Wednesday, January 6, 2010

January 6 2010: Iceland, or Size matters

Detroit Publishing Co. Great Lakes Cruising 1901
Popular excursion steamer Tashmoo leaving wharf with capacity crowd of day trippers

Ilargi: The case of Iceland and its financial shenanigans is, if nothing else, intriguing and amusing. Not for some of the people involved, I know, and I mean no disrespect. But it is in the way the situation is dealt with and in how various parties try to come out on top.

A short background: Iceland had 3 main banks who all, albeit to various degrees, made unrealistic profits for investors and depositors in early 21st century times, and then went bust. One bank, Icesave, which had many clients in England and Holland, owes these clients some $6 billion, a sum the Iceland government is held responsible for and initially seems to have agreed to pay. The people of Iceland, all 320,000 of them as it were, have started questioning why they should pay for foreign investors' losses with banks with whom they have no connection other than that they happen to be located in their country.

Britain's decision to put Iceland on some terror alert list because of the banking affair is likely a big factor in this, as well as in the decision by the president to let the people decide in a referendum on February 20 whether they want to pay back the losses of foreign investors who had accounts with Icesave only so they could get a few basis points more interest on their funds. It doesn't look like they will.

Which may put Iceland on some black list, with the IMF threatening to withdraw emergency funds and Scandinavian loans in peril. The Dutch threat to block Iceland's entry into the EU is seen in Reykjavik as similar to Britain's terror list boondoggle. The prevailing sentiment these days among the geysers can best be summarized like this: "We may be small, but we ain't your bitch". And that is a sentiment that may provoke a lot of sympathy, provided the Icelanders play their cards right.

In the next 6 weeks they will come under huge international pressure to pay up or else, for there's nothing the international community fears more than members who don’t play by the rules, no matter how inane and insane they are. Plus, of course, Iceland is not some small African nation full of poor black people, it’s a small European nation full of the kind of people that wealthy US and EU citizens can identify with: white and relatively affluent. They could be your neighbors. They could be your family. They could be you.

So how reasonable is it for Britain and the Netherlands to demand restitution of losses suffered? Interesting question. The answer is not that easy, since it begs the next question. Who is to blame for the losses? There's the bankers, who went megalomaniacal, and got much bigger than banks based in what is population-wise not more than a mid-size town ought to be. But Iceland is a member of the EEA, the European Economic Area, which gives its banks the right to expand to the rest of the EU.

So alright, let's see. First to blame: the bankers. Second: The Icelandic government, who should have regulated its banks much closer. Third, the governments of Holland and England, who should have done due diligence and demanded far more strict guarantees from the banks. Fourth, the Dutch and British investors, individuals, local governments and companies, who all should have read the fine print. Fifth, the people of Iceland, who were living it up with the cash floating in freely.

But we all know how blame moves. The investors point to their own governments, who didn't warn them. These governments point to the government of Iceland, which didn’t warn them. That government points to the bankers, who went nuts, but who they still have to cover for. And last, the people of Iceland point to all of the above and say they should all have been wiser, and the fact that they were not doesn’t mean Icelanders now have to fork over, no matter how certain parties like to interpret laws and regulations. Some things just don't feel right.

And what do we feel about this, who are not directly affected by any of it? Well, try this one on for size. If you allow me to numb and dumb down the numbers a bit, the US at 308 million citizens is about 1000 times bigger than Iceland (320,000). Which means that the US equivalent of what the British and Dutch are demanding from Icelanders would be, loosely, $6 trillion. Now what would you say the odds are that the American people would agree to pay that kind of money, if it were payment for what their banks have (mis-)done in the past, to a group of foreign investors? Let's say Chinese and Japanese?

I may be wrong, of course, but I have the feeling that I know what Americans would think of that. They'd be marching in the streets, on their way to embassies and consulates, if not private businesses. They'd say: we have a hard enough time ourselves as it is, and we ain't paying no foreigners who weren't making sure they knew what they were doing.

The same reaction would come in London and Amsterdam as well, naturally. Funny thing is that the governments there were very quick to guarantee their citizens' losses, and only after that claimed them back from Reykjavik. There doesn't seem to be any legal obligation for them to do so, it looks more like an election-related issue. There are all sorts of depositor protection schemes in place, that's true enough, but everyone could have known that the established $30,000 guarantee from Iceland for every depositor account wasn't worth much, given that it’s backed only by the full faith and credit of 320,000 people. Britain is what, 200 times bigger than that?

But in the end, as I'm pondering all this, what is probably the most interesting part of it is that the American people ARE in fact in the same boat as the Icelanders. The main difference between them may well be that the latter stand up for themselves, where the former don’t understand what's going on. The US government has indeed already pledged $14 trillion in public funds (with a total risk of up to $24 trillion) for US bank losses. It's just that American banks are covered by the ability of the US to borrow enough money in international markets to cover their losses, something for which Iceland is simply too small. And also, the US gets to bleep around with accounting rules, so bank losses can remain hidden for a long time (though not forever).

So while it may look like the situations are entirely different, they’re not really. On the ground level, it's the citizens who are being forced to pay for institutional gambling debts, the old adage of keep profits private and make losses public. China doesn't go to Obama to demand payment guarantees tomorrow morning, but it's all just a matter of size. That size determines that the Icelandic situation is far more transparent, since smaller make simpler. But down the line, the Iceland banks weren't the greatest gamblers, it was Wall Street and the City of London. And the $20,000 that Icelanders "owe" per capita (in the eyes of others) isn't really the issue, it won’t kill them. They just take a stand against what they see as bullies.

The amount Americans "owe", though, is already more than twice as much per capita at $14 trillion. And there's no end in sight, since none of that money has been used to actively solve problems, it's all merely hiding them for a while longer.

In other words, here's waiting for the moment Americans become more like Icelanders, and stand up against bullies (I'm sure Oprah has advice to provide on the topic). But also, here's not holding any breath, and here's expecting that by the time any sizeable group stands up, the amounts owed will be a multiple of $20,000 and enough to generate debt and poverty for years, if not decades, to come.

And you know what the funniest thing about it all is? In America it wouldn't even take 320,000 people standing up, for real, to change policies and history in a heartbeat.

But they're not there. They’re in Iceland.

Size matters. But so does courage.

Angry Iceland defies the world
Iceland's president has blocked a Bill to pay Britain and Holland up to £3.4bn for Icesave depositors, acknowledging that popular feeling in the island nation is too strong to proceed without a referendum. The move reopens a bitter dispute and greatly complicates Iceland's loan agreement with the International Monetary Fund. It has already led to a fresh downgrade to BB+ by Fitch Ratings, which called the decision "a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world."

The Icesave law was passed by Iceland's parliament in a knife-edge vote late last year, but a petition by the InDefense movement has changed the political landscape. The lobby collected 56,000 signatures – a quarter of voters. President Olafur Ragnar Grimsson said the "overwhelming majority" wanted a direct say over the matter, and that no settlement would hold without their assent. "It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law," he said. "At this crucial juncture it is also important to emphasise that the recovery of the Icelandic economy is a matter of vital urgency".

If voters say "No" when the referendum takes place in a couple of months, the accord thrashed out with London and the Hague during months of wrangling will no longer have any credibility, whatever the legal niceties. The reality is that Icelanders have erupted in collective rage at what they believe to be gross injustice and "gunboat diplomacy" by Downing Street. What rankles is Britain's use of anti-terrorism law to freeze Iceland's assets. The Icelandic central bank was listed besides al-Qaeda as a terrorist body – unprecedented treatment for a NATO ally. Holland was careful not to go so far.

"Importers couldn't get trade finance for food. We feel deeply wronged," said Johannes Skulason from InDefence. Shelves were bare for weeks in Icelandic shops as the banking system disintegrated. Einars Már Gudmundsson, a novelist, said most citizens were unaware that Iceland's three leading banks –Landsbanki, Glitnir and Kaupthing – were operating as global hedge funds with exposure of 11 times Iceland's GDP. "I had never heard of Icesave till this happened," said Mr Gudmundsson. "We were told that what these banks did abroad was nothing to do with us but when it all went wrong the responsibility fell back on us. Profits were privatised, but losses were nationalised." He added: "We're told if we reject the terms, we will be the Cuba of the North. But if we accept, we'll be the Haiti of the North."

Both Britain and Holland expect Iceland to stick to its agreement, but the legal claims are far from watertight. Iceland accepted "political responsibility" for the 320,000 British and Dutch deposits in exchange for lenient terms (arguably denied) in November 2008, but never accepted the legal claim. The UK has refunded private savers up to £50,000, but councils such as Kent are relying on the deal to recoup their money. They have retrieved £100m of the £900m put in Icelandic accounts.

Iceland's Left-wing coalition – which unseated free marketeers in February's "Saucepan Revolution" – has backed the Icesave terms, deeming it is the only way for Iceland to move beyond the disastrous episode. The petitioners said they accept that Iceland's people should foot part of the bill, but object to the "Versailles" terms: a loan at 5.55pc interest, to be repaid within 15 years. The central banks said this will increase Iceland's public debt by 20pc of GDP.

A report by Sweden's Riksbank said Britain and Europe share blame for the fiasco. It said "absurd" EU rules – which cover Iceland indirectly – told states to set up a "guarantee scheme" for banks, but never said taxpayers were liable for losses. The reports added that the UK "hardly bothered" to inform savers that the schemes were ill-funded. "The conclusion is clear: the EU host countries (UK and Holland) are also to blame for Iceland's disaster. It would be reasonable that they carry some of the burden. It takes two to tango," it said.

The UK Financial Services Authority said it was unable to stop Icelandic banks raising deposits in the UK under the EU's "passport" system, even when they began milking UK customers to cover losses at home. Whatever the rights and wrongs, Iceland was by then already being crushed by a financial tsunami. Britain's use of anti-terror laws at that moment will not sit pretty in diplomatic history.

Iceland Should Have Stuck to Fishing
The last time Iceland and the U.K. went to war it didn't end well for the British. In November 1975 the Icelanders wanted to impose a fishing-exclusion zone of 200 nautical miles to protect stocks. This represented a considerable escalation of the previous conflicts, which began with skirmishes in the late 1950s when Iceland attempted to limit fishing by other nation's fleets. In the 1970s Iceland won after it threatened to close a NATO base vital to American interests. But all in all it wasn't much of a war.

A veteran of that third cod-related conflict—a journalist then working for a British tabloid newspaper—remembers " a few bumps and collisions" during his time on board a British frigate skirting Icelandic waters. But no shots were fired: "It was great fun," he says. "Three weeks of Royal Navy pink gins and my entire mess bill, food and drink, came to only £30 ($50) by the end. Brilliant." Yesterday hostilities resumed, with the Netherlands also involved—although it is highly unlikely that any country will deploy its navy. This time the squabble isn't related to fish; it's about money and a sunken savings account called Icesave, from Iceland's Landsbanki. It is a story of colossal folly.

At risk is Icleand's future membership of the European Union and $5.7 billion that the British and Dutch governments say they are owed. In an extraordinary rebellion, the plucky president of Iceland says his country won't cough up and on Tuesday he vetoed the government's bill that was designed to facilitate payment. Within hours Fitch Ratings had announced downgrades for the country's key ratings.

Why is Iceland in this mess?

Here was an unlikely player in the field of financial innovation with an unexciting but seemingly reliable record. Yet from the 1990s onward, Iceland cultivated the apparently perfect post-modern image, encouraging its banks to look for more business beyond its shores. By 2005, Landsbanki's aftertax profit was 25 billion kronur ($200 million), an increase of more than 90% from 2004. An ancient country of fish, snow and tradition melded its sober reputation with a new taste for shiny financial products. A generation of credible young musicians provided the sound-track whilst Icelandic entrepreneurs leveraged up and bought well-known European brands.

At the height of this cheap money boom, savers abroad were attracted when offered high returns from the odd-sounding Icesave (think about it and it sounds like your investments could easily be frozen at any point). But in the crazed excitement of those years, savers in the Netherlands flocked to open accounts. And for the British it also looked too good to be true, with savings rates guaranteed to be above the Bank of England's base rate. The problem for everyone involved was that it was too good to be true.

Icesave collapsed in October 2008; Landsbanki was taken over by the government and the country had to be bailed out with loans from the International Monetary Fund and support from others totalling almost $10 billion. The new government agreed in June last year to pay back the $5.7 billion the British and Dutch had spent partially recompensing their citizens. Public anger has been mounting in Iceland ever since, and no wonder.

Consider what happened. In Britain, the Icesave business was positively welcomed by the government in good times and regulators failed to spot that it was woefully under-capitalised. When it collapsed, the British government, along with the Dutch, decided to bailout its citizens with money in Icesave. They didn't have to do this; those who had placed money in an institution rooted abroad were all adults who should have been aware of the risks. Of course, the governments only paid up because it knew that it was vulnerable to the charge that its regulatory regime had failed. They then set about claiming back the money with menaces from Iceland. Until yesterday the tactics were working.

What message will savers in large countries draw from this for next time there is a boom? That they needn't ask too many questions about apparently easy returns, because if it goes wrong then their government, or their fellow taxpayers, will bail them out. The bill can then be sent abroad and bullied out of foreign taxpayers. Thus they learn the wrong lesson and forget caveat emptor, or buyer beware.

For the European Union this is also a testing moment. Two of its leading members states—hungry for cash—are crowding down on a state with aspirations to join the EU. The talk is of membership being blocked unless the British and Dutch get their money. The EU has form when it comes to bullying small states. One suspects that the union will ask the Icelanders to keep on voting in their referendum on its president's veto until they get the right answer and send a check.

This is a squalid tale all-round. Iceland made terrible policy mistakes for which its population will pay. But in an age of globalization that rewards size and scale it is more than tempting to admire bravery in the face of a concerted international onslaught. A small nation faces sustained economic warfare from bigger countries and under the weight of popular domestic pressure its president has drawn a line in the ice.

Will it work? It is highly doubtful. The last time Iceland tried something remotely similar, in the last of those cod wars, the world was different. Now the multinational organizations—the EU and the IMF—have much greater weight. Both can accord the country virtual pariah status if they choose. This combined with the power of the markets makes resistance look pretty futile. For decades to come, the Icelanders will regret their foray into international finance. By the time their enemies are through with them they'll wish they had stuck to fish.

Iceland Says It Won’t Default Following Junk Rating
Iceland’s Finance Minister Steingrimur Sigfusson said his government won’t default after its debt was downgraded to junk following a presidential veto of a depositor bill that had sought to repair investor relations. "I don’t believe there’s anything that points to" Iceland defaulting, Sigfusson said in an interview in Reykjavik yesterday. Even so, "patience toward Iceland is running out. That is a reality we have to face."

Iceland is trying to put behind it the fallout of the banking collapse that garroted its economy 15 months ago. A settlement of the so-called Icesave depositor bill is the last milestone toward the island’s financial resurrection. Failure to pass the bill may jeopardize an international bailout agreement, Economy Minister Gylfi Magnusson said in an interview today. The veto has already triggered credit downgrades of the western nation hardest hit by the global credit crisis.

President Olafur R. Grimsson yesterday vetoed a U.K. and Dutch depositor bill after receiving a petition signed by more than 60,000 of Iceland’s 320,000 inhabitants urging him to reject the legislation. The accord, which obliges Iceland to use $5.5 billion in borrowed funds to cover the depositor claims, will now be put to a referendum. Polls show about 70 percent of Icelanders oppose the legislation. "The status is very difficult," Sigfusson said. "The assignment we have been tackling has been difficult enough and we are concerned about the progress and resurrection of the economy." An International Monetary Fund review scheduled for this month probably won’t take place after the veto, he said.

Grimsson’s decision doesn’t necessarily mean an IMF-led rescue will collapse, as long as countries that pledged to finance the emergency loans to Iceland remain committed, Mark Flanagan, the fund’s mission chief for Iceland, said in a statement late yesterday. The IMF will consult with countries providing the money for the program, he said. The country’s $2.5 billion loan from the Nordic countries is contingent on resolving the Icesave dispute, Magnusson said in the interview.

"We could contemplate a scenario in which we could move forward without the Nordics, but I’m not sure that it would work and I don’t recommend that we take that route," he said. Grimsson’s announcement prompted Fitch Ratings to lower Iceland’s credit grade to BB+, one level below investment grade. The rating carries a negative outlook. Standard & Poor’s late yesterday put its BBB- rating on creditwatch negative, indicating "the likelihood of a downgrade if political uncertainty grows and external liquidity pressures persist in the wake of" the Icesave veto.

"This latest setback raises renewed uncertainties over the availability of bilateral and multilateral funding for Iceland’s IMF financial rescue program," Fitch senior director Paul Rawkins said in a statement yesterday. "Moreover, it threatens to further stifle progress towards liberalizing capital controls that continue to trap significant non-resident investments in Icelandic krona and also the establishment of a credible market-determined exchange rate regime necessary to restore the economy’s access to international capital over the medium-term," Rawkins said.

Moody’s Investors Service and Standard & Poor’s both rate Iceland one level above junk. Standard & Poor’s credit analyst Kai Stukenbrock said Iceland’s rating may be lowered "by one or two notches" if the "political impasse persists or should we deem that Iceland’s access to official external financing has been affected." Credit default swap spreads on Icelandic debt jumped the to the highest since August, rising 35 basis points to 479 basis points, according to CMA DataVision prices. A higher CDS price reflects a higher cost of insuring against default.

"We would expect to see negative rating actions as a result of the president’s decision," Danske Bank A/S chief analyst Lars Christensen said in a note yesterday. Since the collapse of its biggest banks in October 2008, Iceland has been struggling to reach agreements with creditors trying to recoup about $80 billion in debt. Landsbanki Islands hf, which offered the so-called Icesave accounts outside Iceland’s borders, owed $28 billion of that.

After Iceland’s banking implosion, the krona lost as much as 80 percent against the euro on the offshore market. The central bank imposed capital controls, locking in as much as 700 billion kronur ($5.6 billion) in foreign assets denominated in kronur. The central bank had started to ease the capital restrictions in November, and said last month continued relaxation of controls depends on the stabilization of the economy. "The IMF was contacted today and I’ve spoken to a few people, among them the finance minister of the Netherlands," Sigfusson said yesterday. "We will now meet with the central bank, leaders of labor and employer unions."

Iceland is relying on a $2.1 billion loan from the IMF and a $2.5 billion loan from the Nordic countries. Even after Grimsson’s veto, "the government is committed to honoring its legal obligations and won’t run away from anything," Sigfusson said. "There is no indication" that the government will need to resign, he said. Parliament will reconvene on Jan. 8, instead of Jan. 26 as originally planned, to discuss the fallout of Grimsson’s veto and to pass laws on national referenda, the Prime Minister’s office said yesterday.

How The Government Payroll Replaced Goods-Producing Jobs
In the just-so story of the evolution of our economy, our old manufacturing based economy has been replaced by an innovative knowledge economy. That's not quite true.

In fact, the decline of the jobs in goods producing sectors of the economy--construction, manufacturing, mining and agriculture--has largely been met with an increase in jobs on the government payroll. We've gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.

chart of the day, goods-producing workers vs. government payroll

Private sector sheds 84,000 jobs in December, ADP says
Private-sector firms in the U.S. eliminated 84,000 jobs in December, according to the ADP employment report released Wednesday.. It was the fewest jobs lost since March 2008. The private-sector has shed jobs for 23 months in a row. In November, a revised 145,000 jobs were lost, compared with the 169,000 originally reported, ADP said. The ADP index does not include government jobs.

