Friday, July 30, 2010

"The Numbers Are Not Frightening." Really?

Bloomberg.com reports IMF Says U.S. Financial System May Need $76 Billion in Capital :

The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.

Agreed. So far, not frightening. But what about this?

The IMF said about $1.4 trillion of commercial real estate loans will mature from 2010 to 2014, almost half of which are already “seriously delinquent,” with payments 90 days or more past due, or “underwater,” with loan values exceeding property values.

For some reason, that does appear at least a bit frightening. The article also says:

The IMF stopped short of recommending recapitalizing the banks it studied in the report. Instead, it urged regulators to monitor conditions, especially for smaller institutions with less market access.

Given the immense influence the U. S. has on the IMF, one can only wonder how severely an uninfluential country in similar condition would have been handled.
Sometimes being too big to be criticized is not good.

$700 Billion in delinquent commercial real estate loans frightens me. Of course, residential real estate is a much larger market. What unrealized, unaccounted-for losses in that field reside on various balance sheets?

Copyright (C) Long Lake LLC 20`0

Wednesday, July 28, 2010

Continued Bad News from Small Business

Rasmussen Reports reports that its Discover(R) Small Business Watch survey for July has been completed and is generally worse than June:

Small business confidence fell for the second month in July as a higher percentage of small business owners rated the current economy as poor and see it only getting worse, according to the Discover Small Business Watch. The index dropped to 83 in July from 86.1 in June. It has been below 83 only once since the beginning of 2010.. .

What I found most striking in the report was:

Record Number of Small Business Owners Taking Home Less Pay

•73 percent of small business owners surveyed also report current economic conditions have caused them to take home less money in July, up from 69 percent in July 2009 and 55 percent in February 2008, when the Watch first posed this question.


In order to finance foreign war(s), expand social spending, and fight for re-election, is the government tempted to print money, or shall I call it "money"?

In that vein, the decade-long trend toward historical norms of the Dow or S&P 500/gold ratio has had a significant rebalancing with the simultaneous moves in opposite directions of stocks vs. gold. Of course there are no guarantees that past is prologue, but when a major asset class goes into new high territory after a prolonged bear market/consolidation, there is strong support (buying interest) if the price falls toward to to the prior trading range, but there is generally limited selling interest if the price moves to the all-time high.

Both gold and Treasuries continue in their long-term bull market channels. Of the two, the Treasury bull is much older and with 2-year Treasuries and below at record low yields despite positive price inflation data (see the Rasmussen/Discover survey linked to above, for example), I believe that the Treasury market is more likely closer to the end of its bull than gold.

Meanwhile, economic activity will bounce around, but such factors as foreign military action, increased government involvement in the economy, and demographics continue to act as depressants to the level of productive activity.

Copyright (C) Long Lake LLC 2010

Tuesday, July 27, 2010

The "Austerity" Meme Proliferates

In Four Rules to Remember in the Age of Austerity, Matthew Lynn perpetuates the myth that any sort of general austerity is in, or known to be coming in, to existence outside of small countries such as Ireland. He writes on Bloomberg.com today as follows:

One thing has become clear during the sovereign-debt crisis: Governments everywhere are going to be cutting their spending savagely over the next five years.

They may do it under the direction of the International Monetary Fund, like Greece. Or voluntarily, like the U.K. and Germany.


How real is this "savage" spending cut going to be for Britain, for example?

From the horse's mouth, http://www.ukpublicspending.co.uk/.

(Please click on the link, as it is mostly graphs and charts rather than text to copy.)

As you can see, projected total governmental spending is slated to rise from 576 B to 681 B pounds in only 3 years. Net public debt will be nearly doubling in those 3 years.

We shall see what governments do in Britain. The projections for a huge 3-year expenditure rise from 2008-11, far outpacing alleged price inflation rates, suggest that in reality, there will be no governmental austerity. Perhaps there will be little or no growth in total governmental spending for a brief period; only time will tell. There will be no savagery under currently-anticipated conditions.

A family earning $50,000 a year and spending $70,000/year that wants to avoid bankruptcy may cut spending by half to $35,000 per year. That's an example of austerity.

Because Big Government and Big Finance are currently joined at the hip in the U. K. and the U. S., the increasingly concentrated media, and especially most of the mainstream financial media, is engaged in a concerted effort to sell the ratification of the expansion of the state and the maintenance of the current price level to the public. Thus they will tell you that an obese government is engaging in austerity.

These are the same people who sold the public in the second half of the 1990s that a New Era in investing was underway.

People are better off focusing on facts and then drawing their own conclusions than listening to commentators who are paid by the vested interests whose interests are most likely not in your best interest.

One other point. Some in the media and blogosphere are conflating the school of economics founded by a man from Vienna (von Mises, "Austrian" economics) with "austerity", via the neologism "Austerians". This is about as fair and sensible as taking the prior President's last name and insulting him because of its scatological connotation. Calls for limited governmental involvement in money creation and society in general from various Austrian school economists have been consistently voiced for years. This (among other reasons) differentiates them from tactical converts to "austerity" who may be monetarists, neoclassical economists or any other school (or no school at all).

Copyright (C) Long Lake LLC 2010

China Follows U. S. in Rating Agency Shopping

From Bloomberg.com, Dagong Says China Ratings Miss Local Government Risks:

Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.

Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and “whoever gives them a better rating gets the business,” Guan Jianzhong, chairman of privately owned Dagong, one of China’s five official ratings agencies, said in a Bloomberg Television interview in Beijing yesterday. “This is very dangerous.”


We've seen this movie before . . .

Copyright (C) Long Lake LLC 2010

Monday, July 26, 2010

Distortions Galore

I was going to write a post about one data point or another that came out today, but Calculated Risk plus Bloomberg cover them all. The bottom line is that in past years, when one economic datum after another comes out weak--ranging from ECRI's WLI growth rate dropping below 10% (a level not even reached in the severe 1981-2 recession) or the various weak reports out of new home sales (record low sales), the Dallas Fed Manufacturing Index and the like, and the widespread skepticism that the European bank stress tests are useful, the stock market usually drops and Treasuries rally in price.

Not now. Perhaps the prospect of zero interest rates forever has gladdened the hearts of valuation algorithms amongst owners of capital.

The VIX has dropped to around 23. In turbulent economic times I have noticed that it averages roughly 25. In good, stable times it is in the teens. Thus the VIX hit a record low late in the last decade's bubble period.

It appears to me that when record low governmental interest rates are widespread and are dropping, this could only fail to be a bubble in government debt if price deflation were present--and this would be "good" deflation, associated with greater supply of goods and lower real costs of production.

This is how living standards improve rapidly.

The last time the U. S. had this sort of "good" price deflation was in the latter part of the 1800s.
But guess what: there was virtually no Federal debt then. There was no central bank. There was no involuntary unemployment. Gold was not an investment; it was money. Financial paper took the place of money but was recognized as not being money. Living standards soared and immigrants flowed without restriction into this country, the only requirement being passing a medical test for public health reasons.

Now, any deflation we have is the "bad" kind: price-cutting, such as of homes, due to overproduction. But we have "underproduction" of iPads due to component shortages (presumed temporary).

An example of "good" deflation that theoretically might occur would be the simultaneous discovery near New York City and Los Angeles of massive amounts of easily accessible fields of natural gas, sufficient to displace huge amounts of imported oil.

I'm not holding my breath for any such game-changing event, however.

What I do see is rampant overpricing of financial assets all over the place, this being a sign that too much "money" has been "printed". Yet the real economy is far less buoyant. Not only is this disconnect unhealthy, but since the money is circulating in New York and its printing supports the establishment in Washington, the result is that people look around themselves in their localities and see a distorted view of the real economy.

It's sort of like trying to see what the temperature is out on the farm by putting your thermometer inside a hothouse.

But the Federal Government is locked into a Japanese-style model in that its fiscal health waxes and wanes with the economy. When the economy is weak, Federal finances weaken. Normally, the "market" would make the increasingly leveraged borrower--the Feds-- pay an increasingly higher price to borrow. Inexplicably, as default chances rise, prices have been falling on said debt. Is this due to "crowding out", manipulation, or no other good investments being perceived available to typical bond investors?

