Sunday, February 28, 2010

Going Beyond the Global Warming Debate

The Telegraph in the U. K. is running an opinion piece that sums up much of the case against the "warmists", titled A perfect storm is brewing for the IPCC; The emerging errors of the IPCC's 2007 report are not incidental but fundamental, says Christopher Booker.

I am not going to quote from it but will rather go in a different direction.

There is little question that cap-and-trade is a gift to special interests such as the financial industry, for which a fully implemented cap/trade regime would probably be the largest business line in history-- profits which would be paid by you and me.

Let us go back to fundamentals and not pretend to know the extent to which global warming is occurring and if so whether it is due to human industrial activities.

It's easier to come to a practical solution without trying to know the unknowable but rather to stick with basic principles.

Basic principles are that resources are finite, that in most systems of government, financial accounts need to balance, and that first and foremost, economic systems need to meet the basic human needs of food, shelter, etc.

Another basic principle of economic thought is that Adam Smith's capitalism does not give weight to externalities such as pollution caused by, say, a manufacturer's pollution of a lake used for pleasure fishing but for which the fishermen do not pay dock fees or the like.

A simple way to account for loss of value of a public good such as a pristine lake or a mountaintop that would be destroyed by coal mining is to assess a value to those losses and have the business treat such costs as an input to costs just as much as labor and raw material costs are counted.

Thus, whether fossil fuels, potash or many other nonrenewables are produced, they can be taxed according to the replacement value (which rises over time as the easiest deposits are depleted first) of the resource plus an estimate of environmental damage, or some other similar scheme.

Climate considerations aside, it is difficult to see how an electricity-intensive advanced world and an automobile-poor emerging world are going to find more and more fossil fuels near today's prices to fuel the growth. Price will ration these resources better than any regulatory scheme. It may be better for, say, government to force resource-depleting companies to price in tomorrow's market price today as tax. Paradoxically, doing so will keep market prices lower than they would be in the future, by discouraging consumption of nonrenewable resources in favor or renewable goods, such as those derived principally from human imagination such as the performing arts, medical services, education, etc.

If such an idea occurs, look for resource-based companies to lose value. It would be better for governments to take advantage of the slack in the global economy and avoid taxes on useful things such as work effort or medical devices and instead obtain an increased share of government's revenues from industrial activities that are underpriced to the extent that resource depletion and environmental damage (including non-economic damage) are not considered as input costs by the companies involved.

Copyright (C) Long Lake LLC 2010

Extended Unemployment Benefits: Untouchable?

In Jim Bunning killed the unemployment benefits extension. What now? the Christian Science Monitor has a brief discussion of an increasingly costly public expense, namely extended unemployment benefits.

This program, which now covers millions of Americans who have fallen out of the first and second tiers of coverage, have unprecedented length of benefits:

Unemployed Americans can receive up to 99 weeks of unemployment benefits – nearly two years – which is a record. The last time unemployment was this high, in the early '80s, the maximum was 55 weeks.

The background of the article is:

When Sen. Jim Bunning (R) of Kentucky held up a bill authorizing the extension of certain unemployment benefits Friday, he put the plans of hundreds of thousands of unemployed Americans on hold.

The Senator cites such factors as the lack of a mechanism to pay for this benefit in the Federal budget.

At first glance, who can be against this program?

But at second thought, these benefits may go to the second wage earner in a household, or even a third earner if for example a 24-year daughter is living with two working parents. In the two-earner scenario, what if a nurse married to a successful doctor, or a paralegal married to a successful lawyer, is laid off and cannot find work? Would it not be fairer to all the workers being taxed to pay for this income transfer to have a needs-based system after a certain point?

Where indeed is all the money coming from to pay for all the goodies the Party in power is dispensing?

After a brief surge to +5 in the Gallup hiring/not hiring dynamic (which is probably still consistent with rising unemployment rates), that number fell back to zero yesterday. The 14-day average self-reported spending the day before is at $60. That number first fell that low in February 2009. It was well over $100 two years ago. If we deflate $60 by 5% to account for two years of (say) 2.5% inflation in consumer prices, we get $57 in real dollars. Thus in real terms, self-reported discretionary spending has fallen by 50% in two years.

In our chronic depression, it's one thing to provide fellow Americans with food and shelter. It's another to engage in transfer payments almost without end either by taxation, borrowing or money-printing.

Not to be hard-hearted about things, but faced with the end of unemployment benefits, many workers will accept work that they would not take when they are receiving those benefits. Even with high unemployment, there is massive hiring each year. Unemployment rises simply when even a modest change in the ratio of employers hiring vs. firing moves adversely. There is always lots of hiring. Very generous unemployment benefits may actually increase unemployment rates. Just as owners of real estate have had to take perhaps 50% haircuts on their values, so may labor have to adjust downward.

Senator Bunning raises a good point. Unemployment compensation is not welfare. People truly out of work and in deep trouble have Medicaid, food stamps and other programs available to help them. Given the horrible financial condition of our government at all levels, and given that this extended unemployment benefit is not needs-based, and further considering that in difficult times, there still are jobs available, there should be a debate about making the welfare state justify itself rather than considering it untouchable. At the minimum we need to be realistic about the cost of doing good deeds and about providing the right incentives to work.

Copyright (C) Long Lake LLC 2010

Saturday, February 27, 2010

Cross-Currents in the Treasury Market

The nearby charts nicely show the conflict between a short-to-intermediate term view of the 10 year Treasury note (bond) and the long-term view. (Click on each to enlarge.)
The 2-year view shows both lower highs in yield conflicting with a more rapid uptrend line that defines higher lows, with the panic December 2008 low the obvious starting point for the uptrend line. Conventionally, the likelihood would be that the more powerful trendline upward would tend to win out and that rates would push higher.
On the other hand, the post-1982 major downtrend in rates is clearly intact.
Very short-term, the 10-year is acting as though it wants to rise in price and thus for rates to move lower. Thus a speculative trade in IEF has chart support, but it is speculative because unlike ownership of an actual bond that pays off at par (presumably) at a date certain, ownership of an ETF is perpetual ownership and theoretically can decline in price indefinitely if yields on bonds continually rise.
The Big Finance companies' charts are of little help now in guessing the future.
Assuming that economists will judge that the economy bottomed last year, then if the current economic cycle follows the pattern of the past several, we can look forward to an irregularly-rising yield on the 10-year until the next economic downturn, when new lows in yields can be projected on the charts. This would be the Japan scenario. If this happens soon, before much real wealth can be created, then the Japan/Ice Age scenario would be a reasonable outcome. One of the straws in the wind in favor of this is diminishing foreign appetite for our debt. The Japanese government keeps selling more and more bonds to Japanese, and thus any default will be almost exclusively an adjustment of accounts within the family, perhaps consensual, perhaps contentious. That could certainly happen here.
Copyright (C) Long Lake LLC 2010

Friday, February 26, 2010

Gold Technicals

This chart shows the price of gold for the past 10 years, where the green line is the smoothed 200 day moving average and the blue line is the smoothed 60 day moving average. (Click on chart to enlarge.)

This chart exaggerates the percentage moves as the price increased, as it is not a log or semi-log scale. Thus, a 10% move from $1000 to $1100 takes up more vertical space than the same move from $300 to $330, though the return on investment is the same.

Beginning with the advent of the gold bull market in 2001, there have been 4 prior episodes where the 60 day sma turned down; those were in 2003, 2004, 2006 and 2008. This has happened again recently. In each of those previous cases, the price of gold churned for some months before resolving to the upside.

Given that the average price of gold in 2009 was well under $1000/ounce, and price inflation in USD is not high regardless of whether official statistics understate the rise in the cost of living, it is a reasonable assumption to look for gold to form a multi-month base.

Of course, gold has been roughly tracking the S&P 500 (SPY) for some time, and that relationship is worth monitoring to look for a trend change in that relationship. This is not a day-to-day relationship, however, so longer periods of time are more important.

Is gold "too popular"? One sees the ads on Bubblevision (CNBC) and elsewhere.

I learned yesterday that a finance column in More, a ladies' magazine, recently recommended that its readers own physical gold for investment/security.

My reaction is that it takes bulls to make a bull market. Bull markets require early investors to sell to later investors and for those investors to sell to yet newer investors. I suspect that few More readers actually own investment gold (as opposed to gold jewelry the value of which is largely as decoration rather than gold content). We are nowhere near cocktail party chatter amongst the upper middle classes discussing how much gold has been stashed in a secure home safe, safe deposit box or storage facility out of the country and how much better that investment has been doing than cash or the stock market.

A reasonable scenario is thus for gold to digest its gains, build a base, and then break out after frustrating bulls and bears alike. Will that potential breakout be to the upside? Time will tell of course, but gigantic projected Federal deficits would seem to make gold ownership prudent at least as a hedge.

Past is not necessarily prologue, though. Gold could surge 10% next week and not look back on, for example, some unexpected financial crisis in an unsuspected place or due to a major successful terrorist attack in the U. S. or U. K. So, if one is attracted to the arguments for ownership of gold in physical or ETF form, trying to time the purchase of a core holding in gold may be riskier than getting in a bit early.

