Saturday, February 28, 2009

Rendezvous With Bankruptcy

At times of crisis, countries turn to their leaders to learn the truth and what needs to be done based on the facts. Thus, FDR, the crippled man leading a crippled country, didn't sugar-coat matters. In what sadly was a prophetic speech in 1936, he said:

There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny.

As a Boomer, much was given to my generation. The generation of Boomers' children is inheriting an America of bankruptcies of the largest and previously best-respected companies, and something other than the truth, the whole truth and nothing but the truth out of our business and political leaders.

These young adults are scared and depressed. They voted heavily for Barack Obama because they wanted real change. They don't want the same-old same-old out of Washington. Unfortunately, that is exactly what they are getting from the new boss, same as the old boss (from Jake Tapper at ABC News) in an article today called, if you can believe it:

Obama Will Restore Fiscal Discipline

The article describes the comments of Peter Orszag, director of the Office of Management & Budget, who pointed to the current budget deficit (created by a Democratic Congress, which authorizes all Federal spending and revenue measures):

The first step in addressing this very deep fiscal hole is honesty.

Our truth-meter comes out whenever a member of any administration has to promise that he (she) is going to be honest. He went on:

This budget will not play the games that are typically played . . .

Double uh-oh. Will they play atypical games, play the old games (perhaps under different names), or both?

The article continues:

Orszag pointed out four ways the deficit will be reduced:
1- The recovery act and "normal business cycles" will cause the economy to eventually recover.

DoctoRx responses to Mr. Orszag:

A. The "recovery act" (ARRA, aka the "stimulus" bill) is a gigantic budget-buster.

B. What is normal about the current business cycle?

2- Allowing "high income tax provisions to expire when they are scheduled to expire, at the end of 2010" and closing tax loopholes.

A. Fair enough.

B. "Closing tax loopholes" is an old canard. Close one loophole, open two, that's how it works in D.C.

3- "Winding down the war" in Iraq.

No new news there. The Obama policy is a direct continuation of the Bush policy. The war has already wound down. But what about the unknown costs of escalation of the war in Afghanistan and Pakistan?

4- Making government more efficient.

The President spoke afterwards on that topic:

Obama promised that when the full budget is developed in the spring that the administration will “go through our books, page by page, line by line, to eliminate waste and inefficiency," and promised that no part of the budget will be free from scrutiny or untouched by reform.

Ha! Double ha! We've heard that one before from Jimmy Carter, Ronald Reagan, etc.

Optimistic economic projections are made, as usual out of the White House:

Christina Romer, chairman of the President's Council of Economic Advisors, predicted negative 1.2 percent GDP growth for 2009 but expected it to grow by 3.2 percent in 2010 and 4 percent in 2011.

The best economic seer this cycle has been Nouriel Roubini, previously an adviser to the Clinton Treasury Department. His projections are for more like a 3% GDP decline this year and at best 1% growth in 2010 and 2011.

President Obama -- flanked by his economic team -- acknowledged that in terms of his budget released today, that additions need (to be) made to the deficit in the short term to provide relief over the long run.

When Roosevelt gave his rendezvous with destiny speech in 1936, he foresaw general war a few years hence. We don't have a few years; our economic and financial war is here. Flash from the front line: we are losing. A change in strategy is needed.

Promising to be fiscally responsible in the future while proposing deficits unheard of since WW II is like my alcoholic patients promising to stop drinking someday. Trotting out optimistic economic projections and promising to make the Government more efficient via a line-by-line review of something or other is not change anyone can believe in, even my children.

The President needs to utilize the gloomy economic projections of Dr. Roubini, not the politically-motivated ones of Dr. Romer. If he's too gloomy, great- he can either retire some debt or spend more. But let the upside surprise happen first! The President needs to drop the cant about making government more efficient. He needs to tell us that we can't keep borrowing massive amounts of money from overseas forever. He needs to tell us that individuals can't borrow their way to prosperity, and neither can the Government on our behalf.

In other worlds, he needs to channel FDR or the best parts of JFK and inspire us while keeping the focus on how difficult our problems are, not how a "normal" business cycle will rescue us.

Unfortunately, as predicted here consistently, Barack Obama is continuing the essential Bush-Bernanke policies to spend money we don't have and to give massive amounts of this borrowed or printed money to stupid lying corrupt large financial companies while not preparing America for worst-case scenarios about which the public is rightly terrified.

Do you wonder why the stock market has gone down for six straight months?

It's past time for real change.

Copyright (C) Long Lake LLC 2009

As goes GE . . . reports on General Electric's dividend cut announced yesterday by focusing on its CEO, Jeffrey Immelt, in "Jeffrey Immelt Faces More ‘Hours of Doom’ With GE Dividend Cut".

From the GE website:

GE traces its beginnings to Thomas A. Edison, who established Edison Electric Light Company in 1878. In 1892, a merger of Edison General Electric Company and Thomson-Houston Electric Company created General Electric Company. GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896.

GE has paid dividends continuously since 1899 and last cut its dividend during the Great Depression.

Like America, GE has changed. From

More than 50 percent of GE’s profit in recent years has come from its GE Capital unit, which includes private-label credit cards, real estate, bankruptcy financing and mid-sized company lending, making it a competitor to most banks.

So, GE has for some years been a financial company in drag, despite a very different public image. The company that lit up America morphed into nothing better than a lender of money.

Before this bear market started in 2007, GE sold for about 10 times its tangible book value, even though neither other financial companies nor mature industrial companies merited that valuation. Could it be that GE was so highly rewarded because it rewarded the financial industry? Here's the evidence:

Since 2003, GE has shed more than $50 billion in businesses and acquired more than $100 billion, eliminating divisions like plastics and adding to health care. Before the credit crisis began in 2007, he sold the U.S. sub-prime mortgage business, which catered to the least creditworthy borrowers. Early in his tenure, he shed all of GE’s insurance divisions.

Basically, the thesis here is that there was an unwarranted love-in between GE and the "analysts". GE did deal after deal, paying large premiums for not-so-profitable medical companies, and the brokerage firms took their fees for arranging the deals and didn't look too hard at how GE could be a perpetual growth machine.

A GE spin-off, the insurance and financial products company Genworth, was spun off to shareholders in 2004. What started as a $20 stock is now around $1. Genworth, like GE, has roots that go back to the 1870s.

What has happened in America?

I have just finished reading Wall Street Under Oath, published in 1939 by Judge Ferdinand Pecora, who led the Senate Commission in 1933 that investigated the Crash.

It's clear that what happened, starting in the 1990s, was that the financial community set out to defraud investors. Everyone on Wall Street knew there is never a "new era" of stock valuations, no matter how exciting a new technology appears to be. However, equity losses suffered by gullible investors were equalled by equity gains by insiders, so all that happened was that some people got rich or richer, and some people lost their investment.

What was new about the 1990s was not the old stock game of "pump and dump", which has occurred over and over again. What was new was that the economic expansion was the first one in American history in which the financial health of the average American company declined. In other words, companies were already leveraging up to buy back their own stock so that they could report a meaningless improvement in Earnings per Share, or in other ways companies were using borrowed funds to leverage their earnings.

Everyone in finance knows that leveraged earnings are riskier than unleveraged ones and deserve a lower price-earnings ratio; yet the Street ginned up a mania that brought P/E's to record levels not far below where Japan's got at the peak of its financial bubble in 1989.

When the 2001 recession and bear market hit, the financial community doubled down. P/E's bottomed at levels where they usually peaked when a bull market ended, rather than where a bear market ended. In other words, the New Era of stock over-valuation was made to persist via stimulative fiscal and monetary policy and greed on the Street.

The financial community created the illusion of stability with a 2003-7 stock market climb that set a record for being the longest bull market without even a 7-10% correction. Might that have been a result of stock manipulation, one wonders in retrospect?

This time, unlike the 2001-2 bear market, the action was in debt, not equity. To keep it simple, a lender values a loan as an asset, but if the loan defaults, both the borrower and lender are losers. Lending is riskier to a society than a straightforward sale, such as a share of stock or a kitchen remodel paid for in cash. It is also more difficult to value a loan than a kitchen remodel, a light bulb, or an aircraft engine. The remodeled kitchen has a value and has a use; the loan can become worthless and has no intrinsic use to the lender that owns the loan. 

At the peak of the economic cycle two years ago, it is said that 40% of the S&P 500's earnings were financial in nature. We now know that most or all, or more than all, of those financial earnings were not earnings at all: the loans just hadn't had enough time to go bad.

GE is thus a close example of America's financial status: old, misunderstood, over-financialized, and in a tailspin.

GE has let its shareholders down in a big way.

America, the owner of the world's reserve currency, has let the world down big-time, as well.