If, for one reason or another, the U. S. is going Japanese (before perhaps defaulting), then the pattern in Japan provides a good template. That template includes huge undervaluation in stocks; and, gold has moved to a record high in yen terms over the years. If one lives in Japan and thus has had roughly stable consumer prices for years, then gold has quadrupled in yen terms.

Anyone who thinks that money printing/massive deficit spending associated with a zero interest rate policy exempts the pricing of tiny minority fractional ownership of corporations (aka stocks) from traditional valuation measures may want to study the Japanese financial experience.

Of course, the U. S. is not Japan, past need not be prologue, etc. Nonetheless, isn't there a saying or two about learning from history?

Copyright (C) Long Lake LLC 2010

Sunday, July 25, 2010

U. S. Involvement in the Afghanistan War Expands into Pakistan

Don't anyone look, but the Afghan War that NATO (i.e., the U. S.) is waging is spilling over into Pakistan with U. S. boots on the ground. From an editorial in the Nation online (a leading English language Pakistani newspaper) today:

America’s covert operation in Pakistan, through the ill-famed Blackwater and DynCorp surrogates and its own soldiers, is no secret from the world that is watching Washington’s game plan, the “war on terror”, unfolding in the region. The people of Pakistan, particularly of Islamabad and Lahore, have had the first-hand, bitter experience of their presence when they had to face the brutish behaviour of these armed men roaming around their towns. . .

It is time that Islamabad comprehended the fearful consequences of US intrusive policies that are threatening to weaken and destabilise the country. The unwise support we have been extending to its military and NATO forces in combating militancy has landed us in trouble. The US must listen to its own Congressmen and end its covert operation in Pakistan and read the writing on the wall in Afghanistan that is staring its armed forces in the face and beat a retreat. The will and doggedness of the Afghan resistance is putting the mightiest power on earth to shame!


So that's the Nation's editorial point of view. From its news reporting:

At least four people were killed and five others injured in a U.S. drone attack launched Sunday in South Waziristan. . .

Since August 2008, the U.S. air force launched an estimated 221 drone attacks in Pakistan's northwest tribal areas bordering Afghanistan, reportedly killing nearly 950 people while injuring hundreds of others.

The U.S. drone strikes are considered as a serious violation of Pakistan's territorial air space right and they are an important factor contributing to the anti-American sentiment prevailing across the country as most of the killed and injured in the drone attacks are reportedly innocent civilians.


The nearby picture is one the Nation generally shows when it reports on drone attacks.

Is the U. S. popular in Pakistan?

Pew looked into this recently, and found 68% percent of those polled in Pakistan viewed the U. S. unfavorably, as against 17% that gave a favorable rating. Pew also had this to say:

The U.S. also continues to face image challenges in predominantly Muslim nations. Roughly one year since Obama’s Cairo address, America’s image shows few signs of improving in the Muslim world, where opposition to key elements of U.S. foreign policy remains pervasive and many continue to perceive the U.S. as a potential military threat to their countries.

Meanwhile, while the expansion of the war from Viet Nam into Cambodia bestirred great protest, now the most we have is two powerless "maverick" Representatives (Ron Paul and Dennis Kucinich) protesting this expansion of the Afghan War into Pakistan, as has been widely reported, such as by AFP:

Two US lawmakers -- a Republican and a Democrat -- proposed a bill this week demanding the withdrawal of all US troops in Pakistan, where they are conducting covert operations against militants.

"We have known that US forces have been operating in secret inside the territories of Pakistan without congressional approval," Democratic Representative Dennis Kucinich said Friday, pointing to reports the United States was stepping up its presence there. . .

Kucinich said the covert operations were a "violation of the 1973 War Powers Resolution introduced after the Vietnam War that only allows the president to send US armed forces into military operations abroad if Congress approves the decision or if the United States is under a serious threat or attack."

"It is our constitutional responsibility as members of Congress to act," Kucinich added.


You can be certain that the House will ignore this line of argumentation. The war must go on, our leaders say (when they bother to talk to us about it).

As with the unending housing and other bailouts, Washington just perpetuates one mistake after another. There is no input from the public, no real debate, and no obvious point to policy after policy.

Of course Americans hope for the best, but given the ongoing depression in business activity and human costs, it is unclear why the wiser policy toward the region is not a more peaceful engagement that can over time win hearts and minds rather than hardening them.

Copyright (C) Long Lake LLC 2010

Saturday, July 24, 2010

Financial Media Drumbeat for Money-Printing CONtinues

That's not a typo in the title. Because there's a con game going on. It's the con that the threat is imminent deflation.

In his weekly Emailed commentary today, the well-known financial man John Mauldin differentiates between good and bad deflation. In the category of the latter, he quotes insufficient demand.

You know things are loony when an American can look around him, see the obesity epidemic, and with a straight literary face, cite insufficient demand!

Let's also see-- one vehicle per capita; 20 times as much oil used per capita as in India, etc.

Excess commercial real estate and by world standards double or triple as much residential real estate as is really needed.

And so on. Some insufficiency of demand.

What ties many financial people together in their wails that we need to fear collapsing prices is that they benefit from money printing. One reason for this is obvious: more money in the financial system means more assets under management. Another reason is subtler, and relates to Uncle Warren Buffett's parable of the Gotrocks family. In this story, a family with money keeps getting sold on making the management of their savings more and more complicated, with the only winners being the financial community. Thus, if the Government were to start paying off its debts, there would a simpler system, and thus less reason for the great unwashed to pay financial types fees to invest their money.

Mr. Mauldin is on the more conservative side of the spectrum, so his major point is to keep the Bush tax cuts. Presumably he will do well with that personally, and so will his clients. Others such as Nouriel Roubini always pound the drums for eternal depression, and their solution is greater government spending.

Neither of those camps address the overriding problem of creating a stable financial system. If society wants Sweden or wants Hong Kong, it can have either, but it can't have Swedish social benefits (plus war in Eastasia) with a Hong Kong-level of Federal income (14% of GDP at latest count). Continuing the giant deficits is great for financial types and keeps the Roubini Global Economics business thriving as well.

On the other side of the financial sea from debt-based finance and money printing is gold. The media is all over that one. Barron's is out today with the Abelson article titled A Contrarian's View of Gold.

The "contrarian" works not for some small contrarian enterprise in Nowheresville, but rather for the globe-girdling Bank Credit Analyst. No evidence in the article indicates why this gentleman is called a contrarian at all. The article goes so far as to point out that the negative view on gold that Mr. Berezin espouses is not contrarian at all. To wit:

. . .he gets some support from Barclays Capital's latest commodity forecasts, which sees gold averaging $1,195 an ounce this year, $1,180 next year, $1,010 in 2012 and $850 for "the long-term."

Oh, those wild-eyed crazies at Barclays! Always taking the non-consensus point of view (NOT).

Why is Mr. Berezin negative on gold? Because he expects:

1) An increase in real interest rates, which he feels are bound to rise as the global economy continues to recover.

2) A decline in inflation expectations. Disinflation, he notes, is "gold's archenemy" and, he believes, over the next few years, deflation is the biggest risk.


We should stop right here. What actually happened to real interest rates in the U. S. at least in the Ponzi boom of 2005-7/8 was that real interest rates dropped to zero as inflation surged to at least 5%. In fact, a sign that the boom was built on sand was in fact that the economy could not even tolerate truly restrictive interest rates, unlike the economy of 1980-2. So his idea that real interest rates will rise with a boom is unlikely, given tattered balance sheets all over. Re inflation expectations, well he's a better man than anyone else if he is suggesting you invest on what expectations will be. Predicting facts is hard enough; expectations are second derivative stuff.

He also sees:

. . . the greenback as "among the best houses in a bad neighborhood" that, over time, will strengthen against the euro and the yen, sparking a reassertion of the negative trend between bullion and the trade-weighted dollar index.

My view is different. It is in line with Bill Fleckenstein, and certain bloggers such as Econophile, who see money printing and stagflation as reasonably likely.

The powers that run America financially are great powers. They say that they will do everything they can to make sure that deflation does not take root here. With the lowest short term rates in America and globally in history and 3% Treasury rates despite massive supply, you can expect either a strong economy to put all the monetary stimulus waiting in reserve to start stimulating pricing power and/or more money printing to purchase more financial assets, some of which new money will filter out to the real economy.