The ADP jobs data come two days before the Bureau of Labor Statistics releases its estimate of December nonfarm payrolls. Economists surveyed by MarketWatch are looking for payrolls to rise 10,000 in the BLS survey, the first gain in two years. Compared with the BLS survey, the ADP report has indicated steeper job losses over the past seven months, with an average difference of about 100,000.

To get an apples-to-apples comparison with the Labor Department report, you have to subtract about 10,000 jobs typically lost in the public sector each month. The ADP report implies a 94,000 decline in payrolls. Automatic Data Processing Inc. provides payroll and human-resources services to about one in every six U.S. workers, serving more than 500,000 companies. The ADP sample is taken during the same week of the month as the government's survey, using similar method

US pending home sales index plunges 16%
Pending home sales plunged a seasonally adjusted 16% from October to November as a highly popular tax credit for first-time buyers was set to expire on Nov. 30, the National Association of Realtors reported Tuesday. The report suggests that sales of existing homes will drop off in the next few months. The pending sales index, which had risen nine months in a row before falling in November, was 15.5% higher than in November 2008. October's increase was revised higher to 3.9% from 3.7% previously reported.

The federal tax credit for first-time buyers was ultimately extended through the first half of 2010, and it's expanded to repeat buyers. "The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own," said Lawrence Yun, chief economist for the lobbying group. "We expect another surge in the spring."

To qualify for the expanded credit, buyers must sign a deal before April 30 and close on the sale before June 30. "Sales should rebound going forward," agreed Anna Piretti, economist for BNP Paribas. "Nevertheless, this report suggests that the recent strength of housing demand is still far from becoming self-sustaining and that the housing market remains overly dependent on government support." Yun said he expects about 2.4 million more buyers to take advantage of the subsidy from taxpayers before it expires on June 30, in addition to 2 million who have already taken the tax credit.

The NAR's pending sales index for November fell in all four regions: down 26% in the Northeast and Midwest, down 15% in the South, and down about 3% in the West. The index tracks sales contracts signed on existing homes, usually about a month or two before the sale closes, at which point it is picked up in the NAR's existing-home sales report. Existing-home sales are up 39% in the past six months, boosted by the first-time buyer subsidy.

In a separate economic report Tuesday, the Commerce Department said orders for new U.S.-made factory goods rose a seasonally adjusted 1.1% in November, ahead of expectations for a 0.8% gain. Most of the gain came from a 7% increase in petroleum, which was due, in part, to 3% higher prices.

US public pensions face $2 trillion deficit
The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund. The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. "State and local governments are correctly perceived to be in serious difficulty," Mr Kramer told the Financial Times. "If you factor in the reality of these unfunded promises, their deficits will rise exponentially."

Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations. A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits.

Mr Kramer, chairman of New Jersey’s investment council and also a senior partner at the hedge fund Boston Provident, warned that outdated accounting models and unrealistic expectations of future returns had led states to underestimate their pension requirements. Public pension funds do not use mark-to-market accounting, relying instead on actuarial numbers that average out value of assets and liabilities over a number of years – a process known as "smoothing". Mr Kramer’s analysis used the market value of the assets and liabilities of the top 25 public pension funds at the end of the year.

He also looked at market interest rates, which are used by corporate pension funds and are lower than the rate of return of about 8 per cent employed by public funds, to calculate future returns. Using the 8 per cent rate of return, the funding requirement of the US public pension system would still be about $1,000bn. Mr Kramer, a power broker in the Democratic party, criticised the financial metrics used by public funds and argued that his assumptions were more realistic. "The accounting treatment of public retirement plans is the political leper colony of government accounting. It is a no-go zone," he said.

Pension funds’ requirements are expected to compound the pressure on local finances. Thirty-six of the 50 US states, including California and New York, have plunged into budget deficits since fiscal year 2010 began, which for most states was July 1 2009, according to the National Conference of State Legislatures.

How Will The Economy Recover With Lending Shrinking Like This?
There's been some chatter about a recovery in large commercial bank lending... but the data says otherwise.

The latest figures out of the St. Louis Fed show that once again, for the week ending December 16, lending fell sequentially from to $664.7 billion in total lending from $665.6 billion in the previous period.

That may not look huge, but in order for a recovery to happen, we'll presumably need to seem some evidence of an expansion in lending.

chart of the day, Commercial And Industrial Loans Of  Weekly Reporting Large Commercial Banks

Personal Bankruptcy Filings Rising Fast
The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses. And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filling. A "means" test, for example, was introduced to separate those who could afford to repay their debt from those who couldn't. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured. The worst U.S. recession in a generation is testing the effectiveness of these laws. The economic downturn also has prompted more middle-class Americans to file for bankruptcy protection.

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data. It is the highest level of consumer-bankruptcy fillings since 2005. Consumers rushed to file in 2005 before the new bankruptcy laws took effect in October of that year. Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

"That suggests it was largely ineffective," Ronald Mann, a law professor at Columbia University, said of the 2005 overhaul. "I don't think anybody who's knowledgeable about the bankruptcy system thought the statute was well crafted."

During this recession, the housing crisis and high unemployment rate have prompted more people to file for bankruptcy who may never have considered the option before, experts said. Filings from 2008 showed more people with high income and high education levels resorting to bankruptcy petitions, according to an annual survey of consumer-bankruptcy filers' demographics by the Institute for Financial Literacy, a nonprofit that provides bankruptcy-related counseling and education services. Those demographic trends appeared to continue last year.

Mr. Mann said he believes bankruptcies reached their peak sometime last year, but bankruptcy attorneys from across the country said there was no sign that business was slowing. The 113,274 filings in December alone were a third higher than the same month a year earlier. "I can't see over the top of the files on my desk," said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect. In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran's clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said. "Expenditures that were rational when these people were working at the peak of their salary just are no longer sustainable when they lose jobs or take jobs at a third or a half of what they were making before," Ms. Moran said.

Craig W. Andresen, a Bloomington, Minn., bankruptcy attorney, handles between 20 and 30 cases a month, but said that in most years that slows to between five and 10 in December, as people use the holidays to divert themselves from their financial problems. This year he had a full load of cases through year's end. "Everyone has said, 'Wow, I stayed busy all month.' I've never heard [bankruptcy lawyers] in December say that they're busy and don't want to take time away from their office," he said. "People are committed to filing because they don't think their finances are going to turn around."

The glut of homes and falling real-estate prices ultimately sent Kendy and Joyce Parker over the edge and to Mr. Andresen on the last day of 2009. They expect to file for bankruptcy early this year. "One way or the other we're going to have to," Mr. Parker said. Three years ago the Parkers, who live in Minneapolis and have been married for 29 years, were living well off of Mr. Parker's contracting business. They moved into a new home in 2004 and two years later, when Mr. Parker made roughly $50,000 at his contracting company, they bought an investment property in hopes of renting it out. As the housing economy cratered, Mr. Parker saw his remodeling business shrivel.

He kept the business afloat with a $70,000 line of credit and an additional $70,000 in credit cards. Two years ago, he walked away from the business for a truck-driving job. Despite the steady income from Mr. Parker's job, bankruptcy is the only way to get out of debt. They are debating whether to file a Chapter 7 or 13 petition. "It's not like I want to rip anybody off. We've made mistakes that didn't work and we're starting over," Mr. Parker said. "You can blame the government or you can blame banks, but...humans take risks and they make mistakes."

Schwarzenegger Requests U.S. Aid
California Gov. Arnold Schwarzenegger on Wednesday asked Washington for funds to help close his state's massive budget shortfall -- a move some other states are likely to follow in coming months as they deal with their own fiscal woes. "The federal government is part of our budget problem," the Republican governor said in his annual State of the State address, reiterating a longstanding complaint that California sends far more money to Washington than it receives in return. Mr. Schwarzenegger also said federally mandated spending of state money has further strained California's coffers.

"We no longer can ignore what is owed to us," he said, adding that Washington owes the state billions of dollars for various programs. He criticized elements of congressional proposals to overhaul the health-care system, saying California could be saddled with billions of dollars of additional annual spending. Other cash-strapped states may follow Mr. Schwarzenegger in turning to Washington for more help, some budget experts said. "My guess is many other governors will either say their budgets won't balance unless they get additional federal funds, or they will say these are the unacceptable things they will be forced to do if they don't," said Nicholas Johnson, an analyst at the Center on Budget and Policy Priorities, a nonpartisan think tank in Washington, D.C.

Already, the governors of Maine and New Mexico have written into their budget proposals for the next fiscal year an expectation that Congress will extend supplemental Medicaid monies beyond their scheduled expiration in December. Congress authorized added Medicaid funds as part of about $140 billion of assistance to states in last year's economic-stimulus package. In all, state budget gaps total about $256 billion for the fiscal years 2009-11, with 36 states on track to cut their budgets a total of $55.7 billion this year, according to estimates by the National Association of State Budget Officers.

The federal government is likely to be inclined to provide more aid to states to help in the general economic recovery, said Scott Pattison, executive director of the association. "To the extent additional federal aid is provided, it prevents further budget cuts and tax increases that would occur," Mr. Pattison said. Mr. Schwarzenegger, in particular, faces a challenging fiscal crisis that has sunk his once-soaring approval ratings. California has endured high foreclosure rates and a 12.3% unemployment rate -- just short of the modern-day high for the Golden State. With tax revenue plummeting, the state was forced to delay billions of dollars of payments and issue IOUs to keep the government from defaulting. A deeply divided legislature eventually closed a cumulative $60 billion shortfall last year.

California now faces a $20 billion deficit in an $85 billion budget through June 2011, and the proposals the governor put forth Wednesday will face opposition from the Democrat-controlled legislature. Mr. Schwarzenegger peppered his annual address with the optimism that has defined his tumultuous governorship, which he won six years ago following a recall election that ousted Gov. Gray Davis. He said a $500 million job-creation plan could train as many as 140,000 workers and create 100,000 jobs.

He proposed a series of changes to the state's tax and prison systems. He also proposed streamlining construction projects, offering a homebuyers' tax credit and exempting the purchase of green-technology manufacturing equipment from the sales tax to spur job growth. Jerry Nickelsburg, an economist at the UCLA Anderson Forecast, an economic-forecasting concern, said the proposals should create jobs, but how many would depend on the efficacy of the training program and on how the the state pays for it.

The governor also hinted he wouldn't cut any more funding from state university systems when he releases his official budget proposal Friday. Lawmakers cut $2 billion from higher education last year, prompting tuition increases that led to rowdy student protests. Mr. Schwarzenegger said he would introduce a constitutional amendment to bar the state from spending more on prisons than it does on higher education. The governor said California spent 11% of its budget on corrections versus 7.5% on higher education, and said he would push lawmakers to consider privatizing the state prison system to save what he estimated would be billions of dollars.

Mr. Schwarzenegger said he supported a proposal from a state tax commission that he believed would reduce the volatility of California's tax revenue. Political analysts say the proposal, which would broaden the tax base while reducing income, sales and corporate taxes, doesn't have a chance of gaining the support of majority Democrats in the legislature. Democratic state legislative leaders and political experts met some of the governor's proposal with skepticism. "We have to look at the tax breaks we enacted last year and think about rolling them back, instead of looking at new tax breaks," said Assembly Speaker Karen Bass. Democratic leaders also opposed privatizing prisons and bringing back the homebuyers' tax credits.

"The governor started his address with a story about pigs and ponies" at his Southern California estate, said Jack Pitney, a political-science professor at Claremont McKenna College. "He'll win enactment of his reforms on the day that pigs fly."

Meredith Whitney Cuts Goldman Sachs Estimates Again
Well-known banking analyst Meredith Whitney on Tuesday cut her earnings estimates for Wall Street bank Goldman Sachs for the second time in less than a month.
Shares of Goldman Sachs fell immediately after the news, but then rebounded higher. Whitney, head of the Meredith Whitney Advisory Group, lowered her fourth quarter estimate for Goldman Sachs to $5.50 from $6.

She also cut her full-year estimate for Goldman for 2010 from $19.65 to $19.20; her 2011 earnings per share estimate from $20.60 to $20.25; and her 2012 estimate from $21.45 to $21.10. Whitney had previously cut her estimates for Goldman on Dec. 17. Whitney lowered her estimates for bank Morgan Stanley this past December, reducing her 2010 expectations to $2.60 a share from $2.63 a share. For 2011, her firm lowered its profit estimates to $2.75 a share from $3.28 a share on the bank. It also set an earnings estimate of $2.90 a share for Morgan Stanley for 2012.

Record Issuance Year Expected for Municipal Bonds
State and local governments, led by recently downgraded Illinois, are expected to sell more than $7 billion of debt this week, kicking off what some analysts expect to be a record year for municipal-bond issuance. With interest rates near historic lows, states and local agencies sold $409 billion worth of bonds in 2009, according to Thomson Reuters data. That was almost 6% more than the $386 billion they sold in 2008 and was the second-highest total ever after $429 billion in 2007.

This year's volume is forecast to come in around $435 billion, according to a recent report by Chicago-based Loop Capital Markets analysts Chris Mier and Ivan Gulich. Taxable bonds, including the new Build America Bonds, or BABs, will drive most of the growth, though traditional tax-exempt securities will continue to comprise the largest share of issuance over all. "BABs may comprise about 30% of total volume, or $130 billion," Messrs. Mier and Gulich wrote in their report. That would be almost twice the dollar value of Build America Bonds sold in 2009, when they accounted for one-fifth of all municipal bonds.

Build America Bonds, which offer higher interest rates partially subsidized by the federal government, aren't the only taxable munis coming to market. Illinois, facing a $12 billion budget deficit as well as a severe pension fund shortfall, will sell $3.5 billion of five-year bonds Thursday to meet its pension obligation for the current fiscal year. Its pension fund was about 54% funded as of June 30, 2008, according to ratings firm Moody's Investors Service. Pension bonds don't qualify for tax-exemption under Internal Revenue Service rules and so end up paying higher rates in the taxable market. Tax-exempt bond proceeds can't be invested in potentially higher-yielding instruments to earn a profit.

Illinois, which has the second-lowest state credit rating behind only California, borrowed $10 billion of pension obligation bonds in 2003; that is the largest sale of taxable municipals on record. Moody's and Standard & Poor's downgraded the state last month to "A2" and "A"-plus, respectively. Fitch Ratings has assigned an "A" to the offering. New Jersey's Transportation Trust Fund Authority and New York State's Metropolitan Transit Authority are also scheduled to come to market with taxable municipal bonds this week. Both will sell federally subsidized Build America Bonds: $358 million for the New Jersey agency and $350 million for the New York body.

Build America Bonds were authorized under the federal government's stimulus program and made their first market appearance last March. The taxable bonds have altered the municipal bond market's complexion because the usual 35% BAB subsidy offers borrowers lower interest costs than they can achieve on a tax-exempt basis even as they offer higher nominal rates to investors. The New Jersey offering will include another $495 million of tax-exempt zero-coupon and current-interest debt. Zero-coupon bonds pay no interest but are sold at a discount to their value at maturity. Build America bonds are mainly limited to infrastructure projects.

States and cities sold $64 billion of BABs last year, according to Thomson Reuters data. That catapulted the volume of taxable municipals to $84 billion from $23 billion in 2008 and accounted for almost 21% of overall 2009 state and local issuance vs 6% a year earlier. The highest previous market share occupied by taxables was 10.7% in 2003, when they tallied $40 billion. New Jersey's Transportation Trust Fund Authority is an independent financing arm of the state government that depends on legislative appropriations to fund capital projects. New York MTA's subways, buses and commuter railroads, comprise North America's largest transportation network.

The Illinois deal will be offered through underwriters headed by J.P. Morgan Securities Inc. The New Jersey sale, rated "A1" by Moody's, "AA"-minus by S&P and "A"-plus by Fitch, will be handled by Barclays Capital. The MTA deal, headed by J.P. Morgan Securities, is rated "A2" by Moody's and "A" by S&P and Fitch.

Japan, the US, Bubbles and Deflation
by Doug Short

Here is a series of real (inflation-adjusted) monthly close charts of the Nikkei 225 and the S&P 500 since 1970 with their respective annualized rates of inflation shown below. This series also includes an overlay chart with the two index peaks aligned. The overlay retains Japan's inflation to illustrate a point discussed later in this post.

The left sides of the two bubbles are remarkably similar. More conspicuous, however, are the dissimilar contours of the post-bubble declines. A key difference is the fact that Japan experienced nearly simultaneous bubbles in equities and real estate; the former peaked in December 1989, the latter in early 1991. The equity and real estate peaks in the US were separated by approximately five years, and the 2005 peak wasn't generally recognized for another year or two because of the highly regional nature of the real estate market.

Many economists and market experts predict high inflation as a result of the massive government intervention in the current financial crisis. However, over the past six months, the US economy has slipped into a period of deflation unparalleled in nearly 60 years. The decade following the Japanese twin bubbles was accompanied by mild inflation averaging around 1.4% with occasional brief periods of deflation. Thereafter, the Japanese economy has tended more toward deflation (see the circled area).

In real terms, based on monthly closes, the S&P 500 peaked in August 2000 (the nominal peak was in March of that year). Following the 2000 high, the annualized rate of inflation averaged 2.8% until March 2009, when the economy moved into deflation. To some extent the widespread predictions of high inflation in the US have a political bias. Opponents of government intervention often point to excessive inflation as the inevitable outcome of bailouts, incentives and monetary easing. The Japanese government also played a strong interventionist role in the wake of that county's twin bubbles. As the chart shows, accelerating inflation has not been the result.

Of course the two countries differ in many respects. Both experienced stagflation during the 1970s, but the inflation charts during that period do not mirror one another. Likewise Japan's long-term post-bubble struggle with deflation does not preordain a similar fate for the US. The charts and commentary here merely constitute an observation that severe inflation is not the inevitable outcome of government efforts to manage the US financial crisis. Deflation may be a greater threat than is commonly thought.

12 Dr. Dooms shred 2010 investment optimism
by Paul Farrell

Optimist? Or pessimist? Test your 2010 strategy!

Test time: A neuroeconomic peek inside your brain's new strategy as we enter the "Doomsday Decade" and leave behind the "Lost Decade" ("lost" because the Dow dropped from 11,497 to 10,428 in 10 years, while Wall Street got rich wiping out almost 10% of your retirement funds). Test your 2010 strategy. Are you an ...
  1. Optimist? As the new decade starts, are you an optimist who trusts Wall Street's advice that 2010 will be a great time to buy stocks. Wall Street says the "Lost Decade" (what a great title) is now behind us. So you believe that the 60% market rally since the March 2009 bottom will continue, with at least 20% gains in 2010.
  2. Pessimist? Or, you're distrustful, cynical and pessimistic about all predictions made by Wall Street's bosses and pundits. You're particularly skeptical of any and all forecasts by the "too-greedy-to-fail" bankers who stole trillions from taxpayers, the Fed and Treasury, then failed to stimulate the economy and now pocket mega-bailout bucks as record bonuses, just one year after we saved Wall Street from near bankruptcy.

This is a simple test of your mindset. Betting odds say most of you will pick answer "1." Why? America was founded by optimists. You believe that a "happy conspiracy" binds politicians, CEOs and Wall Street, making capitalism work and America a powerful nation: So you accept Wall Street's greed, lies and thievery as the price of "free-market capitalism," and part of America's DNA. You embrace "capitalism-without-morals."