For that reason, serious people are accumulating a much older currency called gold.

Copyright (C) Long Lake LLC 2009

Friday, February 27, 2009

Domestic Product Gross

The Commerce Department has just released its "preliminary" GDP data for Q4 2008. The numbers are bad and much worse than the milder downturn suggested by the "advance" GDP numbers a month ago.

Far be it from anyone to suggest that there is a trend here, which is to soften up people's views of the economy by letting out a bad number and then revising it downward.

If you are interested in receiving Government economic reports directly, without the filter of the MSM, it is easy. You can simply go to and sign up for free Email dissemination of the data. You may see the numbers before the President!

One day the news will be good, and it may even be truthfully good. For now, the bad news on the economy and the fundamental lack of real asset support for stocks continue to make the basic trend of the stock market lower till proven otherwise.

Copyright (C) Long Lake LLC 2009

Keynes Gone Wild

Among the most important news items of the day is a writeup of the "New Keynesian" who now appears to have replaced Milton Friedman as the go-to guy for Administration economists. "Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed" describes the statist approach to government economic policy of Dr. Tobin. Here's an excerpt:

Like Keynes, Tobin was an advocate for the role of government in maintaining full employment, said James Galbraith, an economist at the University of Texas in Austin. The current economic and financial crisis has validated that philosophy, said Galbraith, a former Tobin student and the son of the late John Kenneth Galbraith, who was a friend of Tobin.

“It’s clear that the position that the federal government has a responsibility for the level of employment, for the economy, has prevailed,” Galbraith said. “The position that the Fed can walk away from the level of employment has completely collapsed. That was the absolutely dominant position coming out of the University of Chicago.”

In contrast to the Friedman-influenced proponents of tax cuts, deregulation and tight control of the money supply, followers of Tobin are more receptive to government intervention in the economy, including stimulus spending.

“I do not believe that over the next two years, we can make major deficit reduction or balancing the budget a goal,” Goolsbee, nominated by Obama to the Council of Economic Advisers, said at a Senate hearing on Jan. 15. “I think that would run the risk of repeating one of the mistakes of Herbert Hoover that led us into Depression.”

The Galbraith and Goolsbee arguments are against straw men. Re Galbraith, the Fed is by law mandated to work toward full employment as one of its two main policy goals, the other being low inflation. What Dr. Galbraith should have said is that the Federal Government (which was always distinct from the Federal Reserve Board before Dr. Bernanke joined forces with Treasury) has under all presidents since FDR adjusted fiscal policy to keep the economy humming. The Fed is supposed to limit itself to the critical task of backstopping the banking system, but was never ever charged with determining overall policy, which has to belong to elected officials who are accountable to the public via elections.

Re Goolsbee, no one has proposed immediately balancing the budget or even making a major deficit reduction effort. But I for one will argue against increasingly massive budget deficits at a time when bond traders are, unbelievably, now pricing in a 5% chance that the U.S. Government will default at some point on 5-year Treasury debt.

Unfortunately for Dr. Galbraith and Goolsbee, they can point to no precedent in any country where massive deficit spending has provided any intermediate- or long-term benefits to the economy.

The Obama budget proposal, which may be over-optimistic on revenues, is for a $2 Trillion cash deficit assuming the $750 Billion "placeholder" giveaway to banksters occurs. This is basically proposing to spend $2 for every $1 in revenues.

This is why markets are acting oddly. At a time of negative inflation, the ultimate inflation hedge of gold has risen in price and the ultimate deflation hedge of Treasuries has been falling in price.

It is long past time to invoke Herbert Hoover. You may as well invoke Nero and boast that your Administration doesn't even own a fiddle. Not being Nero, Hitler or Hoover doesn't mean that your policies are optimal.

Forget "Girls Gone Wild". This is Keynesianism gone wilder.

Copyright (C) Long Lake LLC 2009

Thursday, February 26, 2009

Depression in Durable Goods

The Government has released data on durable goods orders.

New orders are down 26% from a year ago ( down 28% excluding defense-related orders).

"Primary metals": down 41%.

Computers and electronic products: down 15%. (The sub-category of computers and related products was down 27%.)

Non-defense aircraft and parts: down 83%.

Non-defense capital goods: down 31%.

Conclusion: We are in, at best, a Great Recession.

Copyright (C) Long Lake LLC 2009

No Way Out

Obama’s Budget Proposes Up to $750 Billion More Bank-Rescue Aid (

The (senior administration) official, speaking on condition of anonymity, said the White House hasn’t decided whether the $750 billion in additional aid to the financial industry will be needed. He said it will be put in the budget as (a) “placeholder.”

Placeholder? How is that ruse any better than pretending that Iraq and Afghanistan War appropriations were off-budget?

That sounds bad, but wait: budgetary hope is on the way- it's only going to cost $250B:

The official said the aid would appear in the budget as about $250 billion because the rules require policymakers to record the plan’s net cost to taxpayers. The government anticipates it would eventually recoup some, though not all, of the money expended to help financial companies.

As was the senior administration official, I would also want to be anonymous having to come clean about this turkey.

Mr. Obama continues Mr. Bush's policies of giving your money to large financial companies. The rationale makes no sense other than that he likes them better than he likes them better than he likes taxpayers. He wants them to be healthy so they can make a profit by charging you to borrow money from them- even though their money came from you (via your Federal Government), which you either borrowed from someone else or your central bank created out of thin air.

Fiscal rectitute is however demonstrated in the Obama Administration, by proposing to take money away from Americans of varying income levels:

1) The budget would eliminate the Advance Earned Income Tax Credit, a tax break for low-income earners that government officials have said is poorly administrated.

2-5) The administration proposes to finance the budget in part by limiting tax deductions for couples earning more than $250,000 a year, raising taxes on hedge-fund managers, cutting defense spending and paring subsidies to insurance companies participating in the government’s Medicare health-care system.

#1 speaks for itself. Just two night ago, the President promised that if you earn under $250,000, you will see no tax increase. Well, that promise didn't last long!

#2: "High earners": In what part of America is a couple earning $270,000 rich? Certainly not in metro New York, L.A., S.F., D.C., or Miami. These often-professional people are just the ones who present the best credit risks to lenders when they want to expand their professions or small local businesses. So under the Obama logic, they need to pay higher taxes so that "aid" can be given to the largest, worst-managed financial companies, so that these companies can charge them prime + 2 to expand their businesses. Looking-Glass logic, for sure.

#3: Hedge-fund managers: Not much money there these days!

#4: Cutting defense spending: How does that square with ramping up the war in Afghanistan and candidate Obama's plan to enlarge the size of the military? And when push comes to shove, what's more important: a robust Citigroup, or a robust national defense? At least the benefits (if any) of military spending are shared by all of us.

#5: Health insurance company (managed care) cuts: As a doctor, I say good for the Administration on this one given how detestable both the concept and the reality of Medicare HMOs are, but I suspect that 90% of the country would agree with me that between money going to health care insurers or some other part of health care and money going to Citigroup et al, it should go to the health care system one way or the other.

This blog has argued from inception last year that on the financial crisis, there was going to be no real difference between the Obama Administration and that of George Bush. Case proved. Guilty as charged.

And so the crisis continues, with our Government raising taxes on the successful and poor alike in order to feed the black holes caused by the greedy gamblers known as banksters.

Copyright (C) Long Lake LLC

Wednesday, February 25, 2009

Nowhere to Run, Nowhere to Hide

The markets continue to be uninspiring at best. Any hope that the President's speech to Congress last night would provide an uplift to any market was dashed. Not only did stocks sell off, they did so in the worst way, losing support both in the AM and into the close. A familiar pattern continues, with rotation occurring while the overall market trends lower. For example, HMO stocks were weak all day and weakened into the close. Gold and silver moved lower today after being higher at mid-day. Unlike the explosive move that Treasuries had last fall, gold is getting close to the anniversary of its all-time high. GLD has had about a zero total return over the past 12 months and thus has only been a relative-strength story. SLV is a worse performer; as silver is not really a monetary metal, its strength the past few months leads me to be skeptical not only of its move but that of gold, as well.

Within stocks, the McDonald's "indicator" is flashing red. The stock, the second-best performer among the Dow 30 last year, has a miserable short- and intermediate-term chart. An up-move to 57-58 will be met with supply from chartists. WMT has a down-chart in a more advanced state of breakdown. And these two companies are the best in breed amongst the Dow given the poor economies worldwide. Safe-haven stocks such as pharma companies look terrible, including stalwarts such as J&J. Strength today in P&G and AT&T follows a poor recent performance from them. More of the same bear market action, boringly and depressingly. Where is there an end of it, the silent wailing?

Treasuries have a poor technical configuration, but at least this is a seasonally weak time of year for them.

