Thursday, April 9, 2009

April 9 2009 1: Increasing the illusion supply

Detroit Publishing Co. Smoke Stage 1906
Post Office and Eagle Building. Brooklyn, N.Y. At the Alcazar Theatre: "smoking concerts."

Ilargi: If you throw $12.8 trillion and counting at your financial institutions, and you relieve them from the legal requirement to report realistic and reasonable valuations of their assets, and you do what you pretend is a "stress test" but refuse to publish the results of that test (so we don't even know for sure if any test has ever taken place, nor what it has consisted of if it was real), maybe you shouldn't act either too surprised nor for that matter too happy if banking stocks temporarily go up.

But what will happen if the stress test is executed in public (as it should be for banks kept alive with public money), if you demand banks put real values on their paper (or, preferable, have someone independent do that) and if you shut the wide open faucet of taxpayer's cash?

You know you have to do all three of those one day soon. Is it really worth it to delay the reckoning that must come no matter what and have stock brokers celebrate some more profits forked over by the man in the street? Is it worth the hurt and the misery that will follow?

What sort of policy making is this? Is there no window with a view longer than your own nose? Nothing beyond the next few weeks or months? Nothing that tells you that you are playing with the happiness and probably the very lives of millions of children just like your own? Policy, sir, shouldn't be made at the crap table.

But don't worry, for now your guys still have public relations policy firmly in hand. Even if all the rest you do is such an unmitigated calamity, your boys know how to spin it :
  • The trade deficit narrows. Sounds great until you realize that the reason is plummeting imports. Americans just can't afford anything anymore. Other than bailing out banks, that is.

  • The dip in initial claims will be milked for what it's worth in the media. Nice headlines. More profits on Wall Street. Still, I can read:

    • The four-week average of initial claims fell 750.

    • The four-week average of continuing claims rose 146,750.

Say no more, sir. There is no need. We get it.

SEC regains control of U.S.-flagged market ship, finds it looted
On a news day when Somali pirates outwardly threatened U.S. shipping interests off Africa, the Securities and Exchange Commission in Washington took the first small step toward preventing the looting of Wall Street by short-sellers. It was the equivalent of offering a discussion on how to better lock the cargo hold after the pirates had already looted the entire tanker, made it back to land and celebrated with exuberant rounds of gunfire. Oh, and imagine if the pirates also said any discussion of better locks is unfair.

While any steps to improve U.S. financial markets are always welcome, the SEC has dragged its feet on this uptick rule debate for so long that it's almost not relevant anymore to the current crisis. Lehman Brothers, Bear Stearns and AIG were killed by abusive trading involving short-selling. Merrill Lynch and Morgan Stanley barely survived, with Merrill having to sell itself to avoid Lehman and Bear's fate. Bank of America and Citigroup are still fighting for their lives.

On Wednesday, the SEC -- which has approached the uptick rule debate about as aggressively as Bud Selig approached steroids in baseball -- voted to put five proposals out for public comment on how to limit short selling. See MarketWatch story on SEC efforts. The first proposal basically brings back the 70-year-old rule to prohibit short selling of any stock unless the previous price tick of that stock has gone up. This rule was implemented in the late 1930s because of abusive short selling at that time and was intended to create some sort of order in the decline of a stock. It was dropped in late 2007, just about when the stock market peaked in October of that year. An unscientific MarketWatch poll on Wednesday asking readers to vote on the proposals found that almost two out of three supported just bringing back the original rule.

The second proposal made some sense, allowing the rule to kick in on higher bids for stocks and not on actual traded prices. The other three were unwieldy and frighteningly arbitrary, the baseball equivalent of permitting steroid use only on even-numbered game days, or when playing against the Yankees or Dodgers.The SEC's proposals are now out for comment for the next 60 days, a two-month-long wait to settle the issue that will only serve up more of the same debate we've been having for almost a year now. Then, if the SEC decides to approve one of the proposals, it will give Wall Street another 90 days to prepare. So we're five months out before anything will happen, regardless. What's galling here is not that the SEC isn't doing something; it's that it seems not to care at all about the urgency of the crisis in which the global financial system finds itself. Former SEC Chairman Christopher Cox should have brought back the uptick rule the week that Lehman collapsed and Merrill was sold, and the bears went after Morgan Stanley with full force.

That it's taken this long -- and that current SEC Chairwoman Mary Schapiro is instigating a five-month process -- is shameful, given the urgency with which Treasury Secretary Tim Geithner and President Obama have asked the rest of the world to deal with the crisis. Obama, Geithner and Fed Chairman Ben Bernanke are throwing more than $1 trillion at this crisis and the SEC can't even change a trading rule? Even just to see what happens? Give me a break. This is not about whether short-sellers belong in the markets. Of course they do. They serve a vital function, unlike say, steroids dealers in baseball. But the argument that the short crowd is making, that any new SEC rules will disturb the vital price-discovery function of short-selling, is as weightless as the old "guns don't kill people, people kill people" slogan in a despicable month in which we've seen a half-dozen gun massacres across the nation.

Short selling, a useful and important tool in any investment arsenal, was turned into a dangerous weapon over the last few years through the rise of the credit default swap derivatives market. Just as low Japanese interest rates over the last decade enabled the growth of the so-called yen carry trade in the currency markets, the growth of the CDS market from one used to insure against defaults into a speculator's game created new uses for short-sellers. Simply put, short-sellers could create profits on their shorts by pushing up the swaps levels of underlying financial stocks, which created concern about the health of the companies and often triggered cuts in their ratings, leading investors to bail from the stocks. George Soros, who knows a thing or two about taking advantage of market conditions, illustrated this brilliantly in an op-ed piece for The Wall Street Journal two weeks ago.

The uptick rule allowed the shorts to send stocks in investment banks and banks -- whose only real products are their reputations -- into nosedives. The rule itself didn't kill them. The shorts were right to sense weakness in the balance sheets of these companies. But the trading rule made it easier for them to be killed faster by the markets. In a crisis where we've seen the global financial system turned upside down in just the last six months, waiting another five for the SEC to take any action -- new rules or not -- is about as irresponsible as it can be to its mandate to protect investors and restore confidence in the integrity of the markets. Even the Somali pirates know that actions speak louder than words.

Big Jumps in Taxes Loom in 10 States
A free fall in tax revenue is driving more state lawmakers to turn to broad-based tax increases in a bid to close widening budget gaps. At least 10 states are considering some kind of major increase in sales or income taxes: Arizona, Connecticut, Delaware, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Washington and Wisconsin. California and New York lawmakers already have agreed on multibillion-dollar tax increases that went into effect earlier this year. Fiscal experts say more states are likely to try to raise tax revenue in coming months, especially once they tally the latest shortfalls from April 15 income-tax filings, often the biggest single source of funds for the 43 states that levy them.

The squeeze is especially severe in states hit hardest by the recession, such as Arizona, where sales-tax revenue has fallen by 10.5%, income-tax collections are down 15.7% this fiscal year, and the government faces a $3.4 billion budget gap next year. But such shortfalls are likely to be widespread; federal income-tax receipts from individuals have dropped more than 15% in the past six months, according to Congressional Budget Office estimates. While most states so far have managed to cope with dwindling cash by cutting spending and raising fees on things such as fishing licenses and car registrations, that is unlikely to be enough in the new fiscal years that generally begin July 1, many analysts said.

"Income taxes and sales taxes are the go-to taxes when you really need to raise a lot of money," said Donald J. Boyd, who monitors states' fiscal health for the Rockefeller Institute of Government in Albany, N.Y. Sales-tax revenue has fallen more sharply than at any time in the past 50 years, Mr. Boyd said, and he expects income-tax collections to drop below levels state officials projected -- though the extent of the damage probably won't become clear until May.Raising taxes is a perilous proposition for lawmakers, who must balance their states' budgets every year. Not only do they face political heat for increasing financial burdens during the recession, but added taxes risk worsening their states' economic problems by, for example, further hobbling consumer spending.

Some lawmakers say they have little choice. "With the size of our budget gap, we are looking at a situation of closing down our courts, releasing prisoners and cutting the school year by as much as a month," said Rep. Peter Buckley, co-chairman of Oregon's joint Ways and Means Committee. His committee is considering an income-tax increase on high-earners, along with major budget cuts, to help close a projected $4.4 billion budget gap over the next two fiscal years. And things could get worse after a revenue forecast due out May 15, he said, because Oregon's unemployment rate has climbed to 10.8% and the state relies on income-tax revenue.

Oregon Gov. Ted Kulongoski is likely to support the surcharge, said a spokeswoman , because the state is faced with losing as much as a third of its tax revenue. Legislators know the increases will be unpopular with residents. "There will be blame, we accept that," Sen. Eileen M. Daily of Connecticut said earlier this month when she and fellow Democrats announced a budget that raises income-tax rates and expands the sales tax to raise more than $3 billion over the next two years. Connecticut Gov. Jodi Rell, a Republican, has said she would veto the plan. But some governors are proposing tax increases. Delaware Gov. Jack Markell wants to raise the marginal income-tax rate by one percentage point, to 6.95%, on those earning more than $60,000 a year, effective in 2010. His budget plan also includes increases in corporate taxes as well as spending cuts to close a projected $750 million shortfall in a $3 billion budget, said spokesman Joe Rogalsky.

Many states remain determined to balance their budgets by relying solely on spending cuts. That is the case in Indiana, where raising revenue "is really not on the table," said Pat Bauer, the speaker of the state House. Instead, he hopes to tap the state's rainy-day fund and to produce a budget that covers only one year, rather than the usual two, because plunging revenue makes it impossible to forecast that far in advance. Tax collections have dropped drastically the past four months, according to Christopher A. Ruhl, director of the Indiana Budget Agency. Income-tax collections, which reflect withholding and estimated tax payments, fell 21% in March compared with last year and are down 7% for the fiscal year.

States have lowered revenue forecasts repeatedly in recent months, yet the estimates still seem to exceed the grim reality. Last week, Pennsylvania officials said total March tax collections were $334.6 million, or 7.9%, short of expectations, due to sharp drops in income and sales taxes and a steep decline in corporate income taxes. For the fiscal year that began July 1, 2008, collections to date are running $1.6 billion less than forecast. This has led some experts, such as Nicholas Johnson of the left-leaning Center on Budget and Policy Priorities, to predict more legislatures will take up broad-based tax increases as early as May or June. "The problem," he said, "is that they are filling a hole that has gotten a little deeper."

Initial jobless claims dip; continuing claims hit new record
First-time claims for state unemployment benefits dipped a seasonally-adjusted 20,000 to 654,000 in the week ended April 4, reaching a level that is 83% higher than the same period in the prior year, the Labor Department reported Thursday. The four-week average of these initial claims fell 750 to 657,250. For the week ended March 28, the number of people collecting state unemployment benefits reached yet another new record, gaining 95,000 to 5.84 million -- double the level in the prior year. These continuing claims have gained for 12 consecutive weeks, and have reached new weekly records since late January.

The four-week average of continuing claims rose 146,750 to a record 5.65 million. The insured unemployment rate -- the proportion of covered workers who are receiving benefits -- rose to 4.4% from 4.3%, reaching the highest level since April 1983. Escalating levels of initial and continuing claims signal prospects of an approaching double-digit unemployment rate, in the view of many economists. Initial claims represent job destruction, while the level of continuing claims indicates how hard or easy it is for displaced workers to find new jobs. The latest claims report shows that finding a replacement job remains difficult.

The four-week average is considered a better gauge of labor market conditions than the volatile weekly figures because it smoothes out one-time distortions caused by holidays, bad weather or strikes. Typically, state unemployment benefits run out after 26 weeks for those who are eligible. Benefits are generally available for those who lose their full-time job through no fault of their own. Those who exhaust their unemployment benefits are still counted as unemployed if they are actively looking for work. A total of about 1.5 million people were collecting benefits under a federal program that extends unemployment benefits past six months.

The banks are too powerful and they are ruining the rescue plan
Recent events have made me pessimistic that America's latest bank rescue plan will work. Worse, it is the disastrous banks themselves that are being allowed to wreck any efforts to resurrect the global economy. When Tim Geithner, the stumbling Treasury secretary, announced the latest US plan, there was already considerable doubt. Outside investors are supposed to be enticed to buy horrible assets from banks with the help of massive aid from the government. If it goes wrong, the government will shoulder most of the losses. But even so, why should investors want to buy assets no one wants when banks have been unable to sell the same toxic waste for months already?

Let's be clear: bank balance sheets have to be cleaned up no matter what you think about banks and bankers. Sensible economists and business people understand that fully-functioning banks unfettered by past mistakes are a primary requirement for the global economy to recover properly. They perform such basic financial roles that all other businesses are dependent on their health. Yesterday I blogged about an idea to start new state-owned financial institutions with clean balance sheets.  But returning to the financial institutions we have, what has happened since the Geithner plan?

First, genius accounting standard-setters in the US bowed to huge pressure from banks to allow them to use considerable discretion when valuing various assets on their books. The banks say they were in part ruined by "mark-to-market" rules that forced them to write down the value of assets too quickly when markets were falling last year. The tumbling values of assets necessitated calls to repay debts in the same way that you would be asked to repay a personal loan once the lender became worried that you could no longer service the interest.

But mark-to-market at least gives investors a reasonably objective view of the worth of assets since it means stating that the value of something is what it would fetch in a market. What's the point of saying those beautiful oranges are worth £10 for five when the woman standing in front of you will pay only £2? Accounting standard-setters would rather banks just told us how much their assets are worth - and, presumably, different banks will have different opinions about the same assets. The oranges will be worth a million each when they are the last five oranges on Earth.

This is madness if we want to restore confidence in banks and markets. But paradoxically it might make investors more inclined to buy the toxic assets under the Geithner plan since they can then park them on their balance sheets and never acknowledge their true worth until, by a miracle, they go up in value. And that leads us to the second disturbing revelation: some of the buyers of the toxic debt might be the very banks themselves who are trying to sell it. It has recently emerged that large investment banks are considering using vast government guarantees to buy bad assets from each other. The amount of overall waste on banks' books stays the same, it remains administered by the same idiots, the health of the banks becomes harder to gauge as risk associated with balance sheets once again becomes spread round the system. The brilliant part is that this time taxpayers are formally covering any of the losses. Show me the fools that will let this happen.

Meanwhile, few have yet discussed stopping banks from buying each other's assets for another important reason: the banks themselves need to be smaller or they will forever be too big to fail. What has happened since certain massive banks, whose failure would have meant disaster, went on life support? They have been pushed into the arms of other banks. Commercial banks such as JP Morgan Chase and Bank of America have acquired investment banks such as Bear Stearns and Merrill Lynch. In the UK we have taken large banks such as HBOS and put them into other banks, making the whole still larger and still too big to fail. Interestingly, George Osborne, the shadow chancellor (opposition finance minister for those outside the UK), has been talking about this problem today.