Unfortunately, optimism also blinds us to our individual and national faults: Hidden saboteurs tell us we know more than we do, have amazing skills we don't, and are protected by divine forces against dark enemies and even our own irrational stupidity. Yes, optimism is our inner enemy that periodically triggers trillion-dollar meltdowns.

New strategy: 'Getting back to even' means new risks, more debt
True optimists are gung-ho about the future, expecting to recover losses and, as CNBC television host Jim Cramer preaches, "get back to even" in 2010. But the problem is no one has a clue if the market will ever "get back to even." Quite the opposite, since Fed chief Ben Bernanke is pushing the same optimistic cheap-money fantasies that his predecessor Alan Greenspan used to create the dot-com and the subprime crashes. We can expect to see the next bubble fizzle and pop, pushing us deep into the dreaded Great Depression 2 that the Fed and Treasury are trying to avoid by downstreaming today's problems onto future generations.

But soon future generations will start screaming: "The buck stops here" and revolt when the buck isn't worth much, and they've lost faith in the dollar (just like China). Then the game of musical chairs will end, tragically, sadly, stupidly, unfortunately. Why? Because we failed to stop short of total disaster, failed to prepare, and it's too late. So to all you optimists who plan to actively invest in 2010 because you accept that America's "capitalism-without-morals" is working in spite of Wall Street's quasi-criminal behavior: Here's some dark-side input to factor into your investment equation for 2010 and beyond.

Listen closely to the words of our 12 "Dr. Dooms." For a moment, take off your rose-colored glasses, step out of your denial, see the Great Depression 2 dead ahead, really look at the future our "Dr. Dooms" see in their "Doomsday Scenarios:"

1. Faber: The 'American Empire' has peaked, is on a decline
Hong Kong economist Marc Faber says "the average life span of the world's greatest civilizations has been 200 years ... Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline."

2. Grantham: Learned nothing, doomed to repeat past, only bigger
Money manager Jeremy Grantham warns that our irrational nightmare will repeat. A year ago we came dangerously close to the "Great Depression 2." Unfortunately, we've "learned nothing ... condemning ourselves to another serious financial crisis in the not too-distant future."
We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We "learned nothing."

3. Stiglitz: Wall Street creating short respite before next crash
Nobel economist Joseph Stiglitz recently warned: Unless Wall Street's incentive system is drastically reformed, "the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis." Warning, nothing's changed, it's worse: Lobbyists run Obama, Congress and the Fed.

4. Johnson: Running out of time before Great Depression 2
Yes, "we're running out of time ... to prevent a true depression," warns former IMF chief economist Simon Johnson. The "financial industry has effectively captured our government" and is "blocking essential reform," and unless we break Wall Street's "stranglehold" we will be unable prevent the Great Depression 2.

5. Ferguson: Fed's easy money fuels new bubbles, meltdowns
In the 400-year history of the stock market "there has been a long succession of financial bubbles," says financial historian Niall Ferguson. Who's the culprit? The Fed: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks." Another bubble (and crash) is virtually certain, thanks to Washington's $23.7 trillion explosion in debt, the Fed's support for the $670 trillion shadow banking system and Wall Street lobbyists getting superrich thanks to Wall Street's insatiable greed.

6. Taleb: Fed haunted by ghost of Greenspan's failed Reaganomics
When Obama reappointed Bernanke, Nassim Taleb, risk-management professor and author of "The Black Swan," warned of a new disaster: "The world has never, never been as fragile," yet Obama reappoints an economist who "doesn't even know he doesn't understand how things work." New proof? At last week's American Economic Association, Bernanke was still shifting the blame: "The best response to the housing bubble would have been regulatory, not monetary."

Wrong: He conveniently forgets he was advising Bush earlier, did nothing. Now Obama's stuck with a Greenspan clone and an insane ideology focused solely on saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown

7. Soros: Dollar dead as a reserve currency, nest eggs dying
Billionaire investor George Soros' "New Paradigm:" America's 25-year "superboom ... led to massive deregulation ... blindly chasing free markets ... unleashed excessive greed ... created the dot-com and credit meltdowns" and a "shadow banking system" of derivatives. "The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency," warns Soros. "We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances."

8. Hedgers: make billions shorting stupid politicians, bankers
Soros isn't alone. Lots of hedge fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed's cheap-money policies. Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 "managers made $464 million each on average last year ... a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth."

9. Shiller: Dot-com, subprime meltdowns, 'third episode' next
Economist Robert Shiller a "Dr. Doom?" Remember a decade ago with "Irrational Exuberance?" Now he's warning: "Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they're going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust -- not exuberance."

10. Kaufman: Irrationality replaced reason, science, technology
Henry Kaufman was Salomon's chief economist and "Dr. Doom" for 24 years: "Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?"
Kaufman warns: "The computations were correct, but far too often the conclusions drawn from them were not." Why? Selfish, myopic politicians and bankers.

11. Biggs: Sell everything, buy guns, food, head for the hills
In his 2008 bestseller "Wealth, War and Wisdom" former Morgan Stanley research guru Barton Biggs warns us to prepare for a "breakdown of civilization ... Your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc ... A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage." Biggs sounds like an anarchist militiaman.

12. Diamond: Nations ignore obvious till it's too late, then collapse
The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they're unprepared, will be in denial till it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

The warnings were everywhere in 2008, but Greenspan, Bernanke and former Treasury Secretary Henry Paulson were in denial: It will happen again with Obama. Downstreaming problems will fail. Future bubbles get too big, crashes more deadly.

GMAC May Post $10 Billion Annual Loss After U.S. Takes Control
GMAC Inc., the auto and home lender that became majority-owned by the U.S. government last week after a third bailout, may post a loss of more than $10 billion for 2009 as more borrowers defaulted on mortgages. GMAC, based in Detroit, said yesterday that it expects to report a fourth-quarter loss of about $5 billion. Both the quarterly and annual losses would be records for the primary lender for General Motors Co. and Chrysler Group LLC dealers.

The company received a $3.79 billion infusion from the Treasury Department on Dec. 30. The U.S. earmarked about $13.5 billion for GMAC in two previous capital infusions and now controls a 56 percent stake. If the government converts preferred shares to common equity, it would own more than 70 percent of GMAC, the lender said during a conference call. "I think for the taxpayer it’s going to be a loss," said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. "Who is going to buy this? What is the compelling business model that wants us to have this company continue to exist?"

The most recent bailout allowed the lender to contribute $2.7 billion of capital to its Residential Capital LLC unit, which had $2 billion in mortgage assets written down in preparation for a sale. GMAC said it considered several options for ResCap, including bankruptcy. It now expects to sell some of the mortgage assets of ResCap, which ranked among the nation’s biggest subprime home lenders in 2006.

"We’re not going to do anything crazy and give value away, but it’s an asset we’d like to figure out how to capitalize on its value," Chief Executive Officer Michael Carpenter said while taking questions after an investor presentation yesterday. GMAC said the fourth-quarter loss stems in part from a previously disclosed $3.8 billion pretax charge tied to revaluing "higher-risk mortgage loans." The company said it expects delinquencies to peak next year and home prices may hit bottom in the first quarter of 2011.

The latest capital infusion and restructuring weren’t enough to stabilize ResCap and assure a return to profitability, according to Moody’s Investors Service. While the changes were positive, ResCap’s "liquidity position is tenuous, capital insufficient and franchise impaired," Moody’s said in a statement on Dec. 31.

Housing Animal Spirits Set to Be Banished as U.S. Prime Foreclosures Mount
Homeowners with the best credit are the next big risk for the U.S. housing market. An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index. "There will be continuing foreclosures, and not just subprime, it will be prime mortgages," Shiller, a professor at Yale University, said in an interview. "This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so."

The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said. Employers have cut more than 7.2 million jobs in the last two years, the biggest employment loss since the Great Depression. Measured annually, the U.S. jobless rate probably will average 10 percent in 2010, according to the median estimates of economists surveyed by Bloomberg. That would be the highest rate in government records dating to 1948, after rising to a 26-year high of 9.3 percent last year.

"Unemployment is not respecting income boundaries," said Case in an interview. "It’s affecting rich people, poor people and middle-income people and they all have mortgages." The U.S. may begin to see some signs of a housing recovery this year, he said. The foreclosure inventory of prime adjustable-rate loans rose to 10 percent in the third quarter, more than doubling from a year earlier, while prime fixed-rate loans more than doubled to 1.95 percent, said Jay Brinkmann, chief economist of the Mortgage Bankers Association in Washington. The surge in prime ARM foreclosures is coming at a time when rates are resetting lower, reducing monthly payments, he said.

"If you have a prime adjustable-rate mortgage resetting in 2010, you probably are going to see your rate go down," Brinkmann said. "Still, prime ARMs are defaulting at a higher rate because these borrowers were the risk-takers who chose the initially lower payments so they could stretch to get into a house."

While an increase in prime foreclosures will slow the housing recovery that began in September, it won’t be enough to knock it entirely off track, Case said. Home resales in November rose to the highest level in almost three years, the third consecutive monthly gain, and the supply of new homes for sale is at the lowest level in almost four decades. "That’s taking some of the pressure off," Case said. "Hopefully in 2010 we’ll see some recovery."

Foreclosures are declining for the type of subprime mortgages that sparked the global financial meltdown in 2008. New foreclosure starts among subprime ARMs fell to 4.92 percent in the third quarter from 6.47 percent a year earlier after the bulk of loans were either modified by lenders or the properties repossessed and sold, according to the MBA. "What makes the rising default rates on prime loans so insidious is these are not folks who took out some crazy new type of mortgage," said Brad Hunter, chief economist at MetroStudy real estate research in West Palm Beach, Florida. "These are people who probably took out what would ordinarily be a responsible mortgage."

The increase in unemployment and the lackluster housing market have been at the center of the worst economic contraction since the 1930s and remain a challenge for President Barack Obama as he enters his second year in office. While property resales have started to rise nationally, foreclosures and price declines continue, even after the government spent $230 billion in fiscal 2009 to support homeownership, according to a tally by the Congressional Budget Office in Washington.

Loan servicers offered lower monthly payments for 680,000 delinquent borrowers, 274,000 under the federal Home Affordable Modification Program and 406,000 under other plans, according to a Dec. 21 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Borrowers defaulted again on 61 percent of loans modified more than 12 months earlier, the report said. The economy probably will expand 3.5 percent in 2010 as it recovers from a 2.5 percent contraction in 2009, according to Dean Maki, the chief U.S. economist at Barclays Capital in New York. Maki, the most-accurate forecaster in a Bloomberg News survey, estimates the unemployment rate will average 9.6 percent in 2010.

An improvement in the jobless rate may do little to help the nation’s weakest housing markets, Brinkmann said. The rate fell to 10 percent from a 26-year high of 10.2 percent in October, the Bureau of Labor Statistics said in a Dec. 4 report. "Even if the jobs start coming back, where are they coming back? If it’s in Texas or Oklahoma, it’s not helping people in California or Rhode Island," Brinkmann said in an interview.

Michigan had the highest U.S. unemployment rate in November, at 14.7 percent, followed by Rhode Island at 12.7 percent, according to the Bureau of Labor Statistics. California, Nevada and South Carolina tied for third place, with a 12.3 percent jobless rate. Sales of previously owned homes rose 7.4 percent to a 6.54 million annual rate in November as buyers rushed to meet the original Nov. 30 deadline for a tax credit of up to $8,000 for first-time buyers, the National Association of Realtors said in a Dec. 22 report. Two months ago, Congress extended the credit to April and expanded it to include some move-up buyers.

Confidence is the key ingredient to a sustainable economic recovery, Shiller and Nobel Laureate George A. Akerlof said in their 2009 book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism." The book expands on a John Maynard Keynes macroeconomic theory by the same name that says emotion, rather than logic, drives consumer decisions that lead to economic change.

"I do see some signs of animal spirits, but it’s a mixture," Shiller said last week of the housing market. In some areas of the U.S., such as California, home prices are going up at an "amazing" pace, he said. At the same time, "It would be entirely plausible that we would have a weak housing market for many years." U.S. consumer confidence improved in December for a second month as Americans became more optimistic about the economy, according to a Dec. 29 report by the Conference Board in New York. The index rose to 52.9 in December, in line with the median forecast of economists surveyed by Bloomberg News.

In the same month, the group’s measure of home-purchase plans dropped to a 27-year low, despite federal efforts to stimulate housing demand with the tax credit and a $1.25 trillion Federal Reserve program to lower home-loan rates by purchasing mortgage bonds. The index measuring intentions of buying a home in the next six months fell to 1.9 percent from 2.1 percent in the prior month. "At the moment a lot of potential buyers are deciding to wait and see," said MBA’s Brinkmann. "If they do have a job, they may have seen 20 percent of their company laid off and they’re wondering if they’re next."

China Think Tank Calls for One-Off 10% Rise in Yuan
Now is a good time to reform the yuan exchange-rate mechanism and allow a one-off 10% appreciation in the Chinese currency against the U.S. dollar, a prominent Chinese think tank said Wednesday, as it also warned the domestic economy is at risk of overheating this year. A 10% appreciation of the yuan against the U.S. dollar would have limited impact on the Chinese economy, according to an essay by Zhang Bin, a research fellow in the Institute of World Economic and Politics under the Chinese Academy of Social Sciences.

China should allow the yuan to rise or fall as much as 3% annually against a basket of currencies, he said. In another essay presented by the institute during a conference Wednesday, researchers called on China to adopt a tighter monetary policy. They said that if Beijing's fiscal and monetary stimulus policies

Euro brinkmanship escalates as ECB shuts door on Greek bail-out
The European Central Bank has given its clearest warning to date that there will be no EU bail-out for Greece if it fails to control its spiralling deficit, raising the stakes in a game of brinkmanship over the future of the euro. Jurgen Stark, the ECB's chief economist and the powerful German member on the bank's inner council, said Greece's problems are entirely "home-made" and do not meet the terms required to trigger the rescue mechanism under EU treaty law, which is limited to countries that face severe difficulties "beyond their own control".

"The Treaties set out a 'no bail-out' clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece," Stark told the Italian daily Il Sole . "The country has not kept public accounts under control, nor worked to improve competitiveness. Greece is in a very difficult situation."

The comments prompted an acid retort from Greece's new-broom finance minister, George Papaconstantinou. "Frankly we don't need that clarification. We don't expect to be bailed out by anybody as, I think, it is perfectly clear we're doing what needs to be done to bring the deficit down and control public debt." He said the government had agreed to even tougher measures than originally planned, aiming to slash the budget deficit from 12.7pc of GDP to 3pc by 2012 – a year ahead of schedule. "We are sending a message of determination and frontloading the adjustment," he said.

The belt-tightening pledge came as a surveillance team from the European Commission and the ECB arrived in Athens. They are pressing for a rise in VAT and a multi-year freeze on public wages, a prescription for outright deflation or an "internal devaluation" within EMU as it is known to economists. The ruling Hellenic Socialists (PASOK) party has so far balked at rises in VAT or fuel duty, arguing that such measures hurt the poor and are not "citizen-centric". PASOK made wildly unrealistic pledges to secure election last autumn and is now in the uncomfortable position of having to tear up its manifesto. This is potentially dangerous in a Left-leaning political culture where people have yet to accept the need for harsh medicine. Mere hints of austerity over the past two years have been enough to set off street riots, while Communist trade unions are already threatening to strike.

The warnings from the ECB follow a string of comments from German politicians over recent weeks suggesting that Berlin will walk away from Greece if push comes to shove. The markets have always assumed that Germany will roll over in the end, if only in order to safeguard its half-century investment in the European Project and the post-war order. Finance minister Wolfgang Schäuble said Greece will have to find its own "hard way" out of the crisis, distancing himself from a loose pledge given by his predecessor during the Irish crisis last February that the EU will ultimately step into help eurozone laggards. Volker Wissing, chair of the finance committee in the Bundestag, said it should be made explicit that "Germany will not take on the burden of Greek debts".

These debts are large. The Greek central bank said gross debt to foreign creditors has reached €403bn (£362bn), or 168pc of GDP. The treasury will have to raise €56bn from the bond markets this year, heavily concentrated in the second quarter. The peak danger moment for the Greek debt office is from May to June. David Owen, Europe economist at Jefferies, said Greece was "too big to fail" whatever they may say in Germany. "They cannot let Greece go because it would set off a euro crisis and cause markets to focus the debt dynamics of the next countries in line, Portugal and Spain."

There is a view in certain circles of Germany's Free Democrats and Bavaria's Social Christians, as well as pockets of the ECB itself, that a refusal to rescue Greece would be a salutary lesson to others that breach the rules. Greece's ejection from EMU might (in their view) strengthen the eurozone. The question is whether such people will determine the outcome. "At the end of the day, this is going to be a political decision by Chancellor Angela Merkel and President Nicolas Sarkozy," said Hans Redeker, currency chief at BNP Paribas. "The ECB is talking as if it were the old Bundesbank: in fact it is in a weaker position. Europe's leaders are not going to abandon Greece."

"What this crisis has shown is that EMU cannot function without a central fiscal authority. They will have to sort this out," he added. Mr Redeker said Greece might be able to turn itself round if the eurozone recovery is strong enough to lift all boats, but the 2.2pc decline in eurozone industrial orders in October is not encouraging. "We fear, the crisis will escalate in Greece and Spain ."

Greece faces intrusive EU surveillance amid reports of a burgeoning deficit
Greece is bracing itself for the most intrusive surveillance of any eurozone state since the launch of the single currency, amid reports that the country's budget deficit is spiralling further out of control. Officials from the European Commission and the European Central Bank are on standby for a "monitoring visit" to Athens as soon as they receive word from Greek authorities outlining how they intend to get a grip on public debt. The Greek financial website Ta Nea reported that last year's deficit may have reached 14.5pc of GDP as a result of plunging tax revenues in the late Autumn, even higher than the 12.7pc "shocker" revealed by the new Hellenic Socialist (PASOK) government in November.

Julian Callow from Barclays Capital said a detailed analysis of budget data shows the deficit had been running at an annual rate of 16pc over the second half of the year. "The monthly data is even worse than people realise," he said. The political picture is muddied by ideological disputes within the ruling party. Much of PASOK's old guard thinks the crisis is largely bogus, whipped up by right-wing forces at home and abroad to prevent them from pursuing a Left-wing spending agenda. Some seem determined to provoke Brussels into reacting harshly so that they can more easily deflect blame for cuts onto the EU.

Greece has been under "monthly monitoring" since mid-2009 by the Eurogroup of EU finance ministers, a task delegated to Commission officials. They are effectively policing details of the Greek budget, a policy that takes the Europe into hazardous terrain. It is unclear whether any nation will tolerate such an erosion of fiscal sovereignty for long, though everybody is on best behaviour for the time being. "There is close cooperation with the European Commission to avoid any danger of rejecting our stability programme, something which would be catastrophic," said Greek government spokesman George Petalotis.

Athens is already facing "correction" under the EU's Article 126 (8). If it fails to assuage the Eurogroup by mid-February, it will face Article 126 (9) and the threat of sanctions: a suspension of (EIB) loans, and ultimately fines. Both Fitch and Standard & Poor's have cut Greece's debt to BBB+, below the minimum for collateral at the ECB's lending window – once normal levels are restored later this year. Chris Pryce from Fitch said Greece is at risk of further downgrades if the deficit is raised again. "Any further revisions will not be welcome. A figure of 14.5pc would certainly give us cause to think," he said.