What would really be bad for gold, as it was 30 years ago, would be true tight money policies, plus a revival of pro-entrepreneurial policies. Since these are not likely to be forthcoming from Washington any time soon, it makes sense to resist the growing media pressure from multiple sides of the economic-political spectrum that deflation is a serious threat and prepare for a resumption of something like 2003-7.

And to be aware that as in that era, the defining characteristic was a crash.

I suspect that another crash is coming. I just don't know when.

Copyright (C) Long Lake LLC 2010

Friday, July 23, 2010

A New Type of Death Cross


I have been waiting for this to occur. It is what I think of as a different kind of "death cross". In standard charting terminology, that is a cross of a short moving average from above to below a longer one. An example is a stock the 50 day moving average of which breaks below the 200 day moving average.

The accompany is from the Consumer Metrics website. Its "contraction watch" from today incorporates data through July 21.

They have identified growth contractions in 2006, 2008 and 2010 (green, red and blue lines respectively). As you see, the 2008 consumer recession as Consumer Metrics measures it (not the entire economy and not even the entire consumer economy) was receding at the duration at which their metrics are still declining.

You may visit their website for their parameters.

The first chart on their site suggests that their data leads the Bureau of Economic Analysis GDP data by a quarter or so. Whether any of this has predictive value for financial investing is unknown, but what my eye tells me looking at this chart is that there is a significant amount of economic weakness amongst the people of the United States, and that the "recovery" ended some time ago.

If only the powers that run up the bills in Washington would join the people in trying to delever rather than print and borrow money, as in the 1950s, a proper economic recovery would be more likely to occur.

Copyright (C) Long Lake LLC 2010

Ten Dollar Laptops Imminent?

I couldn't resist commenting on a "factoid" sort of report out of Reuters. It would appear that laptop computers are going to go the way of calculators.

When I was pre-med in the 1970s, calculators were banned from tests as they cost hundreds of dollars and thus few students could afford them. Here is the skinny on laptops:

India's Human Resource Development Minister Kapil Sibal this week unveiled the low-cost computing device that is designed for students, saying his department had started talks with global manufacturers to start mass production.

"We have reached a (developmental) stage that today, the motherboard, its chip, the processing, connectivity, all of them cumulatively cost around $35, including memory, display, everything," he told a news conference.

He said the touchscreen gadget was packed with Internet browsers, PDF reader and video conferencing facilities but its hardware was created with sufficient flexibility to incorporate new components according to user requirement.

Sibal said the Linux based computing device was expected to be introduced to higher education institutions from 2011 but the aim was to drop the price further to $20 and ultimately to $10.


As they say on the streets of Manhattan:

Ten dollar, ten dollar!?

Copyright (C) Long Lake LLC 2010

Thursday, July 22, 2010

Ponzis Resume

Just as the Ponzi housing finance schemes in the U. S. hardly missed a beat with FHA bellying up to the bar and Fannie and Freddie being made semi-official wards of the state, Ponzi auto finance is resuming, as reported by the LA Times:

General Motors Co. is getting back into the credit business, a move that will give its dealers more options to lease and finance car sales.

GM said Thursday that it would purchase AmeriCredit Corp. in an all-cash transaction valued at approximately $3.5 billion, or about $24.50 a share.

The acquisition gives GM what's known as a "captive finance unit" or lending division that allows it more flexibility to offer lease and finance deals. It would fill the role once played by GMAC; the automaker sold all but a minority interest of that company in 2006. . .

GM is already working with AmeriCredit to provide auto loans to customers with "non-prime" or poor credit ratings.


GMAC owned DiTech, one of the giant subprime housing finance entities. It is being resuscitated.

Now we have what we thought was European-style mixed economy stuff to complicate matters:

The automaker said it will continue to work with Ally Financial, the former GMAC finance company, for loans to customers with good credit and to provide inventory financing for dealers.

It would be both politically and financially untenable to sever the relationship with Ally to channel all of its financing business to AmeriCredit, said Kirk Ludtke, an analyst at CRT Capital Group in Stamford, Conn.

The federal government has approximately $57 billion of commitments -- including $17.9 billion of direct investment, $32 billion of federally insured consumer deposits and $7 billion of unsecured debt guarantees -- to Ally, he said.

"We continue to believe that the Obama administration is unlikely to allow either GM or Ally to pursue a strategy that would undermine the other," Ludtke said.


Statism is on the march. Anyone who continues to think that the U. S. still has a largely free market economy has another think coming. No less an authority on unfree markets than Hugo Chavez said after the shenanigans of the Bush administration in late 2008:

"Bush is to the left of me now. Comrade Bush announced he will buy shares in private banks."

Whether Senor Chavez was entirely accurate with that quote is not the point. The Federal government is almost everywhere now. Perhaps retail distribution of food and clothing remains free market-oriented; but with over 40 million Americans on food stamps and extensive welfare programs providing consumer "demand", even those bastions are indirectly socialized now.

Who knows, but today's strong up-move in stocks may owe more to hopes of zero interest rates forever than to anything else.

Under the aegis of Keynesianism, what is more certain than ZIRP is that money printing and government deficits will be used for political purposes in the U. S. indefinitely.

Gold has been a protection against that in the past. Is $1200 an ounce adequate protection? Since this is way up over one year ago, short term it may well be. In the long run . . . well, David Rosenberg stated recently that gold accounts for 0.05%of the financial assets of Americans.

Is that likely to increase or decrease?

Copyright (C) Long Lake LLC 2010

Implications of Negative Short Term Rates

A senior Bank of England official named Dale expressed thoughts written up in a British newspaper as follows:

Mr Dale stressed the "huge" monetary stimulus the Bank was continuing to administer to the economy, with the bank rate at 0.5 per cent, a 300-year low, and the injection of £200bn directly into the economy via the Bank's "quantitative easing" programme. The impact of a lower bank rate, especially on those with tracker mortgages, has meant a substantial bonus in lower mortgage payments every month.

But Mr Dale added: "Since the spring of 2006 inflation has been above target for 41 out of 50 months and for two years it has averaged over 3 per cent. Now, we can come up with all sorts of clever and real reasons to explain our view but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk".


(The Bank of England was formed in 1694 to be the U. K.'s central bank; so the term '300-year low' is really an all-time low.)

Do you think that short rates under 1% and official inflation over 3% is either fair or sustainable?

Either a major economic collapse or higher short-term rates appear needed to achieve a more stable situation, at least in the U. K.

Given that Britain has acted as the U. S. "poodle" for quite some time, how different are things in the U. S.?

Copyright (C) Long Lake LLC 2010

Wednesday, July 21, 2010

When Does QE2 Leave Port?

In the hilariously titled post, Let's Start Spending, Dr. Robert Frank argues for more road paving to get the economy moving again. Writing in doubletalk, he says:

The deficit hawks are killing us. No, wait! I’m a deficit hawk. So let me rephrase that: Some of the deficit hawks are killing us. Like other deficit hawks, I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do.

The only reason we’re in a downturn is that there’s not nearly enough total spending to put everyone to work. The $787 billion economic stimulus bill passed in 2009, which many economists at the time warned was too small, is running out. Its effects are being offset increasingly by massive cutbacks in state and local government spending. And now many deficit hawks want us to cut spending further.

This is lunacy. The right kinds of deficit spending not only would help speed economic recovery, they would help bolster the nation’s long-term balance sheet.


He goes on to tout the supposed economic wonders that fixing roadways can do.

Wasn't that was ARRA (last year's "stimulus" bill) was all about?

What's especially important about Dr. Frank's views is that his co-author of an economics text was Dr. Ben Shalom Bernanke. Who just spoke today about mounting signs of economic weakness.

OK. Enough hilarity. Dr. Frank wants us to start spending. As if spending $3.5 T isn't enough this year.

On another front, first it was the sainted Jeremy Grantham with a self-serving alleged switch to fearing deflation as the greater worry than inflation. Now it is the allegedly conservative Weekly Standard that is hyperventilating about the same subject in its blog today, with a post titled Deflation: A primer. Here's one quote from that post:

As awful as double-digit inflation was, single-digit deflation is worse. As triumphant as the victory over inflation was, we can't always be re-fighting the last war.

This is a country deeply in debt. Inflation reduces the burden of debt -- anonymously, impersonally, and across the board. I hope I don't sound too nationalistic when I note that a lot of that debt is held by our Chinese friends. They ran huge trade surpluses with the United States when times were good. Time now for them to contribute a little back.