My overall fear is that in spite of everything that has happened, banks are still the enormously powerful lobbyists that they were before. As a columnist in the Financial Times says today: "In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government." At the G20, the continental Europeans signalled that they were prepared to fight bank influence in accounting and regulation. It is a fight they may lose, but at least they are not just lying down and being trampled on like Barack Obama and the US Congress.

Gold standard debate roars on
by Gillian Tett

A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis. The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard. “Two-thirds of the world’s assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement,” explains Mr Smith, noting that “it seems . . . the Chinese have now concluded that this is not acceptable”. Just a bit of pie-in-the-sky posturing of the sort that often occurs in high-altitude Davos? Perhaps. But Mr Smith is hardly a do-gooding, state-loving dreamer; on the contrary, Tullett Prebon is about as ruthlessly free-market as they come.

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today’s elevated prices. “The logical conclusion of where we will end up eventually is with some type of gold standard,” he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds. Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning. Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues – but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation. Hence the chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even emailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called “Gold and Economic Freedom”*. In the years since he penned this essay,

Greenspan has partly backed away from those ideas (and he blatantly ignored their implications when he was at the Fed.) But now they look prescient. “Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value,” Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Of course, for the moment all this muttering about gold is simply wild speculation. Even if western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.

But what this debate does show is just how much cognitive dissonance – and utter uncertainty – continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events. Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

We should listen to Beijing’s currency idea
Zhou Xiaochuan, governor of China’s central bank, has suggested creating a “super-sovereign reserve currency” to replace the dollar over the long run. He would sharply enhance the global role of special drawing rights, the international asset created by the International Monetary Fund in the late 1960s and just given an enormous boost by the decision of the Group of 20 to expand its issuance by $250bn (€189bn, £171bn). These are the first big proposals for international monetary reform from China or indeed any emerging market economy and deserve to be taken seriously for that reason alone. Several other Asian countries, Brazil and Russia have expressed support for Mr Zhou’s ideas.

The US and several other governments, however, have been quick to reject them, reaffirming their confidence in the central global role of the dollar. They apparently fear that serious discussion of this issue could shake confidence in the dollar, driving down its value and prompting a sharp rise in the euro and other currencies. Such instability and consequent rise in global interest rates would severely complicate US, European and global recovery from the crisis. But there is a more immediate threat to financial stability from the global role of the dollar that could be significantly reduced by pursuing a more limited proposal made by Mr Zhou. The risk is that China and perhaps other monetary authorities, together holding more than $5,000bn in dollar reserves, will lose confidence in the dollar owing to the prospects for huge and sustained budget deficits in the US.

Premier Wen Jiabao recently expressed such concerns in a highly unusual public statement, asking for “guarantees” of China’s dollar holdings that recall the British demand for a guarantee in 1971 that triggered the US decision to break the dollar’s link to gold. These worried dollar holders have refrained from dumping Treasury securities only because the dollar has strengthened over the past year – which is almost certainly a temporary phenomenon – and because of the adverse global repercussions. We ignore at our peril the prospect that they may feel compelled to do so, especially if the US were to provoke the Chinese by taking aggressive trade policy actions against them. Big conversions by China or another large holder, or even market fears thereof, could trigger a massive run on the dollar.
Mr Zhou proposes to alleviate this problem by creating “an open-ended SDR-denominated fund” at the IMF into which dollar balances could be exchanged for SDRs. This is essentially the substitution account idea negotiated in the IMF in the late 1970s and for which detailed blueprints were developed. Similar anxieties about the dollar at that time prompted its sharpest plunge in the postwar period, intensifying the double-digit inflation and soaring interest rates that brought on the deepest US slowdown since the 1930s, until now. I set out how the idea would work in an article on these pages in December 2007, in which Chinese officials displayed considerable interest. Instead of converting unwanted dollars through the market, official holders would deposit them in a separate IMF account for SDR. Their new asset would be liquid and pay a market rate of return.

It would offer the desired diversification as the SDR is denominated in a basket of currencies – 44 per cent dollars, 34 per cent euro and 11 per cent each of yen and sterling. The substitution account would be a winning proposition for all concerned. The dollar holders would obtain instant diversification. The US would avoid the risk of a free fall of the dollar. Europe would prevent a sharp rise in the euro. The global system would eliminate a potential source of great instability. These benefits call for the use of a global asset to make up any losses to the account from future falls in the dollar, such as creation of additional SDR or the IMF’s gold holdings (including the sizeable US share of them). The main argument against such an account is that China has accumulated its dollar hoard of more than $1,000bn by keeping its currency substantially undervalued, through massive intervention in the foreign exchange markets, and thus deserves no sympathy if it takes losses on those dollars.

One might even suspect that the Chinese have mentally booked such losses as the implicit cost of the subsidy to exports and jobs achieved through their currency manipulation. But there is no sign that China will stop intervening, or that its surpluses will abate, even though the US external deficit has declined sharply, and its reserve build-up is thus likely to become even more threatening. Moreover, this is an ideal issue for China and the US to develop the informal “G2” partnership that is needed to provide global economic leadership to pass needed reforms at the existing multilateral institutions. Since China advocates currency consolidation, the US could insist that it contribute substantially to the IMF’s new lending facilities as a quid pro quo. The Europeans would have to concur, since the agreement would include a large increase in China’s voting rights at the IMF, where Europe is so heavily over-represented, but China-US agreement would go far to seal the deal.

U.S. Trade Deficit Narrows as Imports Fall Sharply
The gap between imports and exports in the United States fell to its lowest levels in nine years in February, the government reported on Thursday. Demand for foreign-made goods dropped sharply while American exports rebounded slightly, reversing six months of declines. The Commerce Department reported that the trade deficit fell to $26 billion from a revised $36 billion in January, and that the overall volume of trade between the United States and the rest of the world fell for another month as the global downturn continued to spread. In all, the amount of goods and services brought into the United States or exported to other countries fell to $279.5 billion in February, down from $286 billion a month earlier.

Demand for foreign-made televisions and consumer products has withered as American consumers cut their spending, and plummeting oil prices have reduced the overall value of imported oil and petroleum products. The United States imported $8.2 billion fewer goods and services in February. Exports grew by $2 billion as the country sent more consumer goods overseas, to areas like Canada and countries in the European Union. For the month, the country exported more automobiles, semiconductors, aircraft engines and chemicals. While some economists thought the rise in exports would have a positive effect on the country’s first-quarter gross domestic product, others warned that it was merely be a blip that could be erased as the government revises its trade data in the months ahead.

“Given what is happening in the rest of the world, it is highly unlikely that the February result represents the start of a turnaround in demand for U.S. goods abroad,” Joshua Shapiro, chief United States economist at MFR, wrote in a note. For the year, exports have declined 17 percent. The country’s trade deficit with China shrank sharply from January to February as imports from China fell 23.7 percent. American exports to China rose slightly. Experts said the sharp decline in imports reflected a troubling retrenchment by American businesses. Companies are importing fewer capital goods and industrial supplies as they reduce their investments and expectations for growth and try to cut a glut of inventories.

“Executives are depressed about the state of the economy, recognize that they’ve got too much capacity and try to shut it down,” said Brian Fabbri, chief North American economist at BNP Paribas. “They don’t want to bring in imports.” Also on Thursday, the Labor Department reported that first-time unemployment claims fell by 20,000 last week to a seasonally adjusted 654,000. While the numbers offered some encouragement, the weekly jobless numbers can be volatile, and economists have warned that unemployment is likely to continue rising throughout into next year. Continuing jobless claims rose to 5.8 million for the week ending March 28, from 5.7 million a week earlier. As the recession wears on and unemployment rates top 8.5 percent, people are having a harder time finding new work and are spending more time unemployed.

Global Quantitative Easing
Quantitative easing appears to be the new fad among central bankers including the Bank of England, Japan, Switzerland and the Federal Reserve. Quantitative easing is a tool of monetary policy. The effect is an increase in the quantity of currency without regard to maintaining its quality.


Bloomberg has reported that the Bank of Canada Governor ”Carney has pledged to lay out a plan that would flood banks with cash to halt the hoarding of capital and expand lending.” Consequently, the Loonie has been sliding against gold.


Out of the G-20 meeting came the joint cooperation for global quantitative easing. Here are a few key points: ”To treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs (multilateral development banks), to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries.”

This creation of an additional $250B of SDR illusions to form the foundational capital for lending will only hasten the evaporation of the current system because the SDR has only limited liquidity and no intrinsic value. This is classic inflation by increasing the illusion supply. Because the SDR is a composite asset, a basket composed of the FRN$, Euros, Pounds and Yen, the effect is simply more chicanery of no economic substance. The IMF gold sales will be like a single piece of sushi appetizer to a starving dragon. The market’s reaction will be: ”That was nice. Seconds please.” But who will these measures help?


Bloomberg has reported that the Single Digit Midget Bank of America, with a market capitalization of $45B, needs $36.6B in capital to bring it in line with peers. If Bank of America cannot use the new FASB mark-to-market changes as creatively as its peers that enable fair-value lying to poof an extra $36.6B of fake capital onto its balance sheet then it must have serious intrinsic problems. There are places for worthless corporations like these: bankruptcy court.

How many other worthless, or worse than worthless, banks are having trouble conjuring capital onto their balance sheets? How long will it take other banks like Wells Fargo, US Bancorp or Credit Suisse Group with their approximately $14.90, $14.40 and $31.40 share price respectively and below $63B, $25B and $36.5B market cap to report earnings? The Treasury is delaying the reporting of the results of the federal report stress tests until Q1 earnings have been reported. Hopefully it shows up on Wikileaks like a recent whistleblower leak about JP Morgan’s insider trading program.

While fair-value lying may help the stock prices in the short term; the fundamentals are horrific for value investors. Most likely the longer the information is delayed and the less details the Treasury provides then the worse the true results are regardless of the faux official numbers.

The new FASB changes may enable profitability for a quarter, or even a few, but those profits are bogus. What purpose do these FASB changes and bailouts serve? To funnel bailout money through AIG to Goldman Sachs, JP Morgan, and European banks like Deutsche Bank. After all, Deutsche Bank, assisted by the ECB, has most likely been extremely helpful in perpetuating the gold price suppression scheme.

Why else would the ECB sell 35M ounces of gold the exact same day Deutsche Bank had to deliver 850,000 ounces of gold or risk a failure-to-deliver on the COMEX (Part 1 and Part 2)? The gold and silver markets, along with their shadow of the interest-rate market, are enveloped by the thickest part of the derivative illusion. As securities attorney Avery Goodman observed, “But, simply put, you cannot legitimately or legally hedge against another hedge, which is what the derivatives dealers appear to be doing, and which CFTC seems to be allowing them to do.”

The sociopaths manipulating interest rates, which according to Austrian business cycle theory regulate production over time, has caused and will yet cause catastrophic damage to the world economy and result in tremendous human suffering.


The world already has a world reserve currency of last resort: gold. Gold has a definition under the periodic table and is not the same as paper gold, derivative gold, problematic ETF GLD gold, or other forms of fools gold. Unlike SDRs and other illusions like the FRN$, Euro, Pound, Yen, etc. gold is a tangible asset, no-one’s liability and not subject to counter-party risk.

The next round of derivative shocks may come from a bankruptcy of the condemned General Motors triggering massive credit default swap payments. This will likely be a very stressful event for the banks and may result in tremendous solvency pressure.

Investors are becoming increasingly aware of risk and as the system continues evaporating the importance of seeking the safest and most liquid assets, with physical gold and silver at the tip, becomes increasingly desirable. While the price of gold and silver fluctuates their value does not and both gold and silver will still be there for the next credit expansion. That assertion cannot be made for the Z$, Bear Stearns or GM stock, money market accounts, the SDR or FRN$ and other places where capital was or is allocated. Carney and his fellow miscreants will not succeed in trying to force capital up the liquidity pyramid because the great credit contraction has begun.

U.S. Imagines the Bailout as an Investment Tool
During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front. Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves. As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds. The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The potential risks — politically for the administration, and financially for would-be investors — are considerable. The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit. But, as with any investment, there are risks. If, as some analysts suspect, the banks’ assets are worth even less than believed, the funds’ investors could suffer significant losses. Nonetheless, the administration and executives in the financial industry are pushing to establish the investment funds, in part to counter swelling hostility against the financial industry.

Many Americans are outraged that companies like the American International Group paid out many millions in bonuses despite crippling losses and multibillion-dollar rescues from Washington. The embrace of smaller investors underscores the concern in Washington and on Wall Street that Americans’ anger could imperil further efforts to stimulate the economy with vast amounts of government spending. Many Americans say they believe the bailout programs — and the potentially rich profits they could yield — will benefit only a golden few, including some of the institutions that helped push the economy to the brink. “This is an opportunity to forge an alliance between Main Street, Wall Street and K Street,” said Steven A. Baffico, an executive at BlackRock, referring to the Washington address of many lobbying firms.

BlackRock, a giant money management firm, is playing a central role in the government’s efforts and is considering creating a bailout fund. “It’s giving the guy on Main Street an equal seat at the table next to the big guys,” he said. The new funds are still under discussion, and they are unlikely to be established for several months, if indeed the plans go through at all. But the comparison one industry official uses to illustrate the mistake that America must avoid is the large-scale privatization in Russia in the 1990s, which involved a transfer of entire industries to a few, well-connected oligarchs. That experience tarnished the idea of free-market capitalism in Russia and undermined its program to move toward a market economy.

“It is really, really important to allow Main Street in,” said the official, who was involved in discussions about the plan but who asked for anonymity because he was not authorized to speak about it publicly. “They are getting taxed for this problem. They should have an opportunity to participate in the recovery.” Still, it is unlikely that everyday investors would play a major role in financing the bailouts through these funds. Hedge funds and other private investment firms are expected to invest far more money. The Treasury has not said how much money it intends to raise from individuals; first it wants to select about five fund managers to participate in the program to buy beaten-down securities. These firms must demonstrate an ability to raise about $2.5 billion among them. It may select several more fund managers later.

Perhaps more important than the money would be the political bonus of having thousands or even millions of taxpayers — whose portfolios have nose-dived during the crisis and whose tax dollars are financing bank bailouts and stimulus packages — profit from the toxic asset plan. To head off the political risk of using public subsidies to move the assets from banks into the hands of private investors, the Treasury has already announced that, as part of its plan, it will retain part ownership of the toxic securities and loans, thus ensuring that taxpayers will share some of the gain if the assets’ prices rise. But the plan to allow small investors to participate directly with their own money goes further.

