it's doing good, when that is so far from the truth.

Do you guys and gals get the feeling that one morning we will wake up and the one stud holding the whole floor of the market up would have broke and we will see terror in the economy and no one will know what to do?

I almost get the feeling that some are trying to get their stuff sold and find the exits before it happens.

[Apr 01, 2010] How Long Will The Bond-Equity Divergence Continue ? Not Much Longer According To Morgan Stanley zero hedge by Tyler Durden

It seems that risky assets are pricing a better tomorrow while bond markets are pricing a double dip.

04/01/2010 | www.zerohedge.com
So far the stock market has has been having its cake, and eating it with relish too. With stocks having rallied almost 80% from the lows, the one market participant that still seems to not have gotten the memo of a surging economy is the bond market. To the credit of Merrill's Harley Bassman, 10 Year spreads have been trading in a tight range between 3.2% and 3.8% for almost a year (no doubt in big part precipitated by the Fed's control of a vast portion of the bond and MBS market). Should equities take another major leg higher, whether due to NFP or other reasons (most likely momentum inertia), it is very likely that the 10 Year, which many believe has been patiently waiting for deflation to finally be realized, will finally snap its tight trading range and go higher. Much higher. Morgan Stanley sees the 10 Year going wider by 60 bps in the next 90 days.

In a piece titled, "We can get there from here - higher yiels in 2Q '10", MS' Jim Caron states:

The start of 2Q marks an important period in our core thesis for higher rates and steeper curves in 2010. We are calling for UST 10y yields to rise to 4.50% and the UST 2s10s curve to steepen to 325bp during this quarter. The catalyst for this move is a sharp rebound in economic data. We expect to see 2Q growth at 4%, up from 1Q growth at 2%. This may trigger the break in the 9-month UST trading range that would then drive an avalanche of hedge and speculative related flows that could push yields higher and the curve steeper (Exhibit 1, LHS). We can get there from here.

Many believe the much delayed catalyst will be the NFP number, which with stimulus, census, and snowfall, should finally catalyze stocks into the 1,200 range. That this catalyst, as noted, is based on artificial factors, and various monetary and fiscal stimuli, offset by record bond issuance, is presumably irrelevant. Keynes rules.

Pricing a better tomorrow or a double dip. Equities have been rallying and spread product has been tightening in anticipation of an improvement in economic data (Exhibit 1, RHS), but somehow this has been lost on the bond market. It seems that risky assets are pricing a better tomorrow while bond markets are pricing a double dip. We have argued in the past that the record pace of flows into bond funds has been the culprit that has kept yields low and that low yields are more a reflection of these flows and less a statement on expectations for economic weakness. But the caveat is that these flows can turn with a vengeance as the extremely rate-sensitive bond funds risk declining NAVs that may then shift the flow of money into equities, an asset class that can take better advantage of stronger growth rates in what will still be a historically accommodative rate environment.

A line in the sand – where are we right vs. wrong. The performance in 2Q is not only a critical juncture in our thesis for higher rates and steeper curves but it is also a critical juncture in our base case for a rebound in growth to 3.2% 2010 GDP. We need 4% growth in 2Q in order to achieve this base on our forecast. Otherwise if 2Q GDP disappoints with a, say, 3% reading, then it would require that 2H10 grows at ~4.0% to reach our target of 3.2% for the year. A lower 2Q GDP would certainly up the ante for realizing our forecast for much higher yields.

Of course, in the closed circle of interlinked capital markets, a rise in rates would plant the seeds of the markets own eventual destruction as the impact on mortgage housing, on the dollar (once QE 2 is released as rates surge), and on capital flows becomes magnified, and impacts the currently 25% at least overvalued equity market.

Morgan Stanley admits that the only instance in which the bond bearish thesis may be wrong is if we officially enter a double dip.

n the case of lower than expected GDP, the sustainability of a reasonable rebound in growth may be called into question and expectations for slower growth and disinflation may dominate, pushing yields lower and bull flattening the curve. Thus, if the economy is not on track to achieve 4% growth or better in 2Q, then we may be wrong. But if 2Q produces these results, we are likely right in our forecast for higher yields. This is a simplification of how we may validate our rising yield forecast. Clearly there are a lot of nuances; however, this should serve as a general guide.

And while many are glued to each month's NFP which so far has refused to confirm the economic recovery thesis, MS is much more focused on increasing credit demand: another indicator where so far there has been nothing but disappointment (last month's non-revolving retail credit bounce was dictated by nothing more than laxer government student loan lending standards).

The telltale signs we are watching. The demand side of the economy, and its component parts, needs to show marked improvement in 2Q in order for us to aggressively pursue our rising yield forecast. An improvement in the labor data will be a key ingredient for a rebound in final consumer demand. Additionally we need to see a rebuild in inventories and capital spending pick up in anticipation of a sustainable economic recovery.

These elements are essential because they are signs of increased credit demand. Note where we differ from consensus in our rates forecast: we see private credit demand coming back sooner and in greater force. This would achieve a crowding-out effect in UST product, thus contributing to a rise in yields. A sign that a bottom in housing had been reached would also create a marked change in sentiment that might even lead some to price MBS supply, further crowding out USTs. And signs of a rise in incomes and consumer confidence would be welcome additional evidence that we are on track for stronger growth. Of course there are many other indicators to watch, but these are the ones we consider most important.