Copyright (C) Long Lake LLC 2010

Bloomberg Over-Accentuates the Positive

In its article U.K. Exits Recession at Faster Than Estimated Pace, continues to push the rosy scenario. For example, only at the very end of the piece does the reader find that just last week, the Bank of England lowered its growth forecast for 2010 from 2.2% to 1.4%. (Presumably that growth forecast may now be lowered further, given a higher than assumed baseline for the level of economic activity throughout the fourth quarter.)

In any case, the article begins with the sunny side:

Britain emerged from recession at a faster pace than previously estimated in the fourth quarter as services output jumped, providing a boost for Prime Minister Gordon Brown as he prepares for a general election within weeks.

Gross domestic product rose 0.3 percent from the third quarter, compared with a previous calculation of 0.1 percent growth, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 27 economists was for a 0.2 percent increase.

Am I excited? Hardly. Economists had already sniffed out that the initial estimate was too low. So we are talking about a further one tenth of one percent in a very large economy. In any case, much economic effort in Britain is off the books in any case, and economists are still discussing and revising the level of the economy in 1983 (true). So this headline really is about nothing.

Nonetheless, after a paragraph on politics, the article continues to make much of very little:

“Today’s figures should help to alleviate some of the gloom and uncertainty that descended on markets about U.K. economic prospects,” said Philip Shaw, chief economist at Investec Securities in London. “It will help Brown. We’ll see a slow and steady momentum building up in growth through 2010.”

Huh? Gloom and uncertainty will be alleviated because a revision came in a whopping 0.1% above expectations? And note the final quote. Rather than the BOE's downward revision for 2010 growth being a bad thing, Mr Shaw, one of the zillions of hired gun economists whose job is to help their employers sell and trade securities for their private profit and not for your benefit, puts a happy face on slow growth. Slow and steady. Words designed specifically to connote stability. Isn't it great to be steady?

Meanwhile the article makes clear that Britain can go the way of Greece into forced austerity:

At more than 12 percent of GDP, Britain’s budget deficit is on a par with that of Greece.

The other important trick the article uses is to bury bad news that directly affects the main message (i.e., happy days are here again):

Revisions to previous quarters meant that the economy shrank 6.2 percent since the first quarter of 2008, making the recession the deepest on record.

Oh. Glad you told us this, buried deep in the body of the article.

In contrast, Reuters, which is much more than a partner to Big Finance, plays the same news much more fairly in UK Emerges Faster In Q4 From Deeper Recession, which begins as follows:

The economy grew faster than expected in the last three months of 2009, but the 18-month recession from which it emerged proved to have been even deeper than previously thought. . .

The Office for National Statistics revised up its first estimate of fourth quarter growth to 0.3 percent from 0.1 percent, but calculated that a total 6.2 percent of output had been wiped out during the recession, more than the 6.0 percent first thought and the deepest in over 50 years.

Gilt futures fell modestly after the data, which is likely to provoke mixed reactions at the Bank of England. The Bank expected an upward revision to Q4 growth but will now judge there is even greater slack in the economy pulling down on inflation.

"I don't think we're out of the woods," said Adam Chester, economist at Lloyds TSB Corporate Markets. "The first quarter is now going to be the focus and given the weak January we have had and the bad weather, there is still a distinct possibility that we could dip back into the red in the first quarter."

The way Bloomberg and Reuters report the exact same news is as if two political parties were spinning a debate between their candidates. Same debate, different interpretations.

Even if you trust government economic statistics, you need to be very careful about being manipulated toward the point of view the media wants you to have.

Copyright (C) Long Lake LLC 2010

Thursday, February 25, 2010

R. I. P. Financial Reform We Can Believe In?

While I do not like the post's title, the body of a blog from Charles Gasparino re financial reform is spot on.
How Obama Screwed Volcker begins and ends as follows:

The president needed the gravitas of the former Fed chairman to sell his bank reform to Wall Street. And when the “Volcker Rule” didn’t fly, Obama sold him out. . .'

And just like that, the wise old man became the crazy uncle that no one listens to anymore.

According to Gasparino, Big Finance is in control.

Assuming this interpretation is more or less correct, one wonders how long Tall Paul will hang around with this crew. Party loyalty only extends so far with him, or at least that's his image.

Copyright (C) Long Lake LLC 2010

Inflation Risks Remain Tilted Upward in the Ice Age

As was widely reported, Bernanke Says ‘Nascent’ Recovery Requires Low Rates.

This is of course so wrong as to virtually be a lie.

If less money is paid to lenders, their lost income is equal and opposite to the interest savings that accrue to borrowers.

If one wants to prevent malinvestment, such as occurred in housing several years ago, in commercial real estate, and in many other settings such as unsound corporate takeovers, borrowing costs should be higher rather than lower.

Preventing malinvestment means preventing bubbles. No more bubbles!

The current benefit of record-low short-term borrowing rates is to the U. S. Government and other allegedly high-quality borrowers, and to financial companies that report high current income from borrowing short and lending long (such as by financing the Federal debt by buying a 10-year Treasury with leverage gained from borrowing at the Fed funds rate).

Why did the Fed create massive "reserves" that banks can't do anything with?

Of course it was to "print" "money".

We are seeing the results of the money-printing seep into the economy.

As this occurs, we will see price increases, and the longer the Fed stays "easy", the difference between actual and reported inflation will grow. In the last cycle, the result was massive speculation.

Blaming the speculators is not really fair. What is the owner of capital to do when the "safety" of cash is that even pre-tax, there is a guaranteed return below the rate of price increases?

Now, with industrial and labor slack, what in prior eras would have been outright deflation has been prevented.

If economic hard times remain and the up-cycle is brief and/or restrained enough, the much-maligned Phillips curve may keep actual price increases limited and perhaps allow the 10-year Treasury rate to hit David Rosenberg's target of under 3%, perhaps if and when the economy goes south again.

There have been many times in the 20th century when the 10-year bond yielded less than current inflation, sometimes much less.

Nonetheless, the Fed and the Feds want price increases to "grow" out of the bubble.

Gold but not gold stocks is a long-term hedge against the official desire for inflation. With more volatility, so is silver and definitely not silver stocks.

The price of gold is hanging in well above the average 2009 gold price. This in and of itself tilts the short-term risk to the downside. However, the amazing amount of money-printing and governmental deficits argue that at least so far as the U. S. is concerned, this is a new era.

Just as the Internet did in fact represent a new era and was associated with 20-30% yearly gains in the NASDAQ beginning in 1995 until it doubled in 1999, the "bull" case for gold is built on the new reality that the U. S. Government is not really a AAA borrower anymore. If it were, it wouldn't have had the Fed buy so much of its debt and its more-or-less obligations of Fannie/Freddie mortgage-backed securities.

Investors must keep in mind that the truly extraordinary near-zero return on cash is a reflection of extreme economic weakness and extreme government money-printing to benefit itself and its banking allies, which purchase and resell the government's debt. Traditional stock and bond metrics do not apply now, just as some usual laws of physics and chemistry do not always apply near temperatures of absolute zero.

The economy is in an Ice Age and despite that, prices are rising. A strong economy could easily be associated with 5% inflation and much higher interest rates. Thus, opposite from the situation in 1950, when stocks were cheap and dividend yields were much higher than even the long Treasury bond yield, stocks could be unexciting investments (or worse) if the economy starts doing well.

Strange times in the investment world.

Copyright (C) Long Lake LLC 2010

Wednesday, February 24, 2010

When Bad News Is Simply Bad

There is much discussion of whether the Conference Board's latest consumer confidence number, which plunged 10 points to 46 and reached the lowest level since Feb. 1983, is a contrarian "buy" indicator for stocks.

Well, unfortunately the Gallup self-reported elective spending measures and employee reports of hiring/not hiring at the employee's firm are near their lows of this cycle.

Supporting a not-so-optimistic view is that Dollar Tree surged to an all-time high, up over 10% today, on an upbeat earnings report and current-quarter forecast, and TJX similar moved up strongly to what was probably an all-time closing high and just pennies from an all-time high.

Meanwhile, while Saks had a decreasing loss and is optimistic on the second half of this year, its stock is down about two-thirds from its late-2007 price.

Oil is back to $80/barrel and is thus a headwind for a strapped consumer.

ECRI's weekly leading index has stalled and even declined.

Sometimes bad news is bad news. If the recession ended mid-year last year, the consumer confidence numbers should not be plunging. February 1983 was approximately the endpoint of that recession and in fact the Dow Jones averages went nowhere for 17months afterward.

For what little it is worth, I have price targets for DLTR and TJX that are far enough above current share prices that I am not selling. Discount retail is on a roll and can thrive at least until there is a sustained boom. We should be so lucky.

Copyright (C) Long Lake LLC 2010

Tuesday, February 23, 2010

Stealing in Plain View

In Miami city manager resigns amid money mess, the Miami Herald concludes an article focusing on Miami's financial mess with a point that is generalizable to the ongoing global financial crisis. It ends as follows:

But the salary the city's top bureaucrat is leaving behind illustrates a clear issue the next city manager must confront: Hernandez earns $329,000 a year in salary and benefits -- making him just the 10th highest paid employee in Miami.