Critics like Joseph E. Stiglitz, a Nobel Prize-winning economist, argue that the bailouts merely privatize profits and socialize losses. But if the plan goes well, including everyday Americans as buyers of the assets may encourage them to support the government’s program and avoid another American International Group-style firestorm. If investors lose money, however, the effort could backfire. “If this turns out to be great but you have kept it away from Mom and Pop and the rich are favored, that looks bad, but it’s also bad if you have people who are burned,” said Jay D. Grushkin, a partner at the law firm of Milbank, Tweed, Hadley & McCloy. Some of the biggest investment managers in the United States, including BlackRock and Pimco, have been consulting with the government on ways to rebuild the country’s broken financial markets.

On the day the plan was announced by Treasury Secretary Timothy F. Geithner, both Bill Gross, the co-chief investment officer of Pimco, described it as a “win-win-win policy,” and Laurence D. Fink, BlackRock’s chairman and chief executive, said his firm would take part. The fund industry has been in discussion with the government but insists the Treasury has not been prescriptive about the type of funds it wants established. In its letters to potential investors, however, the Treasury requires fund managers to set out how they will include retail investors, saying applicants “must note whether, and if so how, it plans to structure the fund to facilitate the participation of retail investors in the fund.” Individuals could participate in the funds by investing just a few hundred dollars, although the details are still being worked out.

If selected — likely to happen by mid-May — money managers like BlackRock could begin a fund within weeks. As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government’s plan. For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country’s financial mess.

What is the new banking "big bang" protocol?
Why is it that bankers will not come to grips with the fact the derivatives are destructive and have taken this economy down and turned it to ruin? Toxic assets are derivatives and we are throwing about $3 trillion dollars of taxpayer money into this black hole. Instead they are stubbornly holding on to derivatives and playing mickey mouse with a few changes. Listen to this one: -- 1400 banks and asset managers are adopting a new "big bang" protocol to make it easier to know what will happen in the case of defaults. What in the world do they think they are doing -- creating a new universe? This just a sugar coating. Also, the US market will introduce a standardized pricing for CDS contracts which hitherto have been unregulated. The CDS market is not the main culprit. The main culprits are the CDOs and CLO's and the banks don't have a "big bang" for these derivatives.

Here is another whopper. The Tri Optima, a trade processing group, said it has removed $5.5 trillion dollars of redundant contracts from the market in the first 3 months of the year. Let me say that again --$5.5 trillion dollars has simply evaporated. If the banking sector wants the world to believe they are cleaning up their act, this "big bang" act is just that an act. Why not just admit that derivatives are destructive and caused the current economic crisis and simply abolish them and go back to traditional banking methods. Here is another reason why this is just sugar coating. No one, not the Administration, the Federal Reserve nor the Congress have what it takes to pass a law forcing banks to put ALL their trades "on the books" and end once and for all this hidden shadow banking that Meredith Whitney talks about. And finally, send all the banking lobbyists back into their fox holes.

Bank of America May Need $36.6 Billion, Analysts Say
As Wall Street anxiously awaits first-quarter updates from the nation’s largest banks, analysts at Oppenheimer are predicting that Bank of America will need a big slug of new equity. BofA may need to raise nearly $37 billion in additional capital later this year, according to Oppenheimer’s team of banking analysts, which is led by Chris Kotowski following the departure of Meredith Whitney. In a report previewing the first-quarter earnings season, the Oppenheimer analysts lowered their profit estimates significantly for BofA, citing write-downs, charge-offs and other provisions that they think will weigh heavily on the company’s bottom line. The analysts said they expected the write-downs to send BofA’s ratio of tangible common equity to risk-weighted assets, a measure of its capital strength, to dangerously low levels, well beneath those of its peers. As a result, the analysts say, BofA would need to raise $36.6 billion of new equity capital to bring the ratio in line with its peers, whose average ratio is about 6 percent.

This is a familiar story for the banking industry: Citigroup was in a similar position back in February when its T.C.E. ratio cratered, forcing the government to convert its preferred shares, which had paid a handsome dividend, to common shares, in order to perk up the Citi’s T.C.E. ratio. A Bank of America spokesman told Dealbook on Wednesday that the firm disagrees with assumptions made by the Oppenheimer team, but he declined to elaborate. The Oppenheimer analysts said they believe BofA will not be able to raise the necessary capital by issuing more stock, so it will ultimately have to convert its preferred equity to common, similar to what Citi did a few months ago. If it can’t do that, the bank could raise the cash by using the Treasury’s Capital Assistance Plan. The report speculated that BofA could issue 5.2 billion shares at $6.24 each. The stock traded at $7.23 early Wednesday afternoon, down 1.6 percent from the previous day’s close.

Banking analysts at Oppenheimer have not been shy about making tough calls. Ms. Whitney, the former lead banking analyst who left in February to start her own firm, was one of the first analysts on the Street to say that the banks would need to raise and conserve more capital because of the bursting of the credit bubble. But Ms. Whitney seemed to show a softer side on Wednesday. She told reporters in Toronto that while she thought Kenneth Lewis, Bank of America’s chief executive, made a mistake in acquiring Merrill Lynch — a major source of its current problems — she did not think that he should be removed from the top job.

Bank Credit Growth Drops Precipitously
The Growth Rate of Total Credit at all US Commercial Banks is dropping precipitously as can be seen from the chart below. This is a negative indicator for most banks involved in the actual business of banking, even as the spreads between Fed money and money on loan widen. Advantage goes to those banks who are gaming the markets, also known as trading profits, which is probably the opposite outcome which Tim and Ben would desire, if they were thinking about it. Should banks be trading in the markets at all for their own accounts? We think not.

Glass-Steagall should be reintroduced as quickly as possible to get the banks back in the business of banking. It is a profound disappointment that the Obama Administration with the Democratic leadership have done little or nothing to reverse the speculative trends in the money center banks. That they have been the recipients of huge campaign contributions from these same banks make the situation all the worse, for how can one stand on principle when the outcome is at odds with your stated objectives, and you are taking money from those who favor that outcome? If you wish to get the banks lending again, stop giving them hot money and a free ticket to the speculative gaming tables where the rules, or a lack thereof, are in their favor.

Consumer Credit Crunches
Is Meredith Whitney right about consumer credit? So far, her bearish call is in the money. "This is the most interesting topic for me out there, which is credit card lines," Whitney said in a recent interview with Forbes. As Americans face layoffs and pay cuts, they're turning to their credit cards to make up the difference, says Whitney. These cuts in unused credit lines amount to cuts in compensation. Her gloomiest forecast is for a 50% cut in unused credit lines. On Tuesday the Federal Reserve reported consumer credit fell by $7.4 billion in February, more than double the $3.0 billion drop Wall Street had anticipated. The fall off entirely came from revolving credit, which is made up essentially of credit cards, which fell by $7.8 billion. "I suspect consumer credit lines are being reduced, and consumers aren't taking out any more credit because they're already loaded up to the gills," said Joe LaVorgna, chief U.S. economist at Deutsche Bank.

"It's also conceivable that these numbers capture supply and demand that has resulted in firms not giving out credit cards, or at least not at the same rate." Don't get comfortable with the numbers though. Consumer credit data is notorious for being highly volatile and subject to massive revisions. "I think that it'd be a little more interesting if you didn't get such large revisions," LaVorgna said about Tuesday's report. Whatever the reasons behind February's presumed drop, the situation is bleak. Consumers are highly leveraged and very financially uncertain and insecure, discouraging firms from extending credit. Furthermore, without the ability to securitize the loans, firms are forced to keep them on the balance sheet at a time when they're looking shed liabilities and raise capital.

Why home prices may never recover
Two years away from the peak of the great housing bubble, the talk has turned to whether we've reached a bottom. And whenever there is talk of a bottom, there is the inevitable talk of recovery, the speculation about just how long -- five years? 10? -- it will take for us to get back to where we were. Even at this point, the idea that there is simply no going back -- not for decades -- is still hard to stomach for Americans who have never seen or imagined a more or less permanent drop in value of housing. It's time, however, to start thinking about the likelihood that even when the worst of the financial crisis is over, the downward trend in housing prices will persist.

The belief that to own your home and your land is to assure your future is near universal. It predates our times by many years -- it sent the homesteaders into the hard ground and dry plains of the West. And in the second half of the 20th century, the confidence that home ownership equaled security was consistently rewarded. Thanks to the invaluable work of Yale economist Robert Shiller we know that since the First (yes, that's the first) World War, there have been two dramatic upticks in home values -- one in the 1940s and a second in the last 10 years. The last sustained fallcame close to 100 years ago. Almost a century of experience has gone into reinforcing the conviction that even if the price of your home does not rise, at least it is not likely to fall for any length of time. Imagine the sense of economic security that came from that.

When it comes to real estate, I have almost always found myself in a minority among Americans. I was very suspicious of the run-up in home prices when it started. I now find myself equally skeptical that there will be a housing recovery of the sort people expect. Real estate has just never meant, for me, the kind of stability that it has meant for most of the country. The reason is the New York City neighborhood I grew up in. It was called Jackson Heights, and it was a neighborhood particularly hard hit by the real estate collapse in New York that followed the 1987 stock market crash. But, more unusually, the neighborhood's plan, architecture and history still bore the marks of the Depression years. It was never, as are some urban neighborhoods, stagnant or decaying. Through its history, it was vibrant (more languages are now concentrated in its one ZIP code than in any other in New York, and very possibly the world) and mainly middle class. Nonetheless, it resonated with cautionary lessons about relying on the permanence of real estate wealth.

I know the history of Jackson Heights in some detail partly from having lived there and partly through the efforts of a talented amateur historian, Daniel Karatzas, who plotted 100 years of its history in a book rich with records and interviews that was published by a local historical society. The neighborhood was one of the first in the United States to be planned and built by a single developer, Queensboro, which wanted to take advantage of the eastward extension of New York's subway system. Queensboro set about building a series of apartment blocks around elaborate gardens. The apartments were planned as "cooperatives" -- similar to a condominium except that instead of owning an apartment, residents own shares in the whole building. Cooperatives are common in New York, rare in other parts of the country.

Built mainly in the late 1910s and the 1920s, the Jackson Heights co-op apartment buildings were elaborate examples of the period's residential architecture, built around gardens -- really, small private parks. The apartments were advertised on the radio -- the commercials were among the first in history -- and the grandest of them were designed to compete with luxury buildings like the famous Dakota on New York's Upper West Side. The fanciest of the co-ops -- the Château (with sloped roofs designed to evoke a French castle) and the Towers -- featured apartments with carefully inlaid floors, grand ballrooms and three bedrooms for the family plus one for the household help. Prices there went as high as $25,000 -- in 1920s dollars. Queensboro also built Tudor-style single-family homes, marketed for $38,500.

The Depression hit just as this wave of building had reached its peak. Queensboro was left holding many of the co-op shares and was forced to rent apartments at ever-decreasing rents. Many of the apartments were virtually unsellable. One Jackson Heights resident recounted to Karatzas how her parents rented an apartment in the Greystones, a set of buildings that the developer had decorated with intricate Gothic facades, for $55 a month. The developer offered to sell it to them for a mere $500, but there was still no money to buy. Some of the people who had bought apartments defaulted on their mortgages, and Queensboro was forced to take them back; many (including the Towers) were turned into rentals. It would be decades before those apartments were worth as much as they'd been advertised for in the 1920s. My parents moved into Jackson Heights when we immigrated to the United States from Russia in 1976. Our first American apartment was a tenement with furniture salvaged from earlier tenants.

Our second, rented the next year, was a corner two-bedroom with hardwood floors and an expansive living room in one of the last "garden apartment" complexes built by Queensboro, much less ornate than the Towers or the Château, though arguably more livable and "modern" than the prettier Greystones. Our rent was initially a little above $300 a month, at that time a fairly low but not unheard-of New York rent. In the 1980s, in the midst of a New York real estate boom, my parents' apartment complex, some 360 units in total, was bought by a developer who converted it into a co-op. As tenants, my parents had the option of staying and continuing to pay rent, or buying their apartment. Two-bedroom apartments very much like theirs were offered to nonresidents for $120,000. Tenants could buy at a discount -- first $80,000, then $60,000, then less. Much less.

By the mid-'90s, the New York City real estate market had crashed. Apartments similar to my parents' could be had for under $30,000. On more marginal blocks, beautiful old apartments could be had for even less. My parents did very well in the crash: Their landlord -- a British real estate partnership hoping to cash in on the '80s boom -- went belly up, and they finally bought their apartment at auction in 1995 for $101. That's not a typo. Remember, this was never a neighborhood in terminal decline. Over the years its makeup shifted with new waves of immigrants. (It is now the most notable Indian enclave in New York.) But none of it was ever burned out or abandoned. The local high school wasn't great (I went to a magnet high school in another part of the city), but my elementary school was excellent -- much better than the private school I attended in first through third grades.

But it was a neighborhood that was always just outside the edge of "fashionable," and so the broader real estate market's ups and downs were magnified there -- it joined booms late and was hit by busts early. In 2003 my then-wife and I bought our own apartment not far from my parents. The deciding factor was not the proximity to where I grew up but the sense that it was one of the few underpriced neighborhoods in New York City. My reluctance to enter what I saw as already an overpriced market may well have cost us a fair amount of money. Prices in Jackson Heights were yet again on a dramatic upswing. Those incredible four-bedroom confections in the Towers were no longer almost free, but when we started looking, one was on offer for less than $400,000, still cheap, and much less than a similar apartment would be just a year later.

We wound up buying a pretty one-bedroom, and separating just two months later. My wife got the apartment in our divorce and soon sold it at a profit, near what looked like the very peak of the market. Now, as you would expect, prices are again falling in Jackson Heights, albeit much more slowly than in earlier crashes -- those apartments that were on offer in the depths of the Depression for just $500 are now listed at about $229,000 to $259,000. What should the people buying those apartments now expect? Well, everyone agrees that in the short run, the price as likely as not will not go up. Reading through the history of the neighborhood, however, experiencing the real estate ups and downs of my childhood, and scanning Shiller's data, it seems to me that they should also be prepared for the eventuality that in the long run, the price will not go up, either.

We have become accustomed to think of falling home values as a sign of a city's slow death. (Think Detroit.) We think of cities and suburbs that remain vibrant as being immune from that kind of drop. The common assumption is that eventually, after a downturn, prices will swing back. But, in fact, the long-term data we have is very inconclusive. If home prices merely stop falling right now, then the price advance of the 1990s would still represent a dramatic jump from historical values of the sort that that we have seen only once before (in the 1940s). The home-price optimists, like the National Association of Realtors, persist in the idea that prices will "return" to the peaks of 2006. But there is no reason at all to think that they have to. They may return to where they stood in the late '90s (which would mean that they still have further to fall) or to some point in between.