S&P expects public debt to hit 138pc by 2012, nearing the "snowball" point. The interest spread on Greek 10-year bonds over German Bunds was 235 basis points yesterday, implying a sharp rise in debt service costs if the gap continues. Athens has promised to cut the deficit by 4pc of GDP next year, hinting yesterday at a further €1bn (£895m) in cuts. It is relying on asset sales, sin taxes, a 90pc levy on bank bonuses, and a clamp-down on tax-evasion – a gimmick that exasperates rating agencies. There are few cuts in the bloated structure of state spending. Mr Pryce said Athens is resorting heavily to "one-off" measures.

Greece has no easy way out. As an EMU member it cannot devalue to regain competitiveness lost during its boom, even though foreign tourists are defecting to cheaper Turkey. A deflation policy may be self-defeating if it causes the real burden of public debt to rise further. The nightmare scenario will occur if the ECB starts raising rates just as Greece slides deeper into slump. Danske Bank said Greece still has time to avoid default, but only if it takes drastic action to prevent debt rocketing above 200pc of GDP within a decade. "The current situation is close to becoming unsustainable," it said.

ECB's Stark says markets deluded about eurozone bailout for Greece
Juergen Stark, a member of the European Central Bank's six-member executive council, said Greece had no right to claim fiscal support from other member states under eurozone treaties. "Markets are deluding themselves if they think that member states will open their wallets to save Greece," he was quoted as saying by the Italian daily Il Sole 24 Ore. Mr Stark said Greece's debt problems were of its own making, not due to the global financial crisis. Greek officials say they are not asking for outside help. "We are acting appropriately as the Greek government and we would not as for any other European government to provide support," a senior government official told The Associated Press. He asked not to be identified, as he is not directly involved in the government's fiscal recovery plan.

Greek Prime Minister George Papandreou on Wednesday again promised his country would succeed in rapidly cutting its budget deficit, following a fresh warning over the country's massive debts by a top official at the European Central Bank. The government yesterday vowed to conform with European Union deficit limits in just three years, instead of four as earlier promised. Mr Papandreou said that "2010 will be a year of major change ... We will continue on this course with a feeling of certainty. We know where we are going and the necessary changes made will be made."

His assurances Wednesday were made as EU finance officials were due in the Greek capital to review Greece's fiscal plans. The officials from the European Commission and European Central Bank and due to review preparations for Greece's fiscal stability plan must be submitted to the EU by the end of the month. The country's new Socialist government is promising to reduce the budget deficit, projected at 12.7pc of gross domestic product for 2009, to the EU limit of 3pc by the end of 2012. It had earlier promised to reach that target by the end of 2013. The national debt is expected to reach €300bn (£270bn) in 2009. Last month, three international ratings agencies downgraded Greece's credit rating, prompting the government promises to announce more aggressive public spending cuts.

Data Show Wider Economic Gap in Euro Zone
The gap between the euro zone's strong and weak economies widened at the end of 2009, with Germany's services sector racing ahead, while Spain's service-sector contraction deepened, data showed Wednesday, creating a major headache for the European Central Bank. According to Markit, the final purchasing managers index for the euro zone's services sector rose to 53.6 in December from 53.0 in November. A reading above 50 indicates that activity is growing, while a reading below 50.0 indicates that activity is declining.

"Despite the final services PMI again coming in slightly below its flash estimate, the further improvement in its level month-on-month suggests that momentum in the recovery continued to gather pace," said Chris Williamson, chief economist at Markit. The data echo the results of the manufacturing survey released earlier this week. Despite showing a slight drop, the survey showed France and Germany leading the economic recovery across the euro zone.

While the three most closely watched economies are making clear headway as they emerge from the recession, the ECB could face some tough decisions in the coming months as services sector activity in Spain, another key member of the single-currency area, slumped to 45.0 in December, the lowest level in five months. Wednesday's survey also showed that firms cut prices despite rising costs in an effort to stimulate demand. "The Spanish services economy ends 2009 on a low note, reaching the unwelcome milestone of two years of continuous declines in activity," said Andrew Harker, economist at Markit. "December data provide little indication that conditions will improve in the near future, with new business contracting and employment continuing to fall particularly sharply."

Germany's service-sector PMI, by contrast, picked up in December after disappointing results in recent months, to 52.7 in December from 51.4 in November. France's services PMI slipped from a month earlier, but activity in the key services sector remained strong at 58.7 in December from 60.9 a month earlier. Italy's services sector posted a strong rise to 53.9 in December from November's 49.8. The composite euro-zone PMI, which reports the average output of both the manufacturing and services sectors, rose to 54.2 in December from 53.7 in November. The euro-zone services PMI is based on data from Germany, France, Italy, Spain, Ireland, Austria, Greece and the Netherlands, which account for about 92% of the bloc's services industry.

US Avoids Technical Default By Three Days
On December 24, the Senate passed a vote by a razor thin margin (with not a vote to spare) to raise the Federal debt ceiling from $12,104 billion to $12,394 billion. The actual debt ceiling increase took effect on December 28. And as the chart below shows, the Treasury's cash flow projections were spot on: 3 days later, and the debt subject to limit surged to $12,254, a jump of over $200 billion in 2 days, and a whopping $150 billion over the old debt ceiling. Three days is all the buffer the administration's reckless spending spree has afforded this country to avoid bankruptcy. Had one more Democratic vote dissented from the stopgap measure, the US would now be in technical default. There is just $140 billion left before the revised debt ceiling is breached. We hope for the country's sake that Bill refunding in January is massive, because as we already pointed out, on January 7th we expect another ~$130 of new Treasuries to be announced for auction by January 15th. And then there are two more weeks in January... Which is why the Treasury better be using that TARP money to pay down all it can, because if the general population understands how close this nation was to the fiscal brink, many more answers may be demanded out of the ruling party as to how it could allow things to get so out of hand.

Double-Dip Risk Seen in ‘Stall Speed’ Recovery: Stephen Roach
Where there was despair a year ago, today there is hope. Policy makers have been successful in putting in a bottom to the most wrenching crisis and recession of the post-World War II era. Yet the outlook remains uncertain. That’s because the bottoming process, however encouraging, does little to inform us about the character of the coming economic recovery.

There are four key reasons to remain skeptical about the vigor and sustainability of any rebound in the global economy:
  • First, the financial crisis itself is far from over. The latest International Monetary Fund estimates put the potential for worldwide writedowns of toxic assets at approximately $3.4 trillion; so far, realized markdowns have been only about half that amount. This points to further earnings impairments for financial institutions and concomitant restraints on their lending capacity.

  • Second, the breadth of this global recession was staggering. At its low point in March 2009, 75 percent of the world’s economies were contracting. Typically, the figure is closer to 50 percent. This means it will be much harder to turn around this recession-torn world.

  • Third, the demand side of the global economy is likely to be restrained by a protracted pullback of the over-extended American consumer. In the face of a massive labor market shock to jobs and wage earnings, together with the bursting of property and credit bubbles, the consumption share of the U.S. economy is likely to fall by five full percentage points of gross domestic product -- from its current record of 71.2 percent to the pre-bubble norm of 66 percent.

    This should reduce trend growth of real consumption from the almost 4 percent pace of the pre-crisis decade to 1.5 percent to 2 percent over the next three to five years. No other consumer in the world is capable of filling this void.

  • Fourth, the supply side of the global economy suffers from massive imbalances, especially China-centric developing Asia. While, on the surface, post-crisis resilience of the Chinese economy has been impressive, it turns out that 95 percent of the 7.7 percent GDP growth realized in the first three quarters of 2009 was concentrated in the fixed investment sector, which already accounts for an unheard of 45 percent of GDP.

By compounding its existing imbalances, to say nothing of funding this stimulus by a record surge of state-directed bank lending, China risks a serious misallocation of capital and a worrisome deterioration of bank loan quality. Considering these powerful headwinds, I expect trend growth in world GDP to average about 2.5 percent over the next three years -- the weakest recovery of the modern era. Significantly, such an outcome would be very close to the "stall speed" for a $70 trillion global economy, meaning that a shock could easily trigger a relapse, or the dreaded double dip.

While seemingly sacrilegious in these days of froth, the theory of the double dip is hardly controversial. Normally, in a cyclical upturn, the release of pent-up demands provides an ample cushion of cyclical resilience, enabling an economy to withstand periodic shocks. By contrast, a recovery lacking that cushion is far less capable of warding off the unexpected blow. Right now, of course, these concerns ring hollow. Fueled by a temporary boost from the inventory cycle, the hopes and dreams of a vigorous, or V-shaped, recovery suddenly seem credible. But as the inventory dynamic fades -- it always does -- and the weak state of underlying demand re-emerges, a post-crisis recovery could quickly become vulnerable.

Two potential shocks would play right into that vulnerability, the first being a failed exit strategy from the Great Stimulus. Policy makers are not lacking in tools or tactics to withdraw the extraordinary fiscal and monetary stimulus that has been put in place to save the world. Unfortunately, they are lacking in political will. The odds are high that America’s Federal Reserve will once again embrace an "asymmetrical" exit strategy -- quick to slash the federal funds after the onset of a crisis but slow to normalize policy settings in recovery. This would be a replay of the delayed normalization of 2002-2006, which played a key role in fueling new bubbles and imbalances, setting the stage for the Great Crisis.

A second possible shock would be heightened trade frictions and protectionism, especially a Washington-led outbreak of China bashing. With the U.S. unemployment rate likely to remain higher than 9.5 percent heading into the mid-term congressional election of 2010, the Chinese currency issue has once again become a bi-partisan lightning rod.

If Washington imposes trade sanctions, the Chinese would undoubtedly reduce their appetite for dollar-denominated assets, with severe implications for the dollar and probably real long- term interest rates in the U.S. No one can predict shocks. But the theory of the double dip is very clear in one important respect: Shocks can deal lethal blows to anemic recoveries. That remains a real risk in this still fragile post-crisis climate. In contrast to the denial prevalent in today’s ebullient financial market climate, I would assign about a 40 percent chance to a global double dip at some point in 2010.

(Stephen Roach is chairman of Morgan Stanley Asia and author of "The Next Asia." The opinions expressed are his own.)

The cause of our crises has not gone away
by John Kay

The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007.

The manifestation of the problem in each phase was different – first emerging markets, then stock markets, then debt. But the mechanics were essentially the same. Financial institutions identified a genuine economic change – the assimilation of some poor countries into the global economy, the opportunities offered to business by new information technology, and the development of opportunities to manage risk and maturity mismatch more effectively through markets. Competition to sell products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits, of which a substantial fraction was paid to employees.

Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable – funding the financial systems of emerging economies, promoting start-up internet businesses, trading in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to make write-offs, most of the new economy stocks proved valueless and many structured products became unmarketable. Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success. At the end of each phase, regulators and financial institutions declared that lessons had been learnt.

While measures were implemented which, if they had been introduced five years earlier, might have prevented the most recent crisis from taking the particular form it did, these responses addressed the particular problem that had just occurred, rather than the underlying generic problems of skewed incentives and dysfunctional institutional structures. The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.

I do not know what the epicentre of the next crisis will be, except that it is unlikely to involve structured debt products. I do know that unless human nature changes or there is fundamental change in the structure of the financial services industry – equally improbable – there will be another manifestation once again based on naive extrapolation and collective magical thinking. The recent crisis taxed to the full – the word tax is used deliberately – the resources of world governments and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may not be there.

The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right. We should listen to them before the same message is conveyed in much more violent form, in another place and at another time. But it seems unlikely that we will.

We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions. This led to businesses riddled with conflicts of interest and culture, controlled by warring groups of their own senior employees. The scale of resources such businesses commanded enabled them to wield influence to create a – for them – virtuous circle of growing economic and political power. That mistake will not be easily remedied, and that is why I view the new decade with great apprehension. In the name of free markets, we created a monster that threatens to destroy the very free markets we extol.

TrimTabs suggests government manipulated stocks
The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market. "We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.

The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds. "We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?"

The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index on a monthly basis. Market analysts, however, were quick to debunk the theory. Yes, the government had a heavy hand in rescuing the financial system and the economy as the system started collapsing in late 2008 and throughout 2009. But the huge boosts of liquidity through the system found their way to stocks by the usual means, they said.

"The idea that this is magic is nonsense," said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. "This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market." Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said. But "you can't short stocks when the Fed is at zero," Ritholtz said. "Our own institutional clients came on board" as did other big institutional investors, he said.

Conspiracy theories about the so-called "plunge protection team," or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak. The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.

Noting that the Fed has been buying Treasurys and mortgage-backed securities to keep interest rates low and support the economy, even firms such as Sprott Asset Management have started to accuse the U.S. government of running a Ponzi scheme. "There's a lot of backlash against the government right now and the hate for the Fed has gone into overdrive" in some corners, Greenhaus said. "The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets."

As to the scale and power of the 2009 rally, it actually trailed previous recoveries from bear markets, according to research from Miller Tabak. "While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs," Greenhaus wrote in a note. The stock market, as measured by the S&P 500, plunged nearly 57% from its 2007 highs until it reached lows in March of 2009.

But even after rallying 58% in the seven months after the March lows, the market remained 31.5% off of its 2007 highs. That's nearly the same amount recovered during the market rally of 2003, as the market began to recover from the bursting of the tech bubble. In other instances, such as 1975, 1962 and 1938, the market had actually recovered a much bigger portion of its losses seven months after hitting lows. And in 1983, it was actually 7.3% above its previous highs.

Pimco's Bill Gross Sees 2010 as Year of Reckoning
Pimco managing director Bill Gross not only oversees the world's biggest bond fund, his views often sway markets. In a late December interview with TIME's John Curran, Gross pointed to the second half of 2010 as a period when investors large and small will reckon with a new reality of poor economic growth and a Federal Reserve that is hard pressed to offer much help.

TIME: Where do you see the economy going over the next 6 to 12 months?
Bill Gross: The economy should be relatively strong in the first half of 2010 then weaken in the second half. That's not to say we'll return to recession but we'll see weakness as opposed to a continuation of what will probably be a decent first half.

What will make the first half of 2010 so good?
The first half will be dominated by government stimulus and by inventory accumulation or a lack of [inventory] liquidation among businesses. I expect nothing from consumer [spending] and nothing really from housing or really any of the standard cyclical leading sectors. It's hard to put a number on GDP growth rates, but let's say 4% in the first half and then 2% in the second half, which would basically call for some additional help.

You're talking about a second shot of federal stimulus?
Yes, something else is probably needed if the [government's] thrust is really reducing unemployment below double digits and re-normalizing the economy.

What does this say about the Federal Reserve's hopes to start pulling its added liquidity out of the markets, either by raising short-term rates or just getting out of buying bonds, which has been keeping long rates low?
I think the Fed's statements suggest that they really want to exit in some fashion from the buying program. The first step in that direction, logically, would be to stop buying and our sense is that they're at least going to try that. But based on our forecasts for the second half of the year they may have to re-initiate it, and that will be difficult to do once they stop because it then becomes a political hot potato.

All that said, I think they'll stop buying mortgage agency securities, and the trillion-and-a-half dollar check that's been written over the past 9 to 12 months basically disappears. It's significant from the standpoint of interest rates and interest rate spreads in certain sectors. And I would even go so far as to say it might be a mistake.

Because they might have to restart the buying program later?
Yes, I think the Fed wonders about this as well. But you have to understand that the Fed's probably under political pressure — such as the hearings for new regulation of the Fed, the growing public unease about the supersized Fed balance sheet, etc.. The Fed's expanded balance sheet is not something that I consider to be a problem, but I think the market does — and so the Fed will probably be working in the direction of pulling some of the liquidity out of the marketplace. They won't sell — it's a near impossibility to unload what they've purchased over past 12 months. But they'll at least stop buying.

Won't that put upward pressure on interest rates?
I think it will. I mean the mortgage market would be your first place to look in terms of something that's overvalued that would become normalized. Nobody knows what the Fed's buying is worth — we think about half a percentage point on rates, but we don't know.

But secondly, there's a ripple affect. Just speaking about Pimco's general portfolio strategy, we've sold our agency mortgage securities, Fannie and Freddie, in the billions to the willing check of the Fed. They're buying a trillion dollars of them, or have over the past 9-12 months, and so we sold them a lot of ours. Now, what did we do with the money? We bought Treasuries, we bought corporate bonds, and so the bond markets in general have benefited, as have stocks because this available money effectively flows through the capital markets.

So it's a trillion-and-a-half dollar check that won't be there as the Fed withdraws from the market. How that affects the markets, I just don't know. I'm not eagerly anticipating the answer, but I think it holds some surprises in 2010, not just in mortgage securities but stocks as well. We could miss the money, put it that way.

Given your scenario of weakness later in 2010, will there be a premium on safety, like Treasury bonds and notes?
I'd be careful about this continuing assumption that U.S. Treasuries are the place to go. There are a number of reasons to have doubts about Treasuries, not just because of America's sovereign risk but also from the standpoint of an over-owned currency [the dollar]. Add onto those concerns the comments from Chinese authorities and others. They that haven't said they're up to their neck in Treasuries, but you know they're getting close.

So maybe cash becomes the best asset class of 2010?
I'm not being wishy-washy here but cash doesn't earn anything. There's the Will Rogers quote about being more concerned about the return of your money, but you also have to be concerned about the return on your money and there's nothing [being paid] by cash and Treasury bills. At Pimco we would probably try and substitute for our Treasuries with sovereign bonds of potentially higher quality.

Germany looks interesting to us.Germany has problems, but it's in a much better budget situation than the U.S.
because of a constitutional amendment three months ago that forces a balanced budget in four years.

Given all the crosscurrents, what will the investor's world like in the years ahead?
In a new "normal" world growth will be half of what it was, profit growth will be half of what it was and returns on almost all assets — including bonds — will be half of what we've grown used to. Further, the U.S. economy and other [developed] economies have provided as a whole 7% to 9% returns over the past 10, 20 years, and investors got used to that. That's one of the reasons why states and pension funds with the long-term liabilities matched to expectations for double-digit types of returns are facing problems; now they are suddenly having to come to grips with the potential reality of half-sized returns. I think increasingly in 2010 the market will begin to adjust to that.

Over the past six to nine months, the 60% pop off the bottom not just for stocks but for high-yield bonds, etc., is indicative of a return in perspective to the old normal as opposed to the new normal. We think that 2010 will be tempered, and that doesn't mean bear markets but it does mean a growing realization that we have a lot of problems and the markets aren't necessarily priced for it.

Would a second federal stimulus package improve your outlook?
It would help the economy and if applied through Fed programs in terms of outright purchases of assets, yes, I think it would help the markets. I do sort of expect another stimulus program in 2010 at some point but it can't be a big one because the American public and indeed the rest of the world is increasingly demanding some type of fiscal discipline.

Separated couples stay under same roof due to financial woes
More than a quarter of couples who separate are forced to continue to live together due to the recession, new figures have disclosed. Difficulties in selling the shared home, negative equity and over-stretched finances means former partners are remaining under the same roof for months after the end of their relationship, according to a survey of more than 1,100 individuals for house share website Unsurprisingly, three-quarters found the experience stressful while 65 per cent said they wish they or their partner had moved out sooner. A total of 28 per cent of couples remain at the same property after a breakup due to financial pressures, while the same percentage returns to live at their parents’ house once the split is finalized.

It means they join the growing phenomenon of the so-called Boomerang generation, where adult children move back into the family home. Jonathan Moore, of said: "Relationships don’t always work out, but the recession is preventing even more couples from making a clean break when they split up. "Unfortunately, those same financial stresses that make the breakup process so difficult are often a key reason for the breakup. And although people are aware of the negative equity trap that many divorcing couples face – few realise the heartache this is causing cohabiting couples who have split up – they are a forgotten group."