In other words, the city was "stealing" in plain view, simply by overpaying public servants, who in addition to salary receive great benefits.

The above comment ignores whatever less legal shenanigans may have occurred. Little would surprise anyone who knows the Miami tradition.

By analogy, consider the report on the AIG bailout titled Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs.

This discusses certain secret aspects of the underlying securities that AIG "insured" via writing "protection" on credit default swaps. It is alleged that Goldman Sachs and several other Big Finance companies were foresighted enough to purchase insurance on the worst of the CDOs that were created.

While all this happened in secret, the bailouts are an example of stealing in plain view.

The net result of government and Fed actions has been to impose huge liabilities on taxpayers in order to pay the Big Finance companies virtually 100 cents on the dollar for the CDOs while millions of homeowners default on their mortgages because the financial companies and the government created and sustained a housing bubble. The vast bailouts were largely done in the open, with slipppery and shifting rationales.

Certainly Miami can also provide rationale for its compensation packages, but neither they nor the bailouts pass the sniff test.

We now may be seeing a similar thing with healthcare "reform". While not giving a whit about fighting for the "public option", Barack Obama and the Democrats appear to be going the route of "reconciliation" in the Senate so that they can give more business to insurance companies. That they are doing this just a few years after praising the filibuster and decrying reconciliation when the Republicans controlled the Senate is obviously less important to them than attaining/consolidating Federal control over the insurance industry and one-sixth of the economy in general.

It would be one thing if public polls consistently showed 3:2 support for Mr. Obama's plan. In fact, I believe that all major polls show the public is against it. In what is supposed to be a representative democracy, why is this particular legislation so important to fly in the face of Senate tradition when doing so is clearly against the public will?

In Miami and in finance, money is the ultimate measure of success. In the Federal government, that measure of success is power. The era of Bigger Government is here. The Feds are "stealing" power in plain sight.

Copyright Long Lake LLC 2010

Monday, February 22, 2010

Afghans and Americans Similar in Preference for Less Government

In Afghan official who will govern Marja pays first visit, makes plea to residents, the Washington Post incidentally supported the Tea Party. The piece begins with a description of officaldom making its case to its fellow Afghans to support the Kabul government with goodies from America. Then it says:

But several residents said they were less interested in government services than being left alone. The principal cash crop in Marja is opium-producing poppy, and many farmers are wary that the establishment of local governance and a police force will put an end to what has been a lucrative way of life for them.

Polls show that Americans think that the Federal government wastes vast amounts of money. Afghans know what their government is about, as the article continues:

Halfway through the meeting, one participant stood and proclaimed himself a Talib. "I have nothing against the Americans, but I don't like our government," farmer Ali Mohammed said to Zahir. "It steals all the money that the foreigners give us."

Nice to know that they think we are more honest than their own government.

Home rule, small government, freedom to operate small entrepreneurial enterprises, that's the preferred Afghan way.

At least in this regard, our government should listen to the Afghan people rather than killing them.

Copyright (C) Long Lake LLC 2010

How Greece May Provide a Roadmap for Barack Obama to Regain Popularity

Last week, the Financial Times had an interesting report, Greeks back PM’s austerity drive. It begins:

George Papandreou, the Greek prime minister, is enjoying record levels of popular support despite his government’s commitment to public sector wage cuts, higher taxes and sharply lower pensions.

“Say farewell to the Greece you knew,” said a front-page headline in Eleftherotypia, a leftwing Athens newspaper, warning of the impact on households of a crackdown on tax evasion and an end to early retirement.

Opinion polls published on Sunday in two Athens newspapers, Kathimerini and Proto Thema, gave Mr Papandreou approval ratings of 72 per cent and 61 per cent respectively. Sixty-five per cent of those polled by Proto Thema said the austerity measures were necessary and overdue.

Mr. Papandreou is the son and grandson of Greek prime ministers.

The U. S. has at least as large a budget deficit as a percent of GDP as Greece is said to have, considering that the Fannie/Freddie current massive subsidies are off-budget (without comparing future unfunded liability levels between Greece and the U. S.).

Furthermore, Keynesian deficits were in Keynes' thinking supposed to be balanced by real surpluses in good times, not the faux surpluses of the later Clinton years which were still deficits with GAAP accounting. In this setting, where the government is of questionable credit quality, the concept that increasing deficit spending will really "stimulate" the economy is highly speculative.

Greeks apparently "get it". Their giant shipping industry is all about credit. Without letters of credit, there is no trade. Without large loans, large ships don't get built. And etc. and so on.

Americans, too, "get it". Bill Clinton was on a downward slide in the polls until the balanced budget sentiment that had made Ross Perot the most successful third party Presidential candidate in memory in 1992 gave the Republicans a sweep in 1994 and reined him in. Repositioning himself as the moderate Democrat he had posed as when he was candidate Clinton in 1992 revitalized his popularity.

Barack Obama could do well to ponder the current example of a Socialist prime minister in Greece receiving sky-high approval ratings while imposing austerity measures on the bloated welfare state that his family helped to create and sustain.

Copyright (C) Long Lake LLC 2010

National Anthem

The NYT is reporting, Obama to Urge Oversight of Insurers' Rate Increases.

Apparently what has happened is that in part due to adverse selection, with an increasingly sick pool of potential and actual insureds, Anthem Blue Cross of California, has put into effect a 39% rate increase in its individual coverage.

The Times reports that half the states do not regulate health insurance rate increases, and California is one of them.

So, in an effort to add pizzazz to the faltering healthcare reform effort, the President is now proposing to Federalize state insurance programs, even though he has not agreed to Republican proposals to allow health insurance to be sold across state lines.

Maybe it would be better for the 25 states that do not now regulate rate increases to do so. I don't know why they don't, and maybe setting up a bureaucracy to do so would cost Californians more than it would save. Regulatory capture by the regulated industry is, after all, is the way of the world.

As if the Feds don't have enough to do, they now need to grow the government some more by getting directly involved in intrastate matters.

What happens with Anthem in California should stay in California. There's no need to go national.

If the Dems had simply worked matters out within the House and Senate caucuses, they could have come up with a reasonably popular proposal. Even if it were not "comprehensive", there's always tomorrow. Bill Clinton could certainly have pushed through a national healthcare reform to provide catastrophic health insurance to all Americans, paid for by "sin taxes" on alcohol and tobacco products. But he chose to go whole hog with a micromanaging plan that made it illegal to see the doctor of your choice if doing so violated the referral system. Well, that bill did not even get to a vote.

What we see in this last-minute maneuvering by the President is a desperate attempt to seize on a transitory issue of the day with no opportunity for the public to understand Anthem's rationale (which may be phony), put in a new Federal mandate that had no Congressional hearings, no time for comments by interested parties, no evaluation of costs vs. benefits, etc., in order to push through "reform" that has been rejected by Americans in poll after poll and was even the major issue causing, of all states, Massachusetts to give "Ted Kennedy's seat" to the 41st Republican vote in the Senate.

Major legislation should be bipartisan to be durable. Democratic initiatives such as Social Security, Medicare and major civil rights legislation all had significant Republican support. Health care should follow that pattern.

In the meantime, the Federal government is lurching from one financial crisis to another, with dishonest accounting for the housing bailouts and the pretense that its interventions do a net good to the economy. Rather, it is mainlining the opiate of more and more credit (borrowing and lending) into an addict that needs to detox.

Today on TV I saw an ad for mortgages from Lending Tree. It's easy to borrow from them, they say.

Except for lower housing prices and lots of pain, and a temporary retrenching in battered financial companies how much has fundamentally changed from the credit bubble of the aughties?

Answer: not enough.

Government at all levels have already taken on massive current responsibilities and even more massive future ones. This includes pension obligations at the state level as well as Medicare and Social Security unfunded Federal obligations.

The idea that an irresponsible Federal government should extend its powers and take on yet more responsibilities flies in the face of common sense. Let it show it can do things right with its current job before it gets a promotion.

The American people "get it". A recent WaPo poll showed that by 3:2, Americans prefer a Federal government that provides relatively fewer benefits in return for taxing and spending less. It's not a poll that Barack Obama can easily wriggle away from. Picking on an ancient issue of possibly excessive (how to define?) rate increases by insurers at the last minute in order to bring more power to Washington is the wrong way to govern and also is philosophically out of step with the people who elected him.

Copyright (C) Long Lake LLC 2010

Sunday, February 21, 2010

Is the Fed Manipulating Markets?

This past Thursday, after the close of trading in New York, the Fed announced a surprise intermeeting discount rate hike. Gold immediately moved down, the dollar moved up, and global stock futures took a 1% dive. Subsequently, Japan went down 2% or so, New York opened down and to no one's great surprise, it and gold reversed to the upside. Great volatility, times to coincide with options expiration.

Then tonight, to new special news, Japan has fully reversed Friday's plunge, and is up 3%.

Intentional or not, people are smelling a bad odor from the Fed. It looks like almost overt market manipulation.

The Fed needs to be as pure as the driven snow. It used to make announcements during trading hours. Now it has whipsawed traders and investors with suspicious timing.

Poorly done.