It's even imaginable that the housing market could stagnate long enough to reverse some of the historic advance of the early postwar years. The cultural shift that a persistent drop in the value of American homes would represent is something that we have not really come close to addressing. Americans will, of course, continue to buy their homes -- there are often very good reasons to do that, even if you are not counting on making a bundle from selling it -- but their relationship to the homes they own will be different. And that means their outlook on their futures will be different. In this sense, the culture shift that may be the final outcome of the current housing crash could be profound. The economic dislocations of the housing crash are hitting us hardest now. But there will also be psychic dislocation, and I suspect that it can be deeper and last much, much longer than the real estate crash itself. Think not in terms of months or years but decades.

The experience of ownership and value that came from the postwar rise in home values and their general stability over the next 50 years did a great deal to create the national sense of stability that defined the second half of the 20th century. The real estate experience of the next decades will be very different -- much closer to the experience I had of growing up in a neighborhood beset, to a greater degree than most, by the ups and, especially, the downs of the real estate cycle. I suspect that those whose early experience of the real estate cycle comes from this crash will hold a much more skeptical and jaundiced view of their financial futures than their parents had. The uncertainty of what will happen to home prices over the next years will eventually be resolved. But the uncertainty that comes from wondering about it will, I think, be a big part of defining the national mood for the next half-century, if not even longer.

Ilargi: Henry Blodget has a good and well reasoned riposte of a Wall Street Journal attempt to smear Meredith Whitney. Me, I wonder what that smearing, and its timing, is all about. Has Meredith become more vulnerable now she's no longer on the payroll of a large firm? Anyway, Blodget could have made it easier on himself. The WSJ's Weidner tries to get his point across by saying Whitney should be regarded as being on the same level as Dick Bove. Which is preposterous, since Bove has been more wrong more times than my pet goldfish has in applied mathematics. I don't always agree with Whitnney, far from it, but that comparison is a grave insult.

Meredith Whitney Is Not God!
The Wall Street Journal's David Weidner wants you to know that Meredith Whitney does not deserve all the attention she is getting. Meredith's bold SELL call on Citigroup in the fall of 2007 was not Wall Street's first, says Weidner. Meredith did not foresee how bad things were going to get. Also, Meredith has not been right about everything.  Etc. To the extent that Weidner's point is that global investors should not now decide that they have finally found The One True God of an analyst who will never lead them astray, fine.  We do tend to anoint Wall Street media heroes only to then have our hearts broken again (sorry!), so it is helpful to be reminded of that occasionally. But otherwise Weidner just sounds like a grumbling old man in the corner. 

Meredith Whitney made a strong, bold call that startled the market, pissed off hundreds of clients and thousands of individual Citigroup investors, and infuriated the company itself.  She was dead right. More importantly, she has since stuck with and expanded that call for 18 months during which many of the country's best and brightest--including inumerable CEOs and government officials--have told us that the worst was over, that Citigroup and the rest of the banks were "well-capitalized." Throughout that period, Meredith has explained herself clearly, with conviction, and she has never fallen back on the mealy-mouthed double-speak that most analysts rely on to try to sound smart without actually saying anything. She has handled her newfound fame wisely and well. 

And, yes, as Weidner does not observe, perhaps because it's indisputable, she has also been a pleasure to watch on television, which in an era in which most of the news has all the attractiveness of Freddie Kreuger, is a breath of fresh air. Will Meredith Whitney blow it eventually? Of course. Everyone does. And how she handles that moment will reveal whether she has managed to keep herself in perspective (specifically, whether she has been able to enjoy the privilege and responsibility of having millions of people listen to her without letting it go to her head).  In the meantime, we're glad that Meredith, Nouriel Roubini, and a handful of other folks who had the guts to ridicule the consensus two years ago are now helping to guide us through the crash. David Weidner:
[T]o put it bluntly, Ms. Whitney's call on Citi wasn't that great. It wasn't the first, nor was it the best. Before we douse her with more champagne, put her on TV with Charlie Rose and hand over the keys to the Treasury Department, it might be worth taking another look at what really happened in October 2007. Citigroup was already in deep trouble. Mr. Prince was on the hot seat for Citi's inability to rein in costs. Credit issues were beginning to come to the fore when on Oct. 12, Dick Bove, then at Punk Ziegel & Co., Mike Mayo, then at Deutsche Bank and Charles Peabody at Portales Partners all issued sell ratings on the stock. Citi held a conference call three days later and, according to a transcript, Ms. Whitney participated. She asked three questions of Gary Crittenden, then Citi's chief financial officer. She asked about Citigroup's banking business in Japan and other regions. She also asked how Citi planned to grow its credit card business. She asked no questions about Citi's dividend or capital position.

Two weeks later, Ms. Whitney made The Call and cut her rating. The rest is history. Well, almost. The Call did not say Citigroup was stuffed with hundreds of billions of dollars in toxic assets. It did not say that multiple banks will fail unless the government intercedes. It didn't mention Bear Stearns (which she once expected to earn more than $11 a share in 2009), Lehman Brothers or American International Group Inc. It was a call that Citi was losing money and would have to take drastic action to raise capital. Ms. Whitney deserves a lot of credit for calling Citi's bluff about the quality of its balance sheet. There were, after all more than 20 analysts covering Citi at the time. But Messrs. Bove and Mayo also deserve credit for their earlier, and equally bold, sell calls.

In conversation with Meredith Whitney

Ilargi: Japan is in panic mode, and the international community will see that for what it is. A mere few days ago, the government introduced a $100 billion stimulus plan. Today, it's $154 billion. What'll it be next week?

Japan unveils $154 billion stimulus plan
The Japanese government is to provide Y50,000bn in loan guarantees to government affiliated financial institutions to buy stocks in the market as part of a record stimulus plan that will cost the government Y15,400bn. The size of the new package, which amounts to 3 per cent of GDP, highlights the government’s intention to act aggressively to combat the debilitating impact of the global recession on the Japanese economy. It will give “a large stimulus to the domestic economy”, said Richard Jerram, chief economist at Macquarie in Tokyo. The package also includes a tax break on up to Y40m of “gift” money parents provide their children to buy a house. Details of the new stimulus plan, which also includes measures to stimulate solar energy, encourage more lending to corporations and support the unemployed, will be unveiled on Friday. Using fiscal policy aggressively “will damage the already poor fiscal position but tolerating extended deflation and recession would probably be worse for the path of government debt,” he said.

Takeo Kawamura, chief cabinet secretary told the Japanese media the government would likely have to issue construction bonds and deficit bonds of Y11,000bn to pay for the additional spending. The new stimulus package comes as core machinery orders rose for the first time in five months, posting a 1.4 per cent month-on-month increase in February. Tokyo shares surged on hopes the stimulus package would help lift economic activity, with the Nikkei average rising 3.74 per cent to 8,916.06, but bonds slumped over concerns of a flood of new government debt. Separately, prime minister, Taro Aso, unveiled a mid-to-long-term growth strategy to boost Japan’s real gross domestic product by Y120,000bn, or 24 per cent up from 2008, and create 4m new jobs. Mr Aso also pledged to provide financial assistance to help double Asia’s economy by 2020 through infrastructure and other investments. “Asia is the “growth centre of the 21st century.” One of Japan’s major advantages is that it is located in Asia. When thinking about Japan’s new strategy for growth it is important to make the best of this strength,” Mr Aso said.

Under the new growth initiative, the Japanese government will aim to create 2m jobs in the next three years and stimulate demand worth a cumulative Y40,000bn to Y60,000bn. This will be done through bold institutional reforms and public and private investment focused on increasing the use of environmentally friendly products, creating a society that is “elderly-friendly,” and promoting Japan’s inherent attractiveness, such as its anime cartoons and fashion. Under the plan, Japan will seek to regain its number one position in solar energy by increasing solar energy production levels 20-fold by 2020, subsidizing the use of solar energy in homes and turning schools “green.” To make life easier for the elderly, the government will increase the number of nursing care workers from 1.3m today to 2.2m by 2020 and improve medical services in regions among other initiatives. By improving infrastructure, Japan will also aim to boost its tourism market from Y2,5000bn today to Y4,300bn in 2020. The government will support “soft power” industries, such as manga comics and fashion to create an industry of Y20,000bn to Y30,000bn, Mr Aso said.

Worst may be yet to come for Japan banks
Shares of banks advanced in a buoyant Japanese market Thursday, with Mizuho Financial Group defiantly shrugging off a ratings downgrade from Moody's. But faced with losses on their shareholding portfolios and rising corporate bankruptcies, Japanese financial firms may have to downgrade their earnings forecasts and could see more challenging times ahead, analysts said. "I'm not pretty confident about the forecasts we have from them, because they may be underestimating the degree of losses from equity holdings, as well as perhaps on [loss] provisions," said Ismael Pili, a regional banking analyst for Macquarie Research in Tokyo. Earlier this year, Japan's three largest banks by assets -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- had each forecast they would still report a profit for the fiscal year ended March 31.

Pili said of the three, he expects only Sumitomo Mitsui to be in the black, with the other two likely posting losses. In January, Mizuho Financial Group had predicted a full-year net income of 100 billion yen ($1 billion), down 67.8% from the previous financial year, while Sumitomo Mitsui said it would make 180 billion yen in profit, down 61% from a year earlier. And in early February, Mitsubishi UFJ Financial Group forecast a full-year profit of 50 billion yen, down 92.1%. "The worst is still to come for the banks," Pili said, adding he saw "asset quality deterioration going forward." In Thursday's trading in Tokyo, Mizuho shares jumped 10.1%, even though Moody's downgraded the banking giant and its units on Wednesday, saying the bank's Tier 1 capital ratio could come under short- to medium-term pressure. See full story on Mizuho downgrade. Shares of Mitsubishi UFJ jumped 7%, while Sumitomo Mitsui rose 5.3%.

Goldman Sachs analysts wrote in a report that they expect the downgrades of Mizuho to "have a modestly negative impact to funding costs" and to lower its "flexibility in raising non-dilutive capital." Earlier this week, the Nikkei newspaper had reported that the three banks, as well as Resona Holdings, Sumitomo Trust & Banking Co. and Chuo Mitsui Trust Holdings, were likely to book about 1.2 trillion yen in impairment losses for the year ended March 31, rising further from the 990 billion yen they had lost up to Dec. 31. The three big banks responded to the report by saying they were yet to finalize the results for the full year.

Rising bankruptcies were also hurting the outlook for Japanese banks. Data released Wednesday showed that Japanese corporate bankruptcies surged to a six-year high in the fiscal year ended March 31, while the number of listed companies to go out of business was the highest in any year since the end of World War II. Bankruptcies were up 12% to 16,146 in the just-ended financial year, according to reports that cited Tokyo Shoko Research. In a note released Wednesday, HSBC Global Research said that the liabilities of bankrupt companies reached 14 trillion yen last year, the highest level in seven years. "The numbers imply that a series of government measures to support companies' cash flow has so far not adequately absorbed the pressure they are facing, hence the continued uptrend in bankruptcies," HSBC analysts Kentaro Kogi and Masako Arai wrote in the report.

"We estimate a high level of bankruptcies will continue, especially in the non-manufacturing sector which comprises most of bank lending, keeping banks' credit costs high" in the financial year ending March 2010, they said. In wider market action Thursday, Japan's Nikkei 225 Average finished up 3.7% at 8,916.06, boosted by reports the government had moved closer to a bigger-than-expected 15.4 trillion yen ($154 billion) stimulus in spending and tax cuts. Elsewhere, Hong Kong's Hang Seng rose 3.1%, Australia's S&P/ASX 200 advanced 1.4%, South Korea's Kospi jumped 4.3%, Taiwan's Taiex rallied 4.1%, India's Sensex gained 1.1% and China's Shanghai Composite inched up 0.1%.

Should Public Pension Plans Go Toxic?
Pension managers with huge recent losses are looking at Uncle Sam's PPIP plan to sell off troubled bank assets. Golden opportunity or bad idea? Over the past 18 months, the investments of public pension plans—the retirement security for thousands of police officers, firefighters, and teachers—have lost a combined $1.3 trillion. But now some fund managers think they may have hit gold: the government's programs to clean up toxic assets. On Apr. 3, a group of public pension fund managers met with Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., to talk about the toxic assets burdening large banks. The FDIC, along with the U.S. Treasury, is looking for investors to buy up those troubled assets in a program called the Public-Private Investment Program for Legacy Assets (PPIP). At the table with Bair were representatives of several large local funds, including the New York City pension plan, the Connecticut plan, and New Jersey's pension plan. Representatives from at least a half-dozen other big plans from California to Florida joined in by telephone.

"We had more people than could fit into the room interested," says Orin Kramer, chairman of the New Jersey State Investment Council and general partner in hedge fund Kramer Spelman, who helped organize the meeting. The federal government has come under criticism for structuring the deals in a way that leaves taxpayers with much of the risk while offering a handsome upside to private equity and hedge funds. But if taxpayer-funded public pension funds are investing alongside the hedge funds and reaping the upside as well, Kramer argues, the programs become less controversial. But should public pensions, which are backed by taxpayers, be dabbling in these toxic assets? Kramer acknowledges the risk. "Look, if you own anything other than short term T-bills, it's always possible to lose money," he says. "That's true if you're buying art or stock or corporate bonds or anything else." Alicia H. Munnell, director of the Center for Retirement Research at Boston College, notes that the largest public pension plans have sophisticated managers, but "you do need financial savvy to stick your toe in this pond. People should think carefully about whether they have it before they do this."

Like everyone else in America, the managers of the country's public pension plans are in a budget squeeze. According to one estimate by the Center for Retirement Research, public funds lost $1.3 trillion in assets since the market peaked in October 2007. And while assets have been falling, obligations are rising. A recent study of 59 state pension plans by Wilshire Associates found that their collective assets shrunk sharply in 2008 while their obligations rose. The result: a $237 billion shortfall for just those 59 funds. The options for filling that gap come in varying unappealing degrees: Cut benefits to future public servants such as police officers and school teachers, raise taxes, or search for some way to get more out of your investments. In recent years, public pension plans greatly increased their exposure to equity markets, from roughly 55% of plan assets in 1994 to about 70% today, according to the Center for Retirement Research.

Trent May, chief investment officer of the $4.4 billion Wyoming Retirement System, is a former hedge fund manager who took the job in March, after the fund lost almost $2 billion in just over a year. Filling that hole for a system with 19,000 retirees won't be easy. May, who was plugged in by phone during the Bair meeting, is also actively looking at investing in the Term Asset-Backed Securities Loan Facility, or TALF, created by the Federal Reserve Board in November to support investing in asset-backed securities and small-business loans. May says estimated returns on TALF funds of between 15% and 20% are extra enticing because they come with a government guarantee: "If this is successful, not only do we reap returns on the TALF investments, but if it gets the economy moving, that would be good for our other investments, too." May has been listening to pitches from fixed-income managers such as Pimco and Alliance Bernstein (AB), which are putting together deals of 3? years in length. These firms would assess, choose, and manage the TALF assets—collecting payments on them while investors such as the public funds would get a cut of the upside for having loaned capital for the initial purchase. May says he can minimize his risk by not putting too high a stake into these assets and by sticking to AAA-rated investments, a grading he expects credit rating agencies are now tougher about doling out than they once were.