Meanwhile, the ranks of bears is shrinking as the markets deteriorate. Robert Prechter has removed his bear shirt and called for a sharp up-move in stocks. After the Obama victory, a number of other prominent bears such as Bill Fleckenstein turned somewhat bullish. The more the bears drop out while markets deteriorate, the more I want to think that something is wrong that these experienced pros are missing, and I don't want to be exposed to the downside action until I find out what they don't know. We all know that a stock market that has dropped so far, so fast can shoot upward at any time. We just don't know why it doesn't do so.

Technically and fundamentally, matters are a mess. The Administration and the Fed present somewhat coordinated strategies that present no coherent front and appear to leave Citi and its brethren zombiefied. Gold and silver appear to have been sold to the public a bit aggressively. Treasuries are beginning to have credit risk priced in and certainly have no shortage of supply. As for stocks: if the Dow 30 or the S&P 500 were a single stock, and you evaluated it on the basis of earnings, earnings growth, stock chart, and underlying hard assets (ignoring intangibles and goodwill), you would conclude that at best it was a trading vehicle, not a buy-and-hold type of stock.

The only one of the above that can be ascribed to the new President is the supply of Treasuries. It just may be that it is, from the standpoint of markets, 1931 or early 1974, and what is going to happenwhat happened will/would have happened more or less no matter who occupies/occupied the Presidency.

When money leaves all three major asset classes: common stocks, precious metals, and Treasuries on the same day, as it did today, that suggests it went to cash.

Consider doing the same.

Copyright (C) Long Lake LLC 2009

Tuesday, February 24, 2009

Obama Through the Looking-Glass

No matter how well you deliver a speech, it is what you say that ultimately counts. Regarding this blog's major cause to help in a small way to redirect this country- its economics and culture- away from a reliance on lending (credit) back to its prior pride in being as debt-free as possible, President Obama decisively sided with the debt culture tonight:

The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins.

You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.

That is why this administration is moving swiftly and aggressively to break this destructive cycle, restore confidence, and re-start lending.

We will do so in several ways. First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running.

Instead, the President could have recalled John F. Kennedy's First Inaugural Address and in economic terms paraphrased JFK's words, which were:

And so, my fellow Americans: ask not what your country can do for you - ask what you can do for your country.

My reading of the text of the President's speech suggests that the greatest sacrifice he asks of the American people is to help their children with their homework, or for younger people to attend at least one year of education beyond high school. Not to get on my own soapbox, but I have to believe that during this financial and economic crisis, Americans fully believe that they and this country have a rendezvous with destiny, and will restrict current consumption to secure their financial future: it's called saving. It's an old virtue that is actually making a comeback, despite the exhortations from the Fed, the Feds and the media that a crisis is a terrible time to regain that old-time religion.

Instead, Mr. Obama, in calling for more and more flows of credit, ignored the fact that plenty of lending is still going on and that it makes sense to borrow and lend less when the pace of business is slower and bankruptcies are on the rise. His assertion that "credit has stopped flowing the way it should" is questionable at best. How should credit flow? Who should create it? Why should the quantity of credit keep increasing when it has nearly led to the ruination of our economy? Why would anyone think that future loans will be made any better than those made pursuant to the negligent lending practices of recent times?

Equally important to the above thematic discussion is the sad fact that the speech could not quite hide the fact that the President insists that taxpayers must sacrifice on one thing: they must provide open-ended subsidies to the banks so that the banks can then turn around and lend them money- at a profit to the banks so they can get off life support. From the speech:

Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside. But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade. That would be worse for our deficit, worse for business, worse for you, and worse for the next generation.

I want to say to the President: "Mr. Obama, tear down these banks."

There are plenty of well-run banks that will prudently fund the small businesses the President professes to care so much about. They are asking for no taxpayer money. They only want the Feds to stop subsidizing their poorly-run larger competitors. Mr. Obama's argument, which is identical to that of George W. Bush, is that we collectively should borrow money and then simply give it to the banks so that the banks can then lend our own (borrowed) money back to us would be recognized as illogical if such were argued in front of the Supreme Court, but in the court of public opinion it is known that the public is more knowledgeable about Britney's comeback than it is about financial matters.

A public hooked on debt is being asked to double down on it. We are being asked for the ultimate sacrifice: rather than just keep the money we have, we are supposed to add to our debts so that some of us can beseech a lender to lend some of our own money back.

It's Looking-Glass economics.

Copyright (C) Long Lake LLC 2009

Li Whiz!

Infectious Greed links today to a Wired article, "Recipe for Disaster", about the origins of the CDO mess. The piece highlights a mathematical formula developed by Dr. David Li. More interesting perhaps is a WSJ article linked to in the Wired article from 2005 about the same topic: "Slices of Risk: How a Formula Ignited Market that Burned Some Big Investors".

The 2005 WSJ article begins:

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

Please read the whole thing. It is astonishing, 3 1/2 years later, to see that the WSJ was reporting that the three largest U.S. banking institutions had about $3 Trillion of exposure to CDOs and credit default swaps, the underpinning for which related to a theoretical complex mathematical formula (which is shown, incomprehensibly, in the Wired article). Dr. Xi's own ambivalence about his formula comes through, as does, in retrospect the arrogance, greed and stupidity of the financial companies that knew they were risking vast sums of money they did not have.

Now that these companies, Citigroup, BofA and JPMorgan Chase, are all being kept "alive" by taxpayers, it is even more maddening to realize that all their risks were disclosed long ago.
This makes the call by such interested parties as Bill Gross of PIMCO (the world's largest bond fund) to protect those who own corporate bonds of these companies nothing but self-serving claptrap. Every systemically important owner of the bonds issued by these financial holding companies knew or should have known that these were risky bonds.

No one but depositors should be protected from the insolvency of these companies. The sooner the guillotine falls, the better. And it looks as if Europe's big banks are in the same boat.

The good news is that all this is intangible stuff. The gamblers who lost need to pay the price. For every losing bet, there is a winner on the other side. Losing gamblers who can't pay their debts can suffer the consequences by working things out with the winners who can't collect. Government, through its various powers, needs to make this process happen ASAP and has been way behind the curve for years.

The productive capacity of the world is undiminished. The powers-that-be need to let failing companies fail and work together day and night to cancel out enough debt and other aspects of the over-financialization of the Western world so that normal business can continue and resume.

The shape of the financial markets is indicating that the more basic the asset, the better. Thus, gold and governmental debt show strength. Unpredictable, hidden "stuff" such as that within JPMorgan Chase and GE Capital are seeing money rush out. Unlike GE stock, which might go to zero, oil has a real use and will not go to zero so long as modern civilization as we know it exists.

So long as business and government continue to flail away and thus fail us, the debt deflation will continue. In that situation, short-to-intermediate highly secure credits, such as U.S. Treasury debt or demand deposits in a strong bank with FDIC coverage in addition, appear to be appropriate for funds that are not allocated as pure risk capital.

Copyright (C) Long Lake LLC 2009

Monday, February 23, 2009

The Silence of Breaking China

Quietly, quietly, the word is getting out that China could be the most unexpected busted nation.

On April 21, 2007, China reported that:

"The Red-crowned Crane has won out as the candidate for China's national bird after years of expert analysis and public polls."

The cranes are now silent and motionless. The big, mechanical ones, that is.

Two days ago, Econblog Review referred to this problem in China: Decoupled, or a Potemkin Economy?

The L.A. Times now reports: Beijing's Olympic building boom becomes a bust.

Read, and wonder:

Reporting from Beijing -- "Empty," says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline.

"Beautiful building, but not a single tenant.

"Completely empty."


So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.

Beijing went through a building boom before the 2008 Summer Olympics that filled a staid communist capital with angular architectural feats that grace the covers of glossy design magazines.

Now, six months after the Games ended, the city continues to dazzle by night, with neon and floodlights dancing across the skyline. By day, though, it is obvious that many are "see-through" buildings, to use the term coined during the Texas real estate bust of the 1980s.

By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased.

"The scale of development was unprecedented anywhere in the world," said Rodman, a Los Angeles native who lives in Beijing, running a firm called Global Distressed Solutions. "It defied logic. It just doesn't make sense."

Construction cranes jut into the skyline, but increasingly they are fixed in place, awaiting fresh financing before work resumes.

Boarded fences advertise coming attractions -- "an iconic landmark" or "international wonderland" -- that are in varying states of half-completion. A retail strip in one development advertised as "La Vibrant shopping street" is empty.

Just consider: "more than all the office space in Manhattan" . . . "It just doesn't make sense."

This can only be the result of corruption on a grand scale. Centrally-planned economies just don't build unbelievably gigantic amounts of office buildings on spec. But bribed officials will grant building permits ad infinitum.