Britain has just eight days of gas supplies left, Tories claim
Britain has only eight days of gas supplies left based on current usage levels, the Conservatives have claimed. Figures obtained by the Tories suggested that if the icy weather conditions continue, storage supplies could begin to run out early next week. Greg Clark, the Shadow Energy Secretary, accused the Government of negligence over the issue, claiming they had ignored repeated warnings over potential shortages. For only the second time ever, the National Grid on Monday issued a warning to energy providers that demand for gas is threatening to outstrip supply. The ultimatum comes after a 30 per cent rise on normal seasonal demand as snow and freezing conditions continued their stranglehold on Britain. But the Conservatives claimed the Government had failed to put contingency plans in place for more than a decade.

Mr Clark said: "This alert is just a taste of what’s to come as a result of Labour's negligence. Gas supply shortages are already being predicted in the North West and East Midlands and at today’s level of demand we only have enough stored gas for another eight days worth of supply. "I have repeatedly warned that Britain lacks the essential back-up plans needed for situations like this one. The Government has had its head in the sand on this issue for 12 years. "When will the Government understand we need more storage capacity and the ability to get gas to consumers so nobody has to face the possibility of going without gas during cold snaps like this one?"

However, Gordon Brown denied the country was facing a gas supply crisis. He said: "I think Britain can deal with these problems. There are always difficulties when we have a long spell of bad weather. But we can cope." Concerns over supplies caused natural gas prices to jump to their highest level in 10 months yesterday, touching 45p a therm. While it is unlikely that households will find their supplies restricted, a shortage could lead to higher bills.

The National Grid, responsible for meeting the country's energy requirements, issued a gas balancing alert (GBA) yesterday to give warning that any further falls in supply could force big users like power plants to cut their consumption. Extra gas supplies were rushed out to the liquefied natural gas importation terminal in Kent through pipelines in Belgium and Norway following the alert. The National Grid said the risk of shortages had been temporarily averted by the influx. "Supplies of gas to the UK have increased following the issuing of a gas balancing alert today," a spokesman said.

He added: "The big generators like E. ON have gas-fired power stations and coal-fired power stations. They can choose to switch from gas to coal. "(Yesterday) we thought there was going to be a certain amount of gas going into the country and then a few suppliers, their supplies dropped off. "They weren't going to be able to provide the amount that we thought, so we issued a GBA so hopefully that's going to bring it back to where it should be."

The first time the alert was used was in March 2006. The alerts are a way of warning customers to ease off on the fuel as well as encouraging suppliers to bring in more gas, which Britain relies on imports for. The fuel is used to heat about two thirds of Britain's homes. Freezing weather is set to stay in the coming weeks, and the National Grid has not ruled out sending out further supply warnings. In the event of a serious shortage, big industrial consumers are expected to bear the brunt of gas consumption cuts to shield residential users who rely on the fuel to keep warm.

UK pensioners burn books for warmth
Hard-up pensioners have resorted to buying books from charity shops and burning them to keep warm. Volunteers have reported that ‘a large number’ of elderly customers are snapping up hardbacks as cheap fuel for their fires and stoves. Temperatures this week are forecast to plummet as low as -13ºC in the Scottish Highlands, with the mercury falling to -6ºC in London, -5ºC in Birmingham and -7ºC in Manchester as one of the coldest winters in years continues to bite.

Workers at one charity shop in Swansea, in south Wales, described how the most vulnerable shoppers were seeking out thick books such as encyclopaedias for a few pence because they were cheaper than coal. One assistant said: ‘Book burning seems terribly wrong but we have to get rid of unsold stock for pennies and some of the pensioners say the books make ideal slow-burning fuel for fires and stoves. A lot of them buy up large hardback volumes so they can stick them in the fire to last all night.’

A 500g book can sell for as little as 5p, while a 20kg bag of coal costs £5. Since January 2008, gas bills have risen 40 per cent and electricity prices 20 per cent, although people over 60 are entitled to a winter fuel allowance of between £125 and £400. Jonathan Stearn, energy expert for Consumer Focus, said: ‘If pensioners are taking such desperate measures to heat their homes it is shocking. With low wholesale prices and increasing profit margins, there is clearly room for energy companies to make price cuts immediately.’

Ruth Davison, of the National Housing Federation, said: ‘The spiralling cost of energy means heating homes has become a luxury rather than a necessity for many people – particularly the elderly, low paid and unemployed.’


susana said...

Now that is some odious debt!

Ilargi said...

For those unfamiliar with the concept:

"In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable.

Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion."


M said...

There is another size issue brewing in the United States. As Big Daddy Capitalism pisses on the unrealized dreams of Little Johnny Not Quite Enough, who will be there to put it all in context, to assuage the tendency of people to blame themselves for their own predicament irrespective of societal and economic stratification? ( Not to discount that other tendency of human nature--”We never failed to fail, it was the easiest thing to do”).

With youth unemployment in the United States exploding, along with a generally increasing ignorance of history and politics, it will be very easy for Little Johnny to develop a “size complex” in relation to his progenitors who acquired the American Dream of secure employment along with the large houses and luxury items as a result.

If for no other reason, the study of the “political ism’s” may provide a sliver of understanding that enables a sense of collective self-esteem to remain intact, and in doing so, allow for a bit more tranquil transition to a life of increasing austerity and depravation. In other words, there are increasingly activated forces that will both transcend and negate the individual tendency for over and under achieving. And if a prepared mind is the number one requirement for safe passage through the bottleneck, then bring on the study and discussion of capitalism, socialism or whatever other subject that allows an increasingly stratified youth to understand the underlying economic structure that is delimiting their life in relation to their immediate predecessors. Those that self-hate due to low self-esteem are far more likely to engage in random acts of destruction--in my opinion.

But none of this is new territory. Guy de Mauspassant’s 1884 The Diamond Necklace is just one short story which addresses this very issue:

Nelson said...

Ye gods - this jobs Chart of the Day says that the productive sector of the US is the same size now as it was in the early Sixties?
There were only a hundred-eighty-something million people in the US back then!

Tyr said...

Compare the situation of England and Holland with the one of icelandic banks in Belgium. Those operated out of Luxembourg and were thus covered by its deposit guarantee system (Garantie des Dépôts Luxembourg) up to EUR 20000 (it actually payed out too!) There's plenty of blame to go around here, it shouldn't all go to Iceland. There's no excuse for municipalities putting their money into a foreign bank and not reading the fine print.

Unknown said...
This comment has been removed by the author.
snuffy said...

I am so amazed[and impressed as hell] by those folks in Iceland.They have shown what it takes...they are "All" paying attention now,and will "hang" any political animal who attempts to sell their cold asses down the river....

You notice how little press their story gets down here....TPTB don't want any 'mericans to start getting the same "Ideas"...why,why,they might begin to think of things TAX REVOLT...

Think what the tea[bagger]party could do with this information,presented in such a way as to show "those heroic Icelanders"standing up to the evil banksters...sticking their collective "one finger" in the a air as a wonderful salute to this who wish to privatize profit and socialize cost/risk..


The pension deficit is a nuclear weapon directly under the ass of all the political class.These folks with the "comfortible"retirements from .gov service are all the ones who know where the bodies are they are the ones who put a lot of them well as the police,firefighters,political animal types ect.I have a brother on one now.A cool 5k a month for the rest of his 52.

He admitted that his blood ran cold at the Christmas family gathering when he was talking[bragging]about it,and my sainted 95 year old grandmother looked at him and said quietly"you will have it until they tell you they cant afford it.and then you wont." She was 14 in the last depression,and her stories and wisdom has been a boon to all the generations of my family...
When it comes time to begin saying "Force Major"or whatever the wording is for "tough luck folks"is about the time the security around all those political animals like Schwarzenegger had better be tripled...[I hear he has quite a personal army now]as that will be the time when all those folks who thought they had a free ride for the rest of their life will find out it ain't so...and they have guns.And such.And a very,very bad attitude.

...Starcades Time for all...

The book-burning is sad,But there is a lot of calories tied up in pulp-fiction,tax-code,and self-help softcover...

Its refreshing to see TAE mindset "infecting"a goodly portion of those who are taken seriously by the "the mainstream media"
Now if the trolls would just go bother "them",we could go back to a nearly realtime discussion forum...but it is nice not to sort garbage...


Gravity said...

Everything is relative to gravity.

Gravity said...

The cause of time is relativistic mass.

Ilargi said...

"Ye gods - this jobs Chart of the Day says that the productive sector of the US is the same size now as it was in the early Sixties?
There were only a hundred-eighty-something million people in the US back then!"

Yeah, I noticed that too. And that number has been going down steeply the past 3-4 years. Many of these manufacturing jobs are not expected to come back, ever, once they're gone.

Alfred said...

The mainstream media is virtually unanimous in reporting that jobs will be added sometime within the next few months. What is TAE's view? Possible? Likely? Unlikely? Impossible?

Ilargi said...

"The mainstream media is virtually unanimous in reporting that jobs will be added sometime within the next few months. What is TAE's view? Possible? Likely? Unlikely? Impossible?"

The way things are reported, anything is possible. It would be no surprise if the BLS non-farm numbers come in positive tomorrow. At the same time, though, real unemployment may keep rising, because the rate at which people "fall off the back" is fast increasing. That is a large perverting factor, as is the 2-odd million temp jobs for the Census. The reporting of the numbers has become so convoluted, anything can be presented as true these days. It'll be fun to see how it's all spun.


APC said...

Outside of this proposition:

"Who is to blame for the losses?...Fifth, the people of Iceland, who were living it up with the cash floating in freely."

I completely agree. Thanks for the good read.

Alfred said...

If employment turns positive (at least in terms of how its reported in the media), and 4th quarter earnings continue to show improvement, then financial markets are definitely headed at least into the 1200's on the S&P500, and possibly even higher. Even Denninger has warned the Bears that 1200's for the S&P500 is a reasonable possibility through the first 3-6 months of 2010. Stoneleigh predicts the market peak will be reached at any moment. What are your thoughts Ilargi?

Stoneleigh said...


If employment turns positive (at least in terms of how its reported in the media), and 4th quarter earnings continue to show improvement, then financial markets are definitely headed at least into the 1200's on the S&P500, and possibly even higher. Even Denninger has warned the Bears that 1200's for the S&P500 is a reasonable possibility through the first 3-6 months of 2010.

Employment and earnings do not drive stock markets, they lag them. The figures you are seeing, to that extent that they have any credibility at all, reflect 9 months of rally. We said last March that the fundamentals would look (at least superficially) less awful by the end of the rally.

Watch the markets. Where they lead, the real economy will follow (thanks to the difference in timescale for sentiment to manifest in finance versus the real economy). I think the markets are close to a top. IMO the upside potential has been limited for months, while the risk has been steadily increasing.

Alfred said...

@ Stoneleigh,

Stoneleigh said:
"Employment and earnings do not drive stock markets, they lag them."

My response: I know of no evidence whatsoever to support your claim. In fact, from what I observe on a daily basis, just the opposite is true. Do you really believe a positive jobs number on Friday would have no impact on market behavior? A positive jobs number would drive the sentiment higher and the markets higher, just as a negative jobs number would do the opposite. There is evidence for this sort of phenomenon every day with other economic data. It is pretty rare for the markets to move in opposition to the data.

Alfred said...

Stoneleigh, you first called a market top on September 22nd when S&P500 was at 1072. The market has pushed 6% higher since then. A fairly consensus prediction (in the mainstream financial press and Karl Denninger) for the next few months is the mid 1200's for the S&P500. 1250 would mean the market pushed 16% higher than your initial market top call. That would represent a pretty big divergence in my book. Anyway, the question then becomes what happens next. Well, the Fed strongly hinted yesterday that if weakness emerges in the next 3-6 months, then asset purchases will be expanded. That will push markets higher still. Yes, I know, it can't go on forever. I'm merely pointing out the fact that bearish analysts have underestimated the effects of bailout programs to date. Suspending mark to market accounting and the initial phase of quantitative easing certainly pushed the markets higher. Cash for clunkers pushed the markets higher with no lasting ill effects to car sales since it was initiated. The tax credit for housing and its subsequent extension pushed the markets higher. Why do you suppose that the markets would ignore additional asset purchases by the Fed?

Top Hat Cat said...

We will see if that old saying holds true, 'it's not the size of the dog in the fight, it's the size of the fight in the dog.

Iceland is yet another in a long series of canaries in a long series of post postmodern mine shafts.

Ilargi has done a very nice summation of the rock and the hard place Iceland is situated in and, by somewhat delayed circumstances, what the US and UK are in for.

Do citizens have to make good on the misdeeds of their duly elected governments? Seems a lot of people are always wringing their hands in misplaced paranoia worrying about whether their respective governments are keeping too close a tab on their citizens via illegal wiretaps and breaches of individual privacy. How about the citizen's lack of action and accountability in holding their government's actions/inactions and misdeeds in check via monitoring them?

The TAE is living example that a pretty complete analysis of events can take place without the resources of a CNN or Faux News organization hand feeding the citizenry baby food disguised as news.

An entire citizenry of what ever country claiming that they just could not get to the truth of the matter regarding their collective financial destiny just doesn't pass the smell test in my book.

Everyone seems to be claiming that TDETH.(The Dog Ate Their Homework)

Pleaseee, spare me the crocodile tears.

The investors and their sovereign governments also look particularly pitiful whining about not getting their 'to good to be true' returns.

Hey, that's why they can be referred to as 'to good to be true' returns in the first place.

Is this going to be about all parties taking a hit? Somehow 'averaging out' the claims and counter claims? A Grand Mal Lawyerpalooza? While the global economic infrastructure burns to the ground like Dresden?

We shall see. This is the stuff wars are started with.

scandia said...

Re " technical default "....does it mean that the nation is bankrupt but not experiencing consequence because counterparties to this debt/obligations are not calling in the loans? And from my limited grasp of the situation it looks like everybody is a counterparty who dare not cash in because such a response would start the cascade.
The Icelandic referendum in Feb.will be watched by all. It could start a cascade of raised fingers around the world.(I am envisioning the rolling wave of fans in a stadium.)
I feel excitement and hope as I watch the people of Iceland make a decision. Finally a personal decision, not institutional coercion. Oh please,let a few hundred thousand Icelanders escape from debt slavery! I don't think they thought to build debtors prisons? Not like elsewhere,eh?
Interesting times!
Thank-you,Ilargi, for to-day's focus.
The implications are complex challenges to our governance structures, to each and every life.

Stoneleigh said...


People rationalize moves based on the 'number of the day'. That doesn't mean that rationalization is valid. The way the number is rationalized depends on existing sentiment.

Programs such as the ones you mention work during a rally (in social mood, of which markets are but one indicator, albeit the most quantitative) because sufficient confidence returns for them to work - a suspension of disbelief if you will. They do not work when sentiment does not support them. Rallies make central authorities look good, since what they do appears to be working. Declines make them appear foolish and incompetent, as everything they try fails. Watch and see when the markets turn.

I disagree that the markets will go as high as you think. Corrections are tricky to call as they can morph into multiples of patterns, but not to an unlimited extent. As a pattern completes, a time of higher risk exists. It is prudent to identify those, as people are taking higher risk for limited upside potential. Those who make money on rallies, as with any Ponzi scheme, are those who get in early and out early.

People who have sat on the sidelines since September have not given up much, and they have not taken the larger risk of staying in the market. The only people who have taken a real risk are those who have shorted the market, but shorting is always a very risky thing to do. One has to be an aggressive speculator to take that strategy, and even the best of them will often lose money. They simply hope to make more than they lose in the long run.

Ordinary people should not be gambling with their future IMO. No one should even gamble with what they can't afford to lose.

The MSM has no interest in anyone understanding what is going on. To a large extent they don't understand it themselves. They are largely reflectors of sentiment - feeding it back into the population in a positive feedback spiral. IMO its tone will change substantially in the not too distant future.

Top Hat Cat said...

This headline, Bad news for the stock market: retail investors are flooding back, underscores Stoneleigh's point to Cheryl about knowing when the worm has turned.

I think this is a contributing factor as to how the rally/corpse has remained dancing as long (and longer) than many people would have guessed.

The TBTF's have been waiting for more of the 'dumb money' to flood back into the asset trap before kicking the legs out from under it.

It has taken much longer than expected because the 2008 collapse was so monumentally stunning to so many investors their reluctance to be hosed again took much longer. The mediawhore's effectiveness at propaganda happy talk is waning each leg down.

After this next BSD (Big Slide Down), the MSM will have shed most of it's remaining pitiful sack of credibility.

In that coming news credibility vacuum left by the disgraced MSM, demagogues will grow like poison mushrooms.

Jim R said...

Icelanders are selected for courage: their entire country sits on top of an active volcano range. It's not like California, where there might be a big quake in the next 30 years, the Icelandic volcanoes are spewing every day.

The people who couldn't deal with that left Iceland a long time ago.

Hombre said...

Susana and Ilargi - Thanks for the term "odious" and the clarification.
While these massive debts do stink to high heaven I also understand they, to a large extent, have been balooned artificially in order to save the system for the elites and pols who thrive on it!
True... a lot of folks have made their own bed and deserve to sleep in it, but most people are just caught up in a trickle down economy ran by corporate and political manipulators of an evolved corrupt system. Odious is right... mightily so.

M - "With youth unemployment in the United States exploding, along with a generally increasing ignorance of history and politics"

As I look around me I see this exactly as you describe it right here in my hometown. Kids with little chance to find self-sustaining jobs, with a diploma but with only a smattering of real education--of history and a proper perspective--on their place in the scheme of things. Most of them are living on their own low wages plus some help from mom, dad, or grandpa, etc..

Nelson - Hell yes! Here in the "rust belt" our towns are dotted with large flat concrete lots where a bulldozed down manufacturing plant used to be--which was booming in the 60's. The sad part is, what we sent away didn't go away (to ease environmental concerns, etc.), rather they just moved to other locations around the planet. So we are "devolving" into a shambles with hordes of ill informed and unemployed youth so corporate entities could keep their balance sheets intact.

Cheryl - If you "create" 100k jobs a month and lose 200k jobs a month (or more) then what is there to celebrate?!

Hombre said...

Suicide bomber kills 7 in east Afghanistan (54 minutes ago)

So now the suicide bombings in Iraq--daily--are also occurring in Afghan/Pakistan, and likely Yemen. Spreading like a rampant disease wherever we have went in to "boost democracy" LOL -- read protect our oil supply lines for our wasteful, fuel guzzling habits.

Hombre said...

Egyptians riot after 7 killed in church attack

scandia said...

I am most interested to observe what " pressures" and implied threat will be directed against Iceland.And the terrified citizenry of the world will watch very carefully and learn. Perhaps subservience will look like the best option?
The Allies didn't have to bomb Dresden, they were giving a message to the German people. Surrender or else!
As Geithner says, " It is a question of will." No problem there....we will soon know the will of Iceland.

memphis said...

Cheryl wrote:

Yes, I know, it can't go on forever.

The problem, as I see it, arises from not knowing just how much manipulation is occuring behind the scenes. I shorted housing stocks years ago--too early--believing the market could not hold up as long as it did.

I don't believe Stoneleigh is wrong; to the contrary, I believe she is quite right, but it's impossible to accurately predict the exact timing because we don't know the extent of manipulation that is going on. I'd say it's been that way since at least 1993, and perhaps since 1987 when Greenspan rescued the stock markets after they fell 25% in a day by dramatically lowering rates.

