Sunday, November 15, 2009

November 15 2009: Instant gratification


Unknown Colorado man c. 1900



Ilargi: The desire for instant gratification has apparently pervaded all aspects of the times we live in, including the collapse of our economies. Once you tell people that such an event is inevitable, they want it to happen as soon as possible, or they lose both their focus and their interest. Warhol's 15 minutes of fame is a thing of the distant past, simply because it's so boringly long.

In the past two years, nothing fundamental about our economies has changed in any structural way, and certainly nothing has improved. The damage has been done, whether you care to look or not. What has changed, though, are appearances. If you look at certain sets of numbers from a certain angle, you could swear the recession was over and recovery is here. However, if you'd step back and take some time and look again from another angle, and another, it’s obvious that no recovery is even remotely near. But most people are not patient enough, or just lack the focus, to take that step back, and take that extra bit of time to observe what happens around them.

All the combined bail-outs and stimulus plans and doctored "official" numbers, when put together, seem to paint a picture of a live pig. And unless you can wipe off the lipstick right here and now, then and there, people will insist that what they are seeing looks an awful lot like a pig. And that is basically all it takes for them. That fills their immediate gratifying needs. It's much easier that way. They reason that if that pig were really dead, as you claim, they would know. Or smell, or something. They are rational creatures (the people, not the pigs), and smart to boot, and they would see through the disguise, and anyway, the folks they voted into office would never risk the wellbeing of their voters by telling them lies about the (non-)existential features of a bacon factory.

Inevitably, this view of the world is most strikingly concentrated around stock markets. Much as they know or feel that the S&P 500 has no necessary direct influence on their own lives, it sure looks to be a handy measure, and most of all it only takes maybe 10 seconds per day to check. Hey, if that pig is really dead, it sure does a good job of looking alive.

And of course it makes sense that people who think they have understood what is happening, through reading The Automatic Earth and/or other sources, become uncertain if what they think they have seen takes (what seems like) a -too- long time to materialize. Even if they can rationally figure that those who hold the power in a given society have both the means and the motive to make things look -much- better and sunnier than they truly are.

And so discussions even here at The Automatic Earth increasingly turn to "the stock markets haven't toppled yet, but you said they would!". Yeah, that pig sure looks ready to party, doesn't it?

Now, we have never been, nor pretended to be, a venue aimed at traders or investors, whatever level their involvement in stocks or other investments may be. And sure, we have been surprised too by the extent to which governments dare go, and their citizens are ready to accept, presenting an image that differs to the upside from what underlying numbers suggest. Risking the bankruptcy of entire nations rather than coming clean and thereby risking your careers, it truly is a spectacle worth observing. And at a rate of $1 trillion per month, the US economy can be made to look like a live hog in the eyes of the majority of the population.

And yes, there are plenty people playing the markets who have money on that, and are cashing in. But that's not why we are here, not for pointing out profit opportunities. There are a zillion other joints for that, and if you look sharp and well, you find they all conveniently contradict each other. In the short run, we're all potential tycoons. In the long run, not so much. Stoneleigh and I started The Automatic Earth not to make you make money, but because we are interested in preventing losses for our readers. Which is not the same thing. And while preventing losses may seem less of a priority these days than a year ago, with rising stock markets and all, it will -again- be the prime consideration for everybody other than professional shorts once the downtrend sets in.

Some people think that the Fed can take all the debt on its sheet (it has some $8 triilion at present) and thereby nullify it, but then the ECB can do it too, presumably, and all other central banks; so where does the debt go?

We seem to run into all sorts of confusion when it comes to the state of the economy, be it global or national. There are people who think that central banks are colluding to make all debts go away (no, I'm not kidding, there are those who really think that) by pumping ever more money (i.e. more debt) into the great beyond.

Then there are those who feel that central banks and Treasury Departments, either just stateside or across the G-20, can issue unlimited amounts of paper and trick investors all over the globe into believing that all the paper is worth what it says it is, and they'll be good for whatever IOU's they issue at whatever yield they'd like to sell them for.

I see people suggesting that the US Congress controls Wall Street, and even the Federal Reserve. Some think that quantitative easing, especially when part of a concerted effort, can go on indefinitely and without limit. There are even those who think that Bernanke, Geithner and Obama are executing successful policies that will benefit the American population, if not mankind as a whole. After all, according to government calculations, the recession has been succesfully battled and is now over. What more do you need to know?

But it all feels way too much like discussing the shade of lipstick on the carcass, or the latest botox inserted into Joan Rivers. And such things do not interest us.

When in doubt, return to the long term basics. If you look beyond and underneath all the very tempting and persuasive make-up, there are two elements of the pig that will always remain the most essential, that decide whether it lives or dies: housing and jobs.

There is no such thing as a US housing market anymore, other than through government-run purchase and guarantee schemes. Fannie Mae and Freddie Mac have some $6 trillion in shaky loans on their books, and the shift away from them and towards the Federal Housing Administration and its finance arm Ginnie Mae has resulted in the FHA dropping way below its already insanely low 2% required reserves level (to 0.59%). These numbers, in all likelihood, represent only the mortgages involved. I for one would like to see what that does add up to in mortgage-backed securities issued. Not that I’m considering holding my breath.

And even with Washington (yes, that would be you) as the only player left in a market that has managed to draw in some 5 million überlosers in 2009 (thanks, Barracks O.), there are scores of stories about towns where only 1 in every 4 or 5 empty properties are ever put up for sale. Madoff got 150 years for his scam. And his didn't run into the trillions.

As for jobs, we've covered the topic more extensively here than should be necessary to make you grasp its reality. The bottom line is that close to 1 million Americans are added to the unemployed contingent every single month, with the most rapidly rising contingent being the most long-term jobless. For whom Congress last week extended bare benefits by 14 weeks. Just lovely. And what are we, and they, going to do then?

A nice contradiction is emerging in the White House. The president apparently will shift his focus to two separate topics: jobs (for which there'll be a December summit) and the federal deficit. That should be good. Both ideas are a year late, if not more. And they are incmpatible. You're not going to create jobs by cutting expenses. Not going to happen. How to sell a paradox?! Stay tuned.

When talking about finance and the economy, the Automatic Earth obviously can't completely ignore what happens with stocks and options and shorts and what have you. But that doesn't mean they are what we focus on. They're nothing but a poor and highly volatile indicator for the situation those people find themselves in who do not participate or "play" in those markets.

The state of our economies, whether US or elsewhere, cannot be determined by looking at daily stock exchange data. For that matter, and as sad as that is, it can't be determined using government data either. We have no choice but to read between the lines of a seemingly endless array of words and pages, and look for the spots where the lipstick and the rest of the make-up start cracking. And crack they do, and crack they will. All pretense does. Which is good, when you think about it. After all, as Leonard Cohen puts it:

There’s a crack, a crack in everything. That’s how the light gets in.












Ilargi: This is not TV. You don't have to be just an observer on a couch, and you shouldn't. You can be, indeed you are, very much a part of it, of this thing called the Automatic Earth. If and when you choose to be, that is.

Our Fall Fund Drive (please see the top of the left hand column) is happening right now. Your donations -and visits to our advertisers- make this site possible. Without you, there can be no Automatic Earth. We're not talking multi-thousand dollar donations, even though these are very welcome and would allow us to take the next few steps towards what we think this site could and should be, but essentially, for now, the Automatic Earth is being kept alive with donations of $100 or even $10 at a time.

And of course we'd like to thank all our past, present and future donors for your confidence in us. That can never be said enough, and there never seems to be a proper venue to express that gratitude in. But rest assured, you make us feel humble and unworthy.











U.S. Trade Deficit Increases by 18.2%, Most Since 1999
The trade deficit in the U.S. widened in September by the most in a decade, reflecting rising demand for imported oil and automobiles as the economy rebounded from the worst recession since the 1930s. The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.

Demand for foreign products may remain elevated in coming months as consumer and business spending improve and companies aim to prevent inventories from collapsing even more. Exports may also rise as expanding economies in Asia and Europe and a weak dollar drive demand for American goods, giving manufacturers such as Dow Chemical Co. a lift. “Sometimes what looks bad on the surface is actually quite good and I think that’s the case this time around,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Exports are growing strongly and imports are turning up because domestic spending has turned the corner.”

The dollar dropped after the report. One euro cost $1.4875 at 8:50 a.m. in New York, up 0.2 percent from late yesterday. The yen climbed to 89.68, up 0.8 percent. Stock-index futures pointed to a gain at the open. The trade gap was projected to widen to $31.8 billion, from an initially reported $30.7 billion in August, according to the median forecast in a Bloomberg News survey of 77 economists. Deficit projections ranged from $28.6 billion to $34.1 billion.

A collapse in world trade earlier this year brought the gap down to $26.4 billion in May, its lowest level since November 1999, as imports plunged even faster than exports. As commerce begins to pick back up, global leaders agree more needs to be done to strengthen the expansion. U.S. Treasury Secretary Timothy Geithner and other finance ministers at the Asia-Pacific Economic Cooperation forum in Singapore this week reiterated a pledge to maintain stimulus efforts “until a durable recovery in private demand is secured.”

Asia is “leading the world” back to recovery, Geithner told reporters at a joint press briefing with his APEC counterparts. President Barack Obama began a swing through Asia today as world leaders work toward a rebalancing that will make global growth more reliant on spending by Asian consumers and businesses and less dependent on their American counterparts. Imports climbed 5.8 percent, the most since March 1993, to $168.4 billion. The figures reflected a $4.1 billion increase in imported oil as the cost of a barrel of crude climbed to the highest level since October 2008 and volumes also rose.

Purchases of foreign-made autos and parts surged by $1.7 billion to $16.4 billion, due mainly to a $1.3 billion increase in imports from Canada and Mexico as North American vehicle production picked up. Imports from South Korea also climbed. The federal “cash for clunkers” auto trade-in program, which expired in late August, generated momentum in car sales and boosted demand for parts and supplies. Automotive inventory restocking is also boosting demand for foreign-made autos and parts. U.S. sales for South Korea-based Hyundai Motor Co. increased in September for the third month in a row, while Toyota Motor Corp. is boosting production of models such as Corollas and Camry sedans to rebuild its U.S. inventory.

“Our inventories are continuing to recover with a very good pipeline as we move into the fourth quarter,” Robert Carter, Toyota’s North America sales chief, said on a conference call last month. Exports rose 2.9 percent to $132 billion, the most this year, propelled by sales of civilian aircraft, industrial machines and petroleum products. The dollar this month was down 12 percent from a five-year high reached in March against a trade-weighted basket of currencies from it’s biggest trading partners.

China’s economy grew 8.9 percent in the third quarter from the same period in 2008, the best performance in a year. Exports to the Asian nation were the highest since October, even as imports from China also climbed. “The economic outlook for the rest of 2009 appears to be stabilizing, with strong growth in Asia Pacific, especially China, and other emerging geographies,” Andrew Liveris, Dow Chemical’s chief executive officer, said in an Oct. 22 statement.

Dow’s factories around the world ran at 78 percent of capacity in the third quarter, an increase of 3 percentage points, because of increased demand in developing markets, including China and Brazil, as well as relatively low North American ingredient costs that led to increased exports. The largest U.S. chemical maker yesterday said cost cuts and rising sales will boost earnings more than analysts estimate. After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit grew to $41.7 billion, the highest since January. The figures suggest the government may revise down their estimate for third-quarter economic growth.

The U.S. is growing again after posting its worst contraction in seven decades. The world’s largest economy expanded at a 3.5 percent annual rate in the third quarter, the best performance in two years. Economists surveyed last month forecast a 3 percent rate of growth this quarter.




China’s Liu Says U.S. Rates Cause Dollar Speculation
The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulator Commission. “The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.” His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis. “I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said today that low interest rates in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent interest rate increases by that nation’s central bank. “The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.”

In a currency carry trade, the investor makes money by borrowing in a country with low interest rates, converting the money to a currency where interest rates are higher, and lending the money at that higher rate. The dollar fell against most of its major counterparts as a report showed the euro nations emerged from their worst recession since World War II, encouraging investors to buy higher-yielding assets. The euro advanced for a second week against the dollar and approached its highest level since August 2008 before stalling just short of $1.5050. The dollar dropped for a third week against the yen, falling 0.2 percent to 89.66, from 89.88.

Fed Chairman Ben S. Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. “The dollar’s devaluation has the biggest influence on China among emerging market economies,” China Construction Bank’s Zhao said. “China has huge amount of investments in dollar assets; their safety is threatened.”

President Barack Obama may discuss China’s currency during his visit to Asia after Treasury Secretary Timothy Geithner said the region has shown a commitment to adopting “market- determined” exchange rates. China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable. China has kept the yuan at about 6.83 per dollar since July 2008, after a 21 percent gain in the previous three years.




Bank Failure Toll Reaches 123
The Federal Deposit Insurance Corporation [FDIC] closed banks in California and Louisiana on Friday, pushing U.S. bank failures to 123 this year amid continuing fallout from the worst economic crisis since the Great Depression.
  • On Friday regulators closed Century Bank, FSB of Sarasota, Florida. It was the 121st FDIC-insured institution to fail in the nation this year. The FDIC, which was named receiver and entered into a purchase and assumption agreement with IBERIABANK of Lafayette, Louisiana, to assume all of the deposits of Century Bank, FSB, said Century Bank had $728 million in assets and $631 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $344 million. The last bank closed in the state of Louisiana was Flagship National Bank, Bradenton, on November 6, 2009.

  • IBERIABANK of Lafayette, Louisiana agreed to also assume all of the deposits of Orion Bank of Naples, Florida, which was closed today by the Florida Office of Financial Regulation.
    The FDIC said Orion Bank had $2.7 billion in assets and $2.1 billion in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $615 million.
    Orion Bank is the 122nd FDIC-insured institution to fail in the nation this year, and the eleventh in Florida.

  • Sunwest Bank of Tustin, California, agreed to assume all of the deposits of Pacific Coast National Bank of San Clemente, California. The FDIC said Pacific Coast National Bank had $134.4 million in assets and $130.9 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $27.4 million. Pacific Coast National Bank is the 123rd bank to fail in the nation this year, and the fifteenth in California. The last FDIC-insured institution closed in the state was United Commercial Bank, San Francisco, on November 6, 2009.

The pace of bank failures has picked up significantly this year, causing a drain to the FDIC’s Deposit Insurance Fund, which turned negative at the end of the third quarter. The agency is expecting bank failures to cost the fund about $100 billion for the next 3-4 years, and has said failures will remain elevated this year and next.




Job Losses Mount, Enduring and Deep
The rise in unemployment that has occurred in the current recession has been hardest on young workers, while having a smaller effect on older workers than previous downturns. Women have been more likely than men to hold on to their jobs. The overall unemployment rate, which reached 10.2 percent on a seasonally adjusted basis last month, remains below the post-World War II peak of 10.8 percent, reached in late 1982. But the proportion of workers who have been out of work for a long time is higher now than it has ever been since the Great Depression.

The persistence of joblessness for so many people — 5.6 million Americans have now been out of work for more than half a year even though they have continued to seek employment — may provide the greatest challenge for the Obama administration if it decides to seek a new economic stimulus program. The short-term unemployment rate — the proportion of the work force that has been jobless for less than 15 weeks — has begun to decline, however, and stood at 4.5 percent in October after peaking at 4.9 percent in May.

That decline is a signal that the recession, which officially began in December 2007, probably has ended. In past recessions since World War II, the National Bureau of Economic Research has always dated the end within two months of the peak in short-term joblessness. Over the last three years — since October 2006 — the overall unemployment rate has risen by 5.8 percentage points. That is the largest such increase since the Great Depression, providing another indication of the rapidity and severity of the current downturn.

Before this cycle, the sharpest 36-month increase since World War II was a 4.9 percentage point rise in the period that ended November 1982. The accompanying charts show the short- and long-term unemployment rates during the three cycles since World War II when the unemployment rate rose above 8 percent, and reflect how different groups of workers fared in each. Each of the charts begins in the month when the broadest measure of employment — the proportion of people over age 16 with jobs — hit a cyclical peak. The first two end when that measure reached a cyclical low, several months after the recession was later deemed to have ended. The final chart runs through October, the latest month available.

With each chart are calculations on the proportion of jobs that were added or lost from the peak through the bottom for differing groups of workers. This cycle has been the worst over all, with the government’s household survey in October finding 7.7 million fewer jobs than in December 2006, when the employment-to-population ratio reached its high for the current cycle. The declines during the two earlier cycles, from November 1973 to June 1975 and from December 1979 to March 1983, were 0.8 percent and 2.0 percent, respectively.

Women have held on to jobs better than men have during this downturn, reflecting a pattern that prevailed during the previous cycles. One major difference is how older workers have fared. The number of jobs held by men over 55 is up 5.6 percent since the cycle began, and the number of jobs held by women of that age has risen by 9.3 percent. There are fewer jobs for workers age 54 to 64 than when the cycle began, but that group has done much better than younger workers. By contrast, younger workers were more likely to hold on to their jobs in the two previous downturns.

It is not clear why that pattern has changed. It is against federal law to discriminate against older workers, but that law was passed in 1967, before either of the previous downturns. It could be that the plunge in real estate and stock prices in 2008 led fewer older workers to decide to retire. The proportion of the work force out of work for more than 15 weeks reached 5.7 percent in October, well above the 4.2 percent figure reached in 1982. That had been the highest such figure since the government began calculating the number in 1948. The proportion that has been out of work for at least 27 weeks — half a year — is now 3.6 percent, also a record.





Krugman Misses the Point about Kurzarbeit
Give him credit for recognizing that a society-wide policy of work-sharing is much more humane and rational than America’s current slash-and-burn labor market devastation. Especially in light of the increased unemployment risk faced by minorities and youth, it would be much better for government to push companies to reduce hours rather than bodies. So far so good.

But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.

Oddly, Krugman writes, “Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.....But these aren’t normal times.”

In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.