Sorry. I'm not with that program. There's good deflation and bad, but the blog doesn't differentiate. Most of the 19th century was deflationary in the U. S., and the country was probably the greatest growth story for a whole century in world history. Or close to it. Falling prices due to technologic advances and opening up of inexpensive raw materials are good things. Otherwise scarcity of food would be good, because it means rising prices.

The real problem is that deflation punishes poor borrowing and lending decisions. It is tough on borrowers, but that's a private matter between them and the lenders. If the lenders need to take a haircut, so be it. If deflation were allowed to occur naturally across the entire economy the way it used it be allowed, then both borrowers and lenders would be more prudent. They couldn't count on helicopter drops of money and ZIRP to bail them out.

About stiffing the Chinese with inflation, how spoiled can you get. First the West hires the Chinese to do the tough, polluting manual labor it doesn't want to do, at rock-bottom wages to enrich the owners and managers of the outsourcing companies, and refuses to pay them in kind with an equal amount of manufactured goods; we send them promises to pay. And now we keep up our bargain after receiving the fruits of their labor for our benefit by welching on our paper.
Honorable? No. Wise? Also not.

More and more, the Establishment is laying the groundwork to persuade the sheeple that the cure for excessive borrowing and lending and attendant money creation is more of the same.

QE2, in other words: Quantitative easing 2.0.

This can only continue with declining borrowing costs if private borrowing is crowded out; in other words, if the economy continues to be anemic. The Japan scenario, in other words.

And this may be. But as per Nassim Taleb's story of the turkey, the Black Swan event from the turkey's standpoint was sudden death after a happy, easy life. The economic equivalent of that is either hyperinflation or cessation of credit being supplied by creditors, in a Greek-like scenario with true austerity being imposed from outside. So we can go Japanecian (or, Grecianese), or the hyperinflation scenario such as Argentina and Brazil did in the relatively recent past.

What we can't do is "stimulate" the economy endlessly by printing money under the pretense that we are going to repave our way to prosperity.

The laws of economics trump hopium and hokum.

Copyright (C) Long Lake LLC 2010

A "Conservative" Calls for More Debt Monetization

In Setting the Table for Fiscal Restraint, Vincent Reinhart of the American Enterprise Institute (and a former high Fed official and the husband of Carmen Reinhart, co-author of the book on financial crises with Ken Rogoff), argues that:

The next available weapon in the Fed’s arsenal is the direct purchase of securities. . .

Lower market interest rates from renewed Fed purchases would encourage households and firms to spend.


This view is of a similar philosophic view as George W. Bush's that he violated free market principles in order to save the free market. Though what he was really saving was Wall Street as we know it/as he likes it.

Dr. Reinhart should know better. The Fed has pushed on the proverbial string. To mix a metaphor, it would be better off un-digging the hole it has dug rather than digging some more.

Does not Dr. Reinhart know that for every borrower, there is a lender who will suffer from lower interest income?

If the Fed prints money to buy bonds, temporarily the market for bonds may push higher in price/lower in yield, thus depressing income interest to new lenders. However, the proper signal from debt monetization by the central bank throughout history is that more newly-created money always means relatively higher prices. Certainly it is true that the prior, pre-Fed gold standard era tendency of prices to fall after a rise means that one may not see prices rise as the quantity of money rises. Absent that rise in money supply, instead prices would have fallen. Those falling prices would benefit buyers and hurt producers. So it is true that anti-deflationary money-printing exists; but that new money is never simply burned. It sticks around and then creates rapid price rises in the next up-cycle for the economy.

If the Fed were to create new money and go out and buy a million automobiles over the course of one year at a cost of $30 B, the price of autos would rise. If auto manufacturers were unaware that the Fed was the buyer, they would overexpand production and be surprised the next year when demand fell by the same million units. If the Fed had no use for the autos, they would just sit around somewhere and society would be the worse for the misallocated resources.

If the auto manufacturers were aware this was a one-time Fed boondoggle, they would simply raise their prices while the extra demand for autos was in force. So there would be no benefit, just wasted auto production.

What is true for autos is true for bonds. If the Fed has special knowledge that long bonds or other securities are drastically undervalued, of course it can make a profitable investment for itself by purchasing such securities, collecting interest and then selling them back to the market when their price has risen to reflect their fair value.

That is unlikely, however! The Fed's friends on the Street can price securities just fine. So all we are talking about is more bond manipulation. Now why would the Fed want to manipulate bond prices?

The Fed purchases securities through the Federal Reserve Bank of New York. The FRBNY is a privately owned institution. While its decisions are influenced by the Federal Open Market Committee, the FRBNY pays 6% yearly dividends to its stockholders. From the Fed website:

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

I do not know how a dividend-paying organization is a non-profit. Perhaps the point is that no additional funds are retained after dividends. My understanding is that FRBNY is required to remit profits to the Treasury. I am also unclear whether the 6% dividend yield is off of a base value from the formation of the FRBNY almost a century ago or whether it is 6% of "market value".

In any case, my point here is that FRBNY is owned by its constituent banks. It bailed out said banks in 2008-9 via the AIG conduit and numerous other maneuvers; more precisely, it bailed out the shareholders and bondholders of said bank holding companies. What it did and continued to do by implementing a zero short-term interest rate policy is penalize savers specifically so that the bank owners of the Fed could borrow at next to nothing and then lend either to the government for a guaranteed spread profit or to ordinary borrowers at very attractive spreads.

Dr. Reinhart's proposal would benefit whoever would be selling securities to FRBNY. Those entities would receive the newly-created cash. If the sellers are banks and mutual funds, they would in turn continue the daisy chain and pay themselves the salaries to which they are accustomed and continue the illusion of a healthy economy by buying up other financial assets with the newly-created funds.

Gradually, this new money would make its way into the real economy and force prices higher.

The Reinhart recommendation would be a toxic variation of "trickle-down" economics. At least when what was pejoratively called trickle-down was practiced in the Reagan era (and subsequently), the rewards actually went to high earners via lower tax rates. Since this is America, there's actually nothing inherently wrong with working hard and making a lot of money. When tax simplification occurred in Reagan's second term (TRA of 1986), in a true bipartisan manner it was sponsored by Democrat Richard Gephardt in the House and Democrat Bill Bradley in the Senate.

What's been going on lately has been much more like crony capitalism. The rewards have been and are going disproportionately to those who helped create all the malinvestments in housing and junk bonds that are plaguing the productive parts of the economy today.

My preference is that Big Finance justify itself with no more handouts. In fact, it's time for it to give back to society. But in the age of the Bushbama Continuity of putting Big Finance first, that's asking too much, it would appear.

If Dr. Reinhart's proposals represent mainstream Republican thinking, as the AEI often does, then that is evidence that Team GOP has learned nothing from the past decade. If his thinking reflects the thinking of the powers now in charge in D. C., then the economic hole the country is in is going to get deeper.

Copyright (C) Long Lake LLC 2010

A Bull Market for the Taliban in Afghanistan and the Secular Financial Bear Market in America

The Afghanistan Non-Governmental Safety Office (ANSO)has issued its Q2 report. The findings are horrifying from an American perspective. You can forget the idea that NATO is on the verge of victory, in my opinion, from the chart on page 7. This is a bull market chart--in Taliban attacks. The Taliban initiated 160 attacks in June 2006, as I read the chart. This was up to 1319 in June of this year. (This is a PDF and thus I cannot copy the picture.) It is an open question who has had a better 4 years: Apple Inc. or the Afghan Taliban. Here is a quote from the Strategic Assessment (page 1):

The counterinsurgency approach shows few signs of weakening the opposition. . . It also shows few signs of protecting the population with a 23% rise in civilian casualties (p.9) and widespread assassination of civilian Government workers. We do not support the COIN perspective that this constitutes "things getting worse before they get better" but rather see it as being consistent with the five year trend of things just getting worse (p.7).

The 'key terrain' operation in Marjah has yet to deliver security for the people, provide safe return for the displaced or establish credibility for its boxed Government, as a result Helmand is now the most violent province in the country (p.8). The delayed operation in Kandahar (p.2)promises dire consequences for the civilian population with little to no impact on AOG (Armed Opposition Group) capacity. There, as elsewhere, the application of unsupported COIN theories has only succeeded in dragging civilian development agencies in to the firing line (p.3).