Here Caron brings back the recently trendy and much discussed topic of negative swap spreads.

The weightiness of UST supply is manifesting itself in tighter/inverted swap spreads. The start of 2Q marks the end of the MBS purchase program and is the pinnacle of the exit strategies from governments. The buyer of $1.25 trillion MBS over the past several months is now done. The weightiness of UST supply has finally manifested itself in the inversion of US 10y swap spreads (Exhibit 2). Note that swap spreads have been tightening for the past year in anticipation of larger deficits and greater UST supply − a tightly woven relationship that produces narrower swap spreads (Exhibit 3). But the new twist is that US 10y spreads broke through the psychological zero bound – only now are people starting to pay attention. This is not a case of US credit worsening to Libor, rather it is a testament to the mountainous supply of USTs ($1.7 trillion net in 2010) versus reduced issuance in Libor-related products like MBS ($0 net issuance in 2010). Nevertheless, the weightiness of UST supply and attendant risk for yields to rise are finally manifesting themselves via tighter/inverted swap spreads. This is the first step of many toward rising yields.

Another key catalyst expected by MS: a reorientation of fund flows away from bonds and into equities, precipitating the first negative return in the bond asset class. Alas, as we demonstrated earlier, this will not happen today: last week's equity outflows were among some of the biggest for 2010. We ask the question: just which cohort of the US population will shift away from equities? The same pre-baby boomers who now realize that Social Security is bankrupt and with every uptick in the stock market anticipate a repeat of 2008? These are people who need their annuities, and for whom the risk of a 20% capital loss is too much. In our opinion this is the weakest part of MS' (and PIMCO's) thesis.

Bond market returns aren’t what they used to be – an asset class on the run. Part of our core thesis for UST 10y yields to reach 4.50% in 2Q is that the move would be catalyzed by negative returns in bonds. We believe that the reason bond yields have remained low was because bond funds continued to receive a record pace of inflows (Exhibit 4, LHS). That had the effect of keeping yields low at a point in the economic cycle, and supply cycle, when they should have been rising. But the critical ingredient to these inflows was positive returns. Remember, IG bond funds returned 19% in 2009, which mainly came from spread tightening. In other words, it's quite simple to see why bond yields have remained low, investors are chasing returns, but this is about to change.

We believe that a sustained rise in yields is upon us and bond funds will start to incur losses (losses in NAVs). Those who were chasing returns will run away from losses even faster. Thus begins a route in the bond market that may catalyze a spike higher in yields toward UST 10y 4.50% in 2Q.

Earlier we discussed interest rate risk for the Fed's portfolio. The same is absolutely true for plain vanilla bond funds.

As we stated previously, the interest rate risk in bond funds far surpass the credit risk. Said differently, bond fund performance is more sensitive to a rise in interest rates now more than ever. And that is exactly what is happening today. Notice that bond returns have been trending lower and are now turning negative in March (Exhibit 4, RHS). If one holds an overweight in bonds, as so many investors do judging by the inflows, then they may look to sell their bond holdings. Where will the money that departs from bond funds go? Well, since money tends to chase returns, then maybe equities is a likely target, given that its returns have been good and that asset class has seen outflows.

In short: Morgan Stanley believes that over the next 90 days we will see a 60bps + spike in 10 Year yields. If they are right, the Fed is about to see a $60 billion loss on its recently acquired GSE and other holdings.

Conclusion – opportunities and positioning: We maintain our view for UST 10y yields to rise to 4.50% by the end of 2Q. We argue that the US bond market will underperform the Euro and UK markets. Additionally, we think the technically based rise in yields is doing some tightening for central banks. For example, UST 2y yields rose nearly 30bp over the past few weeks with little in the way of explanation. Globally, the rise in front-end yields has seen forward rates also spike higher – to levels that may be unachievable unless developed markets encounter a V-shaped recovery or if central banks make a policy mistake by hiking rates too much, too fast and well ahead of signs of a sustainable recovery. As a result, owning forward curve steepeners remains a core trade for us. Swap spreads are another matter. On a global basis, these spreads can remain tight or tighten further, given the nature of excessive government supply to fund the government balance sheets in the wake of financial turmoil.

Morgan Stanley's warning should resound well for all those rushing into equities no matter the cost. With the Fed unwilling to tighten regardless of the economic overheating, the bond market will ultimately be forced to spawn its own, involuntary vigilantes who will have to take on the Fed, first by rapid moves in the long-end, which will then rapdily move into the short-end.

Recall we already highlighted that recent 4 Week Bill auction Yields have been steadily climbing, and are now in the mid double-digit basis point range. Maybe we misspoke - maybe scratch the word involuntary when referring to Fed vigilantes. And maybe this whole argument is an Easter bunny egg: in the great fight between bonds and stocks, we have yet to see equities come out on top even once. With stock pickers' inherent optimism, are they simply not seeing the fact that once all various stimuli are removed, once the suddenly biggest import market China overheats and tightens officially as well, then the whole V- shape to a recovery, be it in the developed or commodity producing world, will be seen for the mirage it is? We don't know - Q2 will certainly answer many latent questions.

buzzsaw99:

I'll take the other side of that bet. Old money, cold hard cash money, is going into bonds. Fast money, hot money, leveraged money is goosing the stock market.

I fraking triple dog dare the usa gubmint to let the 10 year go up to 4.5%

http://www.youtube.com/watch?v=8XlPwsmkPHI

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