Senator Reid tees up 2010 jobs bill
Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday. Sen. Ben Cardin (D-Md.) told The Hill that Reid (D-Nev.) made the announcement about a new jobs bill at the Senate Democrats’ weekly lunch. Reid said he was looking at an initiative focused on job creation “and that our caucus will take it up,” Cardin said.

Reid didn’t specify what would be in the bill, but he said that it was going to be “one of the priorities” for the Senate, Cardin added. Cardin said Reid offered no additional specifics, such as timing for a new jobs bill. Sen. Patty Murray (Wash.), a member of Senate Democratic leadership, said that the conference is focused on ways to create jobs but that no decision about legislation has been made. Democrats have had a “number of discussions and everybody is looking at where we can make the biggest difference,” she told The Hill. Reid’s office said it had nothing to add to senators’ remarks on  the push for a jobs bill.

Democrats have been rocked by Friday’s unemployment report showing the jobless rate hitting double digits for the first time since the early 1980s. While unemployment was widely expected to hit 10 percent this fall, it was a surprise that it hit that threshold in October, particularly after reports that the nation’s gross domestic product grew 3.5 percent in the most recent quarter. The bad news on jobs came days after Democrats lost gubernatorial elections in Virginia and New Jersey, two states President Barack Obama carried in last fall’s presidential race. Those defeats raised anxieties in a party already nervous about 2010’s midterm elections, when the party that holds the White House typically loses House and Senate seats.

The effect of the struggling economy has begun to show up in polls, to the detriment of incumbents. Reid himself is one of the GOP’s top targets in the 2010 congressional elections. A Las Vegas Review-Journal poll last month found that Reid had an approval rating of just 32 percent, compared to a 51 percent disapproval rating, and that he trailed Republican candidates in hypothetical match-ups. The newspaper’s May poll had found Reid to have a higher approval rating, 46 percent, than his disapproval rating, 42 percent. The drop in Reid’s standing has accompanied a rise in the state’s unemployment rate, which has gone from less than 6 percent last year to 13.5 percent in October.

Democrats moved a $787 billion stimulus measure earlier this year with little GOP support, and have been hammered by Republicans who say the effort has failed to stem job losses. The White House and Democratic leaders in Congress have said the stimulus has saved or created hundreds of thousands of jobs and that the unemployment rate would be much higher without the stimulus.  The White House has resisted calls from the left that another stimulus was necessary.

A new jobs bill would add yet another piece of major legislation onto the Congress’s plate. Democrats are currently trying to finish work on healthcare reform. Afterward, they plan to turn to legislation curbing climate change and overhauling financial regulations. But some Democrats are wary of moving to the global warming bill, and Reid’s signal that he wants to proceed to a jobs bill could suggest the climate measure will have to wait in line.

Cardin said that the climate change bill could serve as the jobs bill by providing incentives for Americans and businesses to invest in green technologies. “We’ve got to figure out a way to get better job growth in America,” Cardin said. “Too many people in my state and around the country can’t find jobs.” Sen. John Thune (R-S.D.) said that GOP members have also been discussing ways to create more jobs but wouldn’t be able to support Democratic efforts similar to the stimulus, which he deemed a “massive expansion of government” that didn’t lead to much job growth.

Obama’s poll ratings have dropped with the economy. A Washington Post/ABC News poll in October showed that Obama was still personally popular but that his handling of the economy had suffered. Most Americans — 57 percent — approved of the overall job he was doing, but just 50 percent approved of his work on the economy. That’s a 10-point slide from his rating on the economy in March, according to the Post/ABC News poll. Congressional Democrats and the White House have sought to boost the economy in recent months without resorting to another stimulus package.

Last week, Obama signed into law a package extending unemployment benefits, a tax credit for first-time homebuyers and tax refunds for businesses struggling during the recession. Lawmakers have also mentioned extensions of healthcare benefits for the unemployed and higher levels of food stamps for low-income Americans. House Democrats have signaled openness to a tax credit for each new hire companies make, but lawmakers have yet to introduce a bill proposing it. Speaker Nancy Pelosi (D-Calif.) has said that passage of a $500 billion, six-year transportation reauthorization bill, funding highway and transit construction projects, could serve as a jobs bill, but the White House and Senate Democrats have only supported extensions of the current transportation bill.




White House offers unemployment summit




Obama to focus on job creation
President Obama will convene a White House summit early next month to explore ways to reverse the soaring unemployment rate -- and there won't be any shortage of ideas. Economists and lawmakers hope that such proposals as tax breaks for companies that add workers, tax cuts for small businesses and more government highway construction will get renewed attention after Obama's call Thursday for new ways to reverse job losses.

But the administration and its allies in Congress are facing another shortage -- time. Economic and political concerns are rising after the unemployment rate hit 10.2% last month, reaching double digits for the first time in 26 years. With congressional midterm elections looming next year and thousands more jobs being lost each week, Washington must act quickly to get new programs in place.

Addressing those worries before departing for Asia on Thursday, Obama said he was open to "any demonstrably good idea" to stimulate job creation. "We all know that there are limits to what government can and should do, even during such difficult times," he said, alluding to the concerns about the soaring budget deficit. "But we have an obligation to consider every additional, responsible step that we can to encourage and accelerate job creation in this country."

Obama said he would gather chief executives, small-business owners, economists, labor leaders and others to discuss ways to create jobs and grow the economy. The move comes as Senate Majority Leader Harry Reid (D-Nev.) told colleagues this week that he planned to push a job-creation bill in the coming weeks, as soon as the Senate finished debating and voting on healthcare legislation. The jobless rate has continued to climb even as gross domestic product, the value of all goods and services produced in the country, is growing robustly again. So reducing the rate is a "critical imperative," Sen. Jack Reed (D-R.I.) said.

"The recovery for the American family is not measured in GDP," he said. "It's measured in jobs." Reed has been pushing legislation to expand work-share programs, which exist in California and 16 other states. The initiatives entice companies to cut workers' hours instead of laying them off, using a percentage of the unemployment benefits the workers would have claimed to make up the difference in wages. It's one of several ideas floating around Washington in recent months to address unemployment directly.

Sen. Russell D. Feingold (D-Wis.) is drafting a bill to provide a job-creation tax credit, based on a proposal by the think tank Economic Policy Institute. Lawmakers from steel-producing states have pressed for accelerated passage of a new multiyear transportation bill to build highways and other projects. And House Republican leaders continue to push for a package of tax cuts, including one that would allow small businesses to deduct up to 20% of their income to free up money to hire workers.

"What we need to do is to lower the price of risk to increase the confidence of those investors and small-business people who are going to be the job creators," said Rep. Eric Cantor of Virginia, a leading House Republican, adding that mandates in the pending Democratic healthcare legislation are alarming business owners. "We also have to address the very real sense that small businesses are very nervous about committing capital right now."

The administration has not publicly discussed any specific job creation initiatives. Obama said last week that he was looking at additional infrastructure spending, tax cuts for business, making more credit available to small businesses and increasing U.S. exports.

He noted Thursday that the economy was improving -- expanding at an annualized rate of 3.5% in the third quarter after a year of contraction -- and that job growth typically does not return immediately. The pace of job losses has slowed considerably since January. And the Labor Department reported Thursday that initial claims for unemployment benefits fell 12,000 to 502,000 last week, the lowest weekly total since January.

"Given the magnitude of the economic turmoil that we've experienced, employers are reluctant to hire," Obama said. "Meanwhile, millions of Americans -- our friends, our neighbors, our family members -- are desperately searching for jobs. This is one of the great challenges that remains in our economy, a challenge that my administration is absolutely determined to meet."

Feingold said he and his colleagues were discussing ways to help create jobs. "We all know that the healthcare bill is before us, but the jobs issue is at least as important," he said. He is advocating a two-year tax credit for businesses that hire new workers or add hours for current employees. Employers told him that such a measure would help "tip the balance" in favor of additional hires, Feingold said. The Economic Policy Institute estimated the credit, which would refund 15% of the cost of new wages next year and 10% in 2011, could create 5.1 million new jobs.

But short-term policies such as that don't address the larger problem. The economy needs to grow at a much higher rate than 3.5% to create the millions of jobs needed to offset the losses suffered during the recession, said Martin Regalia, chief economist for the U.S. Chamber of Commerce. "What everybody is hoping for is some sort of a panacea, and I don't think there's one out there," said Regalia, whose organization is holding its own forum next week on the role of government in creating jobs. "We go back on things like reducing taxes, making the tax system more streamlined and less punitive in terms of the people who save and invest and put capital at risk."

Administration officials and Democratic lawmakers are increasingly concerned as the jobless rate grows as they head into midterm elections next year. Democratic gubernatorial candidates in Virginia and New Jersey were defeated last week amid voters' economic concerns, though Democrats won special House elections in California and New York. "I don't think there's any question the voters are outraged at the seeming lack of concern on the part of the administration and the [Democratic congressional] majority about joblessness," Cantor said.

Congress recently approved additional jobless benefits, particularly for those without jobs in California and other hard-hit states, and extended and expanded a tax credit for the purchase of homes that is often credited for helping to boost the real estate market. Obama made a point of signing the bill Nov. 6 after the Labor Department reported the October unemployment rate.

He summoned Reid and House Speaker Nancy Pelosi (D-San Francisco) to the White House last month to talk about job creation. And last week, Obama presided over a meeting of business leaders and other members of his Economic Recovery Advisory Board to find ways to lower unemployment. House Minority Leader John A. Boehner (R-Ohio) said it was time for "immediate action," not more meetings. "Americans are asking, 'Where are the jobs?' but all they are getting from out-of-touch Washington Democrats is more spending, more debt and, now, more talk," he said.




After spending binge, White House. says it will focus on deficits
President Barack Obama plans to announce in next year's State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning. The president's plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House.

On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives. On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits. Even if Obama succeeds - and that’s a big if - it will be tough for many Democrats to sell themselves as deeply concerned about spending after voting for the stimulus, the bailouts, the health care legislation and a plan to address global warming, four enormous government programs.

“Democrats have to reassure voters we are not being reckless,” said a Democratic official involved in the planning. “The White House knows this and that's why we'll be hearing a lot about reducing the deficit early next year. Democrats owned this issue for the past four years and cannot afford to cede it to Republicans now."

White House budget director Peter Orszag said in a statement to POLITICO: “The President strongly believes that as the recovery strengthens and job growth returns, we will have to take the tough steps necessary to return our nation to a fiscally disciplined and sustainable path. We recognize that the projected medium-term deficits are too high, and as part of the FY 2011 budget process, we are committed to bringing them down. Our challenge is to tackle those out-year deficits in a way and at a time that does not choke off economic recovery, and the FY 2011 budget will reflect our best judgment about how to walk that line."

The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes. All presidents promise deficit reduction – and almost always fall short. There is good reason to be skeptical of this White House, too, on its commitment.

For starters, the White House has not dropped plans for an aggressive global warming bill early next year that will be loaded with new spending on green technology and jobs – that would be paid for with tax increases. Democratic lobbyist Steve Elmendorf says the White House focus on deficit reduction could easily kill the cap-and-trade effort. “I think this means cap-and-trade has to go to the backburner,” he said.

Additionally, there is no evidence Democrats are willing to aggressively cut the biggest parts of the budget, such as entitlement programs and defense. Former President Bill Clinton told Senate Democrats at their policy lunch this week that one of the biggest reasons to finish health care is to allow Obama to focus on economic concerns next year – in part with more spending. Sen. Ron Wyden (D-Ore.) said afterward that Clinton had advised getting health care out of the way to “clear the tables and allow the focus to be on jobs and education and infrastructure.” None of that is free.

The Wall Street Journal reported Thursday the White House is considering applying some money from the $700 billion financial bailout bill to deficit reduction, and that Cabinet agencies have been asked to submit two budget plans for next year, one that freezes spending at existing levels and one that trims spending by 5 percent. Congress has long history of taking those requests and piling on money for programs it favors. The only way Obama can prevent Congress from imposing its will – a tactic he has been reluctant to do during his presidency – would be to threaten vetoes. And if Obama’s political goal is to minimize tough votes, gutting domestic spending bills could mean fewer projects lawmakers can brag about back home. History shows that that’s often an impossible sale on the Hill.

Kenneth Baer, White House Office of Management and Budget spokesman, said: "You'd have to be a graduate of Hogwarts to know what's in a speech that has not been written, much less outlined, yet. The President and his team are constantly reviewing and assessing policies to create jobs, lay the foundation for long-term economic growth, and put the nation on firm fiscal footing. No decision has been made about what specific policies will be in the FY 2011 budget or any address."

Officials involved in the planning say they're looking for ways to cut spending, reduce the growth in costs in other areas besides health care, and find ways to get Republicans to share the risk. Obama will likely find himself squeezed between economic and political pressures for much of the year. Some White House officials do not want to focus on deficits until it’s clear the economy is in full recovery. It could take another jolt of tax cuts or spending to make that happen, these officials say.

“If we try to reduce the deficit much below what’s been projected, we really run the risk of undercutting the recovery,” said Jim Horney, director of fiscal policy at the Center on Budget and Policy Priorities, a liberal think tank.

But many moderate Democrats are deeply troubled by two recent signs of serious discontent among independent voters. The first was how badly Democrats lost among independent voters in the New Jersey and Virginia gubernatorial races. The second was a Gallup poll released this week that showed Republicans winning the independent vote by 22 points in generic matchups for House and Senate races. That same poll had the parties tied among independents in July.

Most of the competitive House and Senate races are in swing districts in which independent voters are the deciders. “A lot of independents, Democrats and Republicans -- all are concerned about is what are we going to do about this long-term debt,” Obama told ABC’s Jake Tapper Monday. “We've got to show people that we are responsible stewards for their taxpayer dollars and that we're taking some serious steps to at least lay the foundation -- the pathway -- for bringing those deficits down over the next several years.”




State Finance Directors Warn of More Trouble Ahead
Michigan and California are likely to face a fresh round of budget woes when federal stimulus funds used as a fiscal crutch dry up, finance directors for the states said Friday. Short-term budget gaps have battered states as revenues plummeted during the recession. Aided by about $250 billion in funds from the stimulus package expected through the end of next year, states managed to close the gaps this year. But both finance directors, speaking at a Pew Center on the States event in Washington, were pessimistic about their states' futures beyond fiscal 2011.

"We're facing a cliff in 2011 when stimulus dollars run out," said Mitchell Bean, director of the Michigan House Fiscal Agency. "There is not an end in sight, even in recovery." As of July 2009, California's budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps. "I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."

There were no bankruptcy options, and the legislature chose to cut back sharply on education and health care to fill the gap. Mr. Genest already predicts the 2011 shortfall will outpace the projected $7 billion gap. It is a smaller deficit than this year's gap, but the choices will be more difficult because so many cuts have already been made. Mr. Genest estimated that, eventually, 40% of the state's budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state's corrections system. Mr. Bean described a similarly depressing scenario for Michigan, which could end the recession with 25% fewer jobs than in June 2000 and a total of one million job losses. Michigan's unemployment rate in September was 15.3%.

He suggested that strict term limits often lead to political gridlock that prevents large-scale changes, such as overhauling the tax code so it is broad-based with lower tax rates. Mr. Bean said lawmakers will likely have to trim the budget at least 12.5% this year after closing a $2.8 billion gap last year. "Citizens don't quite understand yet the implications of some of the cuts that we've made," Mr. Bean said. "A lot of it has fallen on local governments. I am very concerned that we're going to have a lot of insolvencies in local governments."




America Is An Over-Indebted, Profligate, Spoiled Nation In Decline



You can't borrow your way out of a debt problem. That's the key message from our guest Charles Ortel of Newport Value Partners.

The U.S. and other developed countries have lost the discipline they once had and are now trying to borrow and spend their way out from under the mountains of debt they accumulated in recent years.  In the process, they're prolonging the agony and moving closer to defaulting. The U.S., at least, won't actually default, says Ortel, but as our situation worsens, the value of credit default swaps (insurance against default) should rise.  So Ortel continues to recommend CDSs to his clients.

5-year credit default swaps on U.S. soverign debt currently trade for about 25 basis points (which means it costs $25K per $10M of notional value). How does that compare to other countries or states?
  • Japan = 72 bps
  • United Kingdom = 56 bps
  • Germany = 21 bps
  • California = 177 bps
  • New York = 85 bps

And as for the stock market? No good news there.  Ortel sees the DOW eventually heading back down to the 5,000-6,000 level, below the lows of earlier this year. What will pull the nation out of this state of decline?

Instead of rewarding government workers with ever larger salary and benefits packages, we should fire whole swaths of them.  Instead of borrowing more to spend on "stimulus," we should get out of the way and let the private sector do its thing. In the meantime, about all investors can safely own is gold.




Ilargi: I'm with Yves Smith on this one, who says: “I’m a big Warren fan, but this is a motherhood and pie statement that is unworkable, at least as she is framing it. The idea for having a resolution is that that is presumed to be (as she states) a way to avoid forcing the firms to downsize. This is just incorrect.

There is no way a resolution authority can operate absent massive structural changes in the financial services industry. The firms are too interconnected. The network is the computer. The debt markets are now an integral part of the credit process, which is turn is essential to modern capitalism, and hence cannot be permitted to fail. Why is this so hard to understand? This fantasy plays into the industry’s hands.


I would go one further and more explicit: Warren says that just having the authority to fail firms is enough, as if Too Big To Fail will cease to exist as soon as some law or another is changed. That would do nothing, though, to address systemic risk.

Elizabeth Warren: Need way to unwind troubled firms
The United States needs a credible way to dismantle large troubled financial institutions to squash a belief that some firms will always be rescued, a top U.S. government watchdog said on Friday. "We live in a 'They won't fail' world right now," said Elizabeth Warren, who is in charge of overseeing the U.S. government's $700 billion financial bailout program.

The government is using tens of billions of dollars in taxpayer funds to prop up firms that were considered a risk to the financial system such as insurer AIG and Bank of America. As a result, there is a market perception the government will always step in to prop up large financial firms whose global reach has the potential to destabilize markets.

