Sunday, February 8, 2009

Weekend Wrap-up

This post, like Gaul, is divided into three parts: commentary, economics and markets:


The biggest news this weekend could be the delay in Treasury propounding its plan for repairing the financial system. It announced late last week that Mr. Geithner would talk Monday morning. Now it is to be Tuesday. The reason/excuse provided that he will be busy on Capitol Hill dealing with Congress does not persuade me.

Mr. Geithner could give his talk at 8 AM, answer questions if he wanted, and then hie himself to the Hill.

This is the burning issue of our time. The "stimulus" package will assuredly pass and will work over months and years, or not work. It is not an hour-to-hour emergency. So the talk really should occur when scheduled. Thus the suspicion is arising at this blog that our president has not made up his mind what to do. What a momentous decision for anyone to make! We all sympathize and wish him more than well. Yet, this crisis is not new; and, when the Government announces a talk that the whole world is planning to pay very close attention to, Mr. Obama should direct that come hell or high water, the talk must go on. Messrs. Obama, Geithner and Summers have to do more than walk and chew gum at the same time. Dealing with this crisis and their expansive response to it requires something more like running and playing the guitar at the same time: this is the big leagues (to mix a metaphor).

So far as the day-to-day thinking and mood of the markets, an influential British columnist has a cheery article (not!) - Bond market calls Fed's bluff as global economy falls apart: global bond markets are calling the bluff of the US Federal Reserve (Ambrose Evans-Pritchard). Here's his conclusion: My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.

Here's some of his evidence:

The bank (of Japan) is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.

This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.

The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.

Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.


There are some wonkish and lengthy but important economic posts this weekend. Compliments of Infectious Greed is Coming Up To Date On The Great Depression by Dr. Edward Hugh, who refers favorably to comments of Dr. Paul Krugman. I couldn't read it all, but the basic message is increasing evidence that the U.S. is indeed following the Japanese experience into deflation, with what is called a liquidity trap. I do recommend that you click onto the article on peruse the two graphs showing money supply growth in Japan 1997-2004 and Japan Money Supply and different amounts borrowed by different sectors. These graphs demonstrate that rapid money supply growth can be associated with deflation.

The Japan-U.S. similarity was stated clearly here on January 6, 2009 in Land of the Setting Sun, which began: "We are Japan".

Another more controversial economics article is printed in toto in Naked Capitalism. It is titled Steve Keen: "The Roving Cavaliers of Credit (or Why Ben's Helicopter Will Fail). The intellectual gist is that credit creation precedes and dominates money supply growth. It therefore supports the empirical evidence out of Japan and out of the ongoing U.S. crisis that a real credit collapse can cause deflation despite surging money supply measures. I cannot begin to give this writeup a fair explanation. It is more revolutionary that the prior one, but it is fascinating to see intellectual support for the deflationary debt collapse hypothesis emerging. Interested parties can get the gist of the argument quickly, though the article is very long.


The Econblog Review proprietary Bloomberg video indicator is suggesting that it may be near time to buy intermediate Treasuries: it is reassuring that the video title: "Crescenzi Says Bear Market May Develop for Treasuries" has been present perhaps all weekend. Technically, the yield back-up has been sharp and severe: from about 2% to about 3% in less than 2 months, and the yield is approaching the prior recession's low of about 3.1%, which could represent resistance. There is deflation; the price of gold is churning; my daughter reports that a normally bustling mall in a prosperous area was empty; and "everyone knows" that other than short Treasuries, yields have nowhere to go but up.

Re stocks, our proprietary Big Mac indicator showed nonconfirmation of last week's Dow rally, as MCD barely budged. When market leaders with continued strong fundamentals and reasonable valuations can't even keep up with the market on a strong up week, one should worry that the rally is more short-covering than real.

Gold remains the beneficiary of the global anxiety. The trader in me remains wary of it for now.

Copyright (C) Long Lake LLC 2009

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