At least in the U.S. housing bubble, the builders bothered to place people in the homes.

If China suffers the hangover of all capitalist bust hangovers, it may have nothing better to do with its Treasury holdings than to hold on to them.

Another mess. The East may be Red: balance-sheet red.

Set It Right

In dealing with the ongoing financial crisis, the Obama Administration is going that of G W Bush one worse.

During times of crisis last year, Treasury Sec'y Henry Paulson would appear Sunday afternoon to make an announcement of some feckless but important action. The rationale was to get the news out before the Asian markets opened. (Why? We've got troops in Japan, not the other way round.)

A disquieting pattern may be emerging out of Treasury. Recently it had a delayed major policy talk by Mr. Geithner which was widely panned for being merely the announcement of a plan to have a plan. Last night we saw a Sunday evening trial balloon. This also moved Asian markets, as reported in Citigroup Rises on Report Government May Boost Stake:
Citigroup, Inc., which has accepted $45 billion from the U.S. taxpayer, climbed as much as 28 percent in German trading following a report that the government may increase its stake in the lender.

Citigroup was up 24 percent at $2.41 a share as of 12.05 p.m. in Frankfurt trading today. The New York-based bank slumped 44 percent last week on concern it may be nationalized. .

(Note: the "news" came out before the European markets opened. In response, the Japanese stock market moved from down about 2% to almost even. Also note that the stock has been plummeting for a year and a half, as it has become more and more clear that not only is the Company insolvent, but it has been much more disastrously run than its peers.)

The lender is in discussions with U.S. officials about an increase in the government’s ownership, the Wall Street Journal said earlier today, citing people familiar with the situation. The government may end up owning as much as 40 percent of Citigroup’s common stock, while the bank’s executives would prefer the stake to be closer to 25 percent, the Journal said. Citigroup spokesman Jon Diat declined to comment.

“It’s good news that the bank likely won’t be 100 percent nationalized,” said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London. “It’s a relief even if only 20 percent remains out of government hands.”

(My comments:

1. The Haynes comment is gibberish. What difference if Government owns 80% or 100% of a worthless company? And on what evidence is he even concluding that Citi will not be 100% nationalized?)
2. Why did Bloomberg bother to highlight that idiotic comment?)

Citigroup proposed to its regulators that the government should convert a large portion of its preferred shares into common stock in a transaction that wouldn’t cost taxpayers more money, the Wall Street Journal reported.

To me, this "story" smells more like a pathetic short squeeze effort than real news.

In any case, the above Bloomberg report is disingenuous in the extreme. Currently, the Feds own a semi-senior stake in Citigroup. Why should we move down to the bottom of the credit ladder? To speculate? What are the ethics and the practicalities of the U.S. Government having a common equity stake in one particular company whose fate it controls? How unfair is that to its competitors, anyway? Does anyone suspect that Robert Rubin, who likely still holds lots of Citi stock and options, has been influencing matters to favor Citi?

Overall, given how consistently Treasury has been favoring the Citis of the world over you and me under both Presidents Bush and Obama, I'll take the Paulson approach. At least with him there was a specific policy, disgusting and ad hoc though it may have been.

Though the financial crisis has been worsening for a year and a half, does President Obama even have a policy? (Mr. Summers, the President's senior economics adviser, let it be known two months ago that he and his team were working day and night to solve this problem.)

Some bloggers answer both yes and no to the above question. Yves Smith's answer is a yes and no, disquieting answer, as her Naked Capitalism reported last night: Now It's Official: Stress Test Reports Pre-Determined. The post, which is a very worthwhile read in its entirety, references one especially odd quote from CNBC:

Said one high-level (government) official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Excuse me? The stress tests are designed to prove what Treasury already knows?

And if the banks (read Citi and perhaps BofA) have enough capital, what's this about giving them access to capital?

There have been innumerable references in the press comparing this economy and the financial crisis to the 1930s. Let's not forget the miserable 1970s:

Citigroup and the markets are twisting slowly, slowly in the wind (sometimes not so slowly!). The Administration, Citi, and general market information are providing modified limited hang-outs. Various leaks are providing plausible deniability. Someone may protest that he is not a crook. High-def TV may show in exquisite detail beads of sweat on some malfeasor's frenulum.

The time is out of joint. Is Barack Obama thinking Hamlet's next line:

"O cursed spite, that ever I was born to set it right!"?

Leaks and plans (forget about a plan to present a plan) are useless at best.

The dislocated financial joint must be set right.

Right away.

Sunday, February 22, 2009

Boats Against the Current

Nick Carraway, narrator, musing at the end of The Great Gatsby:

"And as the moon rose higher the inessential houses began to melt away until gradually I became aware of the old island here that flowered once for Dutch sailors' eyes- a fresh, green breast of the new world. Its vanished trees . . . had once pandered in whispers to the last and greatest of all human dreams; for a transitory enchanted moment man must have held his breath in the presence of this continent . . . face to face for the last time in history with something commensurate to his capacity for wonder."

"And as I sat there brooding on the old, unknown world, I thought of Gatsby's wonder when he first picked out the green light at the end of Daisy's dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night."

"Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that's no matter- tomorrow we will run faster, stretch out our arms farther. . . . And one fine morning---"

"So we beat on, boats against the current, borne back ceaselessly into the past."

The Old World may be about to carry America back to the 1930s. Every day brings more evidence that a major financial crisis is underway in Old Europe, otherwise known to Donald Rumsfeld as New Europe, more accurately known as Eastern Europe. An orgy of currency speculation occurred there, also related to mortgages and business-to-business transactions, and the Eastern Europeans are unable to make good on their debts now that their currencies have lost much of their value relative to the "hard" currencies in which their debts are denominated.

There's something about Europe east of Austria and Switzerland. America intervened militarily in the Balkans twice while Bill Clinton was President. World War I originated there. The Great Crash of the stock market of 1931-32 began with a banking disaster there. (Few know that from the stock market peak around Labor Day 1929, the Dow Jones was "only" down about 50% one and a half years later. Over the next year and a quarter, another 80% or so drop occurred, triggered by the collapse of the Creditanstalt Bank of Austria. That was the real financial disaster.)

The orgiastic America as evidenced by the doubling of the NASDAQ in 1999 and the alleged easy riches from real estate "investing" in this decade has found, like Gatsby, that there was no there there when it got there.

As Benjamin Franklin said to his fellow revolutionaries in a different context, an unprepared world had better hang together.

Individually and closer to home, people more and more need to forget about irrelevancies such as show business drug addicts and discuss more serious matters with friends and families.

Financially, the stock market is running on fumes. Debt deflation is the order of the day. The cost of living is manifestly dropping. Barron's almost approvingly quotes Procter & Gamble and Colgate-Palmolive as boasting that they will not contribute to the alleged evil of deflation by lowering prices. Ha! Most of their products that they sell for dollars cost pennies or dimes to produce. Consumer prices allegedly rose in January because of allegedly rising costs of housing and automobiles. If you believe that, I've got a bridge etc. . . .

Money in the bank is risky enough. Gatsby's orgiastic future, the green light of unattainable success, was once my generation's dream, but it's time or past time to go with the flow of the current, not fight it as Gatsby (unknowingly) did.

To mix a metaphor, someday it will be springtime in America again, but right now, baby it's cold outside.

Copyright (C) Long Lake LLC 2009

Saturday, February 21, 2009

China: Decoupled, or a Potemkin Economy?

The easy thinking about future global economic growth is that China, with its massive population and growth-oriented government, will take over the mantle of economic leadership from the West in general and the U.S. in specific.

Lately, a variety of economic statistics out of China have cast doubt upon this. Electricity production is down. Exports are down. Even the government is having problems:

February 17 – China Knowledge: “China saw its fiscal revenue fall 17.1% year on year to RMB 613.16 billion (US$89.72 billion) in January, according to…the Chinese Ministry of Finance…”.

17%? That does not happen in a growing economy.

Similar and worse statistics are emanating from all over Asia and environs, as reported by "Credit Bubble Bulletin":

February 16 – UPI: “Japan’s economy shrank in the fourth quarter at the worst annual rate since the first quarter of 1974, government officials said. The Japanese economy, the second-largest in the world, was particularly hard hit by plummeting exports and a downturn in domestic consumer spending… The real gross domestic product declined at an annual rate of 12.7% from October to December…”

February 16 – Bloomberg (Tom Kohn): “The cost of protecting Japanese corporate bonds from default rose to a record after the economy shrank the most since the 1974 oil shock last quarter.”

February 16 – Bloomberg (Michio Nakayama and Shigeru Sato): “Japan’s electricity generation dropped for a sixth straight month in January, falling 6.4% from a year earlier as factories and businesses cut production because of the deepening recession.”