Instead, what I should have done was to watch anecdotal evidence more closely. My broker knew the housing jig was up when her in-laws, a physician married to a nurse in Florida, opted to obtain their real estate licenses to begin selling RE a couple of years ago.

Stoneleigh said...

The Onion (satirical video): Congo Approves Economic Stimulus Package Of AK-47 For Every Citizen ;)

This one is better if you don't speak French.

Anonymous said...


The MSM have been reporting the jobs situation is improving for a while now. Yet the total dollar value of unemployment payments by the United States Treasury continues to grow every month.

Are UI recipients getting bigger paychecks? No? Well then there must be more of them. Either the UI payment per person is larger or the number is larger. Those are the only two variables in that simple equation.

Yet, because the MSM drools over itself reporting a blatant lie, you expect this to actually manifest as good consequences?

I have a recommendation, Cheryl. Since you seem so sure that the S&P is going to 1200 or beyond, just go dump all your money in an index fund. Maybe it will go all the way to 1500. But if it doesn't I hope you are quick enough to get out in time.

As for me, I'll stay out of the market. I haven't touched a stock market investment since before Lehman blew up and I'm up 17% from before that collapse while most people are still in a down position even after this "rally".

You go right ahead and listen to Tout TV Cramer and his ilk. Please. Do exactly that. But don't cry if you get burned straight to hell on that bet. As for me, I'll put my money in places other than stocks for now and the foreseeable future.

Greenpa said...

Ugandans have developed a nice "prosperity & population control" strategy-

Greenpa said...

Saying "up yours!" to bank demands IS contagious-
The Chinese are following through on their threat to refuse payment on derivative losses:

That's from Dec 29, kinda got lost in the New Years noise, I think (or did I just miss it?)

Anyway- more "courage" -

Phlogiston Água de Beber said...

Stoneleigh said in reply to Cheryl...

The MSM has no interest in anyone understanding what is going on. To a large extent they don't understand it themselves. They are largely reflectors of sentiment - feeding it back into the population in a positive feedback spiral. IMO its tone will change substantially in the not too distant future.

I've been involved in a lot of industries and activities, from moon shots to electronics recycling. Along the way, I spent a few years working with practitioners of MSM. Even lived with a newspaper reporter for awhile and hung out with her colleagues. I've dined and drank with publishers and cable execs.

Like most everyone, what they care about is money. Where do they get their money? Advertisers. Thus their news is crafted to keep their advertisers from getting too annoyed with them and as much as possible to please them. In the broadcast arena, they must also avoid displeasing the government too much because of licensing.

Expecting truth from the MSM is akin to expecting wine from the teats of a cow. The cow does fermentation, but it has no interest in you getting drunk.

The only people advertisers will pay to tell something approaching truth are the satirists. Viacom's Comedy Central Network probably broadcasts more truth in a week than all the NBC channels do in a year. I seriously doubt that medieval kings employed jesters just to make their guests laugh. There were lots of other ways to entertain them.

So, if you want some truth, watch Jon Stewart, Stephen Colbert and Lewis Black. If you are working on your cocoon, stick with the MSM because their stuff can get really gooey.

jal said...

Did the tax payers make the investors good in the Madoff ponzi scheme?
Should the tax payers make the investors good in the Icelandic ponzi scheme?

Phlogiston Água de Beber said...

That was a great Onion Stoneleigh. While I was there, I found this very educational new war game Ultra Realistic Modern Warfare.

Also this very exciting new announcement from Ford, which clearly shows how they are adjusting to market realities. Ford unveils new car for cash.

Anonymous said...


About markets being close to turning (Top Cat, Stoneleigh), has anyone else noticed VIX and EPCR5 over the past two or three days?

Things are lining up for a reversal. Stay tuned.


Weaseldog said...

Cheryl said... "In fact, from what I observe on a daily basis, just the opposite is true. Do you really believe a positive jobs number on Friday would have no impact on market behavior? A positive jobs number would drive the sentiment higher and the markets higher, just as a negative jobs number would do the opposite."

This is true, because bubble headed bleach blondes on the news say so.

Economists rationalize market moves on television, and express that as God's honest truth. then they make predictions that rarely come true.

We believe these people because they are on television.

Top Hat Cat said...

I don't really follow the geek stats for the stock market, I don't have a dog in that fight.

Is there an index or eco-metric stat that follows the volume and amount of retail investors (Not institutional or professional investors) coming and going over Time through the Gulag Gambling Ghetto formerly know as the NYSE(or S&P)?

Does the VIX and EPCR5 reflect the 'amateur' investor?

And what percentage of the stock market is 'amateur' versus pro investor?

15% vs 85%?

Phlogiston Água de Beber said...

RE: the choice to become the Cuba or the Haiti of the North Atlantic.

I can only speak for myself of course, but I would a whole lot rather be Cuban than Haitian. One can speculate that if Iceland allows itself to be Haitianized it may reasonably expect to be regularly raped and pillaged by those fine European folk they have tried so hard to emulate.

If Cubanized, they should bear in mind that they have something valuable to offer their distant cousins, the Rus. That would be an accident of geography that places them in a very strategic spot on this tortured orb. The Rus weren't quite willing to pay the Icelanders supposed debts, but with the debts flushed a protection deal might be much easier to reach.

Unknown said...

Tone it back a little, Grey, if you don't mind. Cheryl has been respectful; you can extend the same courtesy.

I appreciate her concerns, and she has a point, as does Stoneleigh, whom I still like to of as Our Lady of the Immaculate Truth. Our expectations for timing are inherently probabilistic. Stoneleigh is not shy about that, but her expectations are generally the most reliable. I won't speak for her, but I would hazard a guess that she would say that, yes, the rally could continue longer than expected in the way Cheryl describes, but as she's already said, it's less likely than the alternative. That's all. Such is the nature of probability. We have to attend to our best expectations based on the facts and make our preparations based on the risks, costs and benefits. I am of the same mind that the risk has only been growing since the bear rally began and the possibility for return have concordantly been decreasing as the rally nears it's peak. Exact timing is a secondary issue to this understanding, but I understand: we're all impatient for some certainty here.

Unknown said...

Sigh, I really need to edit my posts before I hit the send button. I hope it was intelligible.

Weaseldog said...

Rumor said, "Exact timing is a secondary issue to this understanding, but I understand: we're all impatient for some certainty here."

I'm not sure we're all impatient for some certainty.

Certainty is being in on a rigged game. No one here is likely to hold a seat at the table as far as this is concerned.

So we recognize that uncertainty is the rule, and accept it.

I think those that are sitting on the sidelines as I am now, may agree with me.

Certainty at our level, is for suckers.

Ruben said...

re: Certainty

A few years ago I ran across a European movement called Precarity. I think it is mostly filled with people spouting theory at each other, but the gist may be--life is precarious, and getting more so. That is somewhat good, and also bad. We need to learn to live with it, because certainty is gone.

Alfred said...

@ Stoneleigh

Stoneleigh Said:
"[Government bailout] Programs such as the ones you mention work during a rally (in social mood, of which markets are but one indicator, albeit the most quantitative) because sufficient confidence returns for them to work - a suspension of disbelief if you will.

My Reply:
Our basic disagreement seems to center around the degree to which economic data and government policies influence market direction versus the extent to which aggregate social mood influences financial market direction. I've aruged that, to a large extent, economic data and government policies drive the markets and that social mood is subordinate. You've argued that social mood dictates events.

Consider an example that strongly bolsters my argument: The government's decision to suspend mark to market accounting (MTMA). I argue this policy change is the single biggest factor to explain the rally, not social mood. I'll concede that both suspension of MTMA and social mood were necessary but not sufficient conditions to drive our current rally, but the suspension of MTMA was by far the primary influence. Without the suspension of MTMA, the banks and insurance companies would have continued to report loss after loss after loss until many of them collapsed. We'd be living in a completely different world by now. It wouldn't have mattered one iota how much aggregate social mood yearned for a switch from pessimism to optimism, the repeated drumbeat of losses and bankruptcies from the financial sector would have snuffed out any flicker of optimism and pounded social mood further and further down. Thus, government policies - bailouts and in this case a rule change - drove social mood and market behavior. Government policy is still dictating social mood today. Each subsequent bailout and rule change has further enhanced social mood and muffled any nascent pessimism and given greater confidence the market will rise. There is no way whatsoever a rally or a change in social mood would have been possible without the suspension of MTMA. Do you disagree?

z said...

Behind The Curtain--The Full Monty a three-part tell-all by Martin Armstrong

Stoneleigh said...


The rally began Mar 6th, the better part of a month before MTM was suspended (Mar 30th). We warned our readers that the rally was coming, and that it would be large, at a time when most other news sources were panicking.

The suspension of MTM fed into the psychology of a rally to encourage people to buy back into the market (riding initially on a wave of short covering). Many other programs followed suit and rode a resurgence of confidence.

Watch and see what happens when the market turns. The government isn't going to stop trying to prop things up, but it won't work anymore. They'll try harder and harder, but with each failure will look increasingly impotent and incompetent.

Rallies are good to incumbents. They can make almost anyone look good. Declines are the opposite. The occupant of the white house was elected as the next Herbert Hoover.

Unknown said...

Cheryl, thank you posing your questions; I'm enjoying the discussion between you and Stoneleigh. As to your last point, which was an important question, in addition to Stoneleigh's response I would just like to dwell on our mutual agreement that at some point we expect a crash of the bear rally to come, regardless of (cherry picked) economic indicators and government interventions. From what I understand, we all agree on that, but the question is when and how long extraordinary government support to the rally and cherry picked (ie. misleading) indicators can float the rally. But doesn't this agreement in itself demonstrate that it is social mood that drives the market, not artificial indicators and supports? Those supports will not initially wane when the markets begin to fall; for a time, they will probably be redoubled until they can no longer credibly be maintained. In other words, we all expect the markets to fall despite government intervention and cherry picked indicators continuing. This should occur in the same manner as at the start of the rally which, as Stoneleigh noted, preceded the notable intervention efforts and as far as I recall any significant positive indicators (other than the market rally itself, of course). If it does, then social mood certainly leads these other factors.

Phlogiston Água de Beber said...

@Rumor, Weaseldog & Ruben

"Life is uncertain, eat dessert first."

-- Garrison Keillor

Alfred said...

@ Stoneleigh,

Stoneleigh said:
"The rally began Mar 6th, the better part of a month before MTM was suspended (Mar 30th)."

My reply:
Go back and read some WSJ, Bloomberg, NYTimes, and Washington Post articles starting Monday, March 9th (I've provided the links at the bottom).

Mark to market accounting may have been formally suspended on March 30th, but widespeard reporting of its virtually guaranteed impending suspension rippled through the press starting Monday, March 9th. The expectation of a mark to market suspension had the same effect on financial markets that the expectation of job growth and good 4th quarter earnings is having on our rally now. Suspension of Mark to market meant one and only one thing - banks would soon report profits and no more credit writedowns. Widespread reporting of the expected suspension of mark to market accounting coincided with a virtual 3 week constant news blitz in which big bank after big bank reported huge/record earnings and predicted great 2nd quarter results. Everyone in the finacial press put 2 and 2 together for their readers. They diligently explained that banks are making money hand over fist AND with the widely expected suspension of mark to market accounting, that means they report no more credit losses! Citigroup, which kicked off Monday, March 9th with its earnings announcement, was soon on its way to a 400% increase in its stock price. None of that was possible without the widespread reporting of the expected suspension of Mark to Market accounting starting 2nd week of March followed up by its actual suspension on March 30th. Your argument about the timing of Mark to Market versus the rally is fundamentally flawed.

jal said...

I’ve just listened to Obama ... He has declared war!

Those of you expecting a declaration of war to stimulate the economy now have your answer. hehehe It is not going to be a “traditional war”. Every and all countries will be targeted.

He doesn’t have the required “army” for the upcoming battles.

He will be spending huge amount of money to build up his arsenal of Secret police, spies, task forces, etc.

Watch for it! ... the “War hacks” have been released.

Bigelow said...

Z- Thanks for the Armstrong link(s).

mikel paul said...

Weaseldog..."Certainty at our level, is for suckers." Amen.

Certainty at any level, is deadly. It's like calling Carlin a comic.


Gravity said...
This comment has been removed by the author.
el gallinazo said...

In the relatively short life of TAE, we have had a succession of not-so-loyal opposition figures in the commentariat. With the exception of the current incumbent, Ilargi eventual got fed up with them and banned them. The were stylistically somewhat different, but when you cut to the nub, they all had the same theme. They felt that I & S were dead wrong on their predictions of cataclysmic financial collapse, and they based this assertion on the concept that beneath the rug under which the treasuries and central banks of the world sweep the growing mounds of fecal debts, there exists a giant black hole which compresses said feces into a singularity that no longer exists in our conventual universe. I&S, OTOH, claim that there is quite a limit to the elasticity of the volume under the rug, and when you reach that limit they will come spraying back out with a vengeance. So that is the bottom line. Are the financial markets based on fantasy to their very core and does a black hole exist under the rug?

el gallinazo said...

OK, Stoneleigh inspired me to dig up the URL to my favorite Onion video

Phlogiston Água de Beber said...

For the benefit of those who can't stop thinking about the markets, it might be a good idea to read what Bill Gross of PIMCO has to say.

Let's Get Fisical

If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.

Explaining the current state of global fiscal affairs is often confusing – it’s much like Robert Palmer’s 1980s classic song where he laments that “She’s so fine, there’s no telling where the money went!” Where government spending has gone is not always clear, but one thing is certain: public debt is soaring and most of it has come from G7 countries intent on stimulating their respective economies.

Here for your entertainment is Robert Palmer - Simply Irresistible

Alfred said...


Here is abundant evidence to support my earlier post about mark to market accounting and the timing of the rally. News of the expected suspension of mark to market accounting coincided with the start of the rally. It did not, as you suggested, follow the start of the rally. In addition, the news cycle was overwhelmingly supportive of the rally from its inception with a media blitz in which each big bank reported great earnings. Your theory suggests news should lag the markets. That didn't happen with the March rally. See the links below:

WSJ-Wednesday, March 11th 2009:

Four Reasons the Recession May Be Easing
"The Tide Is Turning Against the Biggest Bugaboo in Finance: Mark-to-market accounting has lost its last friend on Wall Street in James Dimon. Many Wall Streeters have blamed their woes on accounting rules that require banks to take new hits on troubled assets every quarter–and, in the words of Shakespeare’s Macbeth, the line of such assets stretches out to the crack of doom...The drumbeat for a repeal started last fall. Dimon, the CEO of a bank that has suffered less than others, has an opinion that carries weight. In addition, Ben Bernanke suggested easing accounting rules yesterday."

Lead WSJ-Tuesday, March 10th 2009:

Pandit: Citi Had Strong '09 Start
"Citigroup Inc. was profitable in the first two months of 2009 and is having its best quarter in a year and a half, Chief Executive Vikram Pandit said in an internal memo aimed at boosting employee and investor confidence in his struggling bank."

WSJ-Wednesday, March 11th 2009:

"Can Citigroup continue to lift the stock market? Stocks soared Tuesday after Citi Chief Executive Vikram Pandit said the bank was profitable in the first two months of this year. Citi is arguably the nation's sickest large bank, so any sign it can produce real earnings in this economic climate bolsters confidence. What's more, if Citi is on the road to profitability, there is a greater chance the government's bank-sector revival plan -- involving stress tests and possible equity injections -- will get financial firms through the downturn."


Lead Article in WSJ-Wednesday, March 11th 2009:

Dimon Optimistic About Economy
"Mr. Dimon also said Wednesday that J.P. Morgan Chase was profitable in January and February. His statement follows a similar one made by Citigroup Inc. CEO Vikram Pandit, who sparked a stock market rally Tuesday by saying his company also turned a profit in the first two months of the year."

WSJ - Thursday, March 12, 2009

Lews: BofA Won't Need More Aid
"Mr. Lewis told Boston College's Chief Executives Club of Boston that he expects his Charlotte bank to earn "close to $50 billion in pre-tax, pre-provision earnings' in 2009"

WSJ-Tuesday, March 17, 2009:

For Banks, All Is Well — Is It?
"a number of major institutions have jumped on this bandwagon to comfort the markets that they, too, did well in January and February. The suddenly sanguine outlook breathed a bit of fresh air into the equity markets, which traded higher off each successive optimistic voice, from Bank of America’s Ken Lewis and J.P. Morgan Chase & Co.’s Jamie Dimon, to most recently, U.K.-based HSBC Holdings PLC and Standard Chartered PLC. Bank shares are up more than 40% from the beginning of last week."

EconomicDisconnect said...

Loved this post, hit me very hard in many ways and I appreciate it.

If all the news of the day was not enough (Geithner coverup, etc) allow me to remind all today that Lennar posted an actual profit, but only when allowed to consider the tax loss carry over provision covered in one of the last housing bills. LEN stock was up (over 12%!?), and as Cheryl states, the market moves up. What that kind of observation misses is that this is all playing with numbers. Yes it can go on for some time, but any panic or even mild scare will blow the whole thing down. That is not a market, it is a house of cards.

M said...

In fact, the MSM is reporting some negative aspects of the recession. Just this morning I was reading USA Today which asserts that recessions can have catastrophic effects even decades after they occur. That, for example, many are still traumatized by the double-dip recession of the early 80’s.

Looking deeper into the story and once again the materialist/consumer agenda is being subtly touted. If one suffers an economic setback,and a reduction of consumer capability as a result, they potentially are damaged for life.

I would opine that if one is still suffering ill-effects from a decades old recession then economic and material concerns are not the real culprit and it might be time for psychiatrist, if not a Guru.

The article, in my opinion, is just more disguised ‘keeping up with the Jones’ fear mongering that equates a diminished capacity to consume with a failed, traumatized life.

I suppose that espousing non-attachment is bad for business at the end of the day. So the MSM continues to push a certain brand of consumer infantilism--like the infant who distresses over a dropped pacifier.

Shop till you drop; your mental health and lifelong happiness may depend on it.

Gravity said...

Read Wikipedia, Relativity of simultaneity, ask of each particular event; when did it happen in which relative frame of reference?

Timing is an illusion, created between those with momentum and those without. Our only hope, our only peace is to understand it, to understand if it is a glitch or a feature.

The suspension of mark to mordor is itself an expression of herding mechanisms working through various systems, creating preemptive psycho-emotional deformation of targeted statistics in a timely manner.

ric2 said...

Cheryl -

I am enjoying this discussion between you and Stoneleigh. However, I think you are selectively remembering early March reporting.

You said:

Mark to market accounting may have been formally suspended on March 30th, but widespeard reporting of its virtually guaranteed impending suspension rippled through the press starting Monday, March 9th.

Here are some articles from around that time period:

Reuters, March 10: SEC won't seek to suspend mark to market

CNBC (with Reuters), March 10 SEC Decides to Continue Mark-To-Market Regulation

CBS, March 11 SEC Looks at Reinstating "Uptick Rule" (article mentions that SEC will not be suspending mark to market)

I understand your desire to understand market behaviors. We all do. And it is just so darn tempting to assign easily identifiable external causal factors to stock market behavior because it so easily fits into our desire to see clearly defined cause-effect relationships in the world around us. It comes from the pattern-recognition features of our fairly recently evolved neocortex.

Gravity said...

The cause of rallies is the orbit of Jupiter.

Well, maybe not.