Copyright (C) Long Lake LLC 2010

Charming Timmy

Timothy Geithner has visited lettuce in order to rehabilitate his image, the WSJ is reporting.
Quite the look on his face, wouldn't you say? (Click on image to enlarge.)
Boy, am I glad that this key enabler of one of history's worst looting episodes and financial collapses is just another Mr. Mom or something.
It's downright inspiring.
Or something.
Copyright (C) Long Lake LLC 2010

Bringing the War Back Home

This should be read in conjunction with the post immediately below.

In Afghans frustrated in bid to remake Taliban-free towns;
Nawa's district governor, upset by the unresponsive provincial government, pleads with residents not to become disenchanted and ally with insurgents
, the L. A. Times has just now put on-line a report from the real world in Afghanistan that eerily could apply to the U. S. The story begins:

Reporting from Nawa, Afghanistan — Haji Abdul Manaf, the district governor for this region of Helmand Province, was incensed. . .

But for months, Manaf has been unable to get the support he wants from the provincial government.

"I don't know what to do," Manaf complained to a gathering of U.S. and British civilian aid workers.

Please read the article, which is brief. Here's the conclusion. Substitute the U. S. in the appropriate places for my point:

In his final report to his superiors, Marine Capt. Frank "Gus" Biggio, the Washington lawyer and Marine reservist who headed a civil-affairs squad in Nawa until last December, warned that "one of the biggest threats to Afghanistan's future is not so much the drug trade, Taliban influence or corruption at the higher levels of government but rather the patience and persistence of her foreign partners."

In a reference to Nawa that might also apply to Marja, Biggio noted: "There are daunting challenges ahead in this country."

Yes, there are daunting challenges ahead in the United States, including relying on the forbearance of foreign creditors, the drug trade, Big Finance influence, etc.

Earlier, the article says:

The same strategy is being used in the Nad-e-Ali area, where British and Afghan forces are on an offensive similar to that in nearby Marja. Officials have announced that 2,000 people have already registered for a "work for cash" program, two schools have reopened, and nearly a thousand residents have received aid.

Yes, there are daunting challenges in remote parts of Afghanistan, where the U. S. is despised, 100% of the population is Muslim, and betrayal is standard fare. This is where 2000 people are getting cash for work.

Meanwhile vast numbers of Americans are receiving cash in lieu of work and large numbers are simply exhausting unemployment benefits, while young people who can't find a first job are not eligible for any assistance.

What's wrong with this picture?

There are actually numerous projects in the U. S. that would have a payoff as did numerous 1930s projects performed by the Civilian Conservation Corps and various public works projects. Instead, what we got from last year's "stimulus" was the preservation of the culture of dependency, repaving some roads, funding for a high-speed railroad to Sin City (Las Vegas) from Lala-land, a giveaway to old people for being old, Bush-style tax cuts and other unimaginative stuff.

And having not fixed the economy, Mr. Obama moved on to try to reshape energy usage in a giveaway to traders with cap and trade, and then to put physicians and patients under increased government control.

It would appear that more creative thinking is going into reshaping parts of central Asia than improving the United States.

Meanwhile, given the incompetence and venality of the Karzai administration, the U. S. may just be making martyrs of the Taliban "men in black" in Marja and surrounding areas. The madrassas will undoubtedly be teaching how bravely these men fought against overwhelming odds. The military battle is a layup victory for NATO. The political one is the only one that matters, however.

Can and will the U. S. and the U. K. (its only real ally in Afghanistan) persist long enough to avoid another costly failure a la Viet Nam, where we never lost a major battle?

In the 1960s, when the economy was strong, the war began losing popularity. When the economy weakened, it was curtains for the war effort. Our current economic situation is already poor. The Afghan War is thus by analogy not going to be won easily.

Copyright Long Lake LLC 2010

Saturday, February 20, 2010

War for the Long Term: Pak-ghanistan Update

CNN reports that despite NATO warnings to the Taliban to flee Marja in Helmand Province, resistance is somehow increasing:

British forces say Taliban resistance has increased in recent days, and that has slowed progress, despite strides.

On Friday, British officials said more than two-thirds of the Moshtarak clearance phase is completed. But British Maj. Gen. Gordon Messenger said with that effort, "resistance in that area has increased. We did expect the enemy to up the level of resistance, and that has happened.

Like heck they expected that to happen.

CNN then describes the killing, almost murder, of an unarmed man:

Foreign and Afghan forces have taken pains to avoid civilian casualties in the operation. Civilian deaths and injuries during the Afghan war during airstrikes, raids and so-called "escalation of force" confrontations at checkpoints have undermined NATO efforts to get Afghans on their side.

But despite such efforts, such casualties have occurred in Moshtarak, with the latest coming on Friday, when coalition troops shot dead a man they mistook for a militant.

ISAF said the incident occurred in Nad Ali on Friday when an ISAF patrol thought he might have been carrying a bomb in a box.

"The patrol warned the individual by waving their hands, providing verbal warnings, and firing small pen flares into the air. The man dropped the box, turned and ran away from the patrol, and then for an unknown reason turned and ran toward the patrol, at which time they shot and killed him," ISAF said in a news release.

Later, troops discovered that there was no bomb material.

Meanwhile, this operation looks to be unpopular in Europe, per the post titled Dutch government collapses over Afghan troops (no quote as the title says enough; click through for details).

Other descriptions of the battle describe our allies as including drug kingpins. One can also get a sense of the great expense of battling Taliban who are on foot with jet fighters.

Meanwhile, the drone war over Pakistan is killing lots of people described as "militants". Let us hope that works out well for the U.S. One revenge act in America or on Americans overseas could be the result. On the other hand, perhaps this will be part of such a successful pincers movement that the capture of Messrs. bin Laden and Zawahiri will result. EBR reported months ago, after reading Pakistani reports and commentaries, that the Paks believe that their indigenous Taliban are equivalent to hillbillies and posed no existential threat to the government. That the Taliban are on the run in Pakistan is no surprise in these quarters. It certainly is a positive for the Afghan "mission", but the problem is that Pakistan is a real country and Afghanistan is a feudal society with sections of the population living in almost Stone Age-like conditions and where what we consider to be corruption is just the way it is. So in Afghanistan, the main question is who are we fighting for? We know who we are fighting against, but is that good enough in the long run?

Oneindia reports that:

Even as thousands of US and Afghan troops remain engaged in the first phase of the gruelling fight against Taliban in southern Marja, top commanders believe that "real challenge" lies ahead, and the offensive is just in its "opening act."

A week after the launch of Marja offensive, NATO commanders and civilian stabilization advisers are facing an even more daunting task: how to establish basic local governance and security in a place where there are no civil servants, no indigenous policemen and apparently no public buildings.

So there you have it. We are nation-building in one of the poorest, most illiterate, desolate parts of the world.
Meanwhile, all over America, malls and shopping districts are moldering, post offices are in disrepair, small employers are not feeling the Fed's love, universities are failing in their basic function of teaching, and all this is occurring while Federal debt is exploding and numerous other financial imbalances are at crisis levels in the public and private sector.

Is all this expensive, long-term effort in Afghanistan ultimately worth it?

We may find out.

How weird history can be. If someone had said 10 years ago that America would be going through an economic and financial crisis of its own doing while chasing Muslim fundamentalists all over the Hindu Kush and plains of Pak-ghanistan in order to get back to the normalcy that was taken for granted pre-9/11/01, one would not have been believed.

The story then was stocks for the long term. Now it is war for the long term. We can only hope that just as stocks faded, so will our wars.

Until chronic war on the periphery of "empire" ends, stagflation is a likely economic base case.

Copyright (C) Long Lake LLC 2010

New York Times Shills for Commercial Real Estate

In Real Estate Looks Risky, but Less So for Bargain Hunters, the Times presents in a news section (page B5) and posts online a thinly-disguised advertisement for commercial real estate. Here is one assertion, for example:

“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”

What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.

CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.

The "Caution" is almost no caution at all. At today's near-zero one year interest rates, the idea that double-digit interest growth will not begin till next year is more a come-on than a caution. And the implied presumption is that the double-digit dividend growth will be sustained, and that inflation will raise the nominal net asset value of the underlying properties. A much more balanced article would have pointed out the anyone working at Cohen & Steers is horribly conflicted, that the REIT business model is very risky for investors as the lack of retained earnings means that growth comes from selling stock which dilutes out prior shareholders, and that REIT stocks are very high-priced.

An example of that is the leading mall REIT, Simon Property Group (SPG). The yield on SPG is 3.1%. That means its P/E is abou 30X. Why is it not a much, better deal to buy McDonald's at about a 3.4% yield and a roughly equivalent amount of retained earnings, and about half the P/E?

The article begins with the statement that:

EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.

It then goes on to say the following:

Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate.,


But what’s bad for an owner may be good for an investor.

These are classic tricks of writing designed to set up a straw man and then largely knock it down.

Readers who still trust the mainstream media may not be on guard for an article designed to get them buying REITS and the like.

About a year ago, SPG bottomed around $24 per share. It is currently at $77.

Where was this sort of article in the Times when the price of REITS was less than half the current price?