"I am really pushing hard on the importance of resolution authority," Warren told reporters on the sidelines of a Bloomberg Summit in Washington. "In my view resolution authority is what terminates the implicit guarantee (that the government will always backstop certain firms,)" she said.

There are bills in the U.S. Congress that would give regulators a way to resolve large troubled firms and ensure shareholders and creditors would absorb some of the losses. Some policymakers believe that the government should have the authority to break up firms before they become too large to pose a risk to the economy. Warren said resolution authority would help mitigate this risk.

"If we have a credible way to liquidate them, then the need to break them up is substantially less because they are in effect no longer too big to fail," she told reporters. The chief executive of JPMorgan Chase & Co, the second-biggest U.S. bank by assets, also said there should be a system in place to ensure that the biggest banks could fail.

In an opinion piece in the Washington Post newspaper, Jamie Dimon said regulators deserve authority to manage failures of large financial institutions, including the ability to replace management, sell assets, and wipe out shareholders and even unsecured creditors. He argued against caps on banks' size, saying increased scale can benefit customers, shareholders and the economy by permitting better products to be delivered fast and cheaply.

Separately, Warren praised a Senate financial reform bill that would create a single bank super-regulator and strip the Federal Reserve of its supervisory powers. "There is reason to question the current governance of the Federal Reserve," she said. The bill, unveiled by Senate Banking Chairman Christopher Dodd, also creates a new agency to protect consumers from risky financial products.
Warren, a Harvard Law School professor and early advocate of the consumer protection agency, has long been rumored as the candidate for the top job at such an agency. When asked if she wanted the position, Warren said: "I want there to be a consumer financial protection agency. The last thing I want is it to be about personalities."




Bair calls U.S. bank bailout "not a good thing"
Leading U.S. bank regulator Sheila Bair said on Friday that the government's capital injections into the largest banks was "probably not a good thing." Bair, the chairman of the Federal Deposit Insurance Corp, said the billions of dollars of capital infusions last year had a terrible impact on public perception of the financial industry and government regulators.

"I think at the time it sounded like the right thing to do and, again, it was part of an international effort, but I just see all the problems it's created," Bair said during an interview with PBS NewsHour. "I think we would have tried to dissuade Treasury from making these capital investments." During the height of the financial crisis that had virtually frozen credit markets, the Treasury Department in October 2008 injected $125 billion into the nine largest U.S. banks.

The capital investments were part of the $700 billion Troubled Asset Relief Program, which was originally pitched to Congress as a way to absorb banks' toxic assets but was switched to become largely a capital infusion plan to shore up banks' balance sheets and encourage them to lend. Public outcry followed the investments, which largely came to be referenced as government bailouts. Lawmakers raced to attach more conditions, such as restrictions on compensation, to the capital injections.

"It's had a terrible, terrible impact on public attitudes toward the financial system, toward the regulatory community," Bair said. "It's created all sorts of issues about government ownership of these institutions, what happens if they get in trouble again." Soon after populist anger erupted over the capital injections, banks strove to give back the funds. So far, Treasury has allowed a handful of the largest banks to return the government investments, but other firms such as Bank of America and Citigroup retain large government ownership stakes.

Bair has on occasion locked horns with other regulators and administration officials over the right method to stabilize the financial system. She has advocated a more restrained approach, and is now pushing Congress to crack down on the notion that some firms are "too big to fail."

Bair said during the interview that no one should be held accountable for the government's decision to inject capital into the largest banks, but noted that complications are still lingering. She said the government, as partial owners of some banks, are put in the difficult position of determining how to manage compensation and executive changes at these firms. "I think in retrospect that was probably not a good thing," Bair said.




Policy center director says New York state deficits amount to financial emergency
New York state's huge and growing budget gap requires government to take drastic actions to correct it, said E.J. McMahon, director of the Empire Center for New York State Policy at the Manhattan Institute. McMahon spoke to the Council of Industry, a regional trade group, Friday at the Powelton Club.

He charted flat revenues against expected spending if nothing is changed and showed a $20 billion gap looming by 2012-13. McMahon said the state must declare a financial emergency and enact a statutory freeze on public-sector wages for at least three years. State law allows this and enables contracts to be voided, he said. It would save at the rate of $2 billion a year for state, local and school taxpayers. McMahon also called for shutting down the state's pension systems to new entrants and giving them instead a plan similar to one of the alternatives for the State University system, in which a stable amount is contributed by the state and employees can add their own.

He said some parts of the state's Taylor Law, governing labor relations with public employees, should be repealed, including compulsory arbitration for police and fire unions. Other laws should also be targeted for repeal because they're costly, including the rule requiring that on most public work the "prevailing wage" be paid, usually the union scale. State spending should be capped by changing the state constitution, he said, recommending the "tax expenditure limitation" approach exemplified by Colorado.

New York state's fiscal troubles stem from too much reliance on tax revenues generated by the Wall Street financial industry and from a chronic tendency to raise spending even when revenues are collapsing, McMahon said. "They also have more volatile incomes and incomes that crash," he said. The financial sector provides 20 percent of all state tax revenues. The high earners who form the top 1 percent paid 41 percent of New York income tax in 2007, he said. He laid blame on politicians. "It's their failure to stop the growth in spending that is the underlying problem," he said. "New Yorkers are voting with their feet and heading for the exits."

No state is losing population to other states more than New York is, McMahon said. A recent study he did with Wendell Cox of Demographia found the annual net loss of New Yorkers to other states ranged from nearly 250,000 people in 2005 to a low of 126,000 last year. Nearly 60 percent of out-migrants went to Southern states, and 30 percent moved to Connecticut, New Jersey or Pennsylvania. Households moving out are taking wealth with them. They had average incomes 13 percent higher than those moving into New York in the 2006-07 period, the most recent for which data is available. The outflow drained $4.3 billion in taxpayer income from the state, the data said.

Brian Wrye of the Hudson Valley Technology Development Center in Fishkill attended. He asked McMahon whether he thought term limits for public officials would make a difference. "No," McMahon said, pointing to California, which has term limits but also big fiscal troubles. McMahon's prescription is to cut pay of state legislators in half and offer no benefits to scare off careerists. "He summed it up succinctly," Wrye said after the session. "What matters is the will of the people and the backbone of the politicians." Glenn Tanzman, of Tanzco Management Consulting in Poughkeepsie, said of McMahon’s fiscal analysis: "I think the spend side is really what we have to control . When he presented it, I didn't realize it was that much out of control."




Happy Birthday Gramm-Leach-Bliley




Is Ben Bernanke Going To Kill The Stock Market This Monday?
The market had already put together a few up-days in mid-March, but what really got the great v-shaped rally going was the announcement by Ben Bernanke that he would use his power to buy gobs of government and mortgage debt, in an attempt to lower interest rates beyond what he could do merely by cutting.

That's when the dollar began to tank, and ever since then it's been maximum pain for the bears.

The question on everyone's mind is: will Bernanke write the final chapter on Monday, when he delivers a speech in New York.

Morgan Stanley: We continue to believe that the dollar and sterling will remain the main global funding currencies over coming months, until there are signs that either Central Bank is likely to change policy
course. 

Several Fed speakers this week have had the opportunity to downplay growing market concerns about inflation expectations with the five-year breakeven inflation rate five years forward making new highs over the past week and gold rising relentlessly even on days when the dollar has performed better.

The yield curve has also continued to steepen, which has typically been associated with concerns about monetary policy being behind the curve and dollar weakness.

Federal Reserve Chairman Bernanke’s New York speech on Monday will perhaps now be key in determining the path of the dollar into year-end; any hawkish hints will likely lead to dollar strength. 

Meanwhile, the dollar's threat to the market could be significant, if the greenback moves towards anything near "fair value." This is always a dicey thing to compute with currencies (or with any market), but at least you can get a sense for how extreme the current move has been from this chart (via Morgan Stanley)

dollarupsiderisk.png

This chart, meanwhile, suggest that the Euro is significantly overvalued against several currencies.

eurocomps.png





Minyanville's Kevin Depew talks to Robert Prechter
Few market commentators have the ability to inspire the range of emotion that Robert Prechter of Elliott Wave International does. The mere mention of his name is enough to generate controversy. Whenever someone mentions stock market "perma-bears" they almost certainly have Prechter among those in mind, a label that I believe widely misses its mark.

Last week Robert Prechter was kind enough to sit down with me for a wide-ranging interview to discuss, among other things, the mechanics of what he believes will be an intensifying economic depression next year, how to prepare for it, the potential for the US dollar to form a major bottom and his Socionomics hypothesis that social mood drives social action as opposed to social action driving social mood.

Click to open in new window





Chanos Condemns ‘Monstrous Idea’ That Banks Love
Famed hedge-fund manager James Chanos in recent speeches has outlined lessons from the financial crisis. A top one: “Accounting matters a lot.” Chanos, who has flagged numerous accounting frauds over the years including the one that ultimately brought down Enron Corp., is concerned investors will quickly forget this and other warnings from the implosion of the financial system. He doesn’t have to worry about banks missing this point. As Congressional debate over financial reform intensifies, banks are committed to ensuring that accounting rules serve their own needs.

Their latest push concerns the possible creation by Congress of a council of regulators charged with overseeing firms whose failure might blow up the financial system. Banks want any such council, consisting primarily of banking regulators, to help determine how accounting rules are set, or have the power to shelve them during a crisis. The result would be more politicized accounting rules and a process that gives Congress a more direct way to influence what companies must tell investors. It would also mean investor interests take a back seat to those of the banking industry.

As Chanos, head of Kynikos Associates Ltd. and one of the most successful short sellers on Wall Street, said in an e-mail, this is “a monstrous idea.” And it isn’t just Chanos, other investors or accounting groups who are opposed. Even the U.S. Chamber of Commerce, not always known as the most investor-friendly organization, has come out against such moves.

How far this proposal gets will depend in part on what happens next week inside the House Financial Services Committee, which is working on its version of regulatory overhaul. Representative Ed Perlmutter, a Democrat from Colorado, has drafted and may propose an amendment that would allow a systemic-risk council to scrap accounting rules the members don’t like, echoing legislation he introduced earlier this year.

Even if banks don’t succeed next week, they will have plenty of other opportunities to get their way. Senate Banking Committee Chairman Christopher Dodd yesterday began circulating what is likely to become his chamber’s version of reform legislation. Any overhaul measures passed by the House and Senate will have to be reconciled by lawmakers. This will involve a lot of horse-trading, providing ample openings for bank lobbyists to keep trying to change the way accounting rules are set. And the American Bankers Association has said that such a change is a priority.

“A systemic-risk oversight council could not possibly do its job if it does not have oversight authority over accounting rulemaking,” ABA President Edward Yingling told Congress last month. That is a radical, and dangerous, departure from our current, admittedly imperfect, system. Corporate accounting standards are currently set by the Financial Accounting Standards Board. Those standards are overseen, and enforced by the Securities and Exchange Commission.

True, Congress can and does meddle in the process. Sometimes it has managed to bend the rules to its liking -- this spring the FASB watered down mark-to-market accounting rules after Congress demanded it do so. Yet a few years ago FASB successfully, and correctly, bucked Congressional opposition to recording employee stock options as an expense that reduces profit.

Giving any council of regulators a greater, and legally enshrined, say over accounting will change the game in a bad way for investors. “Accounting rules will be viewed through the narrow lens of a few large companies from specific industries,” said a letter to Congressional committee leaders from the Council of Institutional Investors, mutual-fund trade group the Investment Company Institute, Center for Audit Quality and Chamber of Commerce.

In other words, big banks and their regulators will rule the roost. The catch is that bank regulators concerned with the safety of the financial system often have different, and conflicting, aims than investors. Sometimes, bank regulators would prefer the market doesn’t know just how bad things are at a bank for fear of causing a run. Yet investors need that information if they are to make informed decisions and avoid unknowingly subsidizing weak banks.

Banks may also see this as a way to head off mark-to- market accounting rules that require them to value assets such as debt securities at market prices. Banks say the use of depressed, and volatile, market prices fuelled the financial crisis Yet many investors believe these rules give a more grounded view of the current worth of a bank’s assets, and potential losses, than estimates that management comes up with. In his presentations on crisis lessons -- given last month at a conference held at the University of Virginia and another at a Yale School of Management Leadership Forum -- Chanos said that “mark-to-market accounting was not the cause of the credit crisis.”

Indeed, mark-to-market rules are often one of the few things that stymie banks and regulators who prefer to delay losses while praying that they go away. The twist here is if banks succeed in muddying accounting rules, investors may end up charging them more for funds. As Chanos said, “Why anyone thinks that’s good public policy is beyond me.” And beyond most folks who think that markets exist to serve investors.




Bush plays economy blame game




Quantitative Easing Has Been A Monetary Failure; Persistent Deflation Means More Fed Intervention Coming Soon
by Tyler Durden

As more and more pundits discuss the spectre of inflation, with gold flying to all time highs which many explain as an inflation hedge, not to mention stock price performance which is extrapolating virtual hyperinflation, the market "truth" as determined by Fed Fund futures and options is, and continues to be, diametrically opposite. In fact, compared to even a month ago, the percentage of market participants who see the probability of the Fed rate as determined by the June 23, 2010 FOMC decision, at 0.5% and/or below is 88.4%, nearly double the 46.2% on October 1. In a little over a month, the inflationists have gone from being a majority to being barely over 10%! Whether this is due to the continued "exceptional" language in the most recent FOMC statement, or due to the continued deflationary deterioration in the economy, is frankly, irrelevant.

Another way to observe just how much credibility Mr. Geithner has with his daily claims of "dollar strength support" is the below chart tracing the convictions of those believing the Fed Fund rate will be at or below the current baseline of 0-25 bps. As one can see the yellow and red line have hit records: virtually nobody believes that even in 6 months the Fed will do anything to increase rates, regardless of how much liquidity they pump into the system, regardless of what happens to M2 and M3, regardless of whether gold or the S&P hits the 2,000 mark (and one or the other very well might).

The most graphic way to visualize this is based on actual Fed Fund futures and options: the below charts demonstrate the path of highest probability determined by actual traded instruments. It is one thing to parade on TV how inflation has gripped the economy and how people should spend, spend, spend or in the worst case speculate, speculate, speculate by buying GE stock that trades with the volatility of a Tasmanian devil on crystal meth.

The rate probability determined by the futures spot curve a year from now suggests a Fed fund rate of about 0.65% (yellow line). The most likely path probability (thick red line) ends at about 0.75% a year from today. The Fed is certain to do nothing to the rate until June of next year.

Yet even expectations may not be reflecting reality, when reality is massaged and doctored courtesy of factually plain wrong or "adjusted" economic releases by the government. The reason why even micro-inflationists may be wrong is that if one takes the Taylor Rule and extrapolates into the future, based on realistic assumptions, the outcome is quite shocking.

The chart below demonstrates what the implied Fed Fund rate should be today based on the Taylor Rule: a whopping -6.15%! In other words, due to the Fed's inability to charge people money to hold monetary assets (negative rates), QE is expected to inflate assets to the point where the deteriorating economic data drowns out the implied negative number. In practice, the Taylor result means that the economy is still bogged down in a deep deflationary slump. One side effect: look for Excess Reserves to keep rising so long as the direct threat of deflation not wiping out trillions of bad debts at bank balance sheets, persists. Another side effect: look for the Fed's "assets" to start growing exponentially quite soon as the deflationary threat truly takes hold.

What few people realize and what is most troubling, is that despite the Fed's QE program, the current Taylor implied Fed Fund Rate of -6.15% is in fact lower than what it was in January 2009: as we discussed at the time, the Taylor implied rate then was a deja vuish -6%. And this was just as Ben Bernanke was finalizing the $1.7 trillion Quantitative Easing inflation/liquification program. It stands to reason that Quantitative Easing has been not only a failure, but has resulted in a monetary environment that is actually worse than it was at the peak of the crisis. That's what central planning intervention will do an otherwise efficient economy.

So what happens if we project into the future? There is no sense in trusting the government to provide objective data: recall that recently the BLS itself stated that it was going to reduce payroll data by over 800 thousand. As a result we perform a hypothetical extrapolation into the future, using David Rosenberg's estimate of a baseline 13% unemployment into 2010. While the number is likely aggressive (yet real unemployment is materially worse: plugging the U-6 number of 17.5% into the Talor equation and you get a ridiculous, and hopefully, unrealistic deflationary number), we believe we are too generous with CPI estimates, which will likely continue being persistently low for a long time, especially with such government subsidy packages as Cash For Clunkers. As a result we get a Taylor implied rate of -4.2% by October 2010.

All this means is that Bernanke is very likely about to unleash Quantitative Easing 2: If the $1.7 trillion already thrown at the problem has not fixed it, you can bet that the Chairman will not stop here. Furthermore, as the Fed has the best perspective on the economy, which is certainly far worse than is represented, the Fed has to act fast before things escalate even more out of control. Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to, but that a parallel QE process will likely begin very shortly.

The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1. And when that happens, look for global trade to cease completely. In its quest to continue bailing out the banking system and rolling the trillions of toxic loans it refuses to accept are worthless (for if it did, equity values in the banking system would go, to zero immediately), the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China.





Muni Market Absorbs $8.4 Billion in One Week
U.S. state and local governments sold $8.4 billion of bonds this week, revised data compiled by Bloomberg show, as investor demand allowed Connecticut and a California agency to expand their offerings. The number of new issues fell from $10.7 billion last week as bond markets closed Wednesday for Veterans’ Day, Bloomberg data show. Yields on top-rated 30-year general obligation bonds tracked by Municipal Market Advisors of Concord, Massachusetts, were little changed, slipping by 0.01 percentage point to 5.02 from a week earlier. The daily index is 28 basis points higher than the year’s low reached Oct. 1 after a rally in prices.