February 18 – Bloomberg (Janet Ong and Yu-huay Sun): “Taiwan’s economy shrank at the fastest pace on record last quarter… Gross domestic product fell 8.36% from a year earlier…”

February 18 – Bloomberg (Janet Ong and Yu-huay Sun): “Taiwan’s central bank cut interest rates to a record low... Governor Perng Fai-nan and his board pared the discount rate on 10-day loans to banks to 1.25% from 1.5%...”

February 16 – Bloomberg (Seyoon Kim and William Sim): “South Korea faces a ‘deeper and longer’ recession than during the 1997-1998 Asian financial crisis as the global slump pummels exports and indebted consumers and companies cut spending, Nomura Holdings Inc. said. ‘The biggest difference this time around is the country’s exports won’t provide a cushion for a drop in local demand,’ Nomura’s… Kwon Young Sun said.”

February 16 – Bloomberg (Sangim Han and Kim Kyoungwha): “South Korea failed to meet its target at an auction of 10-year bonds for a second consecutive month on concern that the nation will increase debt sales to fund stimulus spending.”

February 17 – Bloomberg (Shamim Adam): “Singapore’s exports fell the most in at least 22 years in January… Non-oil domestic exports dropped 34.8% from a year earlier, after contracting 20.8% in December…”

Back to China. Numbers are only numbers. However, please click on and read the following report from a man who claims to be on the ground in China, as reported by Mish in "Inside China". Here is a sample of this man's report:

I've been to China a lot Mish, spent many months at a time there for the last eight years. China is already in a massive overcapacity real estate bubble. They are building three apartments for everyone that is lived in. Most apartments are empty and those that are rented do not come close to paying the interest on the loan.

There are huge department stores with products loaded on the shelves and staff everywhere and no one is shopping! Staff outnumbers customers five to one. It's surreal. They are ready, waiting for a great wave of shopping to come, but no wave is coming.

Eventually this "borrow and build" economy will be a pop heard round the world. China runs on construction, build build build, but there is no reason for that many places and spaces and big mall businesses with no consumers.

Is it possible that the corruption and overbuilding were worse in China than in the U.S. and U.K.?

If so, the implications would be horrible for China but perversely could be good for us, as the Chinese would then be forced to stop building/over-building roads and other infrastructure, and could then keep buying our debt at expensive prices (low interest rates).

Another wrinkle in a wild and crazy time.

Copyright (C) Long Lake LLC 2009

Keynes Is Dead

The financial markets, which have no ideology, have rendered their short-term verdict on the alleged resurrection of John Maynard Keynes' thinking.

Since the sweeping Democratic victory on Nov. 4, the Standard and Poor's 500 stock index is down 23%. Investors and speculators have placed their bets not in the resurgence of business anywhere in North America, Europe or Japan, but on gold and silver, as well as on Government securities.

This is in part because The American Recovery and Reinvestment Act of 2009, aka the "stimulus" bill, is an odd mixture of tax cuts, multi-year spending plans, and non-job related priorities such as expansion of Pell grants for students. None of this is funded.

The markets see that the Democrats, who rushed the unfunded TARP bailout legislation into law last fall to spend nearly a trillion dollars without paying for it, have a President of their party who is going to hold on Monday a meeting at the White House on fiscal responsibility and who is intent on blaming George W. Bush for the deficits, notwithstanding that his party controlled Congress and passed every spending bill and that rushed the "stimulus" bill into law this year. Whether Mr. Obama can fool the people is irrelevant to the markets, which see through the rhetoric of any politician to the facts. The facts are that if the Feds run gigantic deficits, there is little left over to finance private business growth other than from retained profits, which look to be in short supply.

In the Great Depression, when actual production was down well over 20% and prices were down similarly in addition to physical output, leading to an enormous depression in the nominal value of output, Mr. Keynes theorized that Government could help revive "animal spirits" by temporarily taking on debt, thus making the private sector feel richer, thus helping the business cycle move upward. Keynes felt that in good times, Government would then retire its debt by damping down the economic expansion and perhaps even go into a surplus financial position, thus moderating both the booms and the busts. President Roosevelt and the Brits adopted some of his policies. After Lord Keynes passed on, a bastardized version of Keynesianism was adopted by Government. This version involved permanent Government deficits.

What markets know is that the current mess globally has nothing to do with insufficient demand. What may or may not have been true at the depths of the Depression- a deficit of demand- is untrue today and is an unnatural concept. The debt deflation theory of Irving Fisher and Garet Garrett rein triumphant. That is why the current carnage is in financial companies.

"Stimulus" cannot stimulate when the "stimulator" is as poor a credit risk as the Federal Government, which even when it was running nominal surpluses in the 1990s was running large deficits under Generall Accepted Accounting Principles.

What is really happening in the markets and the economy is what Newsweek celebrated on Feb. 7: "We Are All Socialists Now".

Markets see that the sham arguments propounded by Democrats trying successfully to regain control of Congress in 2006 and early on in 2007 that they were the fiscally responsible party that would reinstitute "Pay as you go" fiscal policies have given way to the greatest orgy of deficit spending in the history of the Republic outside of major wars, probably greater even than during the Great Depression.

Rather than letting the debt-based companies such as AIG and Fannie/Freddie fail and be liquidated, the Government has helped destroy investor faith that traditional business models built on equity are preferred. By going all out to fight for the continuation of the financialized economy, culminating in the "stimulus" package which is entirely financed by more and more borrowing (or money-printing) that no one expects ever to be paid back, Government has helped create one of the greatest stock market crashes in history. Every important long-term trend line for the S&P 500, NASDAQ and Dow Jones Industrial and Transportation Averages has been violated. Worse, the fact that the S&P 500 went to a new high in 2007 and then undercut the 2002 low last week is a horrible technical indicator.

There is now no obvious bottom for this stock market or for the economy. In fact, it serves the purposes of the "We Are All Socialists Now" econo-political model to have a poor economy. In this way, Government can masquerade as the savior of the economy and thus fulfill the long-held goal of the Left to increase Governmental power.

FDR took office many months after the economy bottomed. He pronounced in his First Inaugural Address that the only things Americans should fear was being fearful. The Dow Jones Industrial Average proceeded to triple in FDR's first term. In contrast, President Obama has predicted catastrophe if ARRA/"stimulus" was not passed. It was passed. The markets have responded.

Keynes is dead. The classical economics that he built upon remain for us to rediscover. There is no free lunch. One way or another, everything has to be paid for. The debt-based economy of the last many years is imploding because it was built on a lie, in part by misrepresenting the thinking of Keynes.

In equity, not debt, lies the economic Promised Land. The Establishment in Washington is fighting tenaciously to continue the debt-based economy. GWB or BHO are the same in that regard. They were/are in league with the Merchants of Debt.

Moving to a culture of equity, not debt, will take sweat and toil.

A peaceful mass movement is needed. Please spread the word.

Copyright (C) Long Lake LLC

Thursday, February 19, 2009

Housing, Subsidies and Ponzi Schemes

With the vast amounts of money the Bush Administration and now the Obama Administration have been pouring into housing, there has been no discussion from the pooh-bahs in Washington of why all this is appropriate.

Vast amounts of Federal debt and guarantees are going into the asset class in America of least value to our long-term competitiveness in an increasingly competitive world.  The idea that hard-working Asians and Brazilians will endlessly lend Americans money so that we can live in fantastically superior dwellings borders on insanity.  The American empire and its military superiority is not that durable or even that important, especially to countries such as India, China and Brazil that currently have no serious national security worries.

The more the Feds ruin the Federal finances and America's international competitiveness by plowing vast amounts of money into housing, the more the scheme called Social Security will be perceived as what it always has been:  an inter-generational Ponzi scheme.

Baby-boomers and current workers of retiree age, finances battered, cannot expect even the current level of Social Security payments to be there for them.  The money has been spent.  
Foreigners will not provide that money cheaply forever, and current workers are having too much trouble making ends meet to willingly pay higher and higher taxes on their labor to support the upper generations.

A simple first step is to phase out the tax deductibility for mortgages.  If home ownership is the goal, then all home owners could receive a modest subsidy, whether they owned their homes in full or had a mortgage.

A first step toward fiscal sanity would be for official Washington to tell the truth:  as a nation, we are over-housed.  Large houses do not add to economic productivity.  Factories, career-oriented education, R&D:  all those things do.  The housing bubble is bursting.  Let it burst and let housing compete for people's money on an even footing with other desirable goods and services, such as automobiles, cell phones and medical services.    