Think for yourself.

Unlike the Times, which perhaps in desperation has become a mouthpiece for the financial community in New York, with even Gretchen Morgenson accepting the "need" for all the bailouts, most bloggers are unconflicted.
And their advice is at worst worth what you pay for it.

Copyright (C) Long Lake LLC 2010

Friday, February 19, 2010

Fannie and Freddie: A Review

Peter Wallison has a nice review of the possible future for Fannie Mae and Freddie Mac. A prior piece of his from 2005 ended as follows (discussing possible Congressional legislation):

The Critical Final Step

After years of trimming around the edges of the GSE problem, Congress--with the help of Chairman Alan Greenspan--has finally come to the nub of the issue. If Congress can bring itself to overcome the furious political opposition of the GSEs and their supporters, it will direct the new GSE regulator to reduce the size of Fannie's and Freddie's portfolios and endorse a workable standard by which to measure the proper size of the smaller portfolios that result. This will solve, finally, the problem of two entities using their implicit government backing to control the residential mortgage market, which creates massive risks for the taxpayers and the economy in general.

If Congress cannot take this essential step, however, no amount of additional authority--given to a purported "world class regulator"--will significantly change the course of events. Fannie and Freddie will continue to grow, and one day--as Alan Greenspan has predicted--there will be a massive default with huge losses to the taxpayers and systemic effects on the economy. We should be grateful that Congress finally has before it a serious proposal that is equal to the seriousness of the problem. But we should also worry about whether Congress can find within itself the political will necessary to see the task through to its logical conclusion.

Pretty good.

Here is a link to the PDF of his current writeup, titled The Dead Shall Be Raised: The Future of Fannie and Freddie.

It's a full-length write-up, but the abstract and conclusion may be sufficient for many readers. Here is the abstract:

The renewed interest in Fannie Mae and Freddie Mac is premature. They are currently the mainstays of the U.S. housing market--more important now than they were before being placed in a government conservatorship in September 2008. Many observers do not believe the two government-sponsored enterprises (GSEs) can survive the immense losses they will cause taxpayers, but this is far from true. For Fannie and Freddie to be eliminated, a new mortgage-financing system must take their place, but there is not even a hint of a replacement on the horizon. Once the housing market recovers, the GSEs will still be the only game in town, and supporting them will continue to be the course of least resistance for Congress. Moreover, it will not be easy to implement any of the alternatives to reestablishing Fannie and Freddie as GSEs. Nationalizing or reorganizing them as public utilities would both have significant drawbacks, while privatizing the GSEs--the most sensible approach--would require a major change in public attitudes about securitization. Sadly, in the absence of viable alternatives, their restoration as GSEs seems the most likely outcome.

When talking heads comment on debt-to-GDP ratios and similar metrics, they are often shilling for their own interests. Not only do they generally ignore unfunded liabilities such as Social Security, they assign a present value of zero to this sort of GSE obligation.

The U. S. once had a Federal Government that was serious about financial responsibility. Those days are long gone. One way or another, however, bookkeepers and accountants have their day. The road down which cans get kicked is not smooth, straight and downhill forever.

Copyright (C) Long Lake LLC 2010

Fed Raises Both the Discount Rate and Suspicions of Market Manipulation

Why did the Federal Reserve wait till the stock market was closed the day before an options expiration Friday to announce a surprise inter-meeting rise in the mostly irrelevant discount rate?

It know that the Nikkei would sell off (down 2%), as would gold, and that the dollar would strengthen.

The Fed has made a regular habit of surprise announcements during options expiration week.

Given its leading role as enabler of the wealth transfer from the people at large to the money manipulators at large financial companies, the Fed is increasingly raising suspicions that it is little more than completely in bed with those it is supposedly regulating.

Meanwhile, to the extent that we are in a sense back within more normal dynamics of tightening and easing cycles, perhaps more traditional investment rules apply. One of them is to own assets that are:

1. fairly valued
2. attracting support from new investors
3. rising in fundamental value.

In stock land, this typically means finding companies with improving earnings and stable to improving financial position, stock price outperformance vs. the averages, and reasonable valuation (pick your metric).

In bond land, this means finding yield that beats likely price increases adjusted for risk of default.

In the special case of gold, which is officially a form of monetary wealth and which is also an unofficial alternative "money" to huge numbers of people globally, the twin sell-offs after first the IMF announcement that it would sell the rest of its planned 400 ton sale and second this Fed announcement smacks of profit-taking/market manipulation.

Despite a great amount of slack all over the economy, prices are rising. The Fed is once again behind the curve.

Most financial assets are, EBR believes, toxic in the longer run because of the underlying mess that led to the collapse of the largest financial companies in the world in 2008. This was the financial community's Hurricane Katrina. New Orleans didn't come back. The difference now is that the Feds have doubled down on the same cheap money and cheap mortgages that helped create this mess.

Right now, both cash and gold look attractive, the former because it is due to appreciate after getting completely trashed the past few years, and the latter because the Fed is manifestly pro-inflation.

Copyright (C) Long Lake LLC 2010

Thursday, February 18, 2010

The Wall Street Shuffle Has Led to a Bull Market in Off-Price Retailing

Matt Taibbi is out with a simplified and entertaining view of the past couple of years' financial shenanigans in Wall Street's Bailout Hustle.

The truth is that Federal and Fed policy became one and the same: keep the most major companies solvent or at least pretending to be solvent. What did we the people get out of this? Massive shared economic pain.

Of course, these companies were enablers of the credit and housing bubble, and their owners, meaning shareholders and bondholders, by all logic, history and principles of fairness should have been wiped out if necessary before the public put up a penny, aside from honoring FDIC commitments and the like.

If following Lehman's collapse it was necessary to save Goldman Sachs from the same fate, a massive price could and should have been enacted.

Where is there an end of it?

Today we learned that even in approximately the 2nd quarter since the bottom of the industrial production cycle, Wal-Mart's sales per store shrank last quarter and came in below plan. Something is rotten here. Big Finance must shrink so the rest of the economy can grow.

As an aside, gold was initially down about 1% on the news that the IMF is selling more gold. This is non-news "news". For whatever reason(s), it is now up about 1%. Go figure. In any case, that's bull market action.
And while Wal-Mart continues to disappoint (I am always suspicious when retailers cease reporting same-store sales monthly and switch to quarterly, as WMT has done) operationally and its stock continues to churn, several deep discounters such as ROST, TJX and DLTR have much stronger charts and have recently had rising earnings estimates and improved operational results ahead of plan.

There is a bull market in deep discounters!

But when Wal-Mart does so poorly, times are bad.

Copyright (C) Long Lake LLC 2010

Wednesday, February 17, 2010

Comments on Treasuries: What's the Trend?

The accompanying graph is that of the continuous 7-10 year duration ETF with the ticker symbol IEF. Think of it as a proxy for the benchmark 10-year Treasury.
Now that the ECRI and David Rosenberg are agreed that the peak rate of expansion has already ended, historically this is a classic time for a rally in bond prices (and thus in the IEF) and a decline in rates.
Typically, the markets price in a cyclical reduction in governmental deficits as employment and the pace of business pick up and then positive surprises appear; and simultaneously, inflation actually diminishes as there is so much excess labor and machinery and other spare capacity that businesses and labor are both happy to just bring in net income as unexpected new business and new hiring appears.
On the chart, we have a well defined series of higher lows in price going back to 2007, following a double bottom in price in 2006 and then 2007.
Not shown are some ugly moving average charts.
Also, the charts on JPM and GS are looking toppy, and declines in financial stocks often correlate with declines in yields. Of course, we are at an extreme in short term rates and the Federal deficit is projected to be unusually large for some time to come, with many states hurting as well.
Going back to the chart above, one can envision that IEF is near a support level in price, bounded by a declining line between the peaks starting at the end of 2008. A break above that line could signal an upmove worth playing. Conversely, breaking support around 88 suggests a move to 85 as a first target.
If inflation really gets moving and the Fed stays easy, a meltup in rates is feared.
Unprecented times mean unprecedented possibilities.
Big Finance loves this. They have the best information, plus of course they help control what's to be.
Copyright (C) Long Lake LLC 2010

Tuesday, February 16, 2010

L. A. Area Economist Sees Evidence of Retail Pickup in Business

The L. A. Times is reporting that L.A. and Long Beach ports see 1.6% gain in cargo traffic.

The gains are modest and volumes are far below peak years, but what I found most interesting was the end of the article:

John Husing, an Inland Empire economist who tracks the effect of international trade on one of the nation's biggest warehouse and distribution networks in San Bernardino and Riverside counties, has a home that overlooks San Timoteo Canyon, one of the state's most important historic transportation routes.

Stagecoaches used San Timoteo Canyon to get in and out of Southern California, Husing said. It was also the route used by the old Southern Pacific rail line. Now, the line is owned by Union Pacific.

During the worst months of the recession, Husing said, "there were hardly any freight trains. This month, the number seems to have tripled."

Husing said it was a sign that retailers were finally rebuilding their product inventories after letting them drop to very low levels in late 2009.

"We are beginning to see a definite pickup," he said. "These are some of the signals you always see when the U.S. is beginning to come out of a recession."