“Over the last couple of weeks, they’ve been pushed up, but if you look at it in the totality of the year, we’ve had a big rally,” said Michael Walls, who oversees $540 million in high-yield municipal bonds for Waddell & Reed Financial Inc. in Overland Park, Kansas. “There has been some profit taking.” Municipal bonds soared this year as investors poured money into tax-exempt mutual funds, pushing down the yields that local governments needed to offer to raise money. While prices have slipped since September, municipal bonds still have 13 percent return for the year, marking the best performance since a 17 percent gain during all of 2000, according to Merrill Lynch & Co. indexes.

Connecticut officials, after getting $355 million of bond orders from small buyers led by state residents, expanded the size of its offering this week to forgo a planned second sale of its so-called economic recovery notes. After initially offering $600 million, the state sold $1.08 billion, raising funds to replenish cash used to close last year’s budget deficit and finance school construction projects. “Investors’ reaction to our sale was more than we had expected,” Connecticut Treasurer Denise Nappier said in a release today. “In just one transaction, we were able to negotiate very attractive pricing and, as a result, take advantage of economies of scale.”

A public authority in California sold $1.9 billion of bonds on behalf of local governments whose property tax revenue was tapped to help the state close its budget deficit. The debt, maturing in 2013, is backed by California’s requirement to repay the money, giving the securities the same credit rating as the state government, the lowest among its peers. The sale added to a flood of borrowing by California, with almost $12.5 billion of long-term debt tied to the state issued since Oct. 5. The bonds sold this week by the California Statewide Communities Development Authority yielded 4 percent, compared with a yield of 3 percent the agency estimated last week.

“New issues have been priced cheaper than they have in the past and thus have been well received,” Walls said. The California Statewide Communities Development Authority’s 5 percent securities due in June 2013 rose to about 104.5 cents on the dollar today to yield 3.64 percent, 36 basis points less than at issue, data reported to the Municipal Securities Rulemaking Board show.




FDIC Moves Forward With $45 Billion Plan To Refill Fund
The Federal Deposit Insurance Corp. moved Thursday to refill its fund protecting consumers' deposits, finalizing a plan to raise $45 billion by having banks prepay three years of premiums. The agency's five-member board gave final approval to a multi-step program that will require U.S. banks to prepay their quarterly assessments for 2010 through 2012 when they pay their fourth-quarter premiums at the end of 2009. Additionally, banks will face a three-basis-point increase in their premium rates beginning in 2011.

The move comes in response to the rising number of bank failures, which hit 120 for the year last Friday and are at levels not seen since the savings-and-loan crisis. The FDIC currently estimates that the cost of bank failures will reach $100 billion from 2009 through 2013, an estimate that has repeatedly been revised upward. Those failures have put a strain on the FDIC's deposit insurance fund. Agency staff said Thursday that its liquidity needs would outpace its assets on hand beginning in the first quarter of 2010 without changes to the premium plan, and that through 2011 "liquidity needs could significantly exceed liquid assets on hand."

That does not mean the FDIC doesn't have cash available; the agency had roughly $22 billion in liquid assets as of June 30, though subsequent failures have reduced that figure. Staff did make some changes to the rule that was introduced in late September. The FDIC will repay banks any unused premiums beginning in June 2013, rather than December 2014 as originally proposed, and eased the process for banks requesting an exemption from the prepayment plan.

FDIC officials said the plan would allow it to replenish its liquidity without being too onerous on the banking industry during a time of weakness. An alternative would have been to assess a second special fee on the industry--$5.6 billion was already collected earlier this year--but that plan was abandoned because of the potential negative effect on banks. Banking industry groups lauded the FDIC's decision. "It strikes the right balance between making sure the FDIC has the cash necessary to meet its obligations and not unduly impairing banks' ability to meet their obligations to their communities," said James Chessen, chief economist for the American Bankers Association.




Citigroup, JPMorgan, Wells Fargo End Extra Checking Insurance
Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. will stop insuring checking accounts in the U.S. above the standard $250,000 limit, a year after the government set up the program to ease fears of deposit runs. The banks will exit the Federal Deposit Insurance Corp.’s Transaction Account Guarantee Program on Dec. 31, spokesmen for the three companies said today. The program was among emergency measures created in October 2008 to shore up confidence in the banking system and avert a collapse of financial markets. Bank of America Corp. had said Oct. 16 it would opt out.

In August, the FDIC said it would increase fees for banks that stay in the TAG program past Dec. 31. U.S. officials are trying to wean banks off bailout programs and guarantees that were intended to be temporary. Banks may declare plans to exit partly because staying in would signal weakness, Standard & Poor’s analyst Tanya Azarchs said. “It’ll be construed as a sign of being worried about something,” Azarchs said.

The checking-account insurance program is set to end on June 30, 2010, and the FDIC ended its guarantees of bank bonds on Oct. 31. New York-based Citigroup, the third-biggest U.S. bank by assets, was the leading user of that program, selling $65 billion of FDIC-backed debt over the past year. It accepted a $45 billion bailout last year. “As the economic environment normalizes, and with Citi now one of the best-capitalized financial institutions in the world with a deliberately liquid and flexible balance sheet, certain temporary programs have served their intended purpose,” Citigroup spokesman Alex Samuelson said. He declined to say how much the bank will save in fees.

Citigroup plans to notify corporate customers this week and next, Samuelson said. Visitors to the branches will see posters and other signs explaining the change, he said. The bank posted a notice on its Citibank Online sign-on site. The TAG program covers non-interest-bearing accounts, such as checking, when balances exceed the $250,000 cap available for standard deposit insurance. About 7,100 banks signed up, and about $700 billion of deposits were covered that otherwise wouldn’t have qualified for insurance, according to the FDIC.

Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by assets, disclosed plans to opt out of the program in October. Christine Holevas, a spokeswoman for No. 2 JPMorgan, said in an e-mail today that the New York-based lender will opt out. San Francisco-based Wells Fargo, the fourth- biggest bank, also will exit, spokeswoman Richele Messick wrote in an e-mail. U.S. Bancorp, based in Minneapolis, and New York-based Bank of New York Mellon Corp. said Nov. 2 they would opt out as of Dec. 31.

Banks have complained about the cost of the guarantees, Azarchs said. In Citigroup’s case, the extra insurance might be unnecessary because most corporate customers believe the government won’t let the bank fail, she said. “The environment around them has improved a lot, and people generally feel that the government ownership provides a lot of comfort,” Azarchs said. “It is simply an economic cost-benefit analysis, as to whether they think they’re getting enough value for the price that the guarantee carries.”

In November 2008, following a run that forced Wachovia Corp. to seek a rescue, Citigroup had to seek $20 billion of bailout funds, on top of $25 billion received the previous month from the Troubled Asset Relief Program. Both regulators and Citigroup officials worried at the time that the bank might run short of funds needed to pay obligations and meet expected withdrawals, according to a Nov. 6 report by the Congressional Oversight Panel. Citigroup has raised $93 billion of capital since late 2007, including government funds. It has almost doubled its cash to $244.2 billion, the biggest such stockpile of any U.S. bank.




Patchy Euro-Zone Recovery Reflects Imbalances
European economies are showing a two-speed recovery from the 2008-2009 economic recession, with industrial countries in the region's economic core setting the pace. Fresh data released Friday showed Germany and France posting their second quarter of economic expansion in the third quarter. And Italy experienced its first quarterly growth in gross domestic product since the downturn began. But Greece, Finland and Spain were still contracting. The new European Union members in the Baltics and along the trading bloc's periphery also remained mired in recession, having been hit hardest by recent financial crisis.

Data released by the Eurostat statistics office, the 27-country EU economy expanded by 0.2% in the quarter from the previous period. The smaller grouping of 16 countries sharing the euro currency rose by a faster 0.4% rate. The recovery followed a year of massive fiscal and monetary stimulus programs by governments and central banks to turn around the region's worst recession in 60 years. But the emerging recovery is patchy, traceable to national differences ranging from fiscal policies to industry profiles. It also could suffer a relapse if rising unemployment chills a nascent rebound in consumer spending, as government officials have warned.

"The bad times are over but the good times have not started, yet," said ING economist Carsten Brzeski. In the euro zone, Germany's export-oriented economy is benefiting from the resurgence in global demand, a trend also helping French and Italian industry. Spain is held back by a 19% unemployment rate after its housing market collapsed a year ago. Greece extended its economic contraction in the third quarter, and at a time when the government is under EU pressure to dramatically throttle back spending to reduce budget deficits.

The two-track recovery in Europe poses challenges for the European Central Bank, which already is beginning to consider the timing and pace of withdrawing monetary stimulus that had supported the euro-zone economy and banking system over the past year. "The European Central Bank faces the major challenge of balancing a return to growth in the stronger, large euro-zone economies with ongoing weakness in economies like Spain, Greece and Ireland," said Charles Davis, senior economist for the Centre for Economics and Business Research Ltd. in London.

Among the other EU countries, available third-quarter GDP data shows less promise. The U.K. economy contracted 0.4% -- a reflection of how dependent it is on financial services, which were hit particularly hard. And U.K. officials are warning of a slow and gradual comeback. "From a U.K. perspective, today's figures do not make pleasant reading," said Mr. Davis. "According to the data only Cyprus, Estonia, Hungary and Romania suffered larger quarterly contractions in GDP than the U.K. in the third quarter."

For the EU as a whole, economists had expected a stronger outcome for the last period given large production gains in industrial nations such as Germany and Italy. "This GDP growth [is] entirely a windfall from a policy-induced spurt of activity in the auto sector," said Carl Weinberg, chief European economist for high frequency economics. Euro-zone GDP could even contract again in the final three months of the year as car subsidies are phased out, he said. The ravages of the global downturn were still vivid in the third-quarter data.

Both Italian and German GDP were down by more from a year earlier -- 5.9% and 5.8% respectively -- than the 4.8% yearly contraction for the euro zone as a whole. Both countries have run tighter fiscal policies than their peers in the currency union this year. The broad absence of positive news about domestic demand supports the view that the euro-zone economy is far from healed. Sluggish household demand and business investment makes Europe vulnerable to a slowdown in the global recovery, said Aurelio Maccario, chief euro-zone economist for UniCredit. "It's not easy to see what could trigger a sustainable upswing," he said.




Morgan Stanley’s Roach Says Yuan Concern 'Overblown'
Concerns over China’s currency policy are “seriously overblown” and critics should let the country decide how it wants to manage the yuan to ensure growth, Morgan Stanley Asia Chairman Stephen Roach said. The world’s third-largest economy is still dependent on exports for its recovery and a “sharp appreciation” in the yuan would jeopardize the rebound, Roach said in an interview in Singapore today. The government will probably maintain stimulus measures until threats to rising unemployment and social stability have faded, he said.

Pressure is rising on China to abandon the currency’s fix to the dollar that policy makers implemented in July 2008. Analysts say a stronger yuan would help shift China’s economy toward domestic demand and away from a reliance on exports. “The desire on the part of Chinese authorities to maintain a relatively stable anchor is a very important aspect of China’s own stability in this post-crisis climate,” Roach said. “The world should turn its attention elsewhere and let China really figure out the right currency policy for its sustainable growth.”

Roach said at a business summit in Singapore today that recent trade tension between the U.S. and China “needs to be addressed immediately,” speaking a day before President Barack Obama arrives in Shanghai. China’s economic rebalancing will put upward pressure on the yuan, though a currency adjustment isn’t a prerequisite for the changes to take place, International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday. He added that the nation had the “right way” of addressing the global crisis and reorienting its economy.

China has no plans to alter its policy of step-by-step changes in the value of its currency, Assistant Finance Minister Zhu Guangyao said in Singapore Nov. 12. It has maintained the yuan’s value at around 6.83 against the dollar since July 2008. Gross domestic product expanded 8.9 percent in the third quarter from a year earlier, boosted by a 4 trillion yuan ($585 billion) stimulus package and record lending. China may introduce another fiscal stimulus package in mid- 2010 as the effects of the current plan taper off, Roach said. In the longer term, the nation will reduce its reliance on exports, he said.

“You’re going to see a new China -- a China that rises to the challenge imparted by this crisis,” Roach said at the business conference. The financial turmoil and global recession have been a “wake-up call” for the region, he added -- proving that Asian economies can “no longer depend on the vigor of the American consumer.”




Virtuous Bankers? Really!?!
The Great Vampire Squid has gotten religion. In an interview with The Sunday Times of London, the cocky chief of Goldman Sachs said he understands that a lot of people are “mad and bent out of shape” at blood-sucking banks. “I know I could slit my wrists and people would cheer,” Lloyd Blankfein, the C.E.O., told the reporter John Arlidge.

But the little people who are boiling simply don’t understand. And Rolling Stone’s Matt Taibbi, who unforgettably labeled Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” doesn’t understand. Banks, Blankfein explained, are really serving the greater good. “We help companies to grow by helping them to raise capital,” he said. “Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. We have a social purpose.”

When Arlidge asked whether it’s possible to make too much money, whether Goldman will ignore the people howling at the moon with rage and go on raking it in, getting richer than God, Blankfein grinned impishly and said he was “doing God’s work.” Whether he knows it, he’s referring back to The Protestant Ethic and The Spirit of Capitalism — except, of course, the Calvinists would have been outraged by the banks’ vicious — not virtuous — cycle of greed and concupiscence.

Blankfein’s trickle-down catechism isn’t working. Now we have two economies. We have recovering banks while we have 10-plus percent unemployment and 17.5 percent underemployment. The gross thing about the Wall Street of the last decade is how much its success was not shared with society. Goldmine Sachs, as it’s known, is out for Goldmine Sachs. As many Americans continue to struggle, Goldman, Morgan Stanley and JPMorgan Chase, banks that took government bailout money after throwing the entire world into crisis, have said they will dish out $30 billion in bonuses — up 60 percent from last year.

The saying used to be, whatever happens, the lawyers win. Now, it’s whatever happens, the bankers win. Under pressure from regulators, who were trying to ensure that long-term performance was rewarded, the banks agreed to award more in stock, deferring cash payments. But as The Times reported this week, the Goldman executives who got stock options instead of bonuses last year, at market lows, got a windfall — so it had nothing to do with bank employees’ performance.

“The company gave its general counsel, for example, 104,868 stock options and 14,117 shares in December, when the bank’s stock was around $78,” Louise Story wrote for The Times. “Now the bank’s shares have more than doubled in value, making that stock and option award worth nearly $12 million.” As one former Goldman banker told Arlidge, the culture there is “completely money-obsessed. ... There’s always room — need — for more. If you are not getting a bigger house or a bigger boat, you’re falling behind. It’s an addiction.”

It’s an addiction that Washington has done little to quell. President Obama has not been strong on the issue, and Timothy Geithner coddles the wanton bankers whenever they freak out that they might not be able to put in their new pools next summer. The bankers try to dismiss calls for regulation as populist ravings, but the insane inequity of it cannot be dismissed. No sooner had the Senate Banking Committee Chairman Chris Dodd announced his plan to overhaul financial regulation Tuesday than compensation experts declared it toothless.

The banks and their lobbyists wheedled concession after concession out of Washington and knocked down proposed inhibition after inhibition. Now the banks are laughing all the way to the bank. “Saturday Night Live” was tougher on Goldman Sachs than the government, giving the firm flak about commandeering 200 doses of the swine flu vaccine — the same amount as Lenox Hill Hospital got — while so many at-risk Americans wait.

“Can you not read how mad people are at you?” demanded Amy Poehler. “When most people saw the headline ‘Goldman Sachs Gets Swine Flu Vaccine’ they were superhappy until they saw the word ‘vaccine.’ ” Seth Meyers chimed in: “Also, Centers for Disease Control, you sent the vaccine to Wall Street before schools and hospitals? Really!?! Were you worried the swine flu might spread to the Hamptons and St. Barts? These are the least contagious people in the world. They don’t even touch their own car-door handles.” And as far as doing God’s work, I think the bankers who took government money and then gave out obscene bonuses are the same self-interested sorts Jesus threw out of the temple.




Ukraine credit rating sinks; state firm seeks debt help
Fitch cut Ukraine's credit rating on Thursday and said a delay in IMF funding coupled with a huge budget gap would lead to more instability, a warning underscored by another state firm seeking to restructure its debts. Ukraine is in the grip of a deep economic recession which has been made worse by political rivalry, intensified in the run up to a January presidential election, that has derailed Kiev's co-operation with the International Monetary Fund.

Prime Minister Yulia Tymoshenko has already warned a delay in the IMF's release of $3.8 billion this month would make life "extremely difficult" for Ukraine and other ministers have said Kiev's ability to make timely payments for Russian gas could be affected. Such warnings unnerve European leaders who want to avoid another energy row between Kiev and Moscow during the winter similar to January when Russia cut gas supplies, including those intended to transit Ukraine, and left hundreds of thousands in the cold.

Tymoshenko blames the IMF delay on President Viktor Yushchenko, a bitter rival in the election, because he approved a minimum wage rise that the fund opposed. He accuses her of driving the country to ruin through populist policies funded by borrowed billions. Fitch estimated this year's budget gap would balloon to 11 percent of gross domestic product -- including government aid given to state energy company Naftogaz which purchases the gas from Russia. The IMF funds would have helped cover that gap.

But now, "Fitch sees an elevated risk that Ukraine could resort more heavily to monetary financing via central bank providing liquidity to banks -- effectively printing money. "This would in turn risk undermining the fragile confidence in the currency and the banking system, and/or a rapid loss of foreign exchange reserves." Fitch spelled out the dire figures behind its 'Negative' outlook for its B- rating: the national currency, the hryvnia, has fallen 60 percent in a year; GDP contracted more than 18 percent in the second quarter compared with a year ago; and bad loans amount to 30 percent of all lending.

State railway company Ukrzalyznitsya has approached its creditors to restructure its dollar loan just a week after Naftogaz, often at the centre of the gas rows with Russia, managed to change the terms of its foreign debts. Acting Finance Minister Ihor Umansky said on Thursday the firm failed to repay $118 million of the $550 million syndicated loan that had been organised by Barclays.