Reminiscent of the 1963 South Vietnamese 'Self Defence Corps', Local Defense Initiatives are falling prey to all the same vices with active ones being murdered; smart ones partnering with AOG to exploit the population and Government supplies (Kunduz/Takhar); bold ones just being the AOG (Parwan) and timid ones keeping the staus quo (Wardak). . . The "Village Stability Program" . . . is perhaps the most disturbing development of the year not least because it is so opaque with no single institution having an overview, let alone control, of all activities under this rubric.


This blog has consistently compared the Afghan "surge" to the Johnson 1965 post-election escalation in Vietnam. Now the NGOs are drawing the same parallel.

Meanwhile, the war is a steady drain in resources that are desperately needed at home in America. These resources include human, financial and even emotional/spiritual. We are in a 1984-type scenario. We've always been at war with Eastasia. Or so it seems.

The depth of the public's disappointment with the Obama administration is evident in its willingness to reconsider supporting a Republican Party it turned its back on in the 2006 and 2008 elections, and which has done little to reform itself.

For cyclical and demographic reasons, the Johnson-Nixon-Carter period of rising inflation, rising interest rates, American loss of international prestige coincided with high and rising interest rates. As a result, both stocks and bonds ended up severely undervalued through most of the 1970s and the first part of the 1980s.

The opposite situation has supervened. This is an "ice" scenario unlike the "fire" of Vietnam and that followed the riotous and assassination-prone '60s. That Afghanistan is not on the nightly news (there being no draft and no embedded reporters) is consistent with this perspective. Ultra-low interest rates and too much "money" looking for a home is also of a piece with this sort of mirror image to that last secular bear market.

Perhaps, just as the withdrawal of Americans in humiliation and total defeat from Saigon just ahead of the advancing North Vietnamese forces allowed the country to heal, some finality in Pak-ghanistan will do the same.

For the nonce, the basic and almost primitive nature of gold as money reminds me of the primitive conditions in Afghanistan. Both gold and the Afghans are immutable; they just are what they are, and appear immune to the blandishments that the modern world offers. Both the Afghan resistance and gold have had a good decade. In contrast, except for the rare exception (AAPL), the fancy-Dan stuff out of Big Finance has laid a great big egg over the past decade.

The burden is on the U. S./NATO hawks in Afghanistan and the bulls on Wall Street to prove themselves. As they say on the Street and in the villages in Kandahar, the trend is your friend (until it is not).

Right now, these bodies in motion are staying in motion, and the directions of each are not good for the United States.

Copyright (C) Long Lake LLC 2010

Monday, July 19, 2010

Deflation Theme Getting Too Popular

An increasing number of financial, governmental and academic types are signing on to the idea that (duh!) the economy is entering a slow spot. Jeremy Grantham has joined the crowd (see #1). The deflation argument is getting popular now that Treasuries have surged in price, lowering their yield to ridiculous levels. Where were these deflationists when David Rosenberg was one of the few such proponents 100 basis points of yield higher (10 -30 year bond)?

Supposedly according to this growing alliance of deflationists/economic gloomsters the economy needs more amphetamines, or is it opium? Or is it hopium?

Concomitantly, even the commentators on Kitco.com's commentator site are either bearish for the short term or don't comment at all on the short term, taking a long-term view that paper money devalues (thanks for the insight!).

Mark Hulbert's Gold Sentiment Newsletter Index (HGNSI) was said to be at a contrarianly bullish 9% recommended gold allocation about 2 weeks ago. Given the tone on Kitco and the price action in gold, I wouldn't be surprised if it were below zero now.

In evaluating the main asset classes, certainly cash is the most overvalued. Treasuries are in the late stages of a recovery from a horrible bear market and now are in a Neverland of manipulation. Stocks are looking worse from both a price and earnings momentum standpoint.
Silver is looking like a metal proxy for stocks.

The conditions for the recovery from the multi-year gold bear market that finally ended (for now!) in 2009, when the 1979-80 price range was exceeded for an entire year for the first time since then, are easy money and a desire to fight "deflation".

No matter that the only important deflation is that of houses and stocks, namely assets individuals own. The cost of living is undoubtedly rising in a thousand ways that are uncounted by the Bureau of Labor Statistics. But government statistics are to statistics as military music is to music.

While the Internet was new, tech advances were not new. There was no New Era in the 1990s. There was just a massive stock and investment bubble which extended to property and other lending a few years ago. The sovereign debt bubble is now on the plate in richer countries than the usual defaulters of the past 65 years.

Thus the gold vs. fiat money battle is only now getting going for real. The current fad that deflation is a serious risk is the best argument for gold right now. Short term sentiment amongst gold traders is depressed. Bonds are in fashion. Whatever you own, the financial powers that be want to destroy you if you are leveraged.

As economic activity sputters, Big Finance's potentially insolvent position will make it call once again for money-printing, which aligns with what governments trying to fit a guns and butter agenda generally do. I for one can't come close to timing this. My sense is that once again Nassim Taleb is correct, namely that big-time inflation is the underpriced "fat tail" possibility.

Traders such as Dr. Taleb can take advantage of derivatives such as futures and options, but identifying those opportunities is far beyond my capacity. Gold (and in up-moves silver) is the slow-moving investor's core hedge against these sorts of outcomes. Better to buy when traders are gloomy than when they are ebullient, yes?

And I wouldn't sell gold on a downtick when the trade is into cash yielding nothing. At least not until fiscal sanity is forced upon Washington.

Copyright (C) Long Lake LLC 2010

Sunday, July 18, 2010

Comments on Comparative Health Care Systems; Focus on the Commonwealth Fund's Reports

The Commonwealth Fund has come out with an informative transnational comparison of health care systems. Despite its name, this Fund is not a financial entity. In its own words, it is a:

private foundation that aims to promote a high performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society's most vulnerable, including low-income people, the uninsured, minority Americans, young children, and elderly adults.

(www.commonwealthfund.org/About-Us.aspx)

The main Report discussed herein is "Mirror, Mirror on the Wall: How the Performance of the U.S. Health Care System Compares Internationally; 2010 Update".

The findings reflect poorly on America. This post will summarize some of the information therein. Follow-up posts will explore how America can do better, with some discussion of the recently-passed health care reform bill but with emphasis on new, independent thinking on health and health care economics.

All interested parties should read the Fund's report, either in full as linked above or the Summary.

The report compares various measured outcomes for the U. S. healthcare system against six other countries, most of them English-speaking: Australia, the U. K., Canada and New Zealand; plus Germany and the Netherlands. Similar comparisons in 2004, 2006 and 2007 showed the U. S. was last in all measured categories, as was also found in this year's report.

These results were quality of care, access, efficiency, equity, life span and cost.

Another Commonwealth Fund report on a similar trans-national comparison of health care from June of this year called Measuring the U.S. Health Care System: A Cross-National Comparison. One of the key findings in this related report is:

The U.S. has a comparatively low number of hospital beds and physicians per capita, and patients in the U.S. have fewer hospital and physician visits than those in most other countries.

This report finds that the U. S. has about 27% fewer practicing physicians per capita than the average for 30 OECD countries. It is my sense that this problem, and the related problem of shortages of nurses, is the most fundamental important healthcare problem we have. It takes a long time and a lot of money to bring doctors into the workforce. Even if physician salaries shrink in inflation-adjusted terms as their supply increases in regard to population, total healthcare spending will tend to rise as more patients get seen and evaluated. In other words, an issue not (in my view) satisfactorily addressed by the recent health care legislation is the conflict between the stated goal of "bending" the healthcare cost curve while simultaneously treating more people and educating more and more physicians. The DoctoRx preferred solution is to say openly that the basic goal of the legislation, that of better health of the population, is inherently costly and that the goal of increasing efficiency and decreasing costs is not easy to achieve, and that society therefore should be ready to commit an even greater proportion of its resources to health care than it currently does should efforts to control health care spending not meet projections. Otherwise we may end up with Ponzi/fraudulent economics in this regard.

Back to the theme of the main report.