Alfred said...

@ el g

Ultimately, the equity market rally will continue until the government either (1) voluntarily stops kicking the can down the road with stimulus, bailouts and rule-changes, or (2) A significant bond market dislocation and/or sovereign default here or abroad forces a defensive posture by equity investors. Until either of those things happen, sentiment will remain fundamentally bullish for equities. The equity market can't grow to the moon. That's a straw man and I never took that position. I'm simply arguing that until a bond market dislocation occurs, primarily government policy, not cyclical equity investor emotions, will determine the direction of the equity market.

Stoneleigh said...

The recent fractal adaptive cycles post is running at The Oil Drum today.

Phlogiston Água de Beber said...

el gallinazo,

I congratulate you on your fine characterization of the oppositionally inclined. It is noteworthy though how far she has come since 11/11. Not only in style, but also the adroit reversal of position. It's uncanny I tell ya.

More suspicious minds than mine would probably even begin to wonder if, like Tyler Durden, she is a collective. Folks who've watched too much syfi channel might even question whether she is even a carbon-based unit.

Well, whatever the gravitationally warped approximation to reality, she does bring a breath of scented air to the conversation. One can only hope that it isn't mustard gas or lewisite.

Alfred said...

Ask yourself this:

Would the equity markets be where they are today without the suspension of mark to market accounting? Is anyone seriously going to argue yes? I'd love to hear it. If you say no, then at some level, you're on board with my argument.

snuffy said...

I just had a "Fascinating"conversation with a state employee in the employment division...[never mind who

I had been switched around to several offices trying to straighten out a headache with my claim,when I found a person who "broke the mold"of
What these folks normally will say.This person confided that they are seeing a "wall"of new claims that is overwhelming the system...

[ehh?thought the claims were going down say what?]

That they are seeing every kind of person...PHDs,20-30 years steady work types...people who had never filed a claim in 25 years...ect. ect. ect .That the people in the dept.were all stressed out beyond words...everyone personally known by this person was laid off..they was the only one working...


I sent this person this way,as a site to get un-ambiguous information from,and suggested that anyone who really wants to know whats going on should drop by,so we might get a few more newbies who need a bit of guidance.This person was being tweaked pretty good by what they had seen the last couple of monthes,I wonder who is REALLY keeping track of how bad its getting...that "prevention of withdrawal"of money market and 401 k money is winding its was thru they are getting ready for the next crash,to ensure the total screwing of everyone now...



gylangirl said...

@ Stoneleigh

re Onion story

It's funnier in french.

Although the reporter says so in French, the English subtitles omitted that each citizen gets an AK47.

gylangirl said...

re the french version, the interspersed clips don't match the translation but the anchor/reporter is hilarious.

EconomicDisconnect said...

MTM suspension was the one of the top pressure releases for the banking sector, I agree.

I too tend to think that only something huge could get this show to unravel, or even slow down, but I think I was reminded by Ilargi that things start small. An ember if you will. The subprime crisis began with the collapse of American Home Mortgage and I think I may have seen some tiny bloomberg scroll late at night on TV about it as it happened but that opened the flood gates. Besides there will never be a US bond market failure because the FED would buy them up. Other countries, well maybe!

EconomicDisconnect said...

On the lighter side, this guy is hilarious as he shows the twitter posts of the nations leaders:


I am still laughing.

Greenpa said...

Ask yourself this; has the entire thread been hijacked today by the same old techniques? Doubt, cite, repeat; "you just don't see what I'm saying"; repeat, repeat.

I am NOT enjoying. It's really NOT a conversation.

Ask yourself this, too- how come all of a sudden "Cheryl" has so much time on her hands, and such depth of information (crap information, but deep).

And exactly what is in it for her, to convert Stoneleigh to The True Way?

C'mon, guys. fake, fake fake- and alas, effective. Today.

memphis said...

Cheryl wrote:
Would the equity markets be where they are today without the suspension of mark to market accounting? Is anyone seriously going to argue yes? I'd love to hear it. If you say no, then at some level, you're on board with my argument.

I disagree. While I don't think equity markets would be where they are today without suspension of mark to market, that's a fantasy of its own. The underlying fundamentals haven't changed; the properties and/or the securities that underpin them are, IMHO, still worthless. It's lipstick on the pig. That so many people have seemingly bought into the case for higher equities based on the elimination of mark to market is amazing.

Top Hat Cat said...

A more interesting question.

"....would the equity markets be where they are today without the...

..blatant media whoring of the WSJ & CNBC & Jim Cramer creaming himself barking up the virtues of the likes of Bear Stearns like a circus clown with his hair on fire?

Probably not, that is, without the generous self serving hubris of the Extend and Pretend Don't Worry Be Happy Blitzkrieg mounted by the financial Oberführers in U.S. Ministry of Propaganda who personally made sure that the 'herd' would receive an ADVANCED TASER M26 in the ass to 'start the rally ball rolling'.

Was the rally 'caused' by the suspension of MtoM accounting rules?


Was the rally caused by an evil cabal of crony capitalist?

Only if the 'herd' wanted to believe in the blatant lies being told to them by the media/mouthpiece whores that all's well on the Financial Western Front.

We got a cause an effect mojo egg rally thing going here.

Don't count your chickens before they cross the road Cheryl.

scandia said...

Am I the only one who finds it " odd " that Obamam and his man in charge of intelligence/security were not too bothered by the " highjacker " on the flight to Detroit. I mean they just kept on skiing and scuba diving or tanning or whatever they do on holiday.
Strange laid back non-response to a terrorist attack.Perhaps I am being unfair. Maybe they are just good at delegating?
And who is it that will be awarded the 30B worth of contracts for body scanners world-wide? Nice little earner for somebody. And they just happen to have stock on hand to fill the rush of orders?

Wyote said...

Will Timmy take the fall?

Geithner’s Fed tried to keep sweet deal for banks a secret: Issa

The controversy surrounding Treasury Secretary Tim Geithner's role in the 2008 Wall Street bailouts was ramped up Thursday with the revelation of emails that show the New York Federal Reserve -- then run by Geithner -- pressured insurance giant AIG to withhold information about payments the company made to its creditors.

Rep. Darrell Issa (R-CA) obtained emails between AIG employees showing that the company had planned to disclose in its filings to the SEC that it had paid 100 cents on the dollar to creditors like Goldman Sachs and other banks, but "the New York Fed crossed out the reference," Bloomberg News reports.

We can only hope. Er, scratch that hope thingy. NAIL THE BASTARD!


susana said...

Yesm, when I saw the TAE post this a.m., it caused me to remember the odious debt theory as it was explained by an economics expert in a multi-part documentary I saw on the collapse of the Argentinian economy and currency. A salient feature of that event as I recall it was a ravenous horde of international banks running away with piles of $, gangsters seizing public assets for pennies on the dollar and stripping them down for cash, banks with strangely familiar names... and average citizens very suddenly couldn't get their life savings out of these same banks anymore... good documentary on youtube, you all should watch that one!

jal said...

scandia said...
And who is it that will be awarded the 30B worth of contracts for body scanners world-wide? Nice little earner for somebody. And they just happen to have stock on hand to fill the rush of orders?

I said ...
He will be spending huge amount of money to build up his arsenal of Secret police, spies, task forces, etc.

Watch for it! ... the “War hacks” have been released.
I don't want to give anyone any new ideas by I'm sure that what I'm about to say has been contemplated by both the security forces and the terrorists.

A full body scanner will not be able to detect explosives if the person does not go through the scanner.
The same damage/disruption of air service can be done in the crowd that is lined up waiting to go through security or in any crowd that they please.

Its happening everywhere all the time. There is no protection from them. Check out the news from around the world.

Yep! Nice little earner for somebody.

jal said...

A nice safe place for the underwear bomber to set off his load would have been the bathroom.

Duhhh! ... Geee! Then nobody would know how it got on the plane.


jal said...

How much can the market drop in one day?

NYSE Announces First-Quarter 2010 Circuit-Breaker Levels

The New York Stock Exchange will implement new circuit-breaker collar trigger levels for first-quarter 2010 effective Friday, January 1, 2010.
Circuit-breaker points represent the thresholds at which trading is halted marketwide for single-day declines in the Dow Jones Industrial Average (DJIA).  Circuit-breaker levels are set quarterly as 10, 20 and 30 percent of the DJIA average closing values of the previous month, rounded to the nearest 50 points. 
In first-quarter 2010, the 10-, 20- and 30-percent decline levels, respectively, in the DJIA will be as follows:

Level 1 Halt
An 1,050-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later unless there is a level 2 halt.

Level 2 Halt
A 2,100-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.

Level 3 Halt
A 3,150-point drop will halt trading for the remainder of the day regardless of when the decline occurs.

Circuit-breakers are calculated quarterly.  The percentage levels were first implemented in April 1998 and the point levels are adjusted on the first trading day of each quarter.  In 2009, those dates have been Jan. 2, April 1, July 1 and Oct. 1.

M said...

Perhaps a multi-billion opportunity for more than one company.

Have you ever avoided that long-awaited getaway trip to some exotic locale, put your honeymoon on hold, or even more desperately, considered placing a stuffed sock or John Holmes flesh alike under the interior regions of your underwear in order to avoid an embarrassing trip through the airport security line?

Well, worry no more, for now you and countless other men suffering from airport security small impression syndrome can now approach the x-ray vision security station secure in the knowledge that a significant impression will have been made. Never again will you glance back at the female airport security guard secretly wondering what she is thinking or if that outburst of laughter emanating from the security station was at your expense…

Phlogiston Água de Beber said...


Who knows, maybe she amuses I&S. It appears that she won't desist voluntarily and Ilargi doesn't seem inclined to ban her, which probably wouldn't accomplish much anyway. So, what to do? Remember the old saying, when they send you lemons, make lemonade.

However, now that she has demonstrated the ability to code hyperlinks, it would be nice if she would at least contribute some youtube entertainment now and then. Those links I might actually follow.

ric2 said...

hey -

i have family members who offer similar arguments as cheryl. no, they are not uber ts/sci psyops spooks.

so i enjoyed stoneleighʻs calm responses, since i am trying mightily to convince my loved ones to take action.

oh, and cheryl: did you see todayʻs hideous unemployment benefits data?

the number of people who filed initial claims, continuing claims, and euc was 11,268,091, the highest ever.

and so far this week, treasury has paid out in ui benefits $880 million on monday, $1.082 billion on tues, and $801 million on wed. the most ever in any 3-day period.

ric2 said...

And Stoneleigh, I am also enjoying the Onion videos. Production values so high that TAE commenters are duped into thinking itʻs real.

This one, is, unfortunately pretty close to the truth:

Should the Government Stop Dumping Money Into A Giant Hole?

Money quote:"I love the money fires!"

Anonymous said...

The Typification of Lemons (and other sources of vitamin C)

"Once upon a time... there was a group of folks from the allegorical Land O’Lemons who were just plain happy with damn near everything about themselves. They were so pleased with their qualities of intelligence, charm, wit, looks, and cooking skills they couldn’t understand why other people didn't rush over to both extol their virtues and immediately seek to emulate them.

One day, a stranger showed up wearing sandals and a Grateful Dead tee-shirt. The stranger really had no reason for wearing these clothing articles. They just happened to be sitting nearest the bed in the morning. The Lemonites grew suspicious though, because once Shameless McLemon knew a guy who knew a guy who wore both sandals AND promotional concert tee-shirts. Shameless grew instantly alarmed and began to speechify to the others of his concerns.

“I know exactly what is going on here, my Sunny-Colored Citrus Friends, we have been infiltrated… by a, a, a --A BROADCASTER!”

The whole community gasped!

“Indeed, broadcasters live under bridges and hunt goats. The only way to escape them is to either burn their bridges or become freakishly fat!”

Rupture Von Lemon, whose family had been grafted to the land several seasons ago, was a little puzzled and replied, “Sir, non-sequitor!”

Shameless replied, “You think or you dare? I just told you that I knew a guy who knew a guy. Coincidence OR conspiracy?”

The crowd agreed unanimously, “Shameless is right. We can’t afford to expose ourselves to such risk. The broadcaster must either remove the sandals, turn the tee shirt inside-out or be gone!”

Once more attention returned back to the stranger, who replied, “Actually, all I want is information on sources of Vitamin C. Is it better to ingest in a natural liquid form or should one take a supplemental tablet instead? I read a pamphlet by a noted apothecary who stakes his career on the recommendation to take 2,000 milligrams per day. That number seems rather extreme if one is merely ingesting semi-sweetened juice beverages. Can anyone here explain SUCH numbers to me?”

The crowd nodded again in unison, “Uh-huh, Uh-huh! Shameless was right.”


“So, what to do?”

Rather than talking about her, why don’t you either talk to her directly or move your eyeballs to the next post?

It seems so much more adult that way, don't you think?

Ilargi said...

With the BLS non-farm coming in at a loss of 85,000, we can let that silly "discussion" rest for another month.

It would seem obvious that the real problem, and the real political issue, is in the exponential rise in emergency benefits, and in the unknown numbers who have fallen off even that train, and are therefore no longer (counted as) unemployed.

What makes these "discussions" so utterly useless is of course the lack of reliability in reported numbers that is exposed time and again, and increasingly so, as in just the past few days once more by for instance Tyler Durden, Mish and Michael Panzner.

When government stats lack all credibility, they are no longer of interest. Nor are stock markets moves based on them. They may be to Wall Street traders who have a focus ranging from one day to perhaps a week, but those are not the timeframes our futures are decided in. It would be good for everyone to keep that in mind.

andrew said...

85,000 jobs lost and $3.00 a gallon gas soon: funny how reality keeps intruding on all the happy talk about the impending "recovery" of the US economy. No one can ever quite explain how this recovery is supposed to take place but the empty headed US infotainment industry just accept it on faith and blurt it out to a desperate and vulnerable American people.

Nothing is made in the United States anymore! Nothing that is except weapons of war. War making is the only "healthy" sector of the US economy left, which is why were staying in Iraq, escalating in Afghanistan, and expanding the fight to Pakistan, Yemen and Somalia. But a healthy capacity to drop bombs on people around the world will not rescue this broken economy.

Why? Because the capitalist economic system is exhausted and will soon collapse. From the time of the collapse of feudalism and its birth in the Industrial Revolution, capitalism was always destined to become the dominant global economic force. Globalization will be a historic marker as the zenith of its existence. But globalization robbed the system of the only thing that kept its fatal internal contradictions at bay—-growth. Capitalism has conquered the planet, it has nowhere else to feed. The time of its death is now at hand.

Skirmishes and crisis around the world, are signs the two most powerful groups that capitalism creates are beginning to engage in a final battle for power. Marx called them the bourgeoisie, the ruling class, and the proletariat, the working class. It can be most simply described as the clash between the wealthy and the working people.

The fight is inevitable and it will destroy one class or the other. Then on the ruins of the old system, the class that prevails will reorganize society along the lines of their dictates. If the bourgeoisie remains on top it will not mean the restoration of capitalism to health and stability. It will mean the depopulation of the planet and the enslavement of man in a world described in the dystopian literature of Orwell, Huxley, and Atwood.

Hombre said...

Ilargi - Thank you for this!

" in the exponential rise in emergency benefits, and in the unknown numbers who have fallen off even that train, and are therefore no longer (counted as) unemployed."

This is where the real world lives! The market don't mean a damn thing to the folks around here, even those to whom it used to.
Right behind me is a home--quite nice--which has been empty for months and a new posting on the front door gives the details of a "sheriff's sale" after a foreclosure.
Troll explanations about the market be damned! We need transcendental survival plans... and the truth from the major media and political sources so we can at least make some serious efforts.
Thanks to you and the StoneLady for fending off the silly Trollsters with sound statements!

Weaseldog said...

Looking at Cheryl's question sideways, she does make a good point.

The suspension of Mark To Market, which fraud and trickery, has allowed another financial bubble to form.

Our current system of high finance is being suspended by a ponzi pyramid of fraud, that is an economic bomb, waiting to be triggered.

When it goes off, investors will lose everything, or get quarterly statements of fake wealth that they can't legally draw upon. Either way, the money will disappear when this goes off.

Where the 'I got mine' crowd goes wrong in my view is the focus on short term outlook. In absolute numbers, your portfolio loos like it's gaining wealth. In inflation adjusted numbers, you're losing money, but not real fast. This can give a person a false sense of security and well being.

In the long term, that investor is going to be wiped out, but that's the future. The pleasant fiction created by this house of fraud, is comforting.

Shamba said...

question from a long time reader:

Coudl someone take the time to explain what "Emergency Unemployment benefits" are as opposed to continuing or initial claims, or is there a difference?

thanks for all the information here, Ilargi & stoneleigh. and all the commentators, too.

Peace to All,

Top Hat Cat said...

Without reliable reasonably accurate information on any subject, be it national, state or local, the 'news' vacuum fills with noise and rumors very quickly.

Just for fun, I looked up stampedes since the 'herd' metaphor is used so heavily around here.

Turns out, at least in cattle, that real stampedes very often start at night and very often from storms, thunder and especially near by lightening strikes.

So to torment the poor herd metaphor just a little bit more, the panic and stampede thing becomes especially heightened when the Herd is in the Dark, i.e no good information.

The Night is the Noise, the Static on the Radio.

Lousy information is that edgy gathering unknown rumble Out There, that the Herd knows is coming, even the really, really dumb members of the Herd can pick up the distant rumble in the Dark.

It does not even matter if the News is inaccurate on purpose or through sloppiness or carelessness or stupidty or whatever. The effect is to heighten background tension and a building panic potential (a quiet riot as I heard someone describe it once).

Disinformation is just intentionally inaccurate information does for usually devious reasons but lousy info serves the same effect.

We are losing our instruments and our info radar as a culture and the ship of state is headed for the rocks.

It is even getting hard to make even simple points with people during a debate/discussion/argument because everybody has a different set of stats, custom distorted, just for them.


Weaseldog said...

Shamba, if I understand correctly what you're asking, the emergency unemployment benefits are granted after the period for normal benefits have expired.

Weaseldog said...

Top Cat says, "It is even getting hard to make even simple points with people during a debate/discussion/argument because everybody has a different set of stats, custom distorted, just for them."

Oh and don't forget that they get custom definitions for words too!

So not only are we unable to assume that other people have the same knowledge base to work from, they may be using a different form of the English language too!

For instance, the term 'Socialism' has different definitions in different communities and some of those communities are only permitted to use the definition that their authority figures trained them to use.

So one person might wish to describe socialism as a system where the worker has some authority over the means of production. But a talk show radio listener, may not be allowed to use this definition or even think those thoughts and they will assume the speaker is talking about a system where the government keeps the citizens in cages and shoots people in the street, if they don't worship their government.

In this case no communication between the two parties is possible, because they speak dramatically different languages.

ric2 said...

Hi Shamba -

States pay out "regular" unemployment insurance benefits from their individual Unemployment Trust Fund accounts established by the US Treasury. The money comes from businesses/organizations that pay state ui tax.

EUC kicks in for recipients after regular state benefits are exhausted. This program has several "tiers," and is 100% federally funded. Not sure if the whole program is originally funded from business ui tax or also pulls from other gov sources.

Extended Benefits, not currently available in every state, kick in after regular state benefits and euc are exhausted. This program is 50% state and 50% federally funded. EB was created through stimulus legislation. Again, Iʻm not sure how it is ultimately funded.

Here is New Joiseyʻs DOL page explaining unemployment benefit extensions and a short article describing ui extensions.

hope this helps.