The railway company "should have paid $110 million of the debt and $8 million in coupon payments," Umansky told reporters. "Ukrzalyznitsya has made some proposals to the holders of the debt, which was organised by Barclays." The loan was organised in July 2007 and matures next year, according to Thomson Reuters Loan Pricing Corp data. It had a 2-year grace period, which would have run out this summer.

Umansky said the size of the loan was $440 million after the company made some of the principal payments. Ukrzalyznitsya itself was not immediately available for comment. Analysts believe the debt did not have a state guarantee. The government did not guarantee Naftogaz' $500 million Eurobond, whose looming maturity at the end of September sparked the company's restructuring talks.

But some worry this loan has clauses that would force the company to repay other debts in the event of a default, including a $700 million loan that may have a state guarantee. Naftogaz finally issued a $1.595 billion 5-year Eurobond with a sovereign guarantee in exchange for its earlier Eurobond and three bilateral loans.




Minsky to Bernanke: "Size Matters!"
Size matters. And it particularly matters when the size of the financial system grossly exceeds the productive capacity of the underlying economy. Then problems arise. Surplus capital flows into paper assets triggering a boom. Then speculators pile in driving asset prices higher. Margins grow, debts balloon, and bubbles emerge. The frenzy finally ends when the debts can no longer be serviced and the bubble begins to unwind, sometimes violently. As gas escapes; credit tightens, businesses are forced to cut back, asset prices plunge and unemployment soars. Deflation spreads to every sector. Eventually, the government steps in to rescue the financial system while the broader economy slumps into a coma.

The crisis that started two years ago, followed this same pattern. A meltdown in subprime mortgages sent the dominoes tumbling; the secondary market collapsed, and stock markets went into freefall. When Lehman Bros flopped, a sharp correction turned into a full-blown panic. Lehman tipped-off investors that that the entire multi-trillion dollar market for securitized loans was built on sand. Without price discovery, via conventional market transactions, no one knew what mortgage-backed securities (MBS) and other exotic debt-instruments were really worth. That sparked a global sell-off. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed's emergency intervention pulled the system back from the brink, but at great cost. Even now, the true value of the so-called toxic assets remains unknown. The Fed and Treasury have derailed attempts to create a public auction facility--like the Resolution Trust Corporation (RTC)--where prices can be determined and assets can be sold. Billions in toxic waste now clog the Fed's balance sheet. Ultimately, the losses will be passed on to the taxpayer.

Now that the economy is no longer on steroids, the financial system needs to be downsized. The housing/equities bubble was generated by over-consumption that required high levels of debt-spending. That model requires cheap money and easy access to credit, conditions no longer exist. The economy has reset at a lower level of economic activity, so changes need to be made. The financial system needs to shrink.

The problem is, the Fed's "lending facilities" have removed any incentive for financial institutions to deleverage. Asset prices are propped up by low interest, rotating loans on dodgy collateral. While household's have suffered humongous losses (of nearly $14 trillion) in home equity and retirement savings; the financial behemoths have muddled through largely unscathed. The Fed handed Wall Street a golden parachute while ordinary working stiffs were kicked to the curb. That's why household spending has plunged while the big brokerage houses are gearing up. Here's an excerpt from an article by former Morgan Stanley analyst Andy Xie which explains what's really going on:

"First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding." (Andy Xie, "Why One Good Bubble Deserves Another", Caijing.com)

See? The financial Goliaths are still leveraged to their eyeballs.

Fed chair Ben Bernanke has bent-over-backwards to preserve the system in its present form. That's why the lending facilities should be viewed with a degree of skepticism. They weren't set up merely to rescue the system from disaster, but to keep asset prices artificially high so institutions could continue to maximize profits via risky investments. And, it's worked, too. The S&P 500 is up over 60 percent since March 9. Still, even though Bernanke has succeeded in resuscitating the flagging financial sector, investors remain pessimistic. According to Bloomberg News:

"An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis." (Bloomberg News)

Few people seem to believe in the much-ballyhooed economic recovery. And even though the media triumphantly announced the "end of the recession" last week (when GDP came in at 3.5 percent) a closer look at the data, leaves room for doubt. Goldman Sachs analysts put it like this:

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter." ( http://www.zerohedge.com/article/hedging-their-bets )

Positive growth is an illusion created by government spending. In fact, the economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn't be confused with a real recovery.

Bernanke is a scholar of the Great Depression. He is familiar with Hyman Minsky and Minsky's "Financial Instability Hypothesis" (FIH), which states that, "A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."

Boston Globe Correspondent, Stephen Mihm, summarized Minsky's theory in his article "When Capitalism Fails":

"In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers.

The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system." (When Capitailsm Fails, Stephen Mihn, Boston Globe)

Stability leads to instability. By zeroing in on capitalism's genetic flaws, Minsky countered the prevailing orthodoxy that markets are fundamentally efficient and rational. He not only showed that capitalism was inherently crisis-prone, but also, that it was most vulnerable during those periods which seemed to be most stable. (like during Greenspan's "Great Moderation") Stability invites speculation and risk-taking. Investors are buoyed by market euphoria and fat returns; borrowing to purchase dodgy equities turns into a mania which distorts prices and leads to massive credit bubbles. Eventually, the foundation cracks and debts cannot be rolled over. Then markets tumble.

The point is, Bernanke knows that a bloated financial system poses unnecessary risks to the economy; just as he knows he should wind-down existing lending programs (which just encourage more speculation) and focus on rebuilding household balance sheets. The only way to put the economy back on a solid foundation is by helping struggling workers get back on their feet so they can create more demand. The objective should be full employment and broad, sustained wage growth, which is precisely what Minsky's recommended.

Stephen Mihm again: "The government - or what Minsky liked to call 'Big Government' - should become the 'employer of last resort,' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder." ("Why Capitalism Fails, by Stephen Mihm, Boston Globe)

Minsky's analysis not only sheds light on the causes of the current crisis, but also provides a practical way to fix the system. Too bad Bernanke's not paying attention.




Gordon Brown to apologise for Britain's 'shameful' child migration policies
Britain is to join Australia in issuing an official apology for the "shameful" export of tens of thousands of children to Commonwealth countries with the promise of a better life, only for many of them to end up abused and neglected. In what Ed Balls, the children secretary, described as "stain on our society" the child migrant programmes saw poor, orphaned and illegitimate children sent to Australia, Canada and other former colonies until as recently as the late 1960s, often without the knowledge of their families.

Many ended up in institutions, many suffered abuse and neglect and many others were used as "slave labour" on farms. Now after years of campaigning from pressure groups, Gordon Brown has agreed to meet with representatives of the surviving children before making a formal apology next year. Mr Balls said the apology would be "symbolically very important". "I think it is important that we say to the children who are now adults and older people and to their offspring that this is something that we look back on in shame," he said. "It would never happen today. But I think it is right that as a society when we look back and see things which we now know were morally wrong, that we are willing to say we're sorry."

The government has estimated that a total of 150,000 British children may have been shipped abroad under a variety of programs that operated between the early 19th century and 1967. A 2001 Australian report said that between 6,000 and 30,000 children from Britain and Malta, often taken from unmarried mothers or impoverished families, were sent alone to Australia as migrants during the 20th century. Some of the children were told, wrongly, that they were orphans. The migration was intended to stop the children being a burden on the British state while supplying the receiving countries with potential workers.

A 1998 British parliamentary inquiry noted that "a further motive was racist: the importation of 'good white stock' was seen as a desirable policy objective in the developing British Colonies". Mr Balls said that while an apology would not "take away the suffering" it was important to the victims to admit it was wrong and to make sure lessons are learnt. He said the government was talking to the victims' organisation to work out how to frame the apology. "These were children who were shipped out of the country, often without their parents even knowing, went on to be labourers thousands and thousands of miles away, suffered physical and sometimes sexual abuse as well and it was something that was sanctioned by government and that is no way to treat children," he said,

"I think there have been discussions going on for some months about how to do this but to be honest it’s a matter of shame for our country and countries around the world that this terrible policy happened for so many years and decades and was actually government policy." The issue of the UK child migrants was investigated in 1998 by the Commons health select committee, a process which led to the Department of Health drawing up guidance for families to trace those sent away. Kevin Barron, the chairman, said Mr Brown wrote to him over the weekend to confirm he would issue an apology in the new year.

The Prime Minister told him "the time is now right" for the UK government to apologise for the "misguided policies" of previous governments. However some survivors felt the apology was too little too late. Harold Haig, the secretary of the International Child Migrants Association, said he was appalled that the Australian apology has come before any British apology. "Gordon Brown should hang his head in shame," he said. "He is allowing the country that we were deported to to apologise before the country where we were born. It is an absolute disgrace. He should hang his head in shame."


94 comments:

Cheryl said...

Ilargi,

Interesting post with much to think about.

Where do you get the "$8 trillion" on the Fed balance sheet. Last time I checked, the balance sheet was only $1.8 trillion.

Greenpa said...

One more pothole in progress that is only growing larger- world hunger. The UN now says there are 1,000,000,000 people on the planet who are "hungry."

http://www.cnn.com/2009/WORLD/europe/11/15/un.hunger/index.html

Actually, the headlines say "starving"- how silly. Can't really be that bad! Let them eat tofu!

No, I don't find it funny at all- this is one subject that can make me quickly boil with real, live genuine fury. Easily angry enough to punch faces in- just give me the right face.

All history says- starvation causes governments to collapse. We now have 1/6 of the entire world on the edge of ultimate desperation. And it's not getting better; anywhere. Check your local newspaper for how the "food shelf" programs are doing right in your backyard. There's only one answer- feeding way more people, and out of money.

I do think the $30 billion in Wall Street bonuses might indeed light some fuses, when the UN is begging, literally, for $4B to feed the starving. Slow fuses- but fuses all the same.

So will JP Sacks step forward and just give the UN a measly $4 Bil? What a fabulous gesture that would be! Any chance they'd be that smart? I really don't think so.

John Hemingway said...

Saludos de Miami! Liked your intro today Ilargi:-) I don't know if you have have ever visited Miami but if you have you know all those humongously tall condos built along Biscayne blvd in the '90's and in last few years? Well, a friend of mine tells me that they're about 80 to 90% unoccupied. They can't find any buyers, or even renters. The crisis has hit the housing industry here hard.

Greg Tew said...

Beginning in 1996, I wrote a series of academic papers arguing that increasing house size and the decreasing rate of personal savings were linked and that if the pattern continued there would be big trouble. The pattern did continue but the trouble took longer to arrive than I guessed. So, I agree completely that the timing of problems are hard to predict but the results are inevitable.

About 4 years ago I began arguing that economic globalization can only have one outcome. Our "standard of living" will drop until it stabilizes somewhere below the middle of the gap between where we were then and that of developing nations. Meeting below the middle is simply due to the fact that we are greatly outnumbered by people willing to work for far less than us. With the flood of outsourced jobs to low wage countries it just can't work out any other way. The gap between the haves and have-nots will grow and unemployment will grow. The stock markets can continue to climb as long as a couple of billion people in Asia have increasing incomes, thus the ability to buy stuff from public companies with stock trading in markets around the world.

Again, with the timing, it seems the housing bubble simply delayed and masked the real problem, the fact that we don't really do much real work in the US. High paying middle man jobs are disappearing here every day. And with the loss of those jobs, the people that run the tanning salons, teach our children, and fix our pot holes, lose their jobs, etc, etc. I suspect we will look back at 10% unemployment and find it hard to imagine the time when every adult had the expectation of a salaried job in a non-essential business....

The last chapter in our story will be how well we adjust to smaller lives with far less stuff, and a lot more free time. Can we make a graceful adjustment to a simple but high quality of life, or will we fight to hang on to meaningless high standards of living?

David said...

So, what is the truth? Well, there are two versions of the Truth.

The herd version, and the contrarian version. In many ways, these categories can be similarily compared to the viewpoint of the Fundamentalist (black or white) and the Liberal (many shades of grey).

The Truth is whatever the herd decides is the truth. And the truth is white, and all the black is just so much noise to be ignored.

The contrarian view is that what the herd regards as Truth is merely tunnel vision -- caused by blinders which restrict the view to only a tiny fraction of the data. The contrarians choose to throw off all blinders so as to glean the 360-degree view of all the data that is viewable, of which black, and white, are only two of the 100 data points available.

The herd emphasizes that its dogma is the only way to gain wealth -- the way the herd is currently moving, until it changes its mind. Then that direction becomes the new dogma.

The contrarians emphasize that there are several time-tested pathways available to preserve wealth, for now and for the future.

Unfortunately, since the herd utterly dominates the field because of overwhelming numbers, the direction of the herd will prevail in the pursuit of greater and greater wealth, as there is no force to alter it.

Those who depart the herd (or never joined from the start) will feel the rejection of the herd, including many of their own family and friends, but they will continue to follow the precepts of thier own best judgements.

And as the herd charges ahead, with each individual focused intently on the buttocks immediately in front of its face, their eyes are opened only when the blinders are pushed off by the onrushing wind which greets them as they all plunge off the cliff.

As everything turns from white, to black.

getyourselfconnected said...

Ilargi,
This one just rocks! Thanks for the efforts, I appreciate the work you do here.

el gallinazo said...

We all know where the equities markets are heading in the end. And it's your blog, Ilargi, and you have the right to focus on what you chose. That's what the "front page" is all about. But you say economics is a false cover for political decisions. And the equities markets have a bearing on politics, because the suckers rally is the last bastion of the government, and Fed/Bankers to push their green shoots bullshit while they steal what's left.

The managers of the pension funds are basically doubled down in the equities now because they can't keep the funds alive on the low interest rates. So when the market crashes, there go the public pensions, the 401-k's, and retirement before 90. When the markets crash the true deflationary spiral will begin as the herd will shift to a pessimism and desperation not seen in 80 years.

Economics is politics, and the crash is going to have a huge political effect. So how long can TPTB keep it at bay by baffling the common man with its bullshit. Or are Stoneleigh and Prechter correct and the recent optimism is 100 percent herd instinct reaction and the 24 trillion TPTB shoveled into the septic tank has had absolutely no effect to delay the date of the crash.

The truth is that we will never know. But IMO the equities crash will mark a huge turning point in the political mood of the country, and will probably result in the rise of a Hitlerian populist figure, and it is not unreasonable for even people with no personal investment in the market to take an interest.

This site knows that I have shorted the equities market, so I have a personal interest in it as well. But there are many here, like VK, for example, who are just plain interested. Furthermore, Stoneleigh, who is apparently a partner in this blog site, has felt free to comment on what she expects the equities markets to do, based on socioeconomics, though these speculation form only a small part of her work here. But the point is, that she does not consider it out of bounds.

So though I do not disagree in the least that the housing market and unemployment are the driving engines and the numbers to be watched, the equities crash will be a major psychological event with major political ramifications, and venting your spleen on the readership here for speculating on its timing in the comment section is uncalled for.

So that's where my spleen it at :-)

Chaos said...

Ridiculous article of the week: Coming Soon: Jobs! Daniel Gross, Slate and Newsweek.

Completely without substance...it's just amazing how little light shines in the MSM.

http://www.slate.com/id/2235477/

David said...

El G,

What you said. . .

Rock on.

My the Devil take the hindmost,

and the Angel take the foremost.

D.

Ilargi said...

El G,

I am trying to provide a framework in which we can talk about what we want. And I have for quite a long time seen that focus move towards numbers that have little meaning vis a vis why Stoneleigh and I started this joint. That doesn't mean we forgot that you and others play markets trying to make a buck. No moral judgment included.

=========

Cheryl,

The $8 trillion number is in one of Dylan Ratigan's clips, and also in the previous ones where that spiffy table of his outlines the $23.7 trillion inserted into the US financial system.



.

getyourselfconnected said...

I really have limited positions in the stock market on principal: I refuse to play in that playgroung cus its rigged.

007Billion said...

Harmonics.
I haven't read this anywhere.
I see a lot of charts with wave forms.
Something about the Carry Trade currently bouncing around the globe and the lockstep stocks, currencies and commodities seem to be in these weeks is reminding me of that bridge in Tacoma twisting and rocking over the Puget Sound in newsreel.
Post that pic in your next posting.

If we got wave forms of credit bouncing back and forth in arbitrage, liquidity, and trade at some point when the frequencies and amplitudes compound, I think the stresses will become too great even for our financial machines to cancel out.
Are we entering into a final phase where raw natural physics wrenches away whatever veil is left of our financial wizardry?
Someone can win a Nobel if they knew how to apply harmonics to the current situation because I don't know if the international markets have ever come across such extreme changes and synchronization.

Des said...

General question:

What does one do with term and or universal life insurance that likely will not be payed out even in the event of death when the great financial institutions are all insolvent and incapable of honouring all the "claims"?

I feel like collateralizing the universal policy with a bank and getting some of the money now in return for surrendering the policy to the said bank. Just my parting gift to the fraudsters (bankers)!

007Billion said...

To belabor the point a bit further, what if it's not gravity that brings down the markets while we're mesmerized by Ilargi's cartoon figure frozen in mid-air?
I'm thinking about the Mandelbrot interview at FT posted a few weeks back.
It's the major fluctuation in prices that count. And price changes cannot be described by physical phenomenon like Brownian Motion. But...but our interaction with price changes, our manipulation of markets can contribute in quantifiable ways that lend it to a volatility with a wave function.
Think about Bear Stearns' hedge funds and the CDS as an example. Everyone was betting the same way, amplifying the change of prices in the CDO's. That's harmonics in action.
This time around, much larger frequencies are at play.
So no, it's not a question of when things will fall, its a question of how much things twist and break off in the coming months. But to know that would require an analysis of how much stress the system can take and how these forces synchronize by combing the data.

Joseph j7uy5 said...

Elizabeth Warren is a nice person. She is also very smart, and we should listen to her. However, like many decent, smart people, she cannot understand evil.

Her point is this: if the government has a means of dismantling large financial institutions (a bazooka, if you will), then they won't have to use it. The idea is that if everyone knows that even large banks can be taken down, then there will not be a perception of an implicit government guarantee of the banks. Without the implicit guarantee, there is no moral hazard. Thus, if you have a bazooka, you will never have to pull the trigger.