Wednesday, February 18, 2009

Housing, Future Growth, and the Free Market

The Administration has released details of its housing plan. Succinct commentaries on it may be found at Calculated Risk (CR having major expertise in housing) and Mish's Global Economic Analysis.

Both these bloggers criticize the bailing out of speculators who over-leveraged themselves to live in a house they could basically not afford, expecting to be able to flip the house or else refinance based on a higher future valuation.

There is general agreement here; but there is a deeper criticism: This country continues to make a horrible mistake, which is over-invest in housing. The U.S. became the economic engine of and banker to the world by being the low-cost producer of multiple exportable items. Scarce capital needs to go to strengthening areas that can benefit Americans at home and bring in revenue from exports.

What are these strengths? Biomedical and high-tech are two obvious choices. Go for it, America. Green, knowledge-based industries need much more support and will have marvelous social and financial paybacks. $8 Billion for high-speed rail, including building a high-speed train between L.A. and Las Vegas?

This is not emergency stimulus and is a parody: connecting two regions known for bubble-heads to each other when trains, planes and cars have no trouble doing so already. Scrap the $8 B and make Mr. Reid happy in Nevada by providing large research grants to UNLV.

In Roubini-land, RGEMonitor links to a Levy Institute Public Policy Brief, "After the Bust".

This paper argues for "the creation of a new, progressive Keynesian consensus, that will require placing economics at the center of the political stage."

DoctoRx here: Uh-oh. Isn't economics already a huge part of the political stage?

Even the in-house "conservative" of the op-ed page of the New York Times, David Brooks, wrote today that this "administration has taken its faith in government to such an extreme I'm turning into Ayn Rand."

Ouch! (Mr. Brooks is a mild-mannered moderate Canadian-American, for those unfamiliar to him. He does not get pushed easily towards Ayn Randianism.)

In contrast to the statist Roubini-favored approach to economic recovery, please consider Mish in his first post of the day, The Nationalization Train Has Left The Station, in which he criticizes Nouriel Roubini, Alan Greenspan and George W. Bush. (Quite a trio!) The key paragraph in his post is:

What Roubini, Greenspan or any other proponent of bail-outs, nationalization, etc. fails to explain, or even mention is this: Why can we not just let them fail? Let them go bankrupt! Why not?

He also has a marvelous picture courtesy of Michelle Malkin, inspired by the direct quote from Pres. Bush Dec. 16, 2008:

The statist tide is coming in. Crony socialism ("high-speed Reid") may be replacing crony capitalism. If matters proceed as they did in pre-Thatcher Britain, we may not be arguing about the unfairness of socializing the losses after having privatized the profits, because there may not be many profits. The markets keep pushing gold and silver up on that premise.

In the spirit of the times, I call for a Ronald Thatcher to lead us toward a more classical economics and toward a politics that is not dominated by economics but by the more important principle of freedom.

Wesnesday Morning Commentary

Some day, good news may be released from solitary confinement.

Here is today's "Breaking News" (ignore hyperlinks to each article):

GM Seeks Up to $16.6 Billion in New U.S. Aid, Plans 47,000 More Job Cuts
Stanford Attorney's Withdrawal `Screams Fraud,' Spurred SEC to Take Action
MBIA Forms New Municipal-Bond Insurance Company as Part of Restructuring
U.S. Stock-Index Futures Rise; Citigroup, JPMorgan, General Motors Advance
Hedge Fund Managers Pressed to Consolidate After Record Losses Erode Fees
Immelt Waives Bonus as GE Leaves Chief's Salary Unchanged at $3.3 Million
Berkshire Cuts J&J, Procter & Gamble Stakes as Buffett Favors Fixed Income
Obama Says Afghan War Is `Still Winnable,' Will Send 17,000 More Soldiers
California Senate Deadlocked on $14 Billion Tax Increase to Repair Budget.

A Bloomberg video caption quotes a man from a financial company saying that investing in banks is like "gambling". Econblog Review has been saying for some time that investing in stocks in general is for gamblers. At least the Street is catching up to reality. When it gets there, it will probably overshoot to be overly pessimistic in its public pronouncements. Then it will be safe to get back in the stock water.

Here are articles that Naked Capitalism links to (go to NC for links):

Stimulus Big Winner: Battery Manufacturing MIT Technology Review. Egad, I did a study on advanced batteries back in 1993 and got to drive a US manufactured electric car. And guess what? Looks like we ceded leadership to Asia.
Late Change in Course Hobbled Rollout of Geithner's Bank Plan Washington Post
After Manhattan’s Office Boom, a Hard Fall New York Times
Californian dream turns into nightmare Financial Times
Switzerland threatened with bankruptcy Ed Harrison
Adventures in Flackery, Private Jet Edition Felix Salmon
On the December TIC data Rachel Ziemba
Germany may rescue debt-laden EU members Telegraph. This is a big deal.

The news is legitimately bad. Switzerland of all countries threatened with national bankruptcy?

This is not a contrarian signal to buy stocks, however. Given negative price action, long-term topping action in the charts of the stock averages, and poor earnings momentum for the economy, only gamblers should be in the stock market. Presumably at some point the stock market will have a big upward move and people will point to how negative other people were at the bottom and will say to buy on the bad news. But that's easier said than done, the retrospectroscope being the only accurate diagnostic instrument.

Unfortunately, our own Big Mac indicator, the stock of McDonald's Corp. (MCD), has broken support in the 57 range. MCD has been both fundamentally and technically the best Dow 30 stock. Both on a fundamental and technical basis, stocks could fall much, much farther even if President Obama's feared "catastophe" is avoided. Valuations are nowhere close to trough valuations at other major bear market lows, even ignoring the horrors of 1932.

For some reason, the 30-year Treasury bond has been in great demand the last few days. Since we put in our call that the 10-year T-bond looked good at over 3%, the yield has fallen sharply to 2.63%. Geopolitically and "geo-economically", there has been little decoupling of the world from the U.S. and the U.S. financial institutions may be in less poor shape than their counterparts in Europe. Gold continues to compete with Treasuries for the safe haven funds and to have a strong technical chart.

The best hope for the future is that the productive capacity of the world is intact and still growing, and the globe is relatively peaceful. Thus anyone who would like to ride out this economic downturn in Tierra del Fuego, Bikini Atoll or almost anywhere else in the world can get there safely.

Personally, I prefer living in areas suffering from real estate busts.

Tuesday, February 17, 2009


Markets worldwide continue to reflect one record after another. The records are bad. They involve consumption and manufacturing alike. Perhaps it's time to read Spengler's Decline of the West.

In "Weakness Unmatched In 35 Years", the Liscio Report (found on John Mauldin's letter to subscribers (free)) shows that sales tax receipts were recently down 12% year on year, vastly exceeding the prior record, going back about 50 years.
Auto sales hit a new record low per capita. Perhaps most shocking is the savings data. Recently, all or more than all growth in income in America was spent. Recently, that is, until very recently. This "Marginal Propensity to Consume has ranged from, say, 60% to 140%. It recently hit 2%.

An alert reader (what other kind is there) sent me a graph of the Dow Jones transportation index. A multi-year trend line with support at 2883 was decisively broken today with a 5% drop to 2804. In addition, an ultra-long moving average, the 200-month ma of this indexis around 2930. If the monthly close is below that number, that would be reminiscent of the 1970 break, which foreshadowed bad times in the real economy and the stock market until the 1982 bottom.
The prior time the 200-month ma was taken out was 1930.

In contrast, the Dow Jones Industrial Average has been below its 200-month ma for some time.
This is therefore "confirmation" by the Transports.

As discussed here recently, the safe havens of gold and Treasuries can "catch a bid". Little else does so. All this is despite frenetic global attempts to create "liquidity". This liquidity is apparently going to shore up vital financial and other insolvent or near-insolvent institutions. In this environment, the real economy needs to simply survive. The authorities are not really expecting growth. Russia and now Brazil are succumbing to the global downturn. Perhaps India and China can resist this force.

For now, little else can.

Monday, February 16, 2009

Land of the Rising Sun Going Our Way?

For those interested in the prosperous but no-longer fast-growing (!) country of Japan, an interesting set of posts has appeared in the Asia-Pacific Journal. The articles cover Japanese electoral and economic policies. Given the view here that the U.S. situation has a number of parallels with post-bubble Japan, it may be worthwhile to click on the above link. The related posts, one following the other, are not technical.  They relate both to the recently-passed "stimulus" bill in the U.S. and to a lesser degree to the issues related to the troubled money-center banks here.

Some of the same central planning-type thinking that is common here is debated in Japan, as the posts say:

" . . . Japanese authorities are once again stuck trying to stimulate aggregate demand."


"So wrote Paul Krugman in his 1998 analysis of Japan's prolonged economic crisis, in which he argued that to escape its liquidity trap, it was necessary for "the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.'"