The parts of the economy farthest from the credit cycle, such as medical, tech and basic clothing, were always fated to rebound first.

Copyright (C) Long Lake LLC 2010

Hard to Believe No One Bothered to Send Bills From Miami's Largest Employer

Mish has a post out about huge layoffs due to a financial shortfall in my home region of Miami, FL. I looked deeper because it's so close to home and medical and found that the Jackson Health System Begins Layoffs:

MIAMI -- As part of a massive restructuring and cost-cutting plan, 22 administrators have been laid off from Jackson Health System.

"Any further layoffs will follow contractual obligations regarding layoff notification to the respective unions," wrote CEO Dr, Eneida Roldan in a statement Friday.

Union officials representing nurses and health care providers are concerned workers will bear the brunt of the institution's recovery plan.

“That’s totally unfair for the employees,” said one of Jackson’s registered nurses, who asked to remain anonymous. “We have to see and wait; hopefully they will review and make changes from the top.”

Earlier this month, members of the Public Health Trust, the hospital system’s governing board, were shocked to learn that Jackson is almost a quarter-billion dollars in the red, far worse than expected, and getting deeper by the day.

A significant factor is that the hospital failed to collect on almost three-fourths of its bills last year.

"One of the things that we've been suffering is conversion of our IT systems and information systems, which is what you have seen as part of the issue that's been coming from 2007 with our accounts receivable," Roldan said.

You bet this is unfair. It smells worse than just unfair.

A giant financial enterprise- the largest employer in South Florida-- is not supposed to have chronic massive ongoing revenue shortfalls because it doesn't bother sending a bill to an insurer (mostly Medicaid and Medicare at Jackson) and then "shock" the board. More likely there's corruption here. It's the Miami way. Certainly the global looting by the banksters, which continues, was corrupt though largely legal (probably). At the very least there is dereliction of duty here. What more? Perhaps a shrunken Miami Herald will think it can sell a few more papers if it investigates.

Time will tell.

The many disasters that are befalling this country don't "just happen". People make them happen.

Copyright (C) Long Lake LLC 2010

Even the Tough Talkers on the Fed Are Inflationists

In reporting Fed Governor (Kansas City Fed) Thomas Hoenig's speech today, restates the obvious: Hoenig Says Fed’s Objectives Threatened by U.S. Debt.

Well, duh!

“It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington. . . .

Hoenig criticized a comment published last week from Olivier Blanchard, the International Monetary Fund’s chief economist, that central banks should increase their targets for inflation.

“While this may sound like a reasonable theory from a credible economist, my concern is that it rationalizes solutions to short-term problems that too often take an economy down the wrong path,” Hoenig said.

Governor Hoenig believes in a slower rate of debasement of the currency than some, such as Drs. Blanchard or Krugman, that's all.

But it's all a matter of degree; how best to shear the sheep(le). Dr. Hoenig is just less of a money-printer than is Dr. Blanchard. But as the title of the article suggests, the Fed has no choice, like it or not, but to cooperate in whatever deficit financing the powers that be decree. If money printing AKA quantitative easing is required, Dr. Hoenig is with the program.

Meanwhile, gold went from strength to strength today, though at the end of the day, the retail vehicle GTU mildly outperformed GLD even though GTU is at a generous premium to NAV of 7.5% and thus reflects small investor optimism. More importantly, gold has been more consistent than stocks during this period of credit shenanigans. Closing prices from the ends of 2007, 2008 and 2009 and then today's close for GLD are (in USD):

82.46, 86.52, 107.31, 109.66.

For the SPY ETF that tracks the S&P 500, the same numbers are:

146.21, 88.97, 111.44, 109.74.

Stocks, which should be stabilized via dividends and being able to roll with inflation/deflation, have been far more volatile than gold, although gold scares the average investor more.

The debt monster is coming to eat us up.

If the Fed stopped enabling the Feds, they couldn't run giant deficits without end.

Meanwhile, Gallup continues to show essentially no job creation that is visible to average workers--in the 26th month since the official beginning of the Great Recession/depression.

Deficits have ceased to stimulate. Polls show that the public "gets it". Does the Fed?

I think not.

Interim rallies associated with money printing and post-depression natural rebounds, it will take some really good fortune such as an end to foreign wars and some hot new truly useful technologies (cheap distributable green energy sources, etc.) to fundamentally help matters heal here. We can hope for the best while dealing with that that is.

Copyright (C) Long Lake LLC 2010

Gold and Metals Moving Technically

One might think that with the EU kicking the Greek can down the road till next month and the Euro trading a bit stronger against the USD, that gold would not be rallying. But it is, on top of a rise in Presidents' Day trading. It is impressive that on a percentage basis, it is up almost as much as its more volatile friend silver today, and a good deal more than the stock market averages. Given increasing evidence that China could be on the verge of a bursting credit and property bubble, and given prior evidence of massive speculation in base metals by individual Chinese, all non-monetary metals-- which means all metals except gold--could be at significant risk for price declines without warning.

Meanwhile, here is a chart from the technician Clive Maund (, showing his analysis of gold. As I write this, Kitco reports spot gold is about $1115 per ounce. A close above here and then a close above $1120 would suggest a breakout.
Longer-term charts of the GLD ETF suggest that since the 50-day smoothed moving average of GLD has turned downward (though remaining well above the 200 day sma), some price churning is likely in the months ahead, with my view that the addiction of governments to unsound credit creation implies an upward bias to the gold price.
Also supporting churning rather than a brisk breakout to new highs is the proliferation of ads for gold on TV.
Obviously there is inventory and profit margins.
Nonetheless, unlike the Internet stock scam of a decade ago, "they" can't create new gold the way they created stock offerings. Despite all the creation of new stock supply, the NASDAQ Composite rose almost fifteen times in one decade between the 1990 recession low of 344 to the March 2000 bubble high of about 5100.
From its 1999 and 2001 double bottom a bit above $250 per ounce, gold is up about 4 1/2 times. Even if gold were to double quickly, it would still be underperforming the NAZ bubble.

Not that I am either predicting a gold bubble or advocating that one invest or speculate that one will form.
Right now, it is easy to see GLD bouncing to the top end of the $107-113 range suggested 2+ months ago, when it looked toppy at $119 as was mentioned in this blog in real time. Should that occur, selling covered calls on GLD for the non-core part of my gold holdings may be attractive.
But that commentary jumps the gun quite a bit. On a closing basis, gold remains in a correction and for all we know is in for another almost 3 decades before it gets back to its recent peak price.
Copyright (C) Long Lake LLC 2010

Sunday, February 14, 2010

Long Term Perspective on Gold

Here are charts of gold, platinum and palladium (the "poor man's) platinum from 1960 or 1968 to the late 1990s.
All have increased in price roughly 10 times since 1976.
This is a 7.0% compound rate.
Gold was $20 per ounce 100 years ago. That is a 4.1% compound growth rate. Of course, there was as much deflation as inflation until FDR, about 75 years ago.
In the last 70 years, gold has increased 5.0% per year in price.
Thus the rate of price increase of gold and other precious and semi-precious metals has accelerated.
These prices have increased over the long term faster than agricultural prices. This likely reflects the depletion of higher-grade ores that are easier to mine, along with environmental restrictions. In the case of platinum and palladium, increased use in catalytic converters in the auto industry has increased the market lately.
If governments continue to pursue strategies of bailing out failing companies, especially financial gambling companies, by issuing more debt rather than a more straightforward strategy of paying down debts, why should we not assume that a body in motion will stay in motion, and that the acceleration upward of gold prices will continue until they either get so high that they fall of their own weight (NASDAQ 2000) and/or concerted effort topples them (Volckerism)?
For a technical update on gold, please consider Trader's Narrative recent posts, both the linked-to one and the one immediately below it. I take that analysis as generally bullish, especially considering that the blogger focused on the downside risks to gold rather than the high upside price targets one would get from joining the successively higher price spikes together, and also considering that the latter (earlier) post disses a writer named Ken Kurson as being a perfect contrarian indicator. I have reviewed the evidence presented for that and strongly disagree. The examples cited look as though he has a fine enough track record. So, overall, I consider gold to be reasonably valued relative to the financial alternatives but with the same sort of bullishly-configured chart that the NAZ had in the 1990s.
Copyright (C) Long Lake LLC 2010

Saturday, February 13, 2010

Does LBO Now Stand For Lyndon Baines Obama?

Viet Nam and Afghanistan are merging in the eyes of many savvy obserers. The U. S. (sorry, I mean NATO) operation in Marjah, Afghanistan involves 7500 people attacking (plus 7500 supporting the attack) a town of perhaps 50,000 that allegedly contain 500 or so Taliban fighters. The Taliban are said to normally operate openly and are welcomed in this town that could kick them out in an instant if they preferred Karzai/Kabul rule--but they don't.

Here's a NATO point of view from the above-linked article, if you can provide translation from the English:

"We've caught the insurgents on the hoof, and they're completely dislocated," he said in Lashkar Gah, the capital of Helmand province, where Marjah is located.