We all know how that worked the last time.

Think about gangster drug dealers. They know they could get shot, or arrested. Some of them even set aside money for those contingencies. They don't want their family stuck paying for a funeral. But still, they go right out and do what they do.

Banksters have exactly the same mentality. The threat, of taking down the bank, will not change their behavior one iota. If they did change their behavior in response to the threat, they would lose status.

BTW, Greenspan had the same problem. He was shocked to learn that corporate officers would not fervently protect their companies from the possibility of bankruptcy. They did not, and this has not changed. Sure, bankruptcy entails a loss of face. But that is not as big of a narcissistic insult, as it is to back down from a threat.

snuffy said...

Ilarge

Thank you once again for giving me a needed dose of "reality".There are times when I see the small twitches and movements usually associated with things firing back up again,but reviewing your info puts me back in thew "continue battening down hatches" mode at my little hidout.

Paul, I can understand why he might get a bit grumpy about this blog wandering a bit...

He is just so damn good at presenting his case..sooo..seeing the focus shift...

Spent the day getting some free scrap steel from a shop that is closing.Had a long talk with the owner [who is nearly a neighbor]he saw this coming a year ago,when many shops began "buying"work.This consists of bidding the work "AT COST"w/no profit.You can only do this so long,until one of the mistakes that are inevitably made bidding work bites you hard in a very soft spot.

Then you go down...,and the question is how much do you owe,to whom,and how soon will they send uncle Guido to come get their money...

I am see this played out with minor variations everywhere..

The idea of Mr. helicopter being in charge of the world economy...[which he is]...should frighten all rational adults with more than 2 brain cells working in tandem.


Its weird knowing that he is the one deciding how the chips will fall in this mess.[the banker in chief]I wonder how many of his old friends were on the list of companies that got bailed out...and which ones ,run by folks he considered skunks are still in business

I still have trouble pointing to the exact way that a million or so a month jobs are going down is calculated...The reason I ask is my brother is questioning that number,and I want to beat him over the head with it...he still has some optimism left..and I feel the need to remove it

Later folks...sleepytime

snuffy

KJM said...

el gallizano wrote "So when the market crashes, there go the public pensions, the 401-k's,"

I don't know if this would be called good news or bad news, but 401Ks are insured for $250k same as bank accounts. So - the broker/gamblers may indeed crash them, but the only ones to suffer the loss will be the taxpayers in yet another bailout.

Kimberly said...

the world 1 year from today...

I'm reposting the questions that were asked in a post yesterday.

Whether or not littlebobby whatever is a troll is of less interest to me than the answers to some of his questions.

My friends and family ask all the time why I bother to read doomer blogs. Well my answer is that doom blogs help me prepare mentally and to a small degree materially also.

Why doesn't anybody take a stab at littlebobby's questions since the answers would help us all prepare. I'll give it a go...

U3 unemployment = 13%
U6 unemployment = 25%
Median House Price (% decline) = 40
US Debt/GDP = 110
S&P500 = 800
Price of Oil = 50
Price of Gold = 850
Any major bank failures = Citi
Bank Holidays = yes after Citi blows up
Pension fund defaults = no but new employees are not allowed to join the pension program. They get a new universal IRA.
Municipal bankruptcies = yes, probably cities in central valley of CA and Nevada too...wherever the housing meltdown was biggest
State bankruptcies (if yes who)?
VAT Tax? = don't know
Higher or lower Income taxes? higher
Will entitlement (SS, medicare, medicaid) spending be cut? not yet
Will we have seen major riots in Washington DC? some protests but nothing major
What countries will have defaulted on their sovereign debt? Baltic countries
Will we be beating the war drums? No more than today
Will we be at war? No
Who will win the mid-term elections? Republicans
Will we still live in a Republic?
Yes

KJM said...

Ilargi - you make the comment that some people believe the Fed or the govt will make some of the debt just dissapear.

Why do you think that's impossible? So many countries are in the same bad shape and the financial chicanery permeates banks in so many countries that I think there might be a lot of hinky acounting in the future, with various govts pretending not to notice as long as it keeps everyone's boat afloat.

Our govt and the Fed has done whatever they wanted to fix whatever crisis presented itself. It's become pretty clear that precedent and rule of law is not going to constrain them in any way. So cooking the nation's books, if that's what it eventually takes, seems perfectly logical to me.

Bukko_in_Australia said...

Reading Ilargi's intro about people impatiently wondering when the collapse made me paraphrase a line from a Doors song: "We want the fall, and we want it now.... Now?.... NOWWWWWWWWW!"

There's an angry, nihilistic part of me that wants to see the anschluss of the economic debacle. I reckon there are others who read this site who feel the same way (although your motivations might not be as spiteful as mine.) I've been analyzing my psychology to ask myself "Why do I think like that?"

Part of it's the schadenfreudey idea that I'll be able to say "I was right; you were wrong. so THERE!"

Although who am I going to say that to? Mrs. Bukko is as much of a doomster as I am -- she knows. I could rub it in to my increasingly senile Christian conservative mother, who resolutely ignores my financial advice. But it's cruel and juvenile to slam one's mum; plus it's my inheritance that she's letting evaporate. (It's OK, I don't need it, I already made my nut.)

Shall I trumpet vindication to other people in the blogworld, most of who agree with me (yay! confirmation bias). For all I know, you're figments of my imagination anyway. And if TSHTF, I'm not going to be flaunting my foreknowledge and financial preparedness to the people around me -- none of whom I know, since I'm in a country where I'm a total stranger. No point in seeming like a know-it-all. Everyone HATES those people.

Part of the my mindset of wanting the fallout to hit is a sense of justice. Or rather, injustice. It doesn't seem right that so much cheating and bullshit has gone on for so long. It should crash so some bastards will be PUNISHED, by God! Only, the bastards at the very top who made it happen will be insulated enough to fly off the roofs of their crumbling banks and government buildings with golden helicopters. There will be no consequences for the miscreants.

Another mental thing that makes me wish for "it" to hit (whatever "it" turns out to be) is the sense that "it's" out there, lurking. Like when you were a kid and you did something bad and your mom said "Wait until your father comes home. You're going to get it then!" As bad as you knew the punishment was going to be, the waiting made it worse. The pain was going to come one way or the other -- might as well make it now.

But when the economic calamity unfolds, it will be worse than anything we imagined. Things will unfold in wrinkles we did not envision. And as the primer said, "It won't end when you want it to."

Therefore, all the things I'm wishing about "Bring it on" are completely wrong. My thinking is emotional and illogical. Therefore, I should stop it.

People who are impatiently awaiting the play-out are probably a small set of econo-boffin bloggers. Take me. I'm employed, living in a nice place, and feel financially prepared. (And I don't think I'm delsional on that.) If I was a jobless auto worker in Michigan, or someone facing homelessness in an underwater, unaffordable house, I wouldn't feel so sanguine.

So the people of whom you speak, Ilargi, we impatient ones, are a minority of a minority of a minority. We're among the relative few who are using computers to follow financial news, who have a doom-ish viewpoint, and are eagerly anticipating a well-deserved comeuppance. We matter nothing in the grand scheme, so pay no attention to our whingeing.

6p010535945e12970b said...

One thing I learned as a trader is, fundamental information should NOT be used as trading advice. Nor does Illargi intend it to be used as such. It can inform trading overall to help you assess risk levels, but it cannot be turned into realtime trading strategy. As we have seen, markets often do exactly the opposite of what fundamentals suggest they should do, for extended periods of time. Add to this massive government intervention and its a recipe for a very confusing trading environment.

Based on price levels alone, market risk is high right now, not low. Add to this the analysis of jobs, housing, and the (in)ability to service debt and you add substantial economic execution risk.

High market risk + high fundamental economic risk says to me, why not let someone else take the risk right now. Do you want to be the one "picking up nickels in front of a steamroller?" Why not let someone else do that?

Illargi is here to help you assess economic risks. His analysis says, risk remains high. I happen to agree.

ccpo said...

Re: Elizabeth Warren

I disagree she is being naive. If you look at what she was saying a year ago vs. 6 mo. ago vs. now, you'll see a steady ratcheting up of her rhetoric.

This seems to follow the flow of a person who sees the writing on the wall, but is attempting to speak politically correctly, or in such a manner so as to stir up the air with the least amount of feathers ruffled.

I've recently watched the same thing happen with people at a meeting of Green activists who well know where we stand with climate and oil, but still smiled, clapped and encouraged a series of greenwashed, big money responses to change.

They have to know they are applauding built in failure, yet, there is a system they must work within.

That's what I see with Warren. She's getting shriller in tone (literally). You can hear it in her voice. She's more animated. Her statements are more specific. Her statements sharper.

ymmv

scandia said...

@ David, I am not sure that the herd is driven by data. I would say, instead, that the herd is driven by " the message ", especially subliminal message.

Ed_Gorey said...

A recommendation - Please use greater care/precision when discussing Federal Reserve actions:

These $8, $14, $24 trillion fed figures that get thrown around really should be used with greater care.

Sometimes, people talking about ridiculous fed bailouts quote the increase in the balance sheet from $800 billion to $1.8 trillion (buying MBS, agency debt and Treasury bonds - basically the quantitative easing programs).

Other times people mention $8 trillion, and other times $14 trillion, and still other times $24 trillion.

Really, if you're going to maintain credibility, you need to identify what you're talking about with greater clarity. There's a gargantuan difference between $1 trillion balance sheet increase and $23 trillion increase. The numbers include very different sorts of activities. The $24 trillion is a sum total of all federal gov/fdic/pbgc/fannie/freddie/federal reserve assistance in all its multitude of forms and it only measures liabilities without taking into consideration the assets. The $24 trillion includes: direct cash infusions like TARP, guarantees of $250000 in bank deposits by FDIC, real estate liabilities for Fannie, emergency lending facilities like TALF by the federal reserve, and temporary programs (some of which have now expired) like the guarantee of money market funds by the federal reserve.

The vast majority of the larger figures like $8, $14, $24 consist of guarantees and lending against collateral, not direct payouts. Huge difference.

I'm not defending the bailouts in all there forms. I'm simply pleading for greater clarity in our discussions of them.

Earnest Lux said...

Hi folks

Been away for a while, busy with a nervous breakdown.

Wondering if there has been any local traffic in regards to Max Keiser interviewing Ellen Brown and the Bilderberg Group.

I&S, thankx for supressing any madness that I may have sent your way.

Also, what happened to California's IOU's.

Mugabe said...

Damn ... I wanted to short the market and make some cash !!

Ilargi is definitely the final authority about the purpose of TAE. If discussions of market timing are now officially frowned upon, where else to go for that? Zero-hedge is too insider-esoteric with too much jargon to understand, and doesn't really have a central discussion forum. Denninger and Mish don't help much for timing either, and just say the same things over and over.

Timing is everything. I want to know when the economy will collapse, because it affects travel plans and life decisions as well as investments. One month, one year, three years -- makes a big difference.

Anyhow, things will probably get ugly here in the TAE forum with the end of fall. The loyal fans will forgive anything, but a lot of critics are probably silently sharpening their axes and waiting for December 21.

Stoneleigh said...

Mugabe,

The loyal fans will forgive anything, but a lot of critics are probably silently sharpening their axes and waiting for December 21.

People are entirely free to disregard everything we say, but to dismiss a considerable body of evidence and logical argument on the basis of an extra quarter of tepid expansion would be folly indeed IMO.

I intend to continue addressing market timing, but I want to make it clear that neither I nor anyone else has a crystal ball. A probabilistic market model does not amount to a magical means of infallibly peering into the future and forecasting specifics in great detail (which is why I did not answer the list of specific questions posted the other day).

Models are inherently simplifications of reality, meaning that all models are inaccurate (to varying extents), but some are nevertheless very useful. When it comes to the future, you can't have a map, but you can have a compass.

We knew in spring that the latter stages of the rally would be challenging for us, as the collective psychology moved further and further in a direction contrary to our position. Such is the lot of contrarians.

Coy Ote said...

Wow!
What a great bunch of posts, from all concerned. Forthright, honest, caring pieces.
I read with interest and appreciation. This site is a priviledge indeed!
Open minds willing to share, learn, and ante up to the plate. I humbly admit I have little to add.

Just questions:

Aren't stocks themselves the financial foundations that allow corporations to do their impersonal manipulations?

What's going on in international shipping, with the BDI? Doesn't seem to match up with a plethora of negative stats and signs?

Stoneleigh said...

Coy Ote,

The BDI is simply reflecting the temporary resurgence of confidence that comes with a rally. As risk aversion abates, credit eases, along with access to the letters of credit that shippers require. That circumstance will end when the rally does, and as I have said, I don't think that will be long.

To me stockmarkets are important as they represent a sensitive 'thermometer' of social mood. As the timeframe for action is so much shorter for markets than for things deeper embedded in the real economy, stock indices act as a leading indicator of trend changes in other areas. I watch stocks indices because where they go, the real economy (and later politics) will follow.

Coy Ote said...

StoneLady - Thanks. I take both points as you understood them.

My query about stocks was actually less about their validity as a good indicator as it was about participation--irrelevant at this point, I suppose,but a question of ethics.

If corporate capitalism and globalism are leading us into a dire maelstrom in terms of climate, resources, and corruption how does one justify participation?

Michael Stover said...

When a prediction goes wrong, it can be used to lay blame by critics, but it can also be used by the predictor to evaluate their model of reality and assess why the prediction went wrong. Ilargi says himself that they are surprised by the lengths gov't has been willing to go to so far.

A valuable reaction to current unforeseen happenings would be a re-analysis of the TAE model of reality in light of these wrong predictions. Are they a fundamental flaw in the model, or inconsequential? Are there adjustments that should be made?

The readership would likely welcome such self-critique - that sort of thing is sorely lacking in most blogs.

el gallinazo said...

Ed_Gorey said...

"The vast majority of the larger figures like $8, $14, $24 consist of guarantees and lending against collateral, not direct payouts. Huge difference."

If I&S are even half right, there is almost no difference between "ownership" and a guarantee, particularly in terms of government and pseudo-government (Fed & Fannae and Freddie) agencies. Even less difference between guarantees and taking on toxic waste as collateral at 100 cents on the dollar. I guess when push comes to shove, the govmint will just say on their guarantees "Fcuk you, I was only kidding." So the guarantees are not officially added to the taxpayer tab. But take the FDIC, for example, reneging on bank deposits. Either way the krill gets screwed and the economy takes a huge default deflation hit.

Paleocon said...

Great post, Ilargi.

Thanks to all who responded to my advice query on job opportunities. I elected to take the work-at-home option. It will entail a long commute to HQ routinely, but it also has an option to move to HQ if desired, and travel is company-paid, so it's not an issue for now.

The pay will easily pay the mortgage and support the family, and we'll get ahead slowly on the mortgage. My biggest worry is that we just won't have time to pay it off. I am refinancing, which should get me down to a 10-year horizon, but that's plenty worrisome. I do have paid-off properties, though much smaller, so at least we'll have a house of some sort.

Now for my real point: I see a lot about Debt vs GDP regarding historic norms and other nations, yet the US GDP is a highly inflated GDP that includes banking funny-money and consumer-debt-driven purchases, and a large service-sector which lives on marginal dollars that will go away. What happens to the tax base and debt calcs when the "GDP bubble" deflates? Won't we see debt ratio skyrocket, probably from 2x to 4x MORE, as the numerator grows and the denominator shrinks?

el gallinazo said...

KJM said...
el gallizano wrote "So when the market crashes, there go the public pensions, the 401-k's,"

"I don't know if this would be called good news or bad news, but 401Ks are insured for $250k same as bank accounts. So - the broker/gamblers may indeed crash them, but the only ones to suffer the loss will be the taxpayers in yet another bailout."

I never had a 401-k, so I am not really up on them, but my understanding is that if the 401-k holds FDIC insured fixed incomes, like CD's for example, then, of course, it is FDIC insured. But if it is invested primarily in equities, then it is not. Suppose you have a 401-k, currently nominally worth $100k invested in equities, and it's value drops to say $25,000 after a market crash. How does the FDIC insure this?

zander said...

Excellent post ilargi, I'm tiring of the "so when's it gonna/why hasn't it happened? comments.
Behind the veneer lies a desperate situation which will simply reveal itself when it does, almost all predictions made here have come accurately and fatally true esp. SL's predictions for the uk. I know, I live here, the rise of the BNP is frightening. no one seen it coming but for long enough SL said it would.your work is greatly appreciated.

Z

scandia said...

@ Earnest Lux..."...been busy with a nervous breakdown."
Welcome back! I appreciate your honesty as I don't always find it easy to live with my fears/worries for the future. I am beginning to employ the " cognitive override ".

el gallinazo said...

I am not Karl's biggest fan, but:

http://market-ticker.denninger.net/archives/1623-To-The-Barkers-Answer-This-Question.html

is worth a read.

________________

Michael Stover said...
"When a prediction goes wrong, it can be used to lay blame by critics, but it can also be used by the predictor to evaluate their model of reality and assess why the prediction went wrong. Ilargi says himself that they are surprised by the lengths gov't has been willing to go to so far.

A valuable reaction to current unforeseen happenings would be a re-analysis of the TAE model of reality in light of these wrong predictions."

TAE's predictions have been remarkably accurate over the years (going back to TOD), particularly if you use WIlliams' Shadow Stats instead of the Bureau of Lying Statistics. Perhaps you are referring to the major suckers rally ( which Stoneleigh predicted quite accurately ) which has not yet fallen into collapse. As Stoneleigh wrote this morning, the timing of predictions are simply probability based, but sometimes even the crippled nag wins. She original saw the crash occurring in very late summer or the early fall. I have made analogies to super saturated solutions and avalanche conditions. In terms of physics, the free energy release exists and is very great. It just needs a tiny stimulus to overcome the activation energy. When this will occur is a total crapshoot.