DoctoRx here: The merchants of debt, growth at any costs crowd, and inflationistas cannot stand a slow-growth but stable, prosperous and peaceful society that Japan has been for decades.

Japan is a very prosperous country.   People live a long time there.  Unemployment has been low.  However, there is little in-migration and the population is aging.  There is no point in depleting savings in an aging society. It is arguably better to live in a country where one earns 1% year on a 10-year Government bond when prices fall 1% a year than to live in a country that lives beyond its means.

The advice from balmy Florida to the Japanese is the following:

You have had a good thing going. Don't screw it up and print more and more money to try to persuade a nation of cautious savers to emulate spendthrift Americans.

Copyright (C) Long Lake LLC 2009

Alma Mater: There Will Always Be an England

Alma Mater: From the Latin, "fostering mother".

Charles Bean, Deputy Governor for Monetary Policy at the Bank of England, spoke today at the National Farmers' Union Conference in Birmingham on 'The Economic Outlook'.

When one reads this, one thinks: only a Brit could speak so beautifully about this crisis.

The BOE tries to be upbeat, though it manages to spit out on page 6 that the risks to their sanguine outlook are weighted 3 to 1 to the downside.

One asks, why not pick a "central" forecast that weights the risks at least evenly to the upside vs. the downside. Or, since this is the crisis of the era, why not be conservative and come up with a forecast where one can state that this forecast is nearly a worst case scenario, so don't worry chaps, all shall be well and all manner of things shall be well, each in its season?

In any case, the document is in PDF form and cannot be easily copied. The document reads easily; there are easily-digestible graphs at the end.

It feels fitting to end the President's Day blogging by referring to the country for which George Washington fought in the 1760's and which he fought against in subsequent decades, and with which he then was an important part of reconciliation.

Time heals many wounds.

Copyright (C) Long Lake LLC 2009

Getting It Right But Still Getting It Wrong

A writer named David Carr, who covers the media, has turned his attention to the media coverage of the financial mess. Glory be, he referred to the interview on CNBC between its anchors and two of the best "bears" around, Dr. Nouriel Roubini and Dr. Nassim Nicholas Taleb. The article, This just in: The market is still dead, has a choice part:

The two guests — known as Dr. Doom and the Black Swan, nicknames that usually land on people who do their best work with chain saws and thumb screws — were fresh off their appearance in Davos, Switzerland, where they were hailed as visionaries for having foreseen the financial crisis.

Griffeth started things out briskly by saying, "What would it take to make you bearish on this economy right now?"

You mean bullish, his co-host, Michelle Caruso-Cabrera, interjected. They cracked wise about Freudian slips, but the entire segment, it turned out, was about trying to somehow find the horns of a bull on two ferocious bears.

Roubini quickly pointed out that many big banks were insolvent — something that became more apparent as the week wore on — and went on to predict a brutal, U-shaped recession with no quick end. "It's ugly," he concluded, using the same term of art, minus a few oaths, that I use when it's my turn at home to open the latest update on our retirement fund.

"But that's not the end of the world, is it?" Griffeth asked plaintively. Roubini indicated it was sort of getting there, with a recession that will be three times as long and three times as deep as the previous two.

Sensing the thickening gloom, Griffeth pivoted away to Taleb and said, "You're not as bearish as Nouriel, are you?" Well yes, as a matter of fact he was. "We have the same people in charge, those who did not see the crisis coming," he said.

In studio, Dennis Kneale of CNBC broke in and said, "Let's get back to the real purpose of doing this, because we know the forecast is dark and continuing dark," and then when on to fish for one metric, any measurement, that suggested the economy was "turning the corner."

His guests did not play ball, and later they looked slightly aghast when asked what they would invest in and what was in their portfolios.

You may enjoy the interview at

To me, here's the punch line that prompted this blog: the author's conclusion that the first of the "fundamental lessons" of this crisis is to "have a diversified portfolio".

As did Betty Boop in the eponymous cartoon (1935): No! No! A thousand times no!!

Just as she rejected the villain, people should reject the idea that they should have a "diversified portfolio". Different situations call for different asset allocations. People in their 80's perhaps should no money in common stocks most of the time. Young people without many assets do not have much to lose, and can take more chances. People like yours truly who follow markets closely like to identify a major theme and maximize risk-reward rather than just having the financial assets move like the average asset in a diversified portfolio.

Nassim Taleb, for example, recommends that most people should have 85-90% of their assets in ultra-safe Government securities. Perhaps the diversification would be between Treasury bonds and bills, and Ginnie Mae bonds!

Getting back to Mr. Carr, he reported on Drs. Roubini and Taleb, and undoubtedly watched the interview at least twice, but he obviously did not hear what they were saying.

If a market falls 50%, then it must double to get back where it was. The Great Crash of 1929-32 had a number of 30% down, 28% up sort of moves, but the catch was the up-moves never got back to where the down-move started from. What Dr. Taleb preaches is that one should avoid big losses. Dr. Roubini has been screaming for some time that the risks in the real economy were horrendous, and he still states that there is a probability that the news on the economy will keep being worse than expected.

In that case, Mr. Carr picked the right topic on which to focus, but he missed the point completely. How many other Americans are focusing on the risks but are continuing to miss the point?

Copyright (C) Long Lake LLC 2009

Dead Presidents and a Moribund Economy

As with so much in America lately, this is an artificial holiday. George Washington was born on February 22 (1732). Abraham Lincoln was born Feb. 12 (1809). I used to get two school days off, one to celebrate each man's birth. At some point, business prevailed upon government to consolidate the holidays, so most states now and the Federal Government name neither man and instead give a somewhat meaningless holiday called President's Day on the third Monday in February.

Both men lived through more perilous times than now, but we are in perilous times that require courage and imagination. Every day, I hear of imploding property values. One example is a luxury home on Fisher Island, an exclusive island near Miami. This 4 BR 2800 SF condo, ocean view, was not long ago valued at least at $3 M. Fair value now is said to be $1.4 M, and the current occupant, who rents it and who is highly experienced in real estate matters, believes it is likely to sell at the bottom of this cycle for under $1 M. Four months ago, yours truly sold his primary residence in Florida at a loss, such home having been purchased in 2001, long before real estate bubble talk surfaced. Values in that community are said to have plunged in only 4 months. One owner, for example, is on the Madoff victim list and is listing his house for sale. Between listed homes and known shadow inventory, the overhang of homes is huge. This situation is writ so large in luxury, middle-class and less than middle class communities to need no further repeating.

Another Madoff-type multi-billion dollar scam courtesy of "Sir" Allen Stanford, involving the isle of Antigua, cricket, and Texas is under active Federal investigation. Google him or Stanford Investment Bank to find different articles.

A family member who actually remembers the Great Depression and has successfully been in the retail business for decades states that we are in another Depression. He lived through the horrible economies of the mid-seventies and the LA mini-depression of the 1990 era, and states that the current economy is not just worse than that in either of those times, but now is far worse.

Globally, the headlines continue to be bad without precedent. Bloomberg reports that Russia and Japan are both showing record quarter-on-quarter drops in industrial production. RGE Monitor (Nouriel Roubini's organization) reports that Ireland is on the brink of default, and Germany is being asked by the EU to rescue it. Goldman Sachs reports that the International Monetary Fund is running out of money. Other countries on the brink include Ukraine, which is not a small country, and other Eastern European countries. Western European financial institutions are said to be levered 50 or more to 1 and to have major exposure to cross-border loans in troubled foreign countries.

Back in the U.S., Dr. Roubini has a somewhat triumphant post today in RGE Monitor titled: Republicans start to support the idea of nationalizing insolvent banks (no link; subscription required). Our opinion is that the Citis of the world are Establishment creations, recalling that the major opposition to TARP came from rural, populist small-business Republicans and the rest of the opposition came from the other side of the spectrum (think Socialist Bernard Sanders of Vermont).

In the meantime, markets continue to function, but where is the buying power for a new bull market in anything except distressed debt and the like?

Until the cost of fixing the financial system is known and this task is accomplished, and so long as the economy is either deteriorating or stable but weak, the supply-demand situation in all but the safest assets appears to be poor.

This is what both causes and happens in Depressions.

Copyright (C) Long Lake LLC 2009

Sunday, February 15, 2009

Blogosphere Seeing It Our Way On Obama?

A number of leading financial blogs are turning against Barack Obama. For example, Yves Smith at Naked Capitalism commented a few days ago that she had voted for Mr. Obama (though without great enthusiasm) and had begun to wonder why. Today she comments in Obama to Neuter Bank Pay Restrictions that:

Team Obama seems cowed by Wall Street psychopaths, so aptly described by The Epicurean Dealmaker. And if the Obama crowd lacks the nerve to take on the banks on issues that are largely window-dressing, it's obvious they won't even attempt to tangle with them on matters of substance.