Previously, though, the article pointed out:

So far, the troops have encountered only hit-and-run resistance from Taliban fighters, who have been taking potshots from compounds before moving out as the allied troops returned fire.

No one doubts that thousands of heavily armed, well-supported Western fighters can secure a dusty town square in Afghanistan. But the U. S. never lost a battle in Viet Nam, either. Militarily, we won the Tet offensive in 1968, but it killed LBJ politically. We eventually even "won" Khe Sanh.

We only lost the war, despite never losing a battle. Kind of makes one think, yes?

For an impassioned argument on the specific point of Afghanistan as Viet Nam redux, please consider Obama's Indecent Interval; Despite the U.S. president's pleas to the contrary, the war in Afghanistan looks more like Vietnam than ever.

For a more micro report, the WSJ is running New Battles Test U.S. Strategy in Afghanistan, which has the following paragraph:

Capt. Duke Reim, commander of the American unit responsible for Pashmul, estimates that about 95% of the locals are Taliban or aid the militants. District Gov. Niyaz Mohammad Serhadi agrees. "People here are on the side of the insurgency and have no trust in the government," he says. "Insurgents are in their villages 24 hours."

There is much more in this "must-read" news report.

You may also consider A London Fog on Afghanistan, which concludes:

U.S. strategy in Afghanistan has become almost bewilderingly self-destructive. The White House has constantly slapped Hamid Karzai in public, demanding that he make reforms that would be difficult at the best of times, while performing an end run around him that diminishes his standing even further.

At this rate, when it withdraws, Washington may leave nothing behind in Afghanistan but warring factions -- a mess not unlike the one that precipitated the Taliban's rise to power in the first place.

Losing or inconclusive wars are Bad Things. Barack Obama is pursuing a similar guns and butter policy as Johnson tried, though the economy is vastly more stressed now than when Johnson surged in Viet Nam in 1965.

Afghanistan is a constant and increasing drain of dollars and real resources out of this country, where they could sorely be used. Financial markets will reflect this sooner or later.

Copyright (C) Long Lake LLC 2010

What The Who Have to Do with the Federal Budget and Cap and Trade

The administration's next-year budget includes the assumption that revenues from the cap-and-trade bill will pad the Federal coffers. Yet as the snowiest winter in Washington's history drags on, the former insurgent theory of antropogenic global warming (AGW) is now burdened by being the orthodoxy. It is now prey to criticisms that in its younger days it could hurl at Big Oil and the like.

Most readers are familiar with the case of the U. of East Anglia (UEA) in Britain, a hotbed of research and centralized data collection for AGW. Internal documents were leaked/copied several months ago that embarrassed various researchers, and Dr. Phil Jones has taken a leave of absence from his role as head AGW-er at the UEA. The university has seen fit to appoint a board of inquiry, headed by an apparently neutral Scot named Muir Russell. The Telegraph has published a column that implicitly questions his neutrality and explicitly points out why one member of the review team has already resigned, in Climategate: the official cover-up continues:

1. The inquiry has not even begun and already it has told its first blatant lie – seen here on its official website.

Do any of the Review team members have a predetermined view on climate change and climate science?
No. Members of the research team come from a variety of scientific backgrounds. They were selected on the basis they have no prejudicial interest in climate change and climate science and for the contribution they can make to the issues the Review is looking at.

DoctoRx here. It turns out that the editor of Nature, Dr. Philip Campbell, is an ardent AGW-er, and was forced to resign less than 24 hours after the composition of the review team was announced.

But there's more. From the column:

But are we to feel any more confident about the alleged neutrality of another of Sir Muir’s appointments, Professor Geoffrey Boulton?

Bishop Hill certainly doesn’t think so. He notes that Professor Boulton….

-spent 18 years at the school of Environmental Sciences at the University of East Anglia
-works in an office almost next door to a member of the Hockey Team
-says the argument over climate change is over
-tours the country lecturing on the dangers of climate change
-believes the Himalayan glaciers will be gone by 2050
-signed up to a statement supporting the consensus in the wake of Climategate, which spoke of scientists adhering to the highest standards of integrity
-could fairly be described as a global warming doommonger
-is quite happy to discuss “denial” in the context of the climate debate.

You wonder, if Sir Muir really is that determined to keep his inquiry totally unbiased, independent, above-board and scrupulously neutral why he just doesn’t go the whole hog and appoint Al Gore, James Hansen and Rajendra Pachauri. I doubt the conclusions they’d reach would be any different.

So much for an inquiry we can believe in!

Given the obvious arrogance of the now-entrenched interests on the side of the AGW hypothesis, the severity of our economic downturn, and the fact that cap-and-trade benefits the financial community and has already been a source of a major scam or two in Europe, the chance that the Feds see any revenue from a bill that stalled in a Senate when there were 60 Democratic caucus members appears small to me. What does Barack Obama know that the rest of us don't?

Regarding cap and trade and the Federal budget, my strong suspicion is that there is a lot of hope there, and that things had better change fast for their assumptions to be valid.

Financial markets are fickle. The government is enjoying record-low borrowing costs. What happens if the speculators leave the small fry such as Greece and focus on big fry such as first the U. K. and then the U. S.?

The U. S. government is borrowing most of its money short term. This worked out poorly for Bear Stearns and Lehman Brothers, as well as for Washington Mutual etc.

If the government really wants to run massive deficits, it should do so by locking in the money with long-term financing.

And in any case, using unrealistic assumptions about revenues from a cap/trade bill is irresponsible.

It's past time for the stock- and bond-holders of Big Finance to realize their losses. Having just seen The Who at the Super Bowl, the U. S. taxpayer is tired of being fooled again and again and again.

Copyright (C) Long Lake LLC 2010

Friday, February 12, 2010

No New Taxes? Read the President's Polysyllabic Lips

Now that Federal spending has risen to a post-WW II high of about 25% of GDP, the President has changed his mind. We sort of knew it was coming. Whether the cause was bond market pressure may not matter much, but the powers that be are consolidating the statism that this blog has pointed to as an ongoing trend in the U. S. that began with the bailouts in 2008.

In 2008, candidate/Senator Obama said:

"No family making less than $250,000 will see any form of tax increase."

Now he has dumped religion and certitude for faithlessness:

President Barack Obama said he is “agnostic” about raising taxes on households making less than $250,000 as part of a broad effort to rein in the budget deficit.

Obama, in a Feb. 9 Oval Office interview, said that a presidential commission on the budget needs to consider all options for reducing the deficit, including tax increases and cuts in spending on entitlement programs such as Social Security and Medicare.

“The whole point of it is to make sure that all ideas are on the table,” the president said in the interview with Bloomberg BusinessWeek, which will appear on newsstands Friday. “So what I want to do is to be completely agnostic, in terms of solutions.”

The previous Democratic president swept into office in 1992 in good measure by pounding home the message that his predecessor lied when he kicked off his 1988 campaign with the famous "Read my lips: No new taxes" pledge.

Depublican or Remocrat, it hardly matters. Money and power are inextricably linked.

Washington wants them both.

As an aside, it's interesting that this president, who wrote about finding Christ in his memoirs, used the high-faluting and unpopular word "agnostic" rather than a more common term such as "open-minded". I suspect this was not pre-planned by his handlers and pollsters, but is rather the natural way of speaking for this intellectual, academically trained attorney. I also believe that this way of thinking and speaking will work against him in public opinion. When Lee Atwater made the aristocratic George Herbert Walker Bush look like a man of the people, eating pork rinds and hosting barbecues, it was hokey but effective. A president who, like me, likes an expensive variety of lettuce that most people can't afford (arugula) may be well advised to keep his image more toward the Atwater-created image of Bush the first. Polysyllabism and intellectualism are de rigeur at elite law schools, but the first rule of effective communication is: Keep It Simple.

In any case, the larger Washington gets relative to the economy, the lower the appropriate price-earnings ratio will be. The lords giveth recently, but they also taketh away.

Copyright (C) Long Lake LLC 2010

India Shooting Itself in Foot, Restricts Visas to High Tech Expatriate Talent

Worms are turning all over the world. is running a story that explains: India’s Visa Rules ‘Out of Line’ for Companies Seeking Expats:

T.V. Mohandas Pai says he wants to hire more expatriates for Infosys Technologies Ltd., India’s second-largest software exporter, as the global economic recovery boosts sales. Stricter visa rules prompted by unskilled Chinese workers are holding him back.

Infosys has about 20 foreign workers and needs “many more” to help it expand abroad, said Pai, who runs the Bangalore-based company’s human resources department. Companies in Asia’s third-biggest economy are using annual growth averaging 8.7 percent in fiscal years 2006-2009 to reverse a decades-long “brain drain” to the U.S. and Europe.

The government toughened regulations for foreign workers last year after discovering that about 40,000 Chinese building power plants used business visas instead of employment visas, skirting taxes and taking jobs from locals. The crackdown restricted employment visas to skilled people in senior jobs and limited foreigners to 1 percent of a project’s workforce.

“We need to get expats to help us understand the complexity of businesses,” Pai said. “But instead of helping, the government has tightened the visa rules. The problem in India is policymakers are totally out of line with reality.”

Just in case you thought that only the U. S. did things that seem dumb.