Shamba said...

@ Ric and weaseldog:

Thank you for the answers! It answers my question.

Peace to All,

Phlogiston Água de Beber said...


The unemployment categories breakdown like this.

Initial claims is the count of poor unfortunates that have just been told they are no longer needed here and have made their first pilgrimage to the unemployment office. That is somewhat metaphorical as in at least some states it is no longer necessary to ever visit said office.

Continuing claims are the deadbeats who refused to accept a job that was never offered and insist they would like to continue supporting the food industrial complex. They can do this for 26 weeks.

Emergency also known as Extended Benefits allow folks to eat for a few more weeks after those 26 and are paid entirely by that peculiarly named federal agency known as the Treasury. Peculiar because there is no treasure there. This benefit exists when and for how long those fine farkels in the US Congress decide, by their usual process, which we won't discuss here.

The working of this system is predicated on a few decades worth of business cycle experience. It seems obvious to this old man that they never imagined a perpetual recession. It should be interesting to see how the Page benders attempt to escape this trap. If they just let it lapse, the MSM reportage of mass starvation might start to make the Onion reports look not so satirical.


A Tip of the Hat for that wonderful story. Also good advice regarding adult behavior. As an aside, have you ever wondered how adult came to be the root for two words that describe someone who does, er ah well you know, with someone other than the person to whom they are married and what that deed is called? Seems kinda strange.

Anyway, I think we could use your help here. Because there are a number of adult behaviors one could adopt (never mind about the one mentioned above) and sometimes it is hard to choose. So, what do you think? Should we pattern ourselves after those adults who started Hundred Years War V2.0? How about the ones who bankrupted an entire planet? Somewhere out there a role model we can believe in must exist. Let the search begin.

Anonymous said...


I agree. What is reflected in the stock market means nothing relative to the real economy. I really don't see why so much attention is paid to it.

Gravity said...

That's the fundamental problem with subordinating society to the economy, so that it becomes a subset of econometric unreality.

There is no media narrative to describe other aspects of societal reality beyond definitions in economic terms, specifically to maximise consumerism, therefore it is not politically correct to question the validity of econometric statisticism at any time.

Craig Morris said...


Stoneleigh has given a list of preparations for the future in one of the primers (How to Build a Life Boat). You believe her analysis is flawed. Do you also disagree with her recommendations on preparation?

message_in_a_bottle said...

I disagree with this assessment of icelands responsibility to reimburse depositors.

There is a difference between a deposit and an investment.
It is important that depositors of banks are made whole or else we will see run on banks again with all that that entails.

""""A report by Sweden's Riksbank said Britain and Europe share blame for the fiasco. It said "absurd" EU rules – which cover Iceland indirectly – told states to set up a "guarantee scheme" for banks, but never said taxpayers were liable for losses...""""

The states are responsible but not the taxpayers? It's been a little dim up there in Sweden for quite some time now.

Icelanders have also taken out loans for personal consumption in foreign currencies which now suffer from the new exchange rate.
Presumably they intend to default on that as well.

Seriously think about it: where will it lead when a gnat like that can arrogate to itself the right to
stiff the rst of the world in such fashion.

I say: we put them on some oil tankers past their useful life with a heading of Kerguelen Island
while taking iceland as collateral.

mistah charley, ph.d. said...

Why is so much attention paid to the stock market?


While I agree that it doesn't have a great deal of connection to the real economy, the economy of products and services, of jobs and things, it affects pension funds, 401ks and other retirement vehicles, as well as being one way the most prosperous possess and control the world. It is a major marker in the games played by the so-called Masters of the Universe.

and also

b)CONVENIENCE - It's EASY to talk about. Something is always going up or down, and what will happen next? Blahblahblah. And let's not forget

c) DISTRACTION. The members of the military industrial congressional financial corporate media complex (MICFiC)who have some vestigial awareness of the real situation do NOT want the public to catch on to what is going on. One complicates things as much as possible; one never mentions things, and lies; and one distracts the masses with Emergency Unemployment Compensation (and extended benefits, where available)- bread - and dozens of channels of cable tv - circuses.

So far, it works.

Who knows if it's good or bad?

Shamba said...

Thank you IMNObody for more information I asked about.

Peace to all,

Anonymous said...

I.M.Nobody said...

"As an aside, have you ever wondered how adult came to be the root for two words that describe someone who..."

Nope never once. However, when reading your comment I thought instantly of Nathaniel Hawthorne's classic, "The Scarlett Letter." I first encountered that story at the age of 12 and was quite struck by how women tend to get blamed for a lot of stuff they couldn't possibly be doing alone.

If you're wondering about change in that department, I refer you to Pfc. Lynndie England:

U.S. investigators have determined that the CIA and civilian contractors also bear some responsibility for crimes committed at Abu Ghraib and elsewhere, including the murder of at least one detainee at Abu Ghraib and the deaths of three others in Iraq and Afghanistan. Yet despite the fact that Pentagon and CIA investigators have referred 20 cases to the Department of Justice, only one civilian -- a CIA contractor -- has been prosecuted. Not a single military contractor or CIA officer has been charged.

Torture Policy,, Tuesday, Mar 14, 2006

Later when learning about the Salem Witch Trials, I discovered the notion of mass hysteria -the kind that has all too often led humanity to locations like Auschwitz, Srebrenica and Rawanda.

Wikipedia says Mr. Hawthorne actually changed the spelling of his name to distance himself from relatives who sat on the Trials.

Could that whole event really be explained by ergot poisoning or does it point to something deeper, darker and more unspeakably sinister latent within us all?

If you think we need more role models, step up! I'm sure there’s always room for another "nobody."

eeyores enigma said...

As if you can fire a central bank prez...

Unknown said...

I saw the <a href=">Collapse documentary</a> tonight and found it well and balanced between passion and sobriety. (I can't say I "enjoyed" it, if you know what I mean.) It was nice to see a bit of what Mike Ruppert is like. The subject matter is nothing TAEers are not familiar with, but I do find I require a refreshing of my sensibilities regularly to avoid slipping into complacency about the state of the world.

el gallinazo said...

"Many years ago this was a thriving, happy planet – people, cities shops, a normal world. Except that on the high streets of these cities there were slightly more shoe shops than one might have thought necessary. And slowly, insidiously, the numbers of these shoe shops were increasing. It's a well known economic phenomenon but tragic to see it in operation, for the more shoe shops there were, the more shoes they had to make and the worse and more unwearable they became. And the worse they were to wear, the more people had to buy to keep themselves shod, and the more the shops proliferated, until the whole economy of the place passed what I believe is termed the Shoe Event Horizon, and it became no longer economically possible to build anything other than shoe shops. Result – collapse, ruin and famine. Most of the population died out. Those few who had the right kind of genetic instability mutated into birds – you've seen one of them – who cursed their feet, cursed the ground, and vowed that none should walk on it again. Unhappy lot.

Unknown said...

Ahem. Collapse documentary.

Alfred said...

@ DrabMatter

My discussion with Stoneleigh had nothing to do with the Lifeboat post. I completely agree with the basic argument conveyed by TAE: Our society is approaching a brick wall that will necessitate an uncomfortable realignment with reality.

I disagree with the use of tools like Elliot Wave Analysis to estimate the timing of our collision. I believe Stoneleigh's emphasis on aggregate social mood as the most important factor driving financial markets is wrong. Thus, I believe predictive models based on fluctuations in social mood are fundamentally flawed. Sometimes the timing predictions derived from those models are correct, and sometimes they're wrong. I doubt their long term track record is much better than 50/50.

My belief: Alterations in aggregate social mood are a necessary but not sufficient condition to drive financial markets. If we were to list all the conditions that move financial markets and then rank their relative importance, government policy ranks higher than aggregate social mood. When I say that, I'm not making a value judgement about the use of government policy to influence financial markets. Obviously, current policy, best described as "extend and pretend," is not sustainable in the long run. However, government policy is the most important factor enabling "extend and pretend." When will it end? When government policy becomes less supportive or a bond market dislocation here or abroad forces a defensive posture.

My husband and I are net long, but we've got hedges in place and we're ready to move quickly if events necessitate a change.

Scholastica said...

Weaseldog says:

"For instance, the term 'Socialism' has different definitions in different communities and some of those communities are only permitted to use the definition that their authority figures trained them to use.

So one person might wish to describe socialism as a system where the worker has some authority over the means of production. But a talk show radio listener, may not be allowed to use this definition or even think those thoughts and they will assume the speaker is talking about a system where the government keeps the citizens in cages and shoots people in the street, if they don't worship their government.

In this case no communication between the two parties is possible, because they speak dramatically different languages."

Someone with sufficient maturity, patience, and mental flexibility can communicate with those in authority-controlled communities.

Success in this arena has severe hazards, however. At best, the talk show junkies will try to recruit you as a leader in "the cause." At worst, you will have your own follower.

Phlogiston Água de Beber said...

WgS said...

However, when reading your comment I thought instantly of Nathaniel Hawthorne's classic, "The Scarlett Letter."

There's a vaguely troubling aspect to learning that you have the power to make someone instantly think of Nathaniel Hawthorne AND Lynndie England while not saying anything about them. How will I ever learn to control it!

But enough about me. I share your sense of manifest unfairness. You have studied it more than I, but I don't recall much attention being paid to warlocks. Not fair at all. I think Lynndie should have been given a just slightly less than honorable discharge and sent home, which from what I recall would have been more than adequate punishment for her minor part in it. Then if we had burned at the stake, Bush, Cheney, Bybee, Gonzales and every damn senior military officer in that chain of command, I'd be down with that.

I'm pretty sure the world doesn't need all the nobodies it already has. I hope that this time I have made you think of something related to an entirely different topic. You do have interesting thoughts, WgS.

M said...

It’s always amusing to read Cheryl ( and other contrary voices) being accused of a having dishonorable agenda. Sink and drown to prove your innocence difficult ones; providing contrary and opposing argument will be deemed diabolical by our cyber Witchfinders

Some things never change.

snuffy said...

You sound like some one who lost a whole bunch of money at the track,and now wants a little "horse on the barbie"

Your telling me I need to make good deposits stolen by a crook...because he owned the bank?because I live in the same country...because its the "way its done"?

Fuck you and the horse you rode in on sir.Your attitude of wanting to begger a entire country for the sins of a banker make me think you are of the bankster class yourself,sir,and not fit company for honest citizens.

[yes I&S, I understand if you delete this comment]

Stoneleigh said...


My belief: Alterations in aggregate social mood are a necessary but not sufficient condition to drive financial markets. If we were to list all the conditions that move financial markets and then rank their relative importance, government policy ranks higher than aggregate social mood.

Governments and central bankers are not nearly so powerful as people assume. The power of the collective is stronger. That power makes and breaks reputations. Watch what happens to the popularity ratings of sitting politicians when the mood (as measured by the markets) turns against them. Watch how their policies cease to be effective and people begin to wonder how they could ever have believed these strategies would work. Mood can turn on a dime.

I would guess that few of us here have seen a really large-scale downturn in mood. We have lived though the psychology of a mania for much of the last 30 years, and have come to see it as normal, but it isn't. Its reverse is likely to come as a major shock - like having the rug pulled out from under one's feet.

However, I don't expect you to believe anything or to act on anyone's say so. I present my evidence and arguments, and you are entirely free to take them or leave them as you see fit.

eeyores enigma said...

This headline is ludicrous.

"Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising"

I guess it's the "jobless recovery" thing. As soon as everyone stops looking for a damn job unemployment rate will finnaly correct.

memphis said...

Stoneleigh wrote:

I would guess that few of us here have seen a really large-scale downturn in mood. We have lived though the psychology of a mania for much of the last 30 years, and have come to see it as normal, but it isn't.

My folks were Depression kids--by the time it hit, my dad was in his late teens and my mom around 8 or 9. I remember her telling me of how her family went to bed and woke up to finding the banks padlocked, never to reopen. That was pre-FDIC; they lost everything. They lived pretty much hand to mouth, and depended on, primarily, my great aunt and uncle. My aunt, now in her 90s, blames her severe osteoporosis on the family not being able to afford to buy milk during her formative years.

I don't think my dad EVER felt financially secure. As he languished in a nursing home, he asked me "if we had enough money," to pay the bills. Sudden unexpected and deep impoverishment, through no fault of your own, can leave a deep and lasting psychological effect, even when suffering from stroke related dementia.

For those who have no faith in Stoneleigh's timing, don't worry about the timing. Worry about the reality. If you think we're gonna hit a brick wall, the proximity of the wall is the problem, especially if you're looking through a fog. Surely it makes more sense to begin to brake further out than to trust you can stop just in front of the wall.

The other assumption is that the same rules that currently govern markets will remain in effect; we're already finding out that's not the case. Events like a "bank holiday" were not invented for 2010.

There's a catch phrase that frequently appears on a church signpost: If you want to hear God laugh, tell Him your plans."

So much for plans.

Will said...

"Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising"

Did I miss something?

If the denominator (labor force) shrinks and the unemployed are constant... doesn't the percent unemployed increase?

Phlogiston Água de Beber said...

eeyores enigma said...

This headline is ludicrous.

"Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising"

The ludicrous part, as I pointed a few days ago, is that the way they figure it there is no linkage between employment, unemployment and population. Thus if there was no employment at all in the country and, knowing this, everyone stopped looking for work, there would also be no unemployment. There is a lot of bogosity in many of these numbers.

ogardener said...

Re: "Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising"

Is that because jobs are still being exported to countries like China? Maybe they want us to start breeding prodigiously. I don't have a problem with that if I were to become a member of the Strangelovian subterranean bunker contingent of Doomsday Machine survivalists :)

Shamba said...

My mom was like your dad was in her years in assited living and an Alzheimer's living place. She was an accountant by nature and profession anyway, but her memories of the depression were with her till the end of her life.

I have some of the stories she and my dad told me to get a sense of those days. And my parents actually were pretty well off in those days, no homeless or hungry stories but pretty lean on a lot of things.

Peace to all,

scrofulous said...


Would you have a link to this: the question then becomes what happens next. Well, the Fed strongly hinted yesterday that if weakness emerges in the next 3-6 months, then asset purchases will be expanded.

It looks to me that Obama is looking to raid the 401K's IMO to some extent support treasury sales. If accomplished that might give more breathing room for the market.

(Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

Stoneleigh that last of yours to Cheryl seemed more petulant than argument. Maybe you could say something about the need to roll over many foetid mounds of US debt this year and how a market collapse would aid in that regard? Though, how desperate the big guy would need to be to try that one, one can only speculate.

btraven said...

Re the exchanges between Cheryl & Stoneleigh, here is my take:

There are very few players in the stock market these days. Jill and Joe Smith are not there. The big money players are. My guess is that the bulk of them are quant-driven. So if you want to figure out the stock market, look to the mood of the players and how their computers are programmed (mostly momentum driven).

Given the suspension of mark-to-market, given the vast boost in money the big "banks" have been provided, given other stimulus to the economy (such as cash for clunkers) that helps mask the debt plague on Mainstreet, and given the manipulation of statisitics - the market gains are not suprising, as the illusion of wealth continues. The stock market is 90% game, 10% value. If the momentum is up, the market is up. But as marginal gains diminish, eventually someone's equations are going to point in a new direction, and when that happens, watch the cascade.

To the extent the stock market is tied to Mainstreet and the economy, the mood of Mainstreet affects it.

To the extent the stock market is detached from the Mainstreet and the economy, momentum and computations will affect it.

~ Just my take, of course.

message_in_a_bottle said...


Hope you are not a citizen of iceland.

Let's be clear about what happened in Iceland.
Banking without appropriate caution led to a four year economic boom from which everyone benefited.

Nobody complained about the benefits.
People took out loans in foreign currencies thereby becoming currency speculators.

Now the other side of the coin is becoming visible but somehow it's all the fault of the foreign depositors (here disingeniously called "investors") whose money was gambled away by citizens of Iceland.

I am not one of these depositors but I believe in the principle of standing good on your obligations.

If you believe that Icelanders should just brush off that obligation then how are you different from the bankers which you seem to dislike so much?

memphis said...

aargh! wrote:

(Bloomberg) — The Obama administration is weighing how the government, can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

Guaranteed? Who would the government be kidding? Tresuries go down in value also. The only way the holder maintains value is to hold bonds until maturity. But, they have the chance to lose out as rates increase. And it's surprising (okay, not so much) that no mention was made of when the government CALLED bonds in 1999 as rates fell.

And at what cost would this plan be to the stock markets? There are only so many pieces to the pie--or dollars in retirement assets--to go around. It'd be like robbing Peter to pay Paul, but the government would be the last one holding the cash.

Semper Augustus Gloop said...

Stoneleigh that last of yours to Cheryl seemed more petulant than argument

Really? Petulance? My what high standards we have. Perhaps we should channel our criticism toward our resident lapdogs who try to bite the heads off of people who question the conventional wisdom. Having said that, Cheryl, you've made your point about not believing in EW.

Semper Augustus Gloop said...

If the denominator (labor force) shrinks and the unemployed are constant... doesn't the percent unemployed increase?

From Mish:

Unemployment held firm even though 85,000 jobs were lost and it should take at least 100,000 jobs just to keep up with demographics.

Please note the drop in the civilian labor force by 661,000. Employment dropped by only 589,000 so technically the unemployment rate dropped but not enough to show up in the reported numbers.

el gallinazo said...

Will said...
"Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising"

"Did I miss something?"

It's the new, new math. You learn it in newspeak class.

Ilargi said...

New post up.

Drowning by numbers


Top Hat Cat said...


"...Obviously, current policy, best described as "extend and pretend," is not sustainable in the long run. However, government policy is the most important factor enabling "extend and pretend...."

The so called central 'government' you refer to above is anything but a government, central or otherwise.

It's not a government, it's a den of thieves.

Not figuratively or metaphorically, it is literally little more than a criminal cabal. It's institutional racketeering. That does not constitute a government, so stop referring to what the pimps and chimps in DC are doing as 'government policy'.

This criminal consortium in Washington is not looking out for or making any decisions whatsoever for the well being of the vast majority of 'citizens', the real test by the way, for what a Real Government is.

IT, this 'government' you refer is a Tumor on the body politic, it is not the body politic in and of itself, it's a parasitic growth.

This is not semantics or nuance.

We have nothing left at the Federal level except a burnt out shell of what used to be a governing mechanism.

Your faith in this burnt out Shell as a central governing mechanism is childish and myopic at best.

The U.S. military, while having the trappings of centralized command and control policy making is NOT a 'government' anymore than the Banking Mafia is that has captured and parasitised the three branches of the former government known as the United States.

The Market can crash in a New York minute with a single thunderbolt of awareness on the part of the 'marks' involved in the Casino that the whole thing is a Potemkin Emerald City if you will, being propped up by a little group of 'wizards' behind the MSM's facade of central 'government policy.'

You Cheryl are taking the goofy stance that The Market will only crapout when The Great Oz of Government Policy decrees it.

Nothing important happens in Cheryl World until Big Central® says so.

The Herd can't panic against the Market in DuhMerica until 'government policy' gives it permission to do so?

Wow, who woulda thought.

Just curious, does this slave class mindset Cheryl apply to rebelling and overthrowing Big Central itself? And we need permission from 'the Top' to freak out that the country is totally solvent at all levels?

The only other group of people I can think of off hand who need Permission to rebel against Central Authority (or panic against their Market) would be the Germans, their servile attitude to authority is so deeply ingrained.

I guess the citizens of the U.S. have become honorary. Good Germans