But the program Bair discussed Apr. 3, the Public-Private Investment Program, is not nearly so far advanced. Sherry Reser, a spokeswoman for CalSTRS, California's $114 billion teacher's pension fund, confirmed that her fund's staff was in on the call, but described the meeting as "very exploratory." CalSTRS is now moving 5% of its total portfolio from equities to private equity, real estate, and fixed income, with the goal of finding and investing in solid assets from distressed sellers. "The PPIP may certainly meet our criteria," Reser says. But it's "very early in the process. We're definitely in a wait-and-see mode. We think we're uniquely positioned. We have staff geared up, a process in place, and we are ready to take advantage of the opportunities that do come up in these troubled times." To guard against going too far out on a limb, CalSTRS' upper-level investment staff has put in place a system called the Devil's Advocate, in which one staffer tears any prospective investment apart, posing hard questions. "Because of these potentially toxic assets," says Reser, "we want to make sure the only distress is the sellers'."

Wrangling Ahead on Short-Sale Plans
The Securities and Exchange Commission proposed rules to limit short selling during down markets, but comments from two Republican commissioners signaled tussling ahead. The SEC nodded to political and industry pressure in its 5-0 decision to revisit a Depression-era rule that put speed bumps on short selling. Financial-industry groups said the tactic -- in which investors borrow stock and sell it, hoping to repay with shares bought at a lower price -- contributed to market turmoil last year. While it appears likely that the agency will adopt some restrictions after the 60-day comment period, the details remain uncertain, as the SEC still must winnow down a menu of ideas due to Republican concerns. There are three Democrats and two Republicans on the commission.

The proposals were largely welcomed by banks, which had been pleading with the SEC to rein in short selling. The American Bankers Association called Wednesday's move "balanced and reasoned" and predicted action will limit "downward stock spirals and restore investor confidence." James Chanos, a short seller who runs a New York hedge fund, warned against "ill-conceived government intervention" in markets. "Proposals to inhibit short selling have the effect of limiting [a] vital market-based antidote to corporate fraud and speculative bubbles," he said. The proposals are the first of SEC Chairman Mary Schapiro's tenure. During the meeting she didn't take a specific position on the proposal. Financial institutions blame hedge funds and others for driving their stocks lower, particularly during bouts of market volatility such as the one last fall around the collapse of Lehman Brothers Holdings Inc.

The SEC already has taken action to restrict "naked" short selling, in which traders sell stock they haven't borrowed. Defenders said short selling helps investors hedge their bets and adds liquidity to the market. In recent weeks lawmakers in Congress have pressured the SEC to restore the "uptick rule," which originated in the Depression and was eliminated in 2007. Under that rule, a short sale can only happen when the last sale price of a stock was higher than the previous price. It was meant to prevent a rush of short selling that drives a stock lower. The SEC proposals include an updated version of the uptick rule.

Another proposal, favored by Erik Sirri, outgoing director of the SEC's trading and markets division, would prevent a short sale from being executed if it is below the last national best bid. Mr. Sirri, while acknowledging that bids can be manipulated, said the bid test is "a more accurate reflection of the price of a security" than the last sale price. He also said it would be easier to implement. The SEC also proposed three variations of a circuit breaker that would be triggered when an individual security fell by more than 10%. Once the circuit breaker is triggered, all short selling in that security could be prohibited for the rest of the day, or the last sale-price test or the bid test could be put into effect.

Republican Commissioner Kathleen Casey said she has "not yet been persuaded" that the 2007 repeal of the uptick rule contributed to the past year's market turmoil. She warned against imposing restrictions that could provide "intangible and ephemeral" benefits at the expense of increased costs. Troy Paredes, the other Republican on the five-member commission, said it is possible the curb on naked short selling and other rules already adopted are enough. He also warned against political pressure. "Independence allows administrative agencies the room they need to exercise their judgment," he said. Democratic Commissioner Luis Aguilar said any new rules would have limited impact unless Congress gave the agency the power to regulate other markets, such as credit-default swaps, where traders can make negative bets against companies.

EU warns China over increasing steel exports
A simmering trade conflict between Europe and China is nearing the boil as state-supported Chinese steel companies ramp up capacity despite drastic cuts by the rest of the world. ArcelorMittal, the world's biggest steelmaker, yesterday told its European workforce that production cuts of 50pc would continue indefinitely due to the "exceptional economic environment", raising fears that chunks of Europe's steel industry face closure. "It is a catastrophe, particularly as management does not say when production will be resumed," Jaques Laplanche, secretary of Mittal's European Works Council, said.

A 166-page report by the European Parliament has accused China of systematic distortion of its steel market, resulting in "irrational capacity extension". This is promoted, it said, by "artificially depressed cost levels" and export rebates. The European Commission, the EU's trade enforcement arm, said some Chinese measures to support the steel industry are permissible under World Trade Organisation rules but there has been an escalation into "borderline" subsidies. "The EU is taking this very seriously and we're in discussions with the Chinese," Lutz Gullner, the commission's trade spokesman, said.

"While steel production is declining all over the world to reduce over-capacity, it is still going up in China. This puts pressure on world markets," he said. The EU steel industry employs 440,000 workers. China's steel exports to the EU were 1.6m tonnes in 2005, 5.6m in 2006, 11.5m in 2007 and almost certainly higher in 2008. China cut output late last year as steel prices collapsed, but the EU authorities are worried that China is shifting to a strategy of long-term support – effectively opting to offload extra capacity on the rest of the world rather than accepting a surge of unemployment at home. Beijing says 20m workers have already lost their jobs since the crisis began. Sporadic riots have occurred in the Pearl River industrial hub.

Europe's steel lobby Eurofer said there had been a worldwide dash towards steel tariffs and subsidies since the first G20 summit in November pledged to avoid the sort of "beggar-thy-neighbour" protectionism that blighted the 1930s. Renewed vows of piety at the second G20 last week may prove no better. Eurofer said India, Russia, Turkey, Egypt, Indonesia, and Vietnam had all imposed steel tariffs, while others have used tricks such as licensing requirements to shut out foreigners. Congress inserted a "Buy American" clause in its stimulus package. ArcelorMittal said its latest troubles stemmed from the slump in the EU industrial production, down 16.3pc in January. The group relies on sales of flat steel to the car industry, which has suffered a catastrophic winter despite a pick-up in Germany due to bonuses for scrapping old cars. Sales fell 39pc in Spain and 30pc in Britain last month.

Suit Claims China Dumped Steel in U.S.
The U.S. steel industry filed an antidumping suit against China, covering $2.7 billion of imports, alleging that steelmakers there unfairly dumped specific types of tubular and pipe steel onto the U.S. market last year. The case, one of the biggest ever filed by the U.S. against China, is likely the beginning of a string of steel-dumping cases against China, say attorneys representing steel workers and manufacturers. "I think there are going to be a lot of trade cases, steel and nonsteel, filed against China," said Roger Schagrin, one of the lead attorneys representing the seven domestic companies and the United Steelworkers union, which filed a petition with the U.S. International Trade Commission and the Department of Commerce. "China continues exporting massive amounts of products despite decreasing U.S. demand."

Within the past two years, U.S. steel companies have won antidumping cases in four other tubes and pipes trade cases against China. U.S. steel producers win more of these antidumping cases than they lose but the punishment varies. Sometimes there is a quota and other times there are additional surcharges. Officials at the China Iron & Steel Association and at Baosteel Group Corp., China's biggest steel producer by output, said early Thursday in China that they couldn't immediately respond to requests for comment on the suit. In the past, Chinese steelmakers have said such charges from U.S. competitors are simply protectionism, arguing that as profit-seeking companies themselves the Chinese producers would never export steel at prices below cost. United States Steel Corp. is the largest of the petitioners, which together represent about 90% of the pipe and tubular steel named in the dumping case.

The odds of winning this current antidumping charge will be tough because the U.S. steelmakers have to show that they were damaged financially by the foreign steel. At the time of some of the alleged dumping, some steelmakers were still recording strong quarterly profits. "If you look at U.S. Steel's fourth quarter, they remained profitable primarily because they were making tons of money on their pipe business -- their most profitable part of their company," said Dave Phelps, president of American Institute for International Steel, a trade group that lobbies and represents domestic and foreign producers. The tension between Chinese and U.S. steelmakers has grown in the past several months as the downturn in the global economy puts a strain on the import/export markets. In this weak economy, Chinese steelmakers are trying to keep their plants running as close to capacity as possible as are domestic steel producers.

The problem is that there aren't enough steel buyers as automakers, equipment manufacturers, builders and commercial construction companies severely cut the amount of steel they need. Steel plants have been operating at about 50% of capacity. Steel prices have plummeted by half since last summer along with demand, leaving the world awash in steel and spurring steel-dumping allegations against China, a major exporter of steel. The European Union this week made a preliminary determination that seamless pipe imports from China were dumped there. China exported more than 600,000 tons of seamless pipe into the EU last year. Domestic steelmakers are concerned that the steel could now be diverted to the U.S., where prices are fetching somewhat higher prices than elsewhere in the world.

"There haven't been very many [steel-dumping cases] in the last three to five years," said Mr. Phelps. "The steel industry has been very profitable, with 2006 a record for all-time profit." Mr. Phelps said that the domestic steelmakers are simply trying to guard their own markets. "When the market takes off, the domestics have the playing field all to themselves again." The world steel market was so good for so long that it didn't matter much where steel was coming from. Just last year, there was shortage of steel as prices rose to their highest ever. Since the fourth quarter, domestic steelmakers have been laying off workers and idling plants to bring demand in line with supply. In this latest case, the U.S. steelmakers allege that China dumped oil, country and tubular goods, steel products used to make drilling equipment for markets such as mining and energy.

The case alleges that Chinese producers sent their cheaper, subsidized steel to the U.S., which helped crash the market. "Dumped and subsidized imports from China have tripled from 750,000 tons in 2006 to 2.2 million tons in 2008 and have continued increasing in the first quarter 2009," said Rob Simon, vice president and general manager of Evraz Inc.'s Evraz Rocky Mountain Steel, Pueblo, Colo., one of the petitioners. "These imports significantly undersold U.S. producers and have created a huge inventory buildup in the U.S. market." The ITC will make a preliminary injury determination by May 26. The Commerce Department is expected to issue a preliminary subsidy finding by Sept. 8 and a preliminary dumping finding by Nov. 6.

Gazprom Gains Foothold In US LNG Market With Shell Swap Deal
Russian gas monopoly OAO Gazprom gained its first direct foothold in the U.S. gas market Thursday after signing a new agreement with Royal Dutch Shell PLC to swap a million metric tons a year of liquefied natural gas destined for North America for the equivalent amount of natural gas delivered by pipeline in Europe. Gazprom affiliates will take over some of Shell's capacity to ship LNG from the Sakhalin-2 project in Russia's Far East into Sempra Energy's Costa Azul import terminal in Baja California, Mexico, and deliver it by pipeline to Southern California. In return, it will deliver gas to various locations in Europe through its extensive pipeline network, which Shell will sell to new and existing customers there, a Shell spokeswoman said. Gazprom has been striving to internationalize its gas business for years, making agreements to explore and develop gas resources in Africa, Latin America and setting up retail businesses in Europe. Its U.K.-based subsidiary Gazprom Marketing and Trading has been buying and selling LNG cargoes on the open market for several years.

Canada job losses worst since 1982 recession
Canada's unemployment rate jumped to a seven-year high in March and the economy lost more jobs than expected, resulting in the sharpest five-month employment decline since the 1982 recession. Statistics Canada on Thursday said net job losses in March totaled 61,300 -- all of them full-time -- as the economy contracted at what is believed to be the fastest pace on record in the first quarter. Analysts surveyed by Reuters had forecast job losses of 55,000. The unemployment rate climbed to 8 percent, a level not seen since January 2002 and up from 7.7 percent in February. The report hardens expectations the Bank of Canada will eventually make a foray into nonconventional policies to stimulate the economy as it runs out of room to cut interest rates.

"Given these sort of weak economic conditions, certainly it will keep monetary policy bias toward ease," said Paul Ferley, assistant chief economist at the Royal Bank of Canada. "The issue is now whether they will respond with interest rates or move to some sort of credit easing, but certainly they will be looking for ways to add further liquidity to the system," he said. Economists said the report was close enough to expectations that it would have little market impact. The Canadian dollar firmed slightly after the data, rising to C$1.2345 to the U.S. dollar, or 81 U.S. cents, from C$1.2365 to the U.S. dollar, or 80.87 U.S. cents, ahead of the data. The central bank meets April 21 to discuss policy but its key overnight rate, already at 0.5 percent, may have reached its floor. Governor Mark Carney has promised to unveil in an April 23 report a suite of other policy tools the bank can use to combat the recession.

Analysts believe these will involve printing money to buy assets in the open market in order to bring down longer-term interest rates. Since the labor market peaked last October, employers have shed 357,000 workers from their payrolls. In percentage terms that was the largest decline over such a short period since 1982. In terms of absolute numbers, it was the biggest decline on record. Doug Porter, deputy chief economist at BMO Capital Markets, said the details of the jobs report were in line with expectations. Porter had been on the bearish end of forecasts. "There were very few surprises here and this is about exactly what you would expect given the economic backdrop and the kind of losses we saw in the U.S.," he said.

"Even the industrial breakdown is about what one would've expected in the month." The goods-producing sector was the weakest in March and manufacturing led the downward lurch by laying off 34,000 workers, followed by construction with 18,000. The services sector expanded its work force overall but employment fell sharply in finance, insurance, real estate and leasing as well as accommodation and food services. The average wage of permanent employees -- an indicator closely watched by the Bank of Canada for signs of inflation -- rose to 4.1 percent in March from a year earlier, up from 3.9 percent in February.

Ontario pension safety net can't catch auto workers
The Ontario government is moving to cut the support net for pensioners just as General Motors Corp. and Chrylser LLC teeter on the edge. Amid fears of a bankruptcy protection filing by one of the major auto makers, the province is moving to limit the amount of money it would have to pay in a pension bailout. Proposed new rules, contained in the province's 114-page budget bill, would give the finance minister new powers to deal unilaterally with a pension crisis, and grant Ontario's pension support fund money, but would also make it illegal for the fund to run a deficit. The bill covers pensions in general, and does not target the auto industry specifically, but comes as General Motors and Chrysler seek government bailouts in a bid to remain afloat.