Copyright (C) Long Lake LLC 2010

Thursday, February 11, 2010

California Controller Ignores Overspending, Sales Tax Rate Increase While Accentuating the Positive

In a press release titled Controller Releases January 2010 Cash Update, Democratic Controller John Chiang refers the reader to the more detailed "summary analysis" linked to at the bottom of the release. This is a nicely produced, informative document which contains the following:

The State’s General Fund revenues improved again in
January 2010. Compared to estimates found in the 2010-11
Governor’s Budget, total General Fund revenues were $1.28
billion higher (18.6%) than expected. Personal income tax
revenues were $930 million better (17.2%) than anticipated.
Corporate tax revenues came in above projections by $189
million (73.4%), and sales taxes were also up by $157
million (17.5%).

Compared to January 2009, General Fund revenue in
January 2010 was up $452 million (5.9%). The total for the
three largest taxes was above 2009 levels by $255 million
(3.4%). Corporate taxes were up by $134 million (42.8%).
Sales taxes were $469 million higher (79.8%), and personal
income taxes came in $348 million below (-5.2%) last

Sounds hopeful, correct? The above positive tone continues throughout the document in what may unfortunately just be more a puff piece than anything else, as I will get to shortly. For example, on page 2, large right-hand box, of this document puts forth the Obama administration's (and MSM's) hopeful prognosis for the economy (no quote, and no argument here for or against a positive outlook for the economy).

Only on page 4 does the bad news get a brief mention. This involves a deterioration in projected cash balances despite the above good news. Why is this so, if revenues were above plan? Well, so were costs:

Local assistance payments were $525 million
higher (1.2%) than the 2010-11 Governor’s Budget
projected, and State operations payments were
also up by $156 million above (1.2%).

Why were State operations a large 1.2% above projections? I would not know, but this smells like mismanagement to me.

The net effect is that on page 4, Mr. Chiang finally comes clean: the state had a worse cash balance at the end of January than projected -- a massive negative $24.1 billion negative cash balance -- $126 million below projections.

Basically, per Table 1, while General Fund revenue was $1.465 B over projections, something called "non-revenue" was $1.00 B below projections. This line item was explained as comprising transfers into the General Fund from other State funds. Why this was so far below projections was unexplained; one wonders if perhaps the other State funds have been sucked dry already?

Amongst the smaller details, one line item stands out. Mr. Chiang says:

Year-to-date collections for the
three major taxes were $1.66
billion below (-3.7%) last year at
this time. However, retail sales
taxes were up $1.21 billion
(9.4%) from last year’s total at
the end of January.

Sounds OK, but . . .

He neglects to point out that the State base sales tax rose on April 1, 2009 from 7.25% to 8.25%. This is about a 14% increase in rate. An increase in sales tax receipts of only 9.4% sounds like a significant shrinkage in real sales volume, both in nominal dollars and assuming mild inflation, an even larger shrinkage in actual transactions.

Full disclosure: I linked to the above through a Calculated Risk post, in which CR called the Chiang reports "good budget news". CR is an immensely valuable blogger, with generally very insightful points of view. In this specific case, I would humbly tend to differ. A medical analogy to the Chiang summary: an overweight patient has been put on a calorie restriction and exercise regimen. She (let us say) points out that she exercised above plan last month, thus burning off more calories than expected. Yet her weight rose. Why? She ate even further above plan than she exercised. This is what Mr. Chiang reluctantly tells us, but well "below the fold".

Until California gets spending under control, it will not have good budget news, in my opinion. Note that the rise in State operations above projections of $156 million exceeds the worsening in the cash balance. If California had actually come in below expectations on spending, then it would have something to crow about.

Why was there no discussion of the overspending?

In California, the controller's office is a partisan elected office.

Per Wikipedia, John Chiang is a lawyer with an undergraduate finance degree. He has worked for Gray Davis (who was controller before he became governor) and for Barbara Boxer. His summary of California's finance as described above appears to be the work of a politician more interested in spin/damage control than in truly holding the rest of the state government's feet to the fire till good fiscal health is restored.

Perhaps California should consider changing the position of controller to be a non-elective, non-partisan job, with a requirement that the controller possess an advanced degree in business or finance. In that situation, one would hope that the public would not get official publications that accentuate the positive but instead would receive the truth/whole truth/nothing but the truth in a way that serves the general good rather than the interests of politicians.

Copyright (C) Long Lake LLC 2010

Wednesday, February 10, 2010

Gold Goes Nowhere. Literally

Actually, the thing about gold is that, unlike oil or even platinum, it mostly goes nowhere. It's more boring than watching grass grow, because grass actually grows. The classical reason to own gold is simply to preserve purchasing power. Gold falls out of favor when capital can reliably be used to create additional purchasing power. The easy time to do that was when Volcker made interest rates soar well above declining inflation. Who needed gold then? No one, and a huge bear market in gold ensued, with massive loss of purchasing power from peak prices even through to today's nominal higher prices. Over historical periods of time, gold prices have tracked general inflation levels.

This is the core argument for long-term buy and hold gold investing.

Now, to trading of gold.

Newcomers to gold investing/speculating are feeling glum and worried. My new most favorite precious metals technician, Clive Maund (, with interesting recent free material on the site), is quite bearish short-term on the precious metals, with gold the least bad amongst them in his view; and he makes a living recommending such things as small gold mining stocks. Optimism on the anti-gold asset (the dollar) is at a 15-month high, per reports today in a poll of its users in the Bloomberg Professional Global Confidence Index.

Meanwhile, the headlines at the WSJ and other business publications are reporting, perhaps with more than a touch of schadenfreude, that the king of the subprime shorts, John Paulson, has mistimed the gold market significantly. Here is one of several articles on the subject: John Paulson Gold Fund Said to Tumble 14% in Its First Month. Mr. Paulson has $250 million of his own money in the fund. Minimum investment duration is 3 years. The fund is, I believe, the single largest holder of the ETF known as "GLD".

I too want to be optimistic on Larry Kudlow's "King Dollar" and thus bearish on or simply uninterested in gold, which was my attitude from 1980 to 2001. Everything changed in that regard after 9/11/2001.

We learned that the bin Laden goal was economic ruin of the U. S. He has not failed.

We all want to pinch ourselves and simply choose not to believe that our rich country has created a fiscal nightmare. Out of plenty has come a California using scrip to pay its bills. Phony accounting rules in Big Finance and in D. C. We are given the Big Lie that the Federal deficit is only 60% of GDP, and won't hit a Greece-like level for 10 years or so. Ha! Why don't they try putting Fannie/Freddie on budget, plus a realistic estimate of the coming FDIC and FHA bailouts? (Plus smaller stuff such as unrealized losses on TARP etc.)

And let us recall that all workers get a Federal statement saying what their Social Security benefits will be. Where is the funding for those benefits?

Dollar optimism?

No. It's simply Euro and yen pessimism.

For now, the dollar may be less flawed than the above fiatsco currencies. But gold just sits there. It has no unfunded liabilities. Its supply cannot be gunned by a Fed that wants to reward its buddies who own the bonds of Big Finance companies. Gold rose to the level of the Dow, not the current level of the S&P 500, during the reign of the last Democratic president whose focus was jobs, jobs and jobs and who had an overtly easy-money Fed chairman (Jimmy Carter, till he was forced to install Volcker). Currently gold's price is closely tracking that of the S&P 500.

With the political imperative in the White House and Capitol Hill to retain power via money printing and pushing for economic growth, we can assume that just as in 1933-6 and 1977-79, price inflation is desired if it will bring higher employment levels (so the thinking goes, that it).

Deflationists such as Gary Shilling have great points, and Treasuries can rise in price even as inflation heads from around 1% to 3%, but until the Fed actually gets Volcker-like, I suspect that the articles about troubles in Paulson gold-fund-land are more likely than not signaling a bottoming action in gold prices. You should however worry if a year or three from now you are long gold and you start seeing headlines about what a genius Mr. Paulson has again been proven to be because his fund is up so much.

Most likely Mr. Paulson is trying to preserve his purchasing power via the anti-dollar, in the true hedgie spirit.

It is at core a conservative strategy. However, the Paulson fund buys stocks of producing companies as well as GLD. I am yet more conservative. I believe in going only for refined gold, 0.9999 fine etc., and not trusting that there is any value to gold trapped underground in ore form. That gold may go nowhere and may never be able to profitably extracted, and the company owning the mine may still have an overpriced stock even if it can remove the gold profitably.

With all the above said, gold is being advertised heavily on bubblevision, so there are clearly some cross-currents that to a skeptic raise the question of whether it is "too" popular right now.

Given a 15-month high in dollar optimism and a 15% sell-off in gold in 2 months to a level just above its 2008 highs, and a price only 25% above its prior cycle high price 30 years and one month ago, the bubblevision ads are not enough to scare me into selling. Gold stocks are not cocktail party talk, a better warning sign of a major top.

Along with John Paulson, Paul Tudor Jones and David Einhorn, I shall sit with a modest portion of my financial assets with the inert perpetually shiny metal and root for all the other assets to do so well that the gold does poorly.

Copyright (C) Long Lake LLC 2010