Numerous other organizations such as the World Health Organization have studied other countries such as Japan, Italy and Spain and have shown similar findings. There is thus little doubt that for the stated criteria, America will benefit from improvement. Of course, the devil is in the details. Here are some of the findings of the Commonwealth Fund's report and some of its own commentary, including the following cautionary language (Sec. 1; vii):

Any attempt to assess the relative performance of countries has inherent limitations. These rankings summarize evidence on measures of high performance based on national mortality data and the perceptions and experiences of patients and physicians. They do not capture important dimensions of effectiveness or efficiency that might be obtained from medical records or administrative data. Patients’ and physicians’ assessments might be affected by their experiences and expectations, which could differ by country and culture.

And that is followed by a statement that stems from a particular viewpoint:

Disparities in access to services signal the need to expand insurance to cover the uninsured and to ensure that all Americans have an accessible medical home.

Re the last statement, a different report using the same data and similar public health motives might for example have said:

Disparities in access, which are largely limited to the least affluent members of society, call for free medical care for all of limited means for serious health conditions and heavily discounted care for milder conditions.

Or even more broadly:

The fact that the U. K. is #2 in overall rating amongst the 7 countries studied means that the U. S. should consider adopting its system in which all medical care is provided by the State paid for out of general revenues, with private insurance purchasable if desired, as in the United Kingdom.

In other words, the call for everyone to have "insurance" is a political one. Also, further on in that statement is the vaguer assertion that all Americans should have an "accessible medical home". What does that mean? If it is asserting that everyone should have a primary care doctor, why not say that?

"Accessible medical home" is jargon, but this is a report for the public. Is Commonwealth saying that even the homeless should have a medical home, whatever that is? What about itinerant workers, such as agricultural workers who move from south to north, or golf caddies who do the same thing?

Commonwealth is more than entitled to its own point of view, and I am not commenting on said point of view either positively or negatively. My point is that it would have been optimal in my opinion if there were a clear separation of Commonwealth's policy recommendations from the factual report. After all, advocacy groups such as Commonwealth may present data selectively, and when an organization with a goal, no matter how public-spirited, puts out a report that it wishes to be accepted as fully accurate, it helps its cause when said report meets the highest possible standards of objectivity and peer review.

Let us discuss an economic topic the report addresses, that of spending on health per capita.

We're #1 on that one!

Per capita U. S. spending on health care was $7290 per person, triple that for New Zealand (the lowest spender of the seven countries).

This statistic is worth thinking about at least a bit before passing judgment on it as a sign that something is rotten in the U. S., though it is of course troubling that the U. S. spends more than it needs to achieve mediocre outcomes.

For example, say that in the U. S., surgeons rate highly on per hour compensation, and plumbers much less highly (not so true, but let's assume). And let's say that said ratio of incomes is much more equal in New Zealand (which is the case). Does that necessarily call for "reform", and in which country should the reform occur? Again, the answer is political-economic; there is no absolute right or wrong. In other words, surgeons in the U. S. have relatively higher incomes than in New Zealand or Germany compared to other workers. Is this a bad thing? Might we also say that New Zealand is not getting good value from its plumbers?

If you're a doctor, it's a good thing to be paid more rather than less. Given the relative shortage of doctors in America as described above, it's not a surprise that their income is relatively higher than in countries where they are more plentiful. Overall, is the societal wealth pie changed if doctors are higher or lower on the financial income scale? I'm not sure.

But of course the above point is only part of the problem. I mention it because it is always important to think critically. The Commonwealth Fund points out how deficient the U. S. "system" is on efficiency and related problems, including health information. When one talks inefficiency, one is now talking real costs, both financial and health-related.

One would think that given its global leadership in information technology, the U. S. would be a leader in medical data-sharing and individual data storage. The potential for this to improve quality and efficiency of care in a mobile population is large, but the U. S. ranks last in this study. Assuming more than adequate levels of privacy are ensured, there is great therapeutic and research potential from portable individual data that can also be aggregated for analysis.

Sadly, the U. S. ranks last on efficiency in the Commonwealth report. So much for Yankee ingenuity. (The U. K. ranked first.)

The U. S. also ranked last on "equity". Not good, obviously, and clearly this relates to wealth differences and associated demographic factors. Something "must" be done. It is unknown how healthcare legislation will play out; the U. K. was 2nd in equity, but the Netherlands and New Zealand have not dissimilar systems to each other in some ways but were ranked #1 and #6 respectively in that category. In other words, it may not be that one system is better than another but how they are funded and implemented.

In addition to having a relative physician shortage and probably an even larger shortage of primary care physicians, my major criticism of the U. S.'s current system is that there is no system. There are so many different types of healthcare insurance in the U. S. ranging from universal and nearly or totally free (military), to subsidized privately-funded healthcare (employer-paid and other), subsidized universal coverage by age and disability (Medicare), subsidized by income (Medicaid), and cash payers that there there is no system. It is messy, unfair, inefficient and costly.

The reader may wish to think about whether the healthcare legislation signed into law this year adequately addresses this issue. My sense is that it does not and therefore it has a serious structural deficiency, and that therefore this entire topic may be addressed in the future. I believe that all the other six countries to which the U. S. is compared in the report have coherent systems of universal coverage but with different models including single-payer Medicare-type to insurance companies acting as nonprofit pass-through entities to fairly pure socialism. But everyone is covered for life in one system they get to know and that has maximum advantages of scale. Is it possible that the U. S. ranks at the bottom in good measure simply because of its messy melange of different types of coverage and that the key legislative move would have been to simplify matters as is the case in the other countries studied?

Before concluding, I would like to note that other experts have specific points they have raised in defense of American healthcare. For example, certain cancer treatment statistics favor America over many other advanced countries. Other ways to slice and dice the data for other political reasons break down American healthcare by insured/uninsured status and in other ways, and show (or purport to show) that if you have good insurance in America and are well-educated, there may be no better a place to live re health care. An argument coming from this point of view was to leave the healthcare system largely intact and focus on incremental improvements.

In any case, barring the unlikely event of repeal of said legislation, what is pending is implementation.

Stay tuned.

Copyright (C) Long Lake LLC 2010

Why Krugman and Roubini Are Wrong About Slow Growth

Calculated Risk has a post today titled Double Dip Discussion which double quotes two academics of the gloomy persuasion, Drs. Krugman and Roubini. These doctors decry slow growth as follows. First the Krugman quote:

Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.

Next, the Roubini quote(s, from his article on Project Syndicate titled Double-Dip Days:

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.

Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession.


(The above Roubini quote is from the linked article found at CR's post, but is not from his excerpts from Roubini, but rather are my own for purposes of this post.)

The action point of the Krugman and Roubini arguments is for more stimulus, which I have always called "stimulus". There is a difference between stimulus and "stimulus". Repaving roads in decent repair is "stimulus". Rebuilding a closed bridge that when open allows useful commerce between nearby regions is stimulus. Maintenance of existing structures and infrastructures is not necessarily either stimulus or "stimulus". It is simply needed maintenance; it is a cost, and proper accounting shows it as a depreciation expense to be matched by capital expenditure, in general. Making ammunition is "stimulus". So is using it. The part of the 2009 ARRA "stimulus" bill that supported Medicaid was humanitarian expenditure and neither "stimulus" nor stimulus. It was, as the Wizard of Oz might have said, good deed-doing.

If population grows 1% per year and national output grows 1 1/2% per year, that's OK IF IF IF the output is useful. What happened in the last decade is that home construction far outstripped household creation; and house construction was larger and fancier than before. As it turned out, the economics behind that surge in homebuilding was faulty, and led to the fall of Fannie and Freddie. Further, the lending surge that supported all the homebuilding also supported other malinvestments.

When Drs. Krugman and Roubini say that slow growth equal to or above population growth will feel like a recession, of course it will in today's world, because no one I know feels that the recession/depression has really ended. In some parts of the country, it has lessened, but nationally everyone living in the real world knows that times remain (relatively) tough. In better times, growth slowdowns such as occurred in 1994 and many other times were correctly not perceived as feeling like recessions, because the economy acted healthy.

If the United States government is really of, by and for the people, then said government should come up with good new ideas for how it should allocate resources. More war in Asia? Okay, then pay for it. Yet more road paving? Okay, justify the need and pay for it; and account for the extra strain on oil prices caused by asphalt production (for example). More healthcare spending out of Washington? Okay, but pay for it, because that is an ongoing expense, not an extraordinary one. The idea of borrowing from China to pay medical expenses for American elderly or poor is bizarre, especially considering that per capita GDP is 10X here than there.