The province's safety net has been in place since 1980, and provides retirees with up to $1,000 a month if a pension plan cannot pay full benefits. Premier Dalton McGuinty yesterday described the money available as “very, very modest.” “That comes nowhere near meeting any liabilities – for example, for the auto sector alone, to say nothing of all the other sectors,” Mr. McGuinty said. He added there is not “an endless supply of money” for pension bailouts. Mr. McGuinty said his government has some responsibility to help the pensioners of General Motors of Canada Ltd. and Chrysler Canada Inc. “We have a political and moral responsibility to pensioners,” he told reporters. But the Pension Benefits Guarantee Fund is now in deficit, leaving it ill-equipped to address any pension shortfall in the province.

“We would never have all the money that would be needed to top it up to meet all the demands for all Ontarians who are experiencing troubles with their pension plans,” Mr. McGuinty said. An official in provincial Finance Minister Dwight Duncan's office said the changes were necessary because the fund hasn't been properly managed for decades and the financial turmoil has highlighted that. “We want to get it back on track so that it's capable of serving the intended purpose,” the official said. The omnibus bill accompanying the recent Ontario budget contains a provision to amend existing legislation, giving the finance minister new powers to deal unilaterally with such a crisis. Under existing legislation, the minister needs authorization from the lieutenant-governor to make loans to the fund. But under the proposed changes, the minister could make grants to the fund on his own.

The budget bill also says the legislation will be revised to state that the fund's liabilities cannot exceed its assets. “I really think it's the GM issue,” said Mitch Frazer, a pension lawyer at Torys LLP. “This is the last remaining too-big-to-fail plan.” Pension experts estimate GM Canada's total pension shortfall may exceed $6-billion. Chrysler says its plans should be almost fully funded this year. There are also fears that auto parts makers with large operations in Ontario would collapse if one or both of the auto makers filed for court protection. Some parts companies could fail even if GM and Chrysler succeed in restructuring outside of the courts. “The government is basically saying ‘If we have a whole series of bankruptcies, we're not going to be there to backstop the fund, let's make that very clear,'” Mr. Frazer said. “All you need is one large bankruptcy and you wipe out all the money in the fund.”

Canadian Auto Workers president Ken Lewenza said the Ontario government is partly responsible for the pension crisis at GM Canada because of 1992 legislation that enabled the company to underfund its own plans. “GM has paid a very substantial proportion of the premiums that have been collected over the years by the Pension Benefit Guarantee Fund,” he said in a statement. “So for the government to now suggest that retired auto workers would be denied the protection of this fund is unconscionable.” Retired auto workers worried about their pensions dogged federal Finance Minister Jim Flaherty yesterday in Oshawa, Ont., yesterday. Ontario New Democratic MPP Paul Miller called on the McGuinty government to “step up to the plate” and create a different type of pension protection in the province.

Canada dresses up for bears
For all the designer drinks and gourmet foods - from raw oysters to sushi, and the sea of men in expensive suits and bejeweled women in elegant gowns, the setting seemed fit only for celebration. But dressed as they were to the nines, investors attending “A Night with the Bears” at Toronto’s upscale Elgin Theatre, were eager to hear the worst, on the edges of plush seats amid predictions of market doom from some of the continent’s savviest financial minds. “I only wish we’d sold tickets,” said a smiling Eric Sprott, arguably Canada’s best known hedge fund manager and chairman at Sprott Asset Management Inc, as he looked out at the 1,500 or so crowd. In a media room below stage, journalists were held equally rapt by the star speakers after being treated to a hand-operated elevator ride. Once there, rows of chairs slowly filled as smartly-dressed servers roamed the dimly-lit space offering drinks to journalists briefed quickly.

The message? When an economic recovery takes place — and it won’t take place any time soon – it’s going to be a weak and shallow recovery. “Still negative growth, still the worst recession we’ve had in the last 60 years, still the worst financial crisis since the Great Depression, still even many of the largest banks are going to be found insolvent,” said Nouriel Roubini, a professor of economics at the New York University’s Stern School of Business, who rose to celebrity status after sounding early warning signs about housing bubbles and the credit crisis. Later, experts on stage predicted bank failures and harsher times unless back-to-basics medicine is applied to cure a U.S. economic “pneumonia” that spread to the rest of the world late last year.

“There’s a buyer’s strike and the market is not coming back,” said Meredith Whitney, a Wall Street veteran of more than 15 years and one of its most bearish bank analysts. The groan from Torontonians was audible. Canada’s financial system, for many years criticized for being heavily conservative, is now credited for being among the world’s soundest and most resilient to the global crisis. Canadian banks are routinely ranked as the world’s most solid, having remained profitable despite a crisis that pushed many U.S. and European institutions to the brink of insolvency. Whitney predicted U.S. banks will need to start raising capital by selling hard assets, and advised investors to “stay tuned” for opportunities.

Roubini, introduced to the audience by his nickname “Dr. Doom”, appeared a tad irritated by the moniker, but not enough to change his tune. “I don’t think I’m too bearish,” he told reporters. “I am more a realist rather than a pessimist.” “I’ll be the first one to call for the bottom of this economic contraction, recovery of the market when I see a sustained economic and, therefore, financial recovery. I don’t define myself as a permabear.” He says he can’t be too bearish because he thinks all the massive stimulus measures and rate cuts around the globe will eventually kick in to avert an “L-shaped” near-depression like the one Japan experienced. He described the U.S. recession as three times as long and five times as deep as the last, and warned a recent stocks rally was just a precursor to another fall. “For the first time in more than 60 years we have a global, synchronized recession.”

Ireland imposes emergency cuts
Dublin has unveiled the harshest austerity measures in the history of the Irish Republic, raising taxes and slashing expenditure in an emergency budget despite mounting evidence that the country is already tipping into debt deflation. Brian Lenihan, the finance minister, outlined a grim package of 1930s-style retrenchment, slashing child benefit and allowances for jobseekers. Road and railways projects will be frozen. There will be a cull of junior ministers save costs. Two-thirds of the belt-tightening will come from tax rises. A pension levy of 1pc – imposed in the face of bitter protests in January – will be doubled to 2pc. "These measures will reduce all our living standards. I'm acutely aware of that," Mr Lehinan told the Dail. He said draconian measures were needed to stop the budget deficit spiralling to 13pc of GDP.
Ireland is facing a triple whammy of fiscal, monetary and exchange-rate policies that are all too restrictive for the underlying needs of the Irish economy. There appears to be little that Dublin can do to change course under the constraints of Europe's monetary union. In his funereal speech, Mr Lenihan said the economy would contract by 7.7pc this year, the sharpest fall among the OECD club of rich nations. Consumer prices will tumble 4pc as the downturn tightens the deflation vice. Fiscal tightening in these circumstances is a page from the 1930s, but Ireland has no choice. It already faces EU legal proceedings for breach of the Maastricht fiscal deficit limit of 3pc of GDP. Standard & Poor's stripped Ireland of its "AAA" rating last month and placed the country on negative watch, predicting that public debt would rocket to 70% of GDP over the next four years. It was 33% in 2008.

Ireland's Fine Gael finance spokesman Richard Bruton said the debt may reach 120pc of GDP in a return to the darkest days of the 1980s with the announcement yesterday of a new state agency to soak up €80bn (£72bn) in toxic debt from the banks. "The economy is on a perilous edge. Who is going to bail-out the taxpayer?" he said. Ireland has held together remarkably well so far in this storm. Unions have agreed to accept pay freezes and even cuts for public employees, although 100,000 protesters poured on to Dublin's streets in February. But this calm may not last if people begin to see the current policies as self-defeating.

The slide into deflation threatens an economy struggling to cope with a property bust. Construction rose to 21pc of GDP in 2007, compared 11pc in the US at the height of the sub-prime debacle. Household debt stands at 190pc of disposable income, one of the world's highest. Deflation increases the burden of the debt. Julian Callow, Europe economist at Barclays Capital, said Ireland requires the same drastic mix of "quantitative easing" and devaluation under way in Britain. "If Ireland was running its own monetary policy it would not be in its current state. The imbalances would never have built up to the same extent in the first place. They now need a 20pc devaluation to get out of this. If they try to cut wages it could lead to debt deflation, and that will unleash another set of financial problems," he said.

The country has been simultaneously hit by two "asymmetric shocks": the global banking crisis has punished Dublin's "Canary Dwarf" financial industry, worth nearly 10pc of GDP; and since half its exports go to Britain and the US – the highest of any eurozone state – it has suffered the full brunt of sterling's crash and the overvalued euro. Shoppers are pouring into Ulster border to buy supplies, devastating the retail industry along the borders. Mr Lenihan has accused Britain of "beggar-thy-neighbour" tactics. The plunge is sterling is the sharpest since 1931. This has been immensely bad luck for Irish exporters, and could not have been forseen. Mr Lenihan said he was appointing Sir Andrew Large, ex-Deputy Governor of the Bank of England, to oversee reforms of Ireland's regulatory structure. "The government is determined to restore confidence in our banking system," he said.

Irish police want bankers prosecuted
The man who leads middle-ranking gardai last night called for prosecutions against the banking elite. The Association of Garda Sergeants and Inspectors (AGSI) believes some banking behaviour in the past few years amounted to fraud, and brought the country "almost to its knees". And if there legal loopholes in the current legislation, the law should be overhauled, they say. The charge was led last night by AGSI president Paschal Feeney, who said there was an apparent weakness in dealing with white collar crime. He told his association's annual conference in Athlone that he wanted the Government to take all possible steps to hold those responsible for the demolition of the country's financial reputation to account.

He demanded that the action include initiating criminal prosecutions, taking people before the courts and making them face the full rigour of the law. "If we find that our current legislation is not strong enough," Mr Feeney said, "then the Government should consult with the Garda Fraud Bureau and the Criminal Assets Bureau to ensure that any new laws are effective and that they act to cure this cancer in our financial affairs". Mr Feeney also called for the asset-stripping powers of the Criminal Assets Bureau to be used to the full to recoup all of the monies that had been "squirrelled away" by members of the so-called Golden Circle. "Never again must the actions of a few be allowed to bring a country to its knees," he told conference delegates. He argued that the country was now almost bankrupt because of greed, which had led the banks to lend so much money that they stood "not a chance in hell" of getting it back.

"Greed led them to continue doing it even though they must have known it was unsustainable in the long term. "Greed also fed into our corporate governance. Bank directors and executives paying themselves huge, unrealistic salaries -- and adding huge bonuses on top to reward themselves for their appalling lending policies. "They lent unlimited sums to themselves, bankrupting their own banks and creating the collapse in confidence in our financial institutions", Mr Feeney added. "Greed alone may not have done the trick without serious failures on the other side", he said. "The side that should have been in control -- our financial regulators and our Central Bank -- should not have allowed this to happen".He warned his colleagues:
  • The recruitment embargo would drastically reduce the numbers available for policing.
  • The embargo on promotions would devastate supervision levels and leave younger gardai leaderless.
  • There would be fewer gardai to deal with public order or to respond to emergencies.
  • Cutbacks would result in gardai fighting criminals with one hand tied behind their backs, and the safety of the public and gardai must not be compromised.

Mr Feeney also called on Justice Minister Dermot Ahern to explain why they could not get an explanation for the Government's refusal to allow the gardai to be affiliated to the Irish Congress of Trade Unions. He pointed out that two requests under the Freedom of Information Act had already been refused and a third was now being prepared. "What is the secrecy all about?" he asked.

ING Plans to Sell as Much as $10.6 Billion of Assets to Replenish Capital
ING Groep NV, the biggest Dutch financial-services firm, said it plans to raise as much as 8 billion euros ($10.6 billion) selling assets to boost capital, sending shares up as much as 13 percent in Amsterdam trading. ING expects to sell as many as 15 businesses “over time and as market conditions permit,” leading to proceeds of 6 billion euros to 8 billion euros, the Amsterdam-based company said today. Unloading the units would free up about 4 billion euros in capital, ING said. “I like what I see,” said Christian Vondenbusch, a portfolio manager at Robeco Asset Management who oversees about 700 million euros, including ING shares. “Back to basics, de- risking of the balance sheet and the raising of disposals with a capital relief of 4 billion euros -- that is more than I dared to hope for.”

ING said in February it would review operations after posting a fourth-quarter loss of 3.71 billion euros and tapping the government rescue fund. The retail business in Ukraine will be “unwound,” while life insurance activities in China and Japan are under review. In the U.S., ING will explore “strategic options” for its employee benefits, group reinsurance and existing annuities book, it said today. The Dutch company’s results in the first quarter were significantly better than the fourth, Chief Executive Officer- designate Jan Hommen said on a conference call today. ING rose 47 cents, or 8.9 percent, to 5.73 euros by 10:45 a.m. in Amsterdam, valuing the company at 11.8 billion euros. ING declined 22 percent so far this year in Amsterdam trading, compared with a 20 percent drop in the 37-company Dow Jones STOXX Insurance 600 Index.

ING already raised 1.4 billion euros in February by selling its 70 percent stake in ING Canada Inc., the country’s largest property and casualty insurer. The company can accelerate the additional sales if necessary, Hommen told investors in Rotterdam today. ING’s plan to shed assets coincides with efforts by New York-based insurer American International Group Inc. to dispose of units and repay the U.S. following a $182.5 billion bailout. “A question I have regards timing and proceeds of the disposals,” said Vondenbusch. “It’s a buyers’ market.” ING received a 10 billion-euro government lifeline in October and transferred the risk on most Alt-A mortgage assets to the state.

The firm has already eliminated more than half of the 7,000 jobs it planned to cut to reduce operating costs by 1 billion euros this year. ING had earlier said it may sell as much as 3 billion euros of assets. Financial companies worldwide have announced almost 300,000 job cuts after $1.29 trillion of writedowns and credit losses since the start of 2007. ING’s banking business will concentrate on operations in the Benelux region, as well as Poland, Romania and Turkey. In insurance, ING will focus on life and retirement services in the Benelux countries, central Europe, the U.S., Latin America and Asia. The company will operate its banking and insurance units separately under “one group umbrella to reduce complexity,” ING said.

“It’s good that Hommen takes ING back to basics and reduces complexity,” said Edwin Slaghekke, who helps manage about 60 billion euros at Aviva Plc’s Delta Lloyd Asset Management in Amsterdam, including ING shares. “Perhaps in due time, he should even consider breaking up ING into a bank and an insurance company.” Hommen denied that the company is moving toward such a split-up. He said the U.S. online-banking unit is one of the company’s growth opportunities outside of Europe. The German Internet banking division is “one of the building blocks going forward,” he said. ING plans to integrate its investment-management units in Europe, the Americas and Asia and include real-estate investment management. The company will review options to expand the combined business, while keeping management control, it said.