I thought that Bukko's post was excellent. Sometimes, when you know something horrible is coming, you just want "to get it over with." Even though I shorted the market early, and my shorts lose value over time, everything else being equal, I am not in a "hurry" for the crash. I still enjoy getting my SS check and having my ATM card work internationally. But while we are still in an era of false shoots, the remaining wealth is still being transferred from the krill to the bankers, and the final consequences grow worse than they have to be. Whether the coming market collapse will put an end to the wealth transfer game, I don't know, other than there will be a lot less nominal wealth to transfer.

FB said...

Hello,

@ Paleocon

In response to your question about the debt numerator and the falling GDP denominator, look at the graph in the 8 August issue of TAE (search "Thank Goodness").

If you look closely, you will see that in 1929, at the time of the crash, the ratio was about 160. Then, with the sharp drop in GDP, it shot up to 260 around 1933.

So yes, we should see the debt/GDP ratio rise very high and probably very rapidly, given, as you mentioned, the currently inflated GDP.

Ciao,
FB

jal said...

Bukko_in_Australia said...
“I've been analyzing my psychology to ask myself "Why do I think like that?"”

A very good summary!
-----
On a more fundamental level ... it is the resentment felt by those who need to expend more energy than others around them in order to put food on the table.

It’s the old “suit” vs “grunt” evaluation of value added to the “product”.

These feeling go back to the beginning of all life.

Survival depends on ...
Maximize energy input and minimize energy output.

(It’s an accurate way of explaining ... GREED)
jal

Michael Stover said...

El G -

I understand and agree about SL's accuracy on the big picture. However, there has been a long-running debate with TAE and other's about gov'ts willingness and ability to "spend and extend". With TAE arguing that that ability would run out faster than those on the other side think. It's the deflation vs inflation debate essentially. Some people believe the government can and will print fast enough to prevent deflation and instead trigger massive inflation, whereas TAE think we cannot avoid a deflation spiral first - that the government won't/can't print fast enough to prevent it.

In light of the government seeming to extend the rally beyond what TAE initially expected, and, by their own admission, doing more than they thought they would, my respect for them would be greatly increased if the analysis of what the government can do to avoid deflation was revisited.

Punxsutawney said...

Thanks to all who answered my question about battery chargers and batteries. I would like to get a solar powered one as I would like to be as independent as possible. In the past I had a solar powered fluorescent lantern (before LED’s) and it worked quite well spring to fall. The only problem is days like the last couple here. Dark grey overcast and no wind in my part of the NW over the weekend. It’s not easy to generate your own power considering. There will be plenty of wind the rest of this week though, and the folks in BC won’t see any let up in the rainy weather.

As far as I am concerned the only economic indicator that matters is jobs, ones that actually produce something. Informal survey in my middle class neighborhood is 1 in 5 are unemployed. The longest duration is 18 months now. I agree with Greg Tew that jobs are being outsourced to low wage countries and that the standard of living here will fall. I think the average working person in this country has been sold out in the name of free trade by the big multinational corporations, with the full co-operation of our politicians. The coming resource constraints will only make matters worse.

As to the stock market, I’ll bet it continues up at this point through at least Christmas. After that I’m guessing it will fall 1st Q next year.

Erasmus said...

Stoneleigh I am glad to see you discuss the probablistic nature of your models in explicit detail. I suspect that much of the problems that people have had is that you and Ilargi speak in such definite, or near-definite, terms that the less educated or non-free thinkers may take it as gospel (it is a sad fact of life for anyone that writes a blog with a following). The truth is always somewhere in-between. Could the rally go on for quite a bit longer than you think? Yes. Is it fair to be de-cried and ridiculed by Ilargi for making an argument for this? No. The truth is, and always has been, that there are many factors out there influencing what is going on. I would never have guessed that all of the manipulations would have been as effective and long lasting as they have been, alas. Instead of worrying about timing (the market can stay irrational longer than you can stay solvent), I maintain the general, overarching theme. There are serious structural problems in the economy. Difficult times are ahead (how difficult and for how long, nobody can truly know). Self-preparation is necessary. Much of what you have suggested is, in fact, excellent advice and I thank you for it. I just think market timing calls are always a fools errand that do nothing but erode the credibility of the predictor, if and when that prediction might fail. Still though, I really enjoy receiving your insights. They are both helpful and entertaining to read.

Erasmus said...

El G - I do not much read Denninger much anymore. I mostly skim. Too much emotion, mixed with hedging, which leads to irratic and inconsistent calls. That said, that post by him was excellent.

Wolf at the Door said...

@ Ed Gorey

Re: "These $8, $14, $24 trillion fed figures that get thrown around really should be used with greater care."

Thank you for saying that...couldn't agree more. The reality is bad enough I don't understand the need to exagerate and magnify it just to make a point.

Mugabe said...

I agree with Michael Stover that any critical-thinking person or blog needs to learn from its own mistakes, however small. Predicting the timing of the next leg down was a bold move by TAE, and the prediction still might be fairly right. But it's not a sin to be somewhat wrong on timing if you are at least open to reflection on what happened.

Stoneleigh recently clarified that her timing predictions are based on Elliot wave theory. I don't know much about that, but it strikes me as very rough, timing-wise, especially when unprecedented policy things are happening every day. Nothing wrong with making a prediction if you are clear about the basis, and honest about it being probabilistic, or having an element of gut feel or best guess.

Sounds like Ilargi has sworn off timing, which is too bad. I like this blog partly because it validates my own financial position: all savings in US$ cash. I am never right when it comes to investment, and here is a blog that says I have it somewhat right !!! My fear is that I actually have it wrong, as usual. Perhaps the surprisingly long delay of the reckoning by all manner of extending, pretending, easing, and manipulating will cause the end game to have a different character than expected here.

Erasmus said...

Mugabe said,

Sounds like Ilargi has sworn off timing, which is too bad

Probably a good move. The risk/reward from engaging in that kind of thing is not very good IMO.

snerfling said...

@Ilargi - I've learned to take with copious grains of salt any pronouncements by anyone who resorts to claiming something other than death & taxes is "inevitable".

And when the event(s) which are claimed to be "inevitable" directly contradict the 'taxes' component of "death & taxes", those grains of salt become boulders. That's because, from Hobbes to Hoppe, one can observe that taxes is merely a coded reference for Leviathan.

So, let's simplify definitions: regardless of what you may or may not claim, the only two sure certainties in this or any other life are death & the state. Therefore, to imply that people will peacefully hold hands while singing Cumbayá as we collectively go over the falls absent countervailing actions by the state are absurd.

Now, I know that you will claim that it is "inevitable" that state actions will fail to be effective. I do not believe anyone has standing to make such a declarative statement.

Here's a simple analogy: at the outset of WWII, there was still a sense that governments shouldn't bomb civilian populations. However, by the time the allies had firebombed Germany & Japan and we had nuked Hiroshima, that quaint notion had not only been discarded, but its inverse had been completely embraced as formal doctrine.

Beware Leviathan. Anyone who approaches this subject from an agnostic perspective can see what is occurring not only in the US, but China, Japan and the EU/UK: massive gov't deficit spending programs.

This is only the start; the (global) state will do anything in its power to maintain control. If that means wholesale currency devaluation to the extent of impoverishing billions of savers, but subsequently saves the housing/derivatives/banking/tax systems, it's a prudent bet to expect the latter course of action.

The strength of Stoneleigh's thesis rests on an open system, but it fails to adequately address the possibility of a closed system. Rather than dismiss contrary viewpoints, rationale people should keep an open mind & consider alternatives, even if it doesn't fit with their 'religious' beliefs.

The 7th Day Adventist church predicted the end days would begin in 1844. They have been pushing the date back ever since.

Ilargi said...

Michael,

Just to make sure we're talking about the same things: what "wrong predictions" are you referring to?

Ed et al

I can't help what others use in the way of numbers. And I don't think I've been wildly throwing figures around. At least I try not to. The $23.7 trillion is what Neil Barofsky used as the total in public funds at risk. $8 trillion is what Dylan Ratigan claims is on the Fed balance sheet as part of the $23.7 trillion, a claim undisputed by for instance Carlos Gutierrez, Bush 43's Commerce Secretary. (see video above, Bush plays economy blame game).

Ilargi said...

"Sounds like Ilargi has sworn off timing, which is too bad"

News to me.

Mugabe said...

When I say timing, I don't mean "crash this month." I mean identifying cracks in the facade which signal a big change sooner not later. TAE was good at that in the summer of '08. Lately it's been more general: the economy is still unsound, in the same way it has been for months; it's still deteriorating, in the same way it has been for months. Crack-up is inevitable, in the same way ... True enough; and the TAE news summary is always interesting. But timing is interesting too. Bernanke has a lot of spackle to fill those cracks.

Bigelow said...

South African gold on final deathwatch as top grade scientist finds residual gold is more than 90% less than claimed

scandia said...

I am preparing X-mas gifts this morning while reading comments at the same time. I am remembering last X-mas when the word on TAE was " You won't recognize your town..." A year ago I did recognize changes in my downtown with a couple of businesses closed. Again this year I am seeing a couple more businesses gone but the shopping beat goes on. I can't tell if the beat is slower or whether folks are just moving to another location than the downtown to shop. There is so little traffic in the downtown I can generally cross the car free street without using the traffic signal. There has been an increase in panhandlers of all ages, buskers and, in particular, volunteers for various helping organizations such as World Vision,the Food Bank etc.
Walmart announces it will be open 24/7 which is an indicator.
Noticing any changes in your town this X-mas?

Bigelow said...

"...people will peacefully hold hands while singing Cumbayá..."

Snerfling,

A retired General I know used that exact phrase after I pissed him off blaming Bush for a recent event on or about 9/12/01.

Michael Stover said...

Ilargi -

Wrong predictions refers to, for me, predictions about the end of the stock market rally in late summer, then early fall, then fall, then Stoneleigh has recently suggested it's probably delayed at least until the new year. That's great - it's good to acknowledge that things change, but it's also good to go back and revisit the model to make sure it's still working right.

Another wrong prediction you made at the beginning of the year was about the end of credit. With mortgages still readily available, I think that predication counts as wrong. You have argued that without FHA, no mortgages would be happening, and that may be true, but there is the FHA, and mortgages are happening, and it appears to be due to a surprising (to you) determination on the part of the government to throw money at the problem.

If that is surprising you, what else may end up surprising you and either delaying or canceling some of your predictions and rendering parts of your model incorrect or incomplete?

Ilargi said...

Scandia

"I am remembering last X-mas when the word on TAE was " You won't recognize your town...""

What I said was "You may not recognize your town...", and that is not the same.

el gallinazo said...

Ilargi,

It was Ed Gorey who made the comment about the numbers, not I. My follow-up comment was directed to Ed Gorey saying there was little difference between the government owning toxic waste, using it as collateral, or guarantying it.

snerfling said...

"And when the event(s) which are claimed to be "inevitable" directly contradict the 'taxes' component of "death & taxes", those grains of salt become boulders."

Is the following a prediction?

"This is only the start; the (global) state will do anything in its power to maintain control. If that means wholesale currency devaluation to the extent of impoverishing billions of savers, but subsequently saves the housing/derivatives/banking/tax systems, it's a prudent bet to expect the latter course of action."

Nice blending of cognitive dissonance with pomposity!

Cheryl said...

I know these criticisms are annoying, but many people who read this blog have made major changes in their life trajectory. In many cases, the changes have been so significant, the changes can't be altered now (bridges have been burned etc). So, when events don't unfold as previously described, I'd say it's only natural for the readership to get nervous. I mean, you guys are predicting the end of civilization as we know it. When civilization marches forward as it always has in the past, one begins to wonder.

Contrarian thinking is fine when it works, but it can also quickly destroy you when it's wrong. The destruction comes not only from betting against the markets - short selling a rising market is a quick way to go broke. The destruction also derives from altered relationships where friends, family, and work colleagues begin to feel you've lost your marbles. These issues can't be easily resolved and in an environment where work is hard to get, having a reputation as a crazy doomer is not going to help with employment. My husband read this blog and others for a while until he realized it was really hurting his career. He said some things at work to help people protect their saving and then the rumor mill started. Now he's worried he'll be the next on the chopping block for being "that crazy negative thinking doomer."

His frustration made him throw up his hands last week and rejoin normal society by putting out money back in the bank and the markets.

I know I read several times since last spring that by the late summer, fall, late fall of'09 (and now some undefined time in 2010) all kinds of things were going to start happening. Martin Weiss was strongly criticized (and presented as a contrary indicator) for arguing that the severe problems had been postponed. Well none of those civilization altering events are happening and simply saying that "collective mood hasn't changed yet" sounds pretty similar to "God decided not to punish." Both statements involve faith rather than a willingness to look at the data that pours in everyday to examine what went wrong.

CKMichaelson said...

I let the merely good and better of your efforts pass without acknowledgment, but today's is in the excellent category and gets an official 'well done.'

Most prescient is the observation that our facebook/twittered populace wants whatever is coming to be here now. If the economy didn't collapse yesterday, nor today, why then what are you blathering about.

Ah yes, it's coffee in a cardboard cup.

ckm3

el gallinazo said...

Michael Stover said...
"Ilargi -

Another wrong prediction you made at the beginning of the year was about the end of credit. With mortgages still readily available, I think that predication counts as wrong. You have argued that without FHA, no mortgages would be happening, and that may be true, but there is the FHA, and mortgages are happening, and it appears to be due to a surprising (to you) determination on the part of the government to throw money at the problem."

I am quite sure Ilargi was referring to the private credit market, and in that he was quite correct. As to the government pouring fake money down a sink hole, it will continue until the world cuts us off from our oil fix, and the peasants with their pitchforks burn down Capitol Hill and the White House in a fit of pique as their Suburbans grow roots into their driveways.

Starcade, now from Siren said...

There are a lot of people who do openly wish the reset (and, though they probably won't admit it publicly, the die-off of those they consider undesirable) would happen as soon as possible.

My position has been that the system cannot be maintained any longer, and my mistake (to this point) is the extent to which "extend and pretend" has been able to work.

Consumer credit is dead, so who's going to buy ANYTHING this holiday season?

Who's holding the Big Three carmakers afloat, in any capacity?

What's preventing welfare riots, since we all know that states like California are over the edge already? How are they going to pass a budget in California that isn't going to provoke the riots by this time next year?

I mean, I think we can all agree (except for the few delusionals who pop up here from time to time) that the entire system is abjectly unsustainable.

My position is that a "new normal" cannot be sustainable with the present population base and population's attitude.

I believe Man to be an inherently evil creature, and that only a sense of social obligation has held that off for most.

... an obligation I believe is ending as we speak.

ccpo said...

Long ago they came across the pond
Of their commentary we're quite fond
"Is it all in the timing?"
some bells are chiming
"Probabilistically!" they respond

The markets they rise and they fall
in the end, for one and for all
Does it really matter
to those who do natter
if it's spring, summer, winter or fall?

Tis'nt the day's or week's value we seek
but the longer term trends that will wreak
upon the ill-learned
who advice have spurned
havoc, chaos and deep, sallow cheek

Or something like that.

Please forgive the abuse of privilege, but I was seized by a mania!

Cheers

KJ said...

I wonder what people expect to happen in a 'crash.' Short of nuclear war or an eruption of the Yellowstone super volcano or the 'big one' earthquake in Seattle or LA, life doesn't change all that drastically overnight.

Look at Iceland. Their banks crashed. Their currency is in the gutter. But they get up every day and go about their lives and adjust to each change as it comes along. They can't import the same food they used to so they eat something else now.

Look at WW2. People's houses in Europe were being bombed. But when they weren't huddling behind black-out curtains they were going to school, gardening, visiting family, celebrating holidays, etc.

I think a good mental exercise is to think realistically past the actual 'crash' to what would likely happen next. What would life be like if the banks failed? If the stock market crashed? During the depression people still traded stocks. Banks closed en masse but new ones opened. Even as many were bankrupted, others made fortunes.

The Wizard of Oz was filmed during the depresson. People went to the movies and life went on. They did what it took, family by family, to carry on until things changed, and most did it peaceably. Look at the photos always posted at the top of this blog. How many are of citizen mobs shooting and looting?

Michael Stover said...

el g -

Here's what Ilargi wrote Dec 30th 2008:

"2009 will be the year credit disappears."

...

"But first, 2009. No more loans, not for cars and homes, not for business lines and letters of credit, and increasingly not for governments, who'll be attempting to sell their bonds in an ever more overcrowded marketplace. International bond markets will be but a faint shadow of their former selves. And so will trade, in all its aspects. Of course it’s hard to predict exactly what will emerge from the end of credit. What is easy to see is that it will indeed end."

Loans for cars and homes are still very easily had. The holiday season will be bad - very bad - but very little of it will be paid in cash up front. It will be on credit.

Starcade, now from Siren said...

Greenpa: When will the people finally understand that the rank-and-file population is, at best, expendable -- and, at worst, needs to die off as quickly as humanly possible?

What most of the big-money PTB see the hunger statistics as are an indication of overpopulation. The higher that number gets, the closer we get to NWO-tinfoil land (those who believe the likes of Ted Turner have called for an 80% dieoff worldwide).

John Hemingway: How long before new housing starts effectively STOP, as part of the "new normal"?

Greg Tew: I believe we will fight (quite literally to the death) for that higher standard of living, for three reasons:

1) The aforementioned desire to see the "others" dead so we can continue it

2) the fact that many people cannot psychologically live without it

and 3) the fact that some people cannot live at all without it

"Make-busy work", that work which is non-essential, is the only way you can keep unemployment at a very few percent. Real unemployment, even now, is approaching one American adult in four (last SGS: 22.1%).

el gal: I think they have delayed the date of the crash, or it would've happened in the last two years already. I think the $24,000,000,000,000 has delayed it, but only DELAYED it. The crash will be instantaneous and spectacular now.

HappySurfer said...

Guys !!

No one has a crystal ball -if we can agree on that , how can we then expect someone to have a crystal ball and make explicit predictions. its a non sequitur.