One point of accounting is to allocate costs and benefits, andto allow market forces to help people allocate resources. In a healthy economy where investments and expenditures have good reasons to be done, growth above per capita growth would not feel like a failure. The obvious solution is to limit the distortions and coercions caused by government-- the only legitimate economic actor in this country which acts with the barrel of a gun implied when it wants others to do something-- and allow a free society to work, spend and save as much or as little as it wants, with government respecting those choices within the rules society sets government to enforcing.

Drs. Roubini and Krugman are statists always arguing for more government regulation and control. They may claim to believe in limited government (at least, Roubini may so claim), but it is always in the future. In the meantime, they advocate pushing more debt onto this debt-addicted society and more central control onto a country that grew to be the world's largest creditor during a period when the Federal government had almost no debt and had limited interference in the workings of the economy.

Central planning only works if the planners are humble, hard-working public servants who present governmental finances and plans honestly, and regulate fairly and consistently.

It is the failure of government and its cronies in Big Finance and other "Bigs" to perform on behalf of society at large that have led to the extensive cynicism that abounds in America. The solution is not the Krugman/Roubini solution of more "stimulus" and more "growth" but a return to freedom and an of-by-for the people reordering of the economy. In other words, bottom-up beats top-down right now.

If that (unlikely for now) result occurs, there will be a new rebirth of economic growth.

For now, count me as dubious.

Growth slowdowns are not the important problem. The economy has arteriosclerosis and the Federal finances threaten to turn cancerous given the threat of accelerating money-printing. The Krugman/Roubini wailing over allegedly inadequate growth ignores these much more important problems.

Copyright (C) Long Lake LLC 2010

Af-Pak Through Pakistani Eyes and Words

It's important to understand "the other guy". No matter that al Qaeda used Afghan territory for crucial activities leading up to the 9/11 attacks, the U. S. and NATO are doing what they are doing against Taliban, no al Qaeda. The Nation, a leading (or, the leading) online English language newspaper in Pakistan (a virulently anti-American country at its core) has some breaking news, or at least "news" about the Afghan War. The wording plus the content are both important:

15 US invading troops killed, three Afghan soldiers captured in Baghlan

In encounter with the US invaders in central Baghlan district, Baghlan province, Mujahideen killed about 15 invaders, forcing the rest of the enemy forces to run away using helicopters, while Mujahideen captured three of their local puppets during the fighting on July 17. (Taliban website)

The title is The Nation's, even if the wording of the brief news report may be the Taliban's.

This news has not crossed the wires on Western media that I can see.

Perhaps a more U. S.-friendly Pakistani online newspaper is Dawn. From the current online edition comes the following:

The US must recognise that no matter what the volume of economic assistance given to Pakistan, it will never inspire any feelings of friendliness and partnership until the recurring drone attacks are stopped in accordance with the national milieu.. .

The great sacrifices made by Pakistan and enormous suffering that the nation has endured over the last eight years of the war against terror have remained unappreciated and non-recompensed. To add insult to injury, the CIA based in Afghanistan has been conducting drone attacks in violation of Pakistan’s sovereignty and in total disregard of the government’s protests. . .

The drone attacks have been disproportionate to their objectives, causing avoidable loss of human life and resources. The drone strikes are counter to any move to bring the two partners together. They have remained a sad reminder of US’s lack of concern by a friend also claiming to be a strategic partner.



It is questionable that the Afghan War and the drone war can be "won". Even if those happen, how will the U. S. win after it withdraws? Or is the Afpak region going to be yet another site for military bases while the homeland at best stagnates economically?

After the Viet Nam humiliation, the U. S. licked its wounds and after a while, engaged in a relatively low cost and very peaceful strategy to win the Cold War. Voila! But the key maneuver was to accept a loss, rest and recover. The Pak-ghanistan War is a raw wound for an American economy that cannot afford the cost and a population that is burned out on Asian wars. And to boot, there is real disappointment that a new president who promised peaceful cooperation is turning more and more of the Muslim world against this country.

It's past time for Hamid Karzai to stand on his own two feet.

Copyright (C) Long Lake LLC 2010

Saturday, July 17, 2010

ECRI Follow-up, and Related Updates

In the post immediately below, I commented that there was no press release yesterday for some reason from ECRI related to the release of its Weekly Leading Index. In the past few hours, notice of a Reuters press release dated yesterday has now been added to the "News" section of ECRI's website. Here is the release:

(Reuters) - A measure of future U.S. economic growth was unchanged in the latest week, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index stood at 120.6 for the week ended July 9, unchanged from the previous week, which was originally reported as 121.5.

The index was last below 120.6 in the week of July 24, 2009, when it measured 120.3, according to ECRI.

The index's annualized growth rate fell to minus 9.8 percent from minus 9.1 percent the previous week, originally reported as minus 8.3 percent.


So, ECRI was noncommittal re whether the worsening WLI growth rate in conjunction with the evolving proprietary data is pushing them toward a new recession call.

What I truly don't like in the data I am seeing is that Consumer Metrics has reported July 15 data. This was at 100 (average) on June 30 and now is 93. Its own 91-day growth index is low and dropping. At -2.7% it is the lowest since what that organization dates as a new consumer downturn began at the beginning of 2010.

It appears from the historical data on their website that all throughout the last "Great Recession", only 3 months had average readings below the current average of less than 96 for July (only half through this month, of course). So, leaving aside growth rates to focus on absolute levels of economic activity, the ECRI data, and the Consumer Metrics data are consistent with all sorts of other data such as Discover/Rasmussen's polling data of consumers and small businesses, Gallup.com's "main in the street" polling of elective spending and hiring/firing, and others that that the cyclical upturn has been weak and may already have peaked.

The investing conundrum is that the reflex is to buy Treasuries on economic weakness. But are consumer prices really falling? Is the supply of Treasuries rising or falling? Does the Federal Government have a plan to protect its financial position if (when?) the economy fails to have its hoped-for rendezvous with Rosie (Expectations, that is)?

If your answers are similar to mine, then fundamentally you are uncomfortable with Treasury debt either to generate real returns or to safely preserve capital. Think Greece and Spain, even though right now things are looking Japanese. What happens if and when there is a run on the bank that is the world's effective central bank, meaning the Federal Reserve Bank of New York and its ally at Treasury?

These are dangerous financial waters the ship of state is going through.

Copyright (C) Long Lake LLC 2010

What's Up with ECRI?

For more than two years, I have been checking out the Economic Cycle Research Institute's data that is released every Friday morning. Until yesterday, I always recall an associated press release, almost always via Reuters, though for a couple of weeks the release was via Dow Jones.

Yesterday, ECRI reported a week-on-week flat Weekly Leading Index number. The data massaging to show a year-on-year growth rate of said WLI came in at a worsening -9.8% (the method of calculating this growth rate has been revealed to me under pledge of confidentiality). Basically this percentage change can worsen or improve despite an unchanged numerical WLI due to year-ago data dropouts and averaging techniques.

ECRI does not publicly release other measures such as its Long Leading Index.

My unscientific observation is that major changes in ECRI's outlook are often reflected in that day's stock market. In other words, I am concerned that the continued worsening in the WLI Growth Rate, recent rapid drop in the absolute number of the WLI itself, other comments that ECRI has made, the lack of a press release, and the sharp drop in the stock market might
indicate that ECRI is questioning its no-double dip recession call.

As always, stay tuned.

Copyright (C) Long Lake LLC 2010

Friday, July 16, 2010

BAC and Financials May Be Canaries in a Collapsing Coal Mine

Bank of America stock is currently down over 7% on a poorly-received earnings report. Citi is down half as much, and Wells Fargo is down as well. Look at the stock chart of BofA (symbol BAC) to the right. In the winter, support was found not at the 50 day simple moving average but at the lower, 200 day sma. Now, the 50 day sma (green line) has moved below the 200 day sma, and unfortunately the 50 day has been formidable resistance.

Corroborating this is the severe weakness in what I privately consider bellwether financials UMBF as well as NTRS. I consider them bellwethers as they are not involved with heavy derivatives, did not engage in government-sponsored acquisitions of failing financial institutions in 2008, and are considered to be overall relatively "clean". NTRS (Northern Trust) is of course heavily involved in trust activities and thus is not a pure bank.

The Consumer Metrics Institute (www.consumerindexes.com) shows a significant slowdown that continues to "point lower" at a later date in the slowdown than the 2008 recession/depression.