Berlin Launches Hypo Real Estate Takeover
The German government has launched a takeover bid for the bank Hypo Real Estate by offering shareholders €1.39 per stock. If they refuse, Berlin has the right to expropriate them under a new law. The German government has made shareholders of the troubled mortgage bank Hypo Real Estate an offer they can hardly refuse. Under a new expropriation law, the Special Fund for Financial Market Stabilization -- known as Soffin after its German acronym -- has offered HRE shareholders €1.39 ($1.84) per share as part of a bid to take over the lender. The deal, which was made public Thursday, is higher than was previously expected. Media reports had suggested Berlin would offer just €1.26 per share. "The offer gives HRE shareholders the opportunity to divest at an attractive price," Soffin said in a statement.

HRE's share price jumped by over 14 percent to €1.38 on Thursday morning in reaction to the news. The available shares would cost a total of €290 million under the offer, Soffin said. The fund, which was set up in October 2008 to stabilize the German financial system, already has an 8.7 percent stake in the bank after buying 20 million new HRE shares for €60 million. The German government wants to take over HRE to prevent it from going bust and to avoid the market turbulence an insolvency would cause. An additional goal is to secure the state and private aid, worth €102 billion, which has already been given to the bank. HRE would have collapsed long ago without state intervention. Soffin said in the statement that if HRE were to go bankrupt "it would have substantial and unpredictable effects on the national and international financial markets." It did not specify a timeframe for the takeover, although it did say it wanted to put the offer into effect "very quickly."

German President Horst Köhler signed the expropriation bill -- known in German as the tongue-twisting Finanzmarktstabilisierungsergänzungsgesetz --  into law on Tuesday. The legislation came into effect on Thursday. According to the controversial new law, the government has until the end of June to expropriate HRE's shareholders if they do not sell their shares voluntarily. Were Berlin to carry out an expropriation of HRE, it would be the first such move since the 1930s. US private equity investor J.C. Flowers, who holds 24 percent of HRE's shares, has opposed the nationalization of the bank and has already threatened to take legal steps against an expropriation. HRE was among the first of Germany's banks to be hit by the financial crisis. In early 2008, the bank wrote down €390 million before needing a €50 billion bailout last October. When Germany passed a €500 billion bank bailout bill later that same month, HRE was the first bank to take advantage.

Ilargi: I would find it kind of fitting if Obama decides to go the geoengineering route, since the consequences are as unpredictable as those of his financial policies. Blindfolded double or nothing all the way, baby!

Obama to Look at Climate Engineering
The president's new science adviser said Wednesday that global warming is so dire, the Obama administration is discussing radical technologies to cool Earth's air. John Holdren told the Associated Press in his first interview since being confirmed last month that the idea of geoengineering the climate is being discussed. One such extreme option includes shooting pollution particles into the upper atmosphere to reflect the sun's rays. Mr. Holdren said such an experimental measure would only be used as a last resort. "It's got to be looked at," he said. "We don't have the luxury of taking any approach off the table."

Mr. Holdren outlined several "tipping points" involving global warming that could be fast approaching. Once such milestones are reached, such as complete loss of summer sea ice in the Arctic, it increases chances of "really intolerable consequences," he said. Twice in a half-hour interview, Mr. Holdren compared global warming to being "in a car with bad brakes driving toward a cliff in the fog." At first, Mr. Holdren characterized the potential need to technologically tinker with the climate as just his personal view. However, he went on to say he has raised it in administration discussions. Mr. Holdren, a 65-year-old physicist, is far from alone in taking geoengineering more seriously. The National Academy of Science is making climate tinkering the subject of its first workshop in its new multidiscipline climate challenges program. The British parliament has also discussed the idea.

The American Meteorological Society is crafting a policy statement on geoengineering that says "it is prudent to consider geoengineering's potential, to understand its limits and to avoid rash deployment." Last week, Princeton scientist Robert Socolow told the National Academy that geoengineering should be an available option in case climate worsens dramatically. But Mr. Holdren noted that shooting particles into the air -- making an artificial volcano as one Nobel laureate has suggested -- could have grave side effects and would not completely solve all the problems from soaring greenhouse gas emissions. So such actions could not be taken lightly, he said. Still, "we might get desperate enough to want to use it," he added.Another geoengineering option he mentioned was the use of so-called artificial trees to suck carbon dioxide -- the chief human-caused greenhouse gas -- out of the air and store it. At first that seemed prohibitively expensive, but a re-examination of the approach shows it might be less costly, he said.


ca said...

Stoneleigh --

If I am correct about your position, you believe that by the end of 2010 the DOW could be at 1000. I was wondering if there is anything that could alter this view of the future or whether it is unavoidable?

Tipper said...


From a social perspective what do you see in store for the United States specifically? What is your timeframe?

scandia said...

In the article on Ontario pensions I found, "...1992 legislation yhat enabled the company to underfund its own plans." Wonder if the workers knew this? They seeem so outraged now when clearly this was being set up almost 20 years ago?
In the Telegraph article I learn the first cut is to child benefits! Duh, no healthy children,no healthy future. One way to reduce population I guess. Let the die off begin with the children!Remember the chivalry of women and children into the life boats first? Doesn't look like it is going to play out that way this time.
Also "The government is determined to restore confidence in our banking system" So absolutely untrue! If it were true we would have transparency NOW, we would know what realities we need to handle. Gr-r-r

el gallinazo said...


I can't asnwer your question for three reasons:

1) The banks are keeping the exact status of the TW derivatives secret.

2) It's complicated beyond my pay grade

3) I'm not really interested in it quantitatively. All I know and all I need to know is that the losses are far greater than all the money the world will see for the next 20 years.

As to iPods, mine has paid for itself many times over. When I get really bored with my plumbing and consider knocking off early, I'll just crank up Chris Smithers and put in another hour or two :-)

However, I agree with John Hemingway completely as it is a crass, uncreative gift to the head of state of England. But rather than Shaker furniture, I would suggest Pat Robertson as a 10 year indentured servant. What could be more American than that. And besides the Queen is getting a bit pudgy and that would help to control her appetite.


My Rice Krispies say to try to hold off one year. Earn the money while you can, and put it in your mattress. Vermont is slow to feel the real estate crash. but it's coming. Maybe you could buy stuff now that might be hard to get in a year and store it -- like guns and ammo. Just kidding :-)

Unknown said...

If you folks keep asking huge open-ended questions of I&S that they have answered numerous times before, I am afraid you're going to drive them to a heart attack from all the exertion.

jazzage said...

The Somali pirates can't be any worse than the pirates in Washington DC. Maybe we should give them a chance to run this country since we can't with the losers we have in charge.

Stoneleigh said...

From the last thread:

Ed Gorey,

The main difference in the Automatic Earth outlook vs. Martin Weiss and Karly Denninger is the long term (time frames 2-3 years from now). Denninger and Weiss seem to think that recovery is possible if we take the painful medicine now and admit the obvious - the banks are dead. Businesses will fail, individuals and municipalities will go bankrupt, and debt will be cleared from the system. At that point, both Weiss and Denninger argue that a recovery of some sort can begin. Neither individual makes clear whether they think we can return to year 2006 living standards, but both imply that some sort of lasting bounce off the bottom is possible.

The Automatic earth, on the other hand, argues that a recovery to year 2006 living standards, or anything like them, is nothing but a fantasy.

We think Denninger and Weiss are far too optimistic in this regard. Of course there are always bounces of different sizes and bottoms that are more and less lasting. If I had to say when we might see a bottom that could last a few years instead of days weeks, or months, I wouldn't suggest such a thing would be possible before the middle of the next decade at the earliest. This does not preclude largish rallies within that timeframe though.

I terms of what the world might look like by then, Denninger and Weiss and other purely finance types seem to think that recovery is possible to something at least vaguely resembling business as usual. That isn't our position. We would say that the combination of capital and energy scarcity will preclude a return to anything most of us would recognize (with the possible exception of those almost a hundred years old or who grew up in a war-torn third world country).

Without the tremendous energy subsidy of fossil fuels and the magic of leverage, we will not be able to sustain anything like our current level of socioeconomic complexity, nor the global reach of our present imperial structure. We may be able to stabilize at much lower levels of complexity by centralizing control over resources and excluding most from access to them, so that those resources may be devoted to propping up a repressive power structure. This would hardly count as recovery from the point of view of the ordinary person, however. From that perspective the idea of recovery will be hollow indeed.

This is essentially what the Romans did when facing a comparable crisis. Under Diocletian, Rome implemented repressive control over its subjects and their productive capacity in order to sustain the centre. The centre did indeed survive for a while longer, at the expense of the imperial periphery and the citizenry, but even this step could only last for so long.

IMO as a global society we will NEVER return to the level we saw at this past peak, with 6.5 billion people and a quasi-stable middle class in the countries comprising the centre. We are moving rapidly towards far fewer people in a far more ruined world, as desperate people further degrade global carrying capacity on the way down, and we are moving back to a world where the few live like kings while a large proletariate eeks out at best a marginal existence in virtual slavery. That is where I see us going over this century, beginning (and most definitely not ending) with this depression.

bluebird said...

Much info is in the primers located at the top right of the page. I think it time for me to read them again.

Stoneleigh said...


The Orange Legion is indeed a fine example of herding behaviour. I have my own orange hat that Ilargi gave me so that I might look the part. Apparently he doesn't need an orange hat to look Dutch, but I do ;)

Have you ever read Brilliant Orange: The Neurotic Genius of Dutch Soccer, by David Winner? He's a Brit with a passion for Dutch football and a gift for writing about football in the larger context of culture. Definitely one of the more eclectic and enjoyable books I read last year.

Anonymous said...

The stock market is not the economy. The stock market is a gimmick.

As for Denninger thinking all would be well if xyz were done (xyz won't be done, though) is just a process in the walk called denial. The economy as we came to know it is never coming back. Sir Ponzi is dead...forever. S&I both understand this because they bring a more holistic view to things economic. Denninger, the self proclaimed capitalist pig, has a terminal blind spot. In other words he's a bit naive to say the least.

Stoneleigh said...

Anon @3:52,

The stock market is not the economy.

True, but stock market is good proxy measure of the human herding behaviour (ie the tug-of-war between optimism and pessimism or greed and fear) that also drives the real economy, albeit with a time lag. In other words, where the stock market leads (being a forum where the consequences of decisions show up very quickly) the economy (where consequences take longer to manifest) will follow. Political consequences will follow with an even longer time lag.

Unknown said...

Good, succinct article about future implications of the energy and economic crises by a favourite of mine, Tom Whipple. Nothing we aren't discussing here already, but very well put.

Penn said...

Have you ever noticed that the centers of towns and cities are usually banks?

Anonymous said...


yesterday Ilargi said: "You can't just make new money, because that would either make you an international pariah, or, if you don't care about that, hyper-inflate your coin."

Isn't this already happening?

Isn't this what has been promised will happen to avoid a deflation and pay for the debt?

What you say can't happen, already IS the monetary policy of the US.

Anonymous said...

From article:
Global Quantitative Easing


Bloomberg has reported that the Bank of Canada Governor ”Carney has pledged to lay out a plan that would flood banks with cash to halt the hoarding of capital and expand lending.” Consequently, the Loonie has been sliding against gold.

Gramps and Granny get to eat the cheap brand dog food instead of the premium stuff.


Stoneleigh said...

Anon @4:13,

Isn't this what has been promised will happen to avoid a deflation and pay for the debt?

Promises are cheap. This promise was made in a desperate attempt to reignite confidence, but it has no substance. Doing that would see the US crucified in the bond market, as we will likely see when the market eventually calls this bluff.

rapier said...

"True, but stock market is good proxy measure of the human herding behaviour (ie the tug-of-war between optimism and pessimism or greed and fear) that also drives the real economy, albeit with a time lag. In other words, where the stock market leads (being a forum where the consequences of decisions show up very quickly) the economy (where consequences take longer to manifest) will follow. Political consequences will follow with an even longer time lag."

This below is not a disagreement with the above. Just another perspective.

I subscribe to the Doc Stool view of the stock market. To wit, stocks rise and fall on the money available to buy them. This is of course a monetary view of the markets. When money and credit start to grow the very first place it can be seen is in stocks. Traditionally before the Fed and the credit system came unhinged from any restraint under Greenspan and Wall Street, the easier credit that flowed from Fed easing after recession or slowdown soon found its way into the real economy, but stocks came first.

Thus the idea that the market foretells the future or that the market rises on "confidence" or other paranormal explanations for stock cycles are fairy tales.

The Treasury and the Fed and every government and central bank in the world are now printing money and injecting it directly into the banking and financial sectors. Amounting to trillions already. Little wonder that confidence is rising. (<---irony and sarcasm alert)

The question to my mind is this. Will that money find its way into the real economy? In the historic business cycle business was eager to borrow and invest in plant and equipment and hiring workers . Now nobody wants to borrow as world overcapacity in most things is gigantic. Then too incomes are dropping at a precipitous rate still and even the optimists say it will for the next year.

So can assets just inflate again with pure injections of money, the real cash flow, real operating profits economy left behind as the ideas of a now lost age?

Or can the real economy regain its feet somewhat while leaving a good percentage of the populace totally out of it and an even larger percentage significantly poorer?

I will remain agnostic, tending to the negative, but agnostic. I can sort of envision such a world since it is just a more extreme version of the one we have had for 30 years.

Ignoring the energy or environment mind you.

jal said...



Not yet, according to the latest news.

And maybe will not be needed.


Ilargi said...

Anon 4:13

I'm guessing you're referring to new money as the monetary policy?! It's not entirely clear, nor who "promised" it. Still, how much more is in your pocket? Anything "new" or seen as such is used to pay off previously incurred debt, so there is no net increase. On the contrary, there are writedowns on losses up the wazoo. That's why we see deflation. Avoiding it is a too little too late topic.

In other words, no amount printed suffices to cover the losses, and there is a net decrease in money supply. Any attempt to cover all ""badness" would lead what I said and you quoted. they can''t print enough, or fast enough.

Also, it's not a US thing, everybody does it. And they all fail. Until they give up on foreigners buying their sovereign debt. But then all will have to be sold domestically, to a population that can''t even pay off its personal debt. And yes, by then, a few years hence, some will print all out and face guillotines for it. Or attack neighboring lands for the greater good and advancement of mankind.

Anonymous said...

@ Why home prices may never recover

He fails to mention the obvious, i.e. home prices can never recover until incomes recover. His analysis is just an anecdote.

Anonymous said...


Stoneleigh says: "Promises are cheap. This promise was made in a desperate attempt to reignite confidence, but it has no substance. Doing that would see the US crucified in the bond market, as we will likely see when the market eventually calls this bluff."

Promises may be cheap, but when the Fed injected $1.2 trillion last month on top of all the other injections we have seen, these real actions are no longer promises.