I / we read this this blog and Ilargi some while ago said he was not prepared to give full commentary on the articles presented, but to include the WHOLE article so we could read it and make up our OWN minds.

Yes the articles are the ones he has chosen but so be it, it is his blog.

(Ilargi this is not verbatim but I hope I have conferred the gist.)

Yes he will give a preamble commentary on his thoughts - it is after all his blog.

Now it is simple as I see it, you read the blog at the moment free, and make our own decisions -or you can pay some high profile consultant a fee to direct you on how to invest, with "maybe" some recourse on the consultant getting it wrong.

If you do find that person let me know as I have yet to find some one who will guarantee the advice if you lose money.

I do not see any problem in Ilargi in HIS blog venturing some "predictions" on how he and Stoneleigh see how things may pan out, you don't have to read it, if you don't like and he doesn't have to answer to you if he is not so inclined. That's life.!


We have been warned many times that this is an overview or a process which will unfold to a pattern, and the "future chosen or pattern" on this blog is the way Ilargi and Stoneleigh see it.

Don't like it, don't read.

We are all "big boys" here.

susan said...

We have been reading S&I since the Oil Drum days. Even donate (now about the every 3 day posts...)

We do not come here for market timing advice. That said, there is always inherent risk on making definitive statements which have deadlines. In Q1-2009 things were not pretty at all.

Will the S&P crash? We have no doubts that it will at some point, whether Q4-2009 or whenever -- What has happened under Obama is lipstick on a pig.

We have removed the majority of our worth out of equities before 2007 and even more since that time. We have a reasonably sustainable place with acreage (did that back in 1979!).

Going back to the Oil Drum, recall Westexas's many posts on ELP. What is the worst than can happen if one "hunkers down"? No debt, sustainable lifestyle, savings, etc, etc.

That has to be better than McMansionville.

Michael Stover said...

Happy Surfer -

I'm not here proclaiming "you're wrong, you're wrong, nanana-nyanya", I'm interested in what is different between the real world and the model in SL's head that led to a prediction that hasn't quite panned out. Those inconsistencies, if faced honestly, can often lead to better understanding of things.

A better understanding is what I'm after. That is all.

el gallinazo said...

Cheryl

You are not following the numbers. Look at Williams' U6. Look at world credit. The only thing inaccurate with I&S's predictions is that TPTB have pumped a little more inertia into the system by pissing away $24T and counting (that's Neil Barofsky's number) of our grandchildren's future. It's like a thug avoiding bankruptcy until next month by mugging another victim at gunpoint, and the victim is our grandchildren.

Probably the most accurate prediction that Stoneleigh has made was just how much shit she would take just before the suckers rally tanked. A veritable septic tornado! I can sympathize having cut a pressurized septic pipe with a sawzall. One literal the other figurative.

No one told your husband to proselytize in his workplace. If I had had the misfortune to still have been employed in a Dilbert corporate setting where chirpiness and positive thought were mandatory, I would keep my mouth shut frankly (or hang myself with my necktie).

As to putting your money back in the bank for an extra 2% interest, lol.

littlebobbyjones30 said...

There is no reason whatsoever this rally can't continue for another two years. Simon Johnson, the respected IMF economist, thinks it'll be another economic cycle (2-3 years) before the old problems reemerge. Those of you who shorted had better pull in your reigns, or else you're going to get steam rolled and you'll panic and sell with even bigger losses than you have now. No matter how cool under pressure you think you are, another two years of gains and the indexes making new highs and you'll sweat and sell. It's all part of the plan. There's no way in hell the governing authorities are going to let the little guy profit from the collapse. That's a big boy game, riffraff not allowed.

littlebobbyjones30 said...

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.

Robert Prechter has been predicting a monumental crash since 1994. Those of you with shorts based on elliot wave predictions should keep that time frame in mind. Be ready to hold 'em for years. Who knows if Proshares will be around for that long.

scandia said...

@ Starcade...Greetings.
Just read an article in a UK paper about "Arnie "
Headline:
Arnie Schwartzenegger visits Iraq-And aims to transfer military tactics to California
Do read it at
www.timesonline.co.uk/tol/news/world/iraq/article6919262
Seems he shares your take on the situation that will require the state to use counter-insurgency tactics.

snerfling said...

@El G - Word have meaning. As long as you continue to characterize the ongoing market run-up as a "sucker rally", the more you display your ignorance as what is actually transpiring.

Look, it's really, really simple. In fact, Ilargi has correctly observed the various mechanics, and has pointed them out for all to see many times before: if the Fed & fedgov stop supporting Fannie/Freddie, it's all over - game, set & match.

So waddya think they're gonna do? They're gonna continue to print. Ben comes out today saying {wink, wink, nod, nod} the PTB support a strong dollar policy. Market thinks about for about 10 minutes, then drives the $USD to new lows and adds 135+ pts to the Dow.

And you think this is a sucker rally? As if anyone really thinks things are improving? Get real. Ben can't stop printing for exactly the reasons Ilargi has identified.

Obama is in China, where they're doing the exact thing on a very grand scale (eg building vast empty cities) to herald their 8% GDP "growth".

No one is going to stop printing. The debt must be defaulted one way or the other. Devaluing the world's basket of currencies to the tune of 50:1 achieves the exact same result.

Ilargi said...

Cheryl,

You make some valid points, but you also paint with an overly blunt axe.

"When civilization marches forward as it always has in the past, one begins to wonder. "

Sure, but that is just perception, and faulty at that. The point of view of the millions who have lost their jobs and/or homes would obviously be that the march forward has largely halted.

As for your point on short selling, it's good to mention that we have never advised or encouraged anyone to short anything.

As for people thinking you've lost your marbles, what do you think people say about us? Still, that goes back to your first point, the continuing march ahead of civilization, which is but a delusion.

"Well none of those civilization altering events are happening"

Yes, they are.

Ilargi said...

"littlebobbyjones30 said...
There is no reason whatsoever this rally can't continue for another two years."


Don't expect any serious reaction to nonsense like that. Not here, from us, at least.

Coy Ote said...

Hosts - I went full circle today reading the posts! From real appreciation earlier this morning to wondering what some of these folks were thinking when they posted today and this evening.

I read TAE regularly, along with lots of other sources of information. (foreign press, TOD, Energy Bulletin, Karl D., Astyk, gold/silver, BDI, left, right, MSM, alternet, etc. etc.) just to stay openminded... out of a box!

TAE is my most-visited site because what I read in IL and SL posts are, IMO, unvarnished realism and the response comments are articulate and a part of my continuing education concerning the PREDICAMENT we are in.

However it boggles my mind that anyone would make major changes in their lives based on the information gleaned from a single blog! Or any one source! And then to go back and point an accusing finger. That's a real stretch.

I doubt seriously if Ilargi is Nostradamus reincarnated, nor did Edgar Cayce come back as a StoneLady. But they're a couple of very smart folks that it pays to listen to... AMONG OTHERS! IMO

"He that wrestles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper" -- Edmund Burke

Bigelow said...

Gerald Celente: Terror Strikes Probable in 2010 (Part 1 of 2)

lord.bacon said...

@ Michael Stover,

MS said:
"I'm not here proclaiming "you're wrong, you're wrong, nanana-nyanya", I'm interested in what is different between the real world and the model in SL's head that led to a prediction that hasn't quite panned out. Those inconsistencies, if faced honestly, can often lead to better understanding of things."
---------

What you're describing - analyzing the differences between reality and the conceptual model - is a central component of the scientific method. I went down the route and hit a dead end several days ago. Elliot Wave, the model Stoneleigh uses, is not routed in science. It's faith. I like the comment posted above drawing a comparison to Pre-Copernican astronomers. Just focus on the ground-level fundamentals like Ilargi does. There's no need to read waves.

Brendan said...

Doom up, cheersters: The Doctor himself would like to reassure you. And we know how careful he is with his oracular reputation.

http://www.rgemonitor.com/roubini-monitor/257978/the_worst_is_yet_to_come_unemployed_americans_should_hunker_down_for_more_job_losses

Penn said...

This rally is inflation at work. The Fed was going to get asset inflation, and that's what it got. It was their goal the whole time.

Look at Bernanke: a follower of Milton Friedman, who himself believed the cure for depression is inflation.

Look at the fall of the dollar and the rise of the stock indexes and the correlation in between. I can't tell you exactly what it means, but it seems to indicate that the stock market is being buoyed by the falling dollar.

Look at the underlying data. In Japan, exports are still down 32% from a year ago.

jal said...

Time for an update on Tim Geithner!

1. Stabilize the banks
2. Stop the economic depression
3. Governments offer zero interest loans
4. Reform the financial system by getting rid of the systematic fault (compound interest)
5. Make banking a public utility
-----
Tim Geithner has saved the financial system from the Abyss and stabilized the banks.
He has Stopped the economic depression and has offered zero interest loans.
Point #4 and #5 are still to come.

What is he working on?

6. Resetting the economy to its new reality. (To a much lower credit system.)
It’s happening.

7. Taking actions to lower the US dollar to increase exports. (Monetary easing)
It’s in progress.
As Canadians, we are well aware that a lower Canadian dollars is good for our exports.
Tim Geithner is aware of the advantages of a lower US dollar for their exports.

As the US dollar goes down, price of gold goes up, market go up, $C, goes up, $euro goes up, US imports go down, (to the chagrin of Canadians and China), US exports rise, US manufacturing increase,

Announce that Fannie & Freddy, (the US), are the biggest landlords in the US history.

He has not announced it but it’s obvious.

Try to find jobs for the unemployed.
Labor camps are in the cards for anyone physically fit wanting a gov. check.
jal

el gallinazo said...

Ilargi

"As for your point on short selling, it's good to mention that we have never advised or encouraged anyone to short anything."

This is absolutely true. Stoneleigh, who has dealt with the issue more frequently than Ilargi, has advised everyone to stay out of the equities market, but if one cannot stifle oneself, don't bet more than you can afford to lose.

littlebobbyjones30 said...

"Those of you who shorted had better pull in your reigns, or else you're going to get steam rolled and you'll panic and sell with even bigger losses than you have now."

Thanks for your words of concern. With a handle like that, it's hard to resist. Makes me want to fly to Savannah and buy a pecan pie. BTW are you long in equities?

Well, we have two schools of thought in the comment section of this blog. Both schools decry how TPTB are screwing over the "common man," which refers to those with net worth less than $10M. One school claims that TPTB through their minions, the executive branch and the central banks, can play this "crisis" like a fiddle, and can control the bond and equities markets, as well as the krill who are down to their pitchforks as their last possession. The other school, which includes our noble hosts, says that the methods they are using to stall the inevitable are despicable, as they will lead too much greater misery for a few months of reprieve, enabling them to continue their larcenous ways, but these delaying tactics are very short lived and bound to fail.

In support of this contention, they point to the real, not the phony, unemployment numbers. The MSM media last year use to constantly repeat that consumer spending represented 70% of the GDP. For some reason you hear that less frequently over the EM waves. Over 85% of mortgage credit is now government financed, and the central bank, the Fab Fed, is buying up a large portion of the deficit spending as treasuries, in a process that Mad Max colorfully refers to as "a dog eating its own vomit." Yet the school of the all powerful central authorities claim that this can go on for years if not a post hominid epoch, whatever comes after the holocene.

While I suffer in my new semi-tropical hellhole, it almost makes it worthwhile to see how it all plays out.

WgS said...

Listening to Charlie Gibson rip the Obama website on job creative. Seems like somebody gets the message every now and again.

All the chatter about The Great Recovery and The Goldman Greed seems more like gloating than anything else. It's offensive.

The US Ag Dept reported today 17 million US households (14.6%) had difficulty feeding their families while the International food summit turned down UN requests for (what seems measley compared to international financial bailouts combined) $44 billion for agricultural development.

As Greenpa pointed out the UN numbers - 1 billion people globally (1 in 6 human beings) go hungry.

Definitely, all these &*%$ CEO's should donate their bonuses and live off their meager salaries. It's not like they would go hungry for doing so.

soundOfSilence said...

Ilargi -you sound (I'm reaching for the right description)... frustrated?

To borrow from Dave Cohen people are down to "hopeful optimism" and that's all they've got.



Bullish opinions fanning the flames of Hope is the only thing we’ve got supporting a strong economic recovery in the United States, in so far as the fundamentals—household debt, bank solvency, unemployment, foreclosures, etc.—suck. In these times, hopeful optimism is always the key to … something—exactly what escapes me right now. Nasty surprises later?

http://www.energybulletin.net/node/50688

el gallinazo said...

WgS said...

"Definitely, all these &*%$ CEO's should donate their bonuses and live off their meager salaries. It's not like they would go hungry for doing so."

Fat chance. As I former plumber, I had to confront one of the great paradoxes of the universe. In plumbing, shit sinks. Put in modern society, it floats to the top of the power structure. I have never been able to wrap my mind around this sort of human evil, but it sure makes reincarnation a lot less attractive. Why do people inflict such pain on other people just to have lots of toys? I mean, I like a good (Mac) laptop and the sound of a good stereo, but I wouldn't see a neighbor starve to death to keep them.

There has got to be a Ph.D. thesis in there somewhere.

soundOfSilence said...

KJM said...
Ilargi - you make the comment that some people believe the Fed or the govt will make some of the debt just dissapear.

Why do you think that's impossible?


I can't speak for out host - however onn some level all of our interactions (financial or not) involve trust. If the government were to step in and "disappear some debt" what would that ultimately do to trust?

The disappearance of trust was one of the reasons the depression went on for as long as it did.

Starcade, now from Siren said...

scandia: I can tell you that's the case without even reading your link -- which I will in any event.

There are already cities in California in which many people would openly call for martial law as a matter that the cities in question have been irrevocably lost. Oakland? Richmond???

Snerfling:When Fannie and Freddie were nationalized, I added about $6 or more T to the debt, because the fedgov now owns about half the mortgages in this country, one way or the other.

The fact is that something has to continue this "extend and pretend", or everything falls apart _simultaneously_.

BTW, there's a reason you are LITTLEBobbyJones... Take your denial BS elsewhere, like the RNC or something.

lord.bacon said...

@ El G

El G said:
"The other school, which includes our noble hosts, says that the methods they [TPTB] are using to stall the inevitable are despicable, as they will lead too much greater misery for a few months of reprieve, enabling them to continue their larcenous ways"
------------------

Your statement might accurately represent much of Ilargi's position, but it completely misstates Stoneleigh's argument.

From an elliot wave perspective, the actions of the fed gov and fed reserve etc [TPTB] are completely and totally irrelevant. From an elliot wave perspective, it all boils down to aggregated optimism/pessimism of the herd. All other actions are impotent relative to that over-arching mechanism.

This notion of herd psychology as a primary driver disagrees with actual market behavior on a daily basis. At least 70-80% of the time, the markets respond exactly as one would expect each time new economic data is reported. Bad unemployment number, markets go down. Good employment data, markets go up. Bad retail sales, markets down. Good auto sales and markets go up. You can watch this happen every day in the markets. Sure, there are occasional events when the market moves opposite to what one would expect based on the economic data, but those events are by far the minority. According to the pschology-driven thesis, all this positive correlation between news and market moves is incidental. I don't buy it. Markets respond to the data.

DIYer said...

Today we passed 1111, the Mark of the Handbasket, in intraday trading. Did somebody say we are going to Montana someplace?

And, I will affirm and verify that I&S have never advised anyone to short anything. Their current advice is consistently cash-on-the-sidelines. Warren Buffet is a crazy risk-taker by comparison.

The ultrashort shop could just hang out the "gone out of business" sign -- and it probably will when there's not enough in the till to pay off all the bets... the trick is to not be too greedy.

Wolf at the Door said...

This place is like a hornets nest tonight....good stuff.

This blog is interesting in that it is a combination of incredible intelligence and analysis on behalf of the hosts on the one hand (high value) mixed with thier cheap market prediction parlor games on the other (low to no value)...

This unusual juxtaposition does make for an addictive blog experience, although it is amusing that our hosts are left wondering why everyone is interested in discussing where thier damn market crash went after hearing about it here for the past 6 months....I am not sure what other outcome they could have expected...

I can certainly see the disaster ahead although I would not put a date on it (or even a season) by any means...

I just know that when the markets turn (or the herd changes it's mind if you prefer) this virtuous circle that has been pushing equities steadily up (dollar debasing, carry trade, momentum traders, capitulating bears, ect...)will be working in reverse feeding on itself as it falls and the next leg down is going to be one for the history books...of that I am certain.

Enjoy the now. This is as good as it gets for a long while.

getyourselfconnected said...

My favorite line from Bernanke's speech today:

"My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely."

Maybe he has been reading TAE? You never know. I am puzzled why Ilargi and Stoneleigh were not invited to the Treasury meeting. Any guesses?

Wyote said...

This is for El G, Coy, Ahimsa, Snuffy, greenpa, I&S, starcade, paleocon and Bukko. All others too.

Read the letter to Joe Bageant today and then his reply. It'll smoke ya.

All the best, Wyote

Submit your advice said...

fwiw I been banging the crap out of shorts in the oil sector for the past month. I've never had it so good. I just watch the dollar and play accordingly. Ducks in a barrel...

Ilargi said...

New post up.

Peter Paul said...

The economic downturn seems to be affecting everyone these days. Saturday mail delivery in the US may become a thing of our quaint past. The US Postal Service has witnessed the largest drop off in total volume in its history, with a corresponding drop in revenue.

The U.S. Postal Service reported a $3.8 billion loss in the 2009 fiscal year, and plans to propose to Congress in 2010 that it drop Saturday delivery to cut costs.

This is the third year in a row that the agency has posted a loss; it lost $2.8 billion in fiscal 2008, and $5 billion in 2007. The USPS is a self-supporting government agency.

The service's total mail volume plunged by more than 25 billion pieces, or 12.7%, to 177.1 billion pieces.

That drop was twice as much as any mail volume decline in the Postal Service's history.