" . . . the (financial) industry has completely bamboozled Team Obama."

One of these days, if past is prologue, I suspect that her posts will name the President rather than the euphemism "Team Obama".

At Mish's Global Economic Trend Analysis, the harshness with which Bush-Paulson (and Bernanke) policies were skewered continues under Mr. Obama. For example, here is one from Feb. 12, No Transparency in "Stress Test", which begins:

The New York times is discussing a "stress test" for banks in Bank Test May Expand U.S. Regulators’ Role. Three things stand out.

1. A massive audit of the 18 largest banks is underway.
2. There is no transparency in the audit.
3. There are no details on the alleged "stress test". Moreover, an audit can hardly be construed to be a stress test.

There is no transparency and there are no details. Is this supposed to inspire confidence?

At Jesse's Cafe Americain, the proprietor, Arthur Cutter, continues to rail against the system. Today he says:

Now is the time to break up the big money center banks. Now is the time to reinstate Glass-Steagall. We must demand the reforms for which we elected the Obama Administration.


And be prepared to act on a larger scale in a peaceful way to get the point across that we value our liberty and we will stand for justice. We are not optimistic that the government will do the right thing without more prodding and significant support from the public.

At The Big Picture, Barry Ritholtz is perhaps keeping the faith, as per his post Media Misreads Bailout Plan Reaction (Feb 11):

Both the NYT and the WSJ seemed to focus on the lack of details as the cause for the selloff. But that conclusion is belied by the “sell the news” reaction immediately as Geithner began speaking. No one could have digested anything in that milli-second.

I have a decidely different take. Wall street was hoping for another multi-billion, no strings attached, taxpayer funded giveaway. Instead, they got something much tougher than they expected.

Hence, the selloff/tantrum.

They wanted their candy and didn’t get it…

Mr. Ritholtz was a prominent "Obamacan", i.e. a Republican for Obama. Whether he is privately losing faith in the economic/financial course that Mr. Obama is setting is not clear yet.

Overall, the sense here is that a number of bloggers and many who comment in their chat rooms are unhappy and perhaps surprised that Mr. Obama's administration is one of continuity with George Bush's regarding the large financial institutions. That observation has been the theme here from day one of this blog in December 2008.

Readers should be aware that the bloggers who this blogger reads are either known to be people of substance or have been predictively right over the past year or two.

Without a change in course, the news looks to continue to be disastrous on many fronts on a day-to-day basis. The view here is that the stock market continues to ignore the obvious risks and therefore should not be owned. Gold and Treasury securities are the polar opposites in a kind of dialectical opposition and both could be owned, though predicting the prices of such assets is more than ever impossible. Halfway measures such as corporate bonds look to have a better risk-reward better than stocks, but the risk of Great D II or even a worsening Great Recession scares this blogger away for now.

Copyright (C) Long Lake LLC 2009

What does Austria Have to do with Stalingrad?

In Failure to save East Europe will lead to worldwide meltdown;
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point,
Mr Ambrose Evans-Pritchard reports and opines about new things about which to worry:

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

In 1931, the failure of the Austrian bank, the Creditanstalt, is credited with setting off round 2 of the Great Crash and the Great Depression. The first year and a half (or so) of the Crash was, from stock market terms, similar to the last year and a half here, or "not so bad" and not unprecedented. In less than a year and a half following the chaos of the Creditanstalt's collapse, stocks were down another about 80%. This is where the historic nature of the Great Crash and Great Depression came.

When one sees reference in what I hope is reputable press worrying about a monetary Stalingrad, then I worry too. Stalingrad is infamous for the extensiveness and brutality of the German siege during World War II.

More generally, what has received too little publicity Stateside is that the large EU financial institutions are much more heavily leveraged than their equivalent companies here.

The financial speculation was not limited to the U.S. More and more areas are revealed to have been part of the wildness.

As l'affaire Madoff has now perhaps led to the uncovering of l'affaire Stanford, which could be a multi-billion dollar scam, so too has the awareness of the scale of overpriced subprime securities been supplemented by the awareness of more and more risky borrowing and lending and other forms of speculation.

Great Depression II, with cellphones, is possible.

Copyright (C) Long Lake LLC 2009

Friday, February 13, 2009

Friday Afternoon Wrap

CR reports that: S&P heads to first quarter ever of negative earnings.

(MarketWatch) - As Wall Street tracks Washington's moves to help the beleaguered banking sector and pass more economic stimulus, nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss -- even excluding financials.

That's not all:

This is the worst, after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's.

A sixth quarter of negative growth ties the prior record set when Harry Truman was president, and ran from the first quarter of 1951 to the second quarter of 1952.

"And next quarter we're expected a new record of seven quarters of negative growth," Silverblatt said.

As of the close of business Thursday, Silverblatt calculates S&P earnings-per-share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that EPS deficit would drop to $2.35.

Comment: When profits vanish, the emphasis placed here on tangible book value becomes paramount. More specifically, cash in the bank and high-grade financial instruments are safer from an investor's standpoint than the book value of plant and equipment. After all, there's no law that a stock cannot sell for prolonged periods of time below tangible book value. In fact, many companies have sold for less than the value of their net working capital, with patents, trademarks, and physical assets net of debt thrown in. Under the "We are Japan" hypothesis, there could be many more years of a grinding down of stock prices before a secular bull market occurs, kickback rallies notwithstanding.

Additionally, the Economic Cycle Research Institute finds that:

Business Cycle Recovery Remains Elusive

Reuters February 13, 2009

(Reuters): A measure of U.S. future economic growth slipped further along with its annualized growth rate in the latest week, indicating a hazy reading of economic recovery, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 106.1 for the week ending Feb. 6, from a revised 106.6 in the previous week.

The index's annualized growth rate fell to minus 24.8 percent from a revised minus 24.5 percent, hitting its four-week low since Jan. 9 when it read negative 25.2 percent.

"With WLI growth falling once again, a business cycle recovery remains elusive," said Lakshman Achuthan, the Managing Director at ECRI.

The index fell to a nine-week low, the lowest reading since Dec. 5, 2008, when it was 105.7.

Comment: The ECRI has a marvelous track record. On an absolute basis, the WLI is about at a 1995 level. The Dow Jones was then much lower than today. In addition, a technical analysis of the WLI going back to 1974 shows that for the first time, a recovery in the economy/bull market in stocks both pushed to a new high in the WLI (in 2007) and then dropped to a low that was below the prior cycle's low (in 2001).

In addition, the Commerce Department reported an unprecedented 9% year on year drop in retail sales yesterday. With some or many money center banks feared to be insolvent, more and more factual news items keep piling up that have not happened since the early 1930s.

In any case, Monday is President's Day. Both America's George the First and Honest Abe faced tougher times than do we.

Copyright (C) Long Lake LLC 2009

The Times and "We are Japan"; and Yamada in India

The New York Times has published two articles on a topic discussed here almost daily. The main article is: Ailing Banks May Require More Aid to Keep Solvent: Experts say the situation at some of the nation’s banks demands a more direct government role than in the plan outlined this week.

What is old news in the blogosphere is getting out, gradually, in the main-stream media (MSM). Better late than never.

The secondary article is more interesting to this blogger: In Japan’s Stagnant Decade, Cautionary Tales for America.

This article makes the Japanese experience appear worse to the man in the street than it actually was, but it does make the point made here in Land of the Setting Sun.

That post began: "We are Japan". The main reason is the insolvency or near-insolvency of the large financial institutions, and the reluctance of the powers-that-be to take decisive steps to wipe them out and move on.

When the New York Times and rest of the MSM actually catch up to ordinary Americans and celebrate the virtues of thrift and saving, criticize unnecessary risk-taking, and stop focusing endlessly on "growth" as the most important goal, then not only will this be a healthier society, but the stock market is likely by then to be a "buy". For now, there's lots of change needed in the American ethos.

From a global thematic perspective, perhaps the large economy most suited to grow despite the woes of the consuming Western countries and their suppliers is India. The thematic technical analyst who most accurately predicted the structural ("long-term) bear market in 2000 as well as the buying opportunity in 2003 and selling opportunity in 2007 was Louise Yamada, who gave three days ago an interview from New York to CNBC India. She continues to see considerable risk of more downside price action in US stocks, believes gold is not technically ready to go to new highs and is uncertain even if it holds the $750-800 range in a correction, and is not bullish for now on oil. All this prognostication fits the "We are Japan" theme expressed here: a long-term economic and financial market problem.

Most workers have a 3-day weekend. Enjoy it. What will be, will be.