I don't think there is any bluff to call when the cards have already been played- and, as promised, will be played more in the future.

Anonymous said...

ilargi I am in a mood, and wish to torment the conservatives, so plan to send this below to all MP's if you would mind adding or correcting it would be appreciated.

-With debt levels near record highs, and savings near record lows, further increases in the money supply would further devalue what money Canadians do have saved. One of the reasons for this 'recession' has been the lack of personal savings. In order for Canadians to save for the future, we must have faith in our dollar to hold some value. Saving in foreign currency (or gold) would not be nearly as useful to the Canadian economy as savings that would be reinvested into the Canadian economy through the banking system. The aim of Mr. Carney seems to be to try to circumvent the banks who are not lending. What money that has been saved is there for the lending, what is wrong with the banks?

Further I would suggest sending Mr Carney back to Goldman Sachs and bringing back David Dodge.

jal, you say:


Not yet, according to the latest news.

And maybe will not be needed."

Good I say but where do I find such news? If you mean this:

‘Not Preordained’

Although the bank is considering quantitative and credit easing policies, “their use is not preordained,” Carney said in an April 1 speech in Yellowknife,

Yes, it may be a trial balloon but in that case should be shot down in flames and yelled about from roof tops.


Anonymous said...

Ilargi's list of people who should disappear should have included Lloyd Blankfein, current GS CEO. I heard him on NPR yesterday. Some women interrupted a speech he was giving. They were holding a banner that said "We want our money back". The NPR corporate lackey asked (acting like it was a tough question) "When will we get the (bailout) money back?" LB responded "I will tell you precisely when Goldman Sachs gives its money back: As soon as we are able to, while still being able to perform our functions in the capital markets systems subject to the approval of our regulators."
He then went on to say why he and others need to be paid so much. The smarmy, self serving bastard. I found myself yelling at the radio and had to turn it off. Utterly disgusting.

jal said...

@ xxx
Yes, it may be a trial balloon but in that case should be shot down in flames and yelled about from roof tops.
Yes, that is my reference.

The consummer, (importers), are outnumbered by the sellers, (exporters), who are fighting for a lower $C vs $US.

If the $US goes down the $C goes up and makes it harder to export.

I want a stronger $C so that I can buy more imports for the same $C.

Unfortunately, TPTB, want the opposite of what I want.

If the US want to get out of their problem they will have to lower the $ so that they can export to the rest of the world and at the same time reduce their imports.

It's a great protectionism mechanism.

Canadians exporters will just have to adjust to the coming reality without trying to print money.


Stoneleigh said...

Anon @5:04,

Promises may be cheap, but when the Fed injected $1.2 trillion last month on top of all the other injections we have seen, these real actions are no longer promises.

I don't think there is any bluff to call when the cards have already been played- and, as promised, will be played more in the future.

This was a token measure in comparison with the credit destruction we've seen in the last year. The bluff is that they will keep printing ad infinitum, and it may seem to work in restoring confidence for a while.

Once this rally is over though, we'll be right back in the same pickle. They'll be forced to follow through with more printing, but it won't help. Confidence will evaporate anyway, and when the bond market loses confidence, interest rates will spike. That will precipitate a tsunami of debt default, which is highly deflationary.

Stoneleigh said...


If I am correct about your position, you believe that by the end of 2010 the DOW could be at 1000. I was wondering if there is anything that could alter this view of the future or whether it is unavoidable?

I view that trajectory as unavoidable, although the specific number is only my best guess at this point. IMO we have some large-scale market cascades to live through before the end of 2010.

pineapple said...

rapier said: "The question to my mind is this. Will that money find its way into the real economy? In the historic business cycle business was eager to borrow and invest in plant and equipment and hiring workers"

Mostly no. Very soon the government is going to require banks to repay the Fed's largess and pump money (credit) into the economy. A few will do this, a few will refuse but the majority simply won't be able to (although they won't admit they can't). I call this period the bank rebellion and it is fast approaching. When you hear the government make announcements that the banks are going to start pumping credit to consumers there will be brief spike in the markets (this may be very substantial) and then the markets will start declining when people realize the banks are not going to follow through.

Ahimsa said...

El G,

Thanks for your response. That's our gut feeling, too. Yes, our 26 yr. old son and my husband will hold on to their jobs as long as possible. The 19 year old is completing the AA degree at the community college and hopes to become a writer and organic farmer. We just hope a category 5 hurricane won't come our way too soon. :)

Anonymous said...

Here's my 2 cents if anyone cares.

The DOW won't likely fall to 1000 b/c the underlying measuring stick, aka, the US Dollar, will be printed into the stratosphere to keep that from happening (we're already monetizing debt to keep interest rates artificially low and have made preferred equity purchases of banks among other tactics (see TALF, TARP etc...). I see DOW 3-5k as the low.

Now in terms of purchasing power, undoubtedly most will lose 90% of their purchasing power through either asset declines or currency debasement.

Manipulation lives on! Uptick rule reinstatement, leaking the bank stress test results (by the way, did they even conduct them?) and the big sting of the day, the Wells Fargo positive earnings preannouncement, no doubt synched with the aforementioned releases and only days after mark to myth was approved by the so-called independent FASB, proves the manipulation of percepetion and confidence is ongoing.

Notice how Wells didn't mention AOCI for the quarter, undoubtedly where all the mark to market unrealized losses were hidden. It will be interesting to see if book value per share increased by less than $0.55 in the quarter (or the net income per share they reported, after preferred stock dividends).

My favorite point of the day was that throughout the decline in the markets, asset management firms essentially experienced minimal net outflows in 2008 and through Q1'09, meaning most retail investors have held throughout the decline, a sure sign no capitulation occurred during a 50% market decline!

As Ilargi said, the game is the plan. And it is in full-effect right now. Geithner, Summers et al continue to run their game unabated despite $55 trillion in worldwide asset losses.

Obama says buy stocks, stocks rise. Now he says refinance. Hmmm...

Anonymous said...


Granny N Gramps better take note - even the animals are refusing the cheapest stuffs. Seems they'd rather starve and if the animals won't touch it, well...

dark_matter said...

My idea for a new reality show called "The Herd": Put 100 people in a big room and give each $1 the first minute, $2 the second minute, $4 the third minute and so on exponentially. The catch is, only the first 10 people to leave the room get to keep the money. Make sure to have good ethnic mix. Oh, and give each person a taser. Now that would be must see TV.

Anonymous said...


It's a great protectionism mechanism.

Canadians exporters will just have to adjust to the coming reality without trying to print money.

Maybe it's time to chuck Nafta? You know, money may start growing on trees down there but when the lights go out it gets burnt through quickly.


Stoneleigh said...

Some one asked me if hierarchical structures would always result above a certain scale. IMO this is true, and from quite a small scale too.

Pecking orders are very common in social mammals in general. Even my sheep will punish a new addition to the flock quite mercilessly before eventually accepting them - head butting the poor thing into walls and keeping them away from the food. There's a clear pecking order in our barn and we have to be careful that the low sheep on the totem pole actually gets enough to eat. Even if there's plenty to go around, the alpha-sheep will still hog as much as possible and leave the subordinates with little or nothing if they can.

It's interesting watching the sheep and alpacas trying to communicate dominance to each other when their dominance signals are so different that they don't trigger the intended a submissive response. It's very amusing watching a confused sheep that's just been spat at by an alpaca and doesn't know it's supposed to feel cowed.

Our pack of dogs behaves somewhat similarly to the sheep, although to a less extreme extent. We have a new puppy at the moment, and the older dogs will take toys away from her just because they can. They also engage in occasional puppy-squishing, just to remind her of her place in the pack, and they would eat her food if we didn't prevent it, even though they have plenty of their own. Eventually she'll be twice their size, so the shoe may well be on the other foot, so to speak.

Humans show clear signs of our mammalian heritage. Culture affects how we express our impulses, but it doesn't erase them.

Anonymous said...

Does anyone know where the union was when looking after how well funded GM pensions were. They must have financial advisers and lawyers and such. Did they trade off long term safety for high wages and glittery pensions that depended on the idea of too big to fail rather than a low risk sensible pension?


Anonymous said...

I've been pondering the notion that nowhere do I see rational, adult like behavior manifesting itself to deal with any of the major problems of the planet; climate, population, energy, finance etc...

A new term 'Sub-adult', comes to mind as the best description for the present quality of human leadership on the Late, Great Planet Earth.

'Sub-adult' in the sense that they act like hormone driven adolescences but are to old and has been to be one.

I think humanity is doomed because nowhere do I see any voluntary restraint in consumption patterns. Imposed poverty by means of tyranny seems to be the only limiter on the human appetite for more stuff.

No one but a small minority of humanity will ever voluntarily check their own behavior as regards consumption.

Reason and enlightened self interest will never prevail over the hard wired hierarchical 'brown nosing' that lies at the center of the Herd's irrational Heart of Darkness.

Anonymous said...

Illagi wrote:
"Then again, people do still trust Obama. God only knows why, but they do"

People trusted and worshiped Stalin, even as he rounded up millions and through them into gulag slave camps. Many of the inslaved workers believed that it was a mistake made by some low-level bueracratic, when in fact Stalin personally signed the order to send them to the gulag.

Despite that Obama is expanding the Middle East wars, and is increasing the Federal gov'ts power over the population (warrentless wiretaps, nationalization of all medical records, etc), they still cheer! I would imagine the America people would celebrate even if Obama starts WW3. As long as the Democratics start it, its OK!

CA wrote:
"you believe that by the end of 2010 the DOW could be at 1000."

The Dow "priced" in USD will never fall that low. The gov't will ramp up printing to make sure that markets don't collapse. I would think that the gov't would not allow the US Dow to fall below 5000. In addition, the Dow index will swap out the worst of the losers and use there complex formula's that price the Dow. If you took all of the Dow 30 stocks it would not equal the Dow value. When a stock is swapped out for another they use a complex calculation so that the value of the Dow does not change from the previous stock.

Perhaps compared to other currencies, perhaps Precious metals, etc, the Dow will fall to 1000, but not in relative values.
Consider that Japan, which began the Quantive Easing also bought stocks to prevent their stock market from collapsing.

Anonymous said...

Almost barfed up my dinner when I read this:

Oh Goody! We're All Included!

"During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars.

But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

el gallinazo said...

For some reason, I am still on's mailing list. Think I may have contacted them about something in 2005. Never gave them money though. I would only contribute directly to Kucinich and Nader. Anyway, I got this email yesterday asking me to sign a petition directed to Timmy Twolips demanding that he "fire" Ken Lewis of BOA.

I sent them the following comment:


Speaking as an Old Lefty who goes back to the ‘60’s and SDS, I have met cats with more brains than When are you guys going to realize that you were sucker punched and that Obama was a Manchurian candidate, bought and paid for by the banksta mob? And you address your petition to Geithner! The head of the IRS who cheats massively on his own taxes. The President of the NY Fed who did nothing to control the thievery on Wall Street though that was suppose to be his job. He orchestrated the Bear Stearns taxpayer fiasco to protect Morgan Chase against their bad CDS gambles and orchestrated the AIG fiasco along with Paulson to pass tens of billions of taxpayer dollars surreptitiously onto Goldman and UBS. And now he wants the FDIC to front a cool trillion to the Bankstas on their gambling losses as an end run around Congress which is just starting to wake up from its stupor, ignorance, and endemic corruption. Complaining to Tim Geithner about Ken Lewis is like complaining to Adolf Eichmann about Joseph Mengele.

And the Manchurian Candidate’s other economic genius, Summers. The kleptocrat Robert Rubin’s star pupil; the man most responsible for repealing Glass-Steagall which permitted this taxpayer grand theft. A man so obnoxious and obtuse that even Harvard vomited him forth from their presidency. I live in the US Virgin Islands and can’t vote for president, but if I could, I would have voted for Nader again. And I supported his campaign financially.

So what’s’s deal? Are you that freakin’ stupid, or corrupt, or just too proud to admit that you got suckered once again by the banksta kleptocrats? I just stay on your mailing list because I need a sardonic laugh once in a while.

Disrespectfully yours,

EBrown said...

El Gal,
That was rich ;)

Anonymous said...

el gallinazo said...

For some reason, I am still on's mailing list.

J. Hanson said it succinctly, "Everyone is trying to sell you something". Good retort.

Anonymous said...


"Humans show clear signs of our mammalian heritage. Culture affects how we express our impulses, but it doesn't erase them."

But like tits on a bull it could make them useless;)

Jay Hanson misses it when he doesn't realize that if we have a saving grace, a genetic propensity', it is the ability to change our culture - unlike a sheep which only has a sheep culture. Our problem here is to get it right when we do want change.

For instance a culture that promoted the concept that we are not our ideas ... "who are you alone yourself and nameless" ... would make for malleability of ideas and so flexibility of hierarchy, but how to get it right? with spin that could as easily end up grey rigid and totalitarian rather than gay relaxed and anarchic.

So ... ?

anon 11:36

Interesting we are both suddenly using Jay today!

You say: J. Hanson said it succinctly, "Everyone is trying to sell you something". Good retort.

Just goes to show you just cant wantonly trust ideas. I would expect Jay loses out on a lot, so rigid in his thinking - doubt mucho joy flying with that stick. But I guess it's his head and it's up to him how he hangs it.

Anonymous said...

PLEASE, proof read your writing before you post your column, otherwise it makes you look as ignorant as the people you're railing against.

scandia said...

Anon 3;20, You are not the first to make that suggestion to Ilargi.
I don't mind an error or two myself. It's the substance, the insight that I'm looking for.

Zaphod said...

Anon 3:20

You no can haz cheezeburger! No soup 4 U!

1) I wish people wouldn't post completely anonymously. I don't expect real names, but it sure is nice when skimming for value to have some meaningful name tags from which to key.

2) When you put up your own blog and write as clearly in Dutch as Ilargi does in English, perhaps Europeans will join your blog and criticize you as well.

Anonymous said...

Welcome to Mississauga"
posted today on Jesse's Cafe. Interview with the Canadian city's mayor - the only debt free city in Canada.

Anonymous said...

Interesting overview of economic risk scenarios from a link posted on, although I believe they have the scenario probabilities inverted.

Anonymous said...

Anonymous said....

El Gal:

It seems you don't believe in cause and effect, karma, as you sow so shall you reap? It's manifesting itself all around you every day -in the public arena AND both personally and privately.
Time to pay attention!

Anonymous said...

Hey 3:20 please define clearly who you are railing against as you were right under me and I didn't figure out it was Paleocon who was railing at me as an anonymity without tags.

Sorry Paleocon, am red in the face with embarrassment, usually keep a identity for a session


Anonymous said...

Oh say Paleocon,

Would you hail from Oregon by any chance, if so I had the impression that soup ran free there?


Anonymous said...

With a slight booth charge of course.