It is increasingly looking as though the Fed created money, distributed it to holders of mortgage-backed securities as well as owners of Treasuries (primary broker-dealers) and that money largely stayed within the financial system, propping up the prices of stocks and bonds. Unfortunately, on Main Street, demand for loans that met the newly-rational standards of the chastened banking community was small. People have begun paring their bloated debt levels and so the U. S. has gone Japanese for now. However, unlike Japan, the U. S. does not self-finance its own debt. Thus the duality of us being Japanecian: as with Greece, "the markets" can cause rates to soar by suddenly claiming to be shocked, shocked at the state of Federal finances.

Are T-bills truly riskless in this environment? Their equivalent in Greece did not prove to be so, and the euro-bond vigilantes have turned to Spain. Echoes of 1997-98 abound. That era proved both to be the top for the average U. S. stock (not the capitalization-weighted indexes such as the S&P 500, though) but the resulting deflation helped prevent price inflation here. Given how complicit the U. S. was in this current part of the cycle, it is easy to see things getting worse here both in the real economy and even more so in what continue to be overvalued domestic stock and bond markets.

In early 2007, the persistent relative weakness in the large-cap financials foretold the bear market and financial troubles to come. Let us hope that the recent past is not prologue.

Copyright (C) Long Lake LLC 2010

Thursday, July 15, 2010

Can't Anybody Here Play This Game?

The following could be from 2-3 years ago:

(July 14) -- Warning that the military could run out of money as early as next month, the Pentagon is putting pressure on Congress to pass the wartime budget before lawmakers leave for the August break.

Defense Secretary Robert Gates was "disappointed that the Congress did not pass the defense supplemental before the July Fourth break," Pentagon spokesman Geoff Morrell said at a press briefing today.

The Pentagon is seeking another $33 billion to cover ongoing wartime operations
. . .

Of course this is from today, not when a prior administration was surging in Iraq.

The more things change, the more they remain the same, it would seem.

Except there's less and less credit money available for elective wars now. One thinks of LBJ posing as the peace candidate in 1964 and immediately escalating in Viet Nam in 1965, or Richard Nixon with his "plan" for peace in Viet Nam and nobody caring once he was in charge that he bore no responsibility for the U. S. involvement there. Similarly, it's Barack Obama's surge in Afghanistan, and he therefore owns that surging war more than he owns the (allegedly free market) economy. And his party controls Congress. The country is turning against this surge, because it appears to be failing. And because there's no money to pay for it.

In Treasury auctions, they call the inability to sell all the debt it is desired to sell a FAIL. Afghanistan is turning into a financial FAIL as well as a military-political FAIL.

As an American I would much prefer a WIN.

But every day, in every way, the U. S./NATO effort in Afghanistan seems to be getting worse.

Is the genius of General Petraeus and perhaps some good fortune going to turn the tide and at least let us call Afghanistan a draw? We can only hope . . .

Meanwhile even the financing of this war reflects incompetence within the governing party.

Americans of all political persuasions deserve better.

Copyright (C) Long Lake LLC 2010

Wednesday, July 14, 2010

More Strangeness out of California


Calculated Risk has two sequential posts worthy of a little additional discussion. First posted was an update on L. A. Port Traffic, from which I have reposted the graph nearby.

Note how close imports were to exports at the left of the graph, which is January 1995. We are back near a bubble peak of imports exceeding exports. The difference is that our national financial condition is far worse now than then.

It was one thing when Japan, a defeated occupied nation, continued on for decades as a supplier of goods to its conqueror, the U. S., despite a series of economic recessions and even the semi-ultimate sacrifice of what appears to be an upcoming population shrinkage.

China, though, made whatever deal it made with the U. S. and the West when it moved toward totalitarian capitalism in the 1980s; but it was never defeated and occupied by NATO countries the way Japan was. It thus may well be more independent than Japan and may not accept IOUs in return for manufactured goods indefinitely.

It is hard for me to see other than that the trend toward a weakening dollar vs. trade surplus countries in Asia and elsewhere (Norway, perhaps) is likely a durable one. Meanwhile, the U. S.-based rating agencies insist that despite the enormous current Federal deficit, the parlous state of state finances, the large accumulated Federal deficit, the much larger promises to current and future retirees, and an electorate that is disappointed in its leaders, the U. S. is a triple-A credit.

Now, on to the other CR post, on a California housing tax credit. CR concludes the somewhat lengthy post thusly:

This sure doesn’t seem like a well-run program!!!!!

In addition, my comment is:

What on earth is California doing by giving up tax money?????

As Cole Porter penned, "The world has gone mad today . . ."

Copyright (C) Long Lake LLC 2010

More Ungood News from Eastasia

From the AFPAK Channel today, the first three paragraphs describe three separate but related news bits that show the difficulty of "winning" in Afghanistan.

Insurgents carried out a suicide car bomb-led attack against the headquarters of the elite Afghan National Civil Order Police in Kandahar this morning, killing three U.S. soldiers, an Afghan officer and five civilians (NYT, BBC, AP). The Taliban has claimed responsibility for the attack, which is similar to two recent attacks at Bagram and Jalalabad where suicide car bombers detonated their explosives, allowing follow-up gunfire from militants. And armed residents of a Ghazni village repelled a Taliban attack yesterday (CNN).

More details emerged about Tuesday's attack by an Afghan non-commissioned officer that killed three British soldiers, including the company commander in charge of the base and two members of the Royal Gurkha Rifles who died when a rocket propelled grenade struck their command center (Tel, AJE, AFP, Independent).The Afghan soldier, believed to be named Talib Hussein, reportedly fled to a Taliban-controlled area after the attack, and a Taliban statement claimed Hussein had joined the group. The attack is leading some in the United Kingdom and the United States to question the exit strategy for Afghanistan, which is predicated in part on the build-up of Afghan security forces (Guardian).

On Monday, Haji Zahir, the lead local official in Helmand's Marjah who a senior U.S. military official called "Mr. Right Now, not Mr. Right," was replaced by the Afghan government without explanation(Wash Post).


Then there is yet another problem that ties into Pakistan, from the same post:

Gen. David Petraeus is reportedly working to designate top leaders of the Haqqani network as terrorists, a move that would complicate not only the United States' relationship with Pakistan but also the Afghan government, currently discussing negotiations with insurgent groups (NYT, Dawn). In a press conference yesterday Senate Armed Services Committee Chairman Sen. Carl Levin (D-MI) called for both the Haqqani network and the Quetta Shura, another of the three main Taliban factions, to be blacklisted (Wash Post).

The alert reader may notice that two words are missing from the above: "al" and "Qaeda".

The reader who was paying attention in 2007 also will remember that the Iraq surge actually started working from the get-go, unlike the current Afghanistan surge.

Doesn't the U. S. have enough problems at home? Can't the hard-working men and women of the military and the extensive support system for them strengthen the U. S. from within? Aren't drones and local hired hands enough?

We have always been at war with Eastasia . . .

Copyright (C) Long Lake LLC 2010

California Fiscal Update

The State of California is out with its June budgetary data and fiscal year-end data, as well.
Given higher tax rates and accelerated withholding tax maneuvers, I cannot directly compare June 2010 to June 2009. The best that can be said is that given shrunken estimates, the State appears to be living in reality, but---there is a huge whole in the deficit that is being met by internal borrowing:

The State’s operating cash deficit stands at $9.9
billion (Table 3), and is being covered with
internal borrowing.


Source: Controller's office, to view click HERE and see page 3 for documentation and the entire document for further information.

Given massive debt loads and deficit operations, there is no easy way for anyone to verify that the U. S. of A. as a financially integrated agency is, net, profitable. The travails of California raise the disturbing possibility that perhaps the entire economy truly has a Ponzi-pyramid scheme underpinning rather than a solidly profitable business model.

As with Martia the shapeshifter in Star Trek VI, the financial powers-that-be keep moving the peas between different shells. I don't know, but where things are overly complicated, I'm suspicious. That fits the American financial scene to a T.

At least California is, in a fairly straightforward way, relatively bankrupt; but states cannot declare bankruptcy per se, so it is borrowing from itself. Confusing enough, but clear as the proverbial bell compared to what continues to go on in Big Finance.

Copyright (C) Long Lake LLC 2010