In Tangibles

A nice, concise bullish post on gold by Bill Fleckenstein. The ending quote is from one of the obvious financial geniuses of our time, John Paulson, who made himself and his investors billions by shorting subprime residential real estate at the right time.

The more that New York publications such as The New Yorker lionize Wall Street's great friend Larry Summers, the more you should fear for the financial future of this country. (For a HuffPo critique of that article, click HERE.) And the more you should consider owning tangible things rather than derivatives of those things, including publicly owned stocks.

Copyright (C) Long Lake LLC 2009

The Longest Word

Caroline Baum has an opinion piece about the administration proposals on "reform" of the financial system on Bloomberg.com titled Obama Bulks Up 'Too Big Too Fail' With Steroids. Here are two choice paragraphs.

In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.

It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.

It's a concise read which EBR generally endorses. EBR predicted in December that there would be a Bushbama continuity in the field of finance. The news continues to be bad in that regard. We learn today that the allegedly conservative Republican Robert Bennett of Utah would look positively at the appointment of Larry Summers as new Fed Chairman. Some populist Mr. Obama is turning out to be!

From the prism of 2001-5, with the country looking to be center-right politically, Jimmy Carter was remembered in many circles as a wild-eyed liberal. It was easy to forget that Sen. Edward Kennedy engaged in the unusual step of challenging a sitting President within his own party- and from the left, as not being liberal enough. The financial blogs I go to, which range from libertarian/center to left- has hardly a good word now to say about this administration's financial policies.

As predicted by EBR, the administration has accepted the recommendations of the G30, led by an AIG Vice President, for financial system reform. Mr. Obama is channeling the longest word we learned as schoolchildren: antidisestablishmentarianism. In short, this word means being pro-Establishment. One thing the Establishment does not like is change. It simply likes to change lipstick colors on the same pig.

Copyright (C) Long Lake LLC 2009

News Flow Remains Poor, so Why Shouldn't Stocks Soar?

Chrysler is going under, almost 30 years after the Feds bailed the company out with a now modest loan guarantee.  Its impending bankruptcy is a testament to two major factors:

dysfunctional management-labor relations that pervaded the Big Three; and the over-financialization of auto purchasing, wherein auto companies became finance companies with unprofitable manufacturing facades.

In other negative news, the Commerce Department reported today that private wage and salary disbursements dropped $33 B in March on top of $29 B in February; these are seasonally adjusted annual rates.  This $62 B (annualized) two-month drop in wages and salary is a 1% drop.

There is massive human and physical overcapacity in the United States and in many other places.

With secure income on financial assets hard to find, riskier assets such as stocks and high-yield bonds have attracted positive cash flows.  

In the meantime, the $5.2 million salary hedge fund genius ($26 million annualized salary given his reported 1 day of "work" per week) Larry Summers continues to advise President Obama that a further massive wealth transfer from taxpayers to large financial institutions is necessary via PPIP, the $750 billion "placeholder" in the first Obama budget, direct Fed purchase of Treasury debt, etc.

The Federal Open Market Committee reported yesterday a downbeat assessment of the economy.  

We know in retrospect that the jobless recovery from the mild 2001 U. S. recession was spurred by a lunatic housing and commercial real estate boom.  That boom that at some point entered bubble territory was a continuation of a bull market in real estate that began in the mid-1990s and that initially was simply a recovery from the bear market in real estate that tied into the S&L mess.  Similarly, the tech bubble in the late 1990s was an excess that grew out of a real boom and real innovation.

Where is the ongoing positive industry trend, even one without innovation, which will underpin and provide a theme for and employment/investment options, a true economic growth cycle?

The answer is obviously none, which is why Econblog Review is skeptical of the prospects for a strong economic recovery.  Printing money only goes so far and then fails.

Currently, the major leadership in the stock market is the financial sector due to your money going straight to the banksters' pockets.  The canary in this coal mine, beyond all the obvious matters, may be Northern Trust (NTRS).  NTRS is perhaps the best-regarded TARP recipient, yet it needed to raise equity at a significant discount to its stock trading range.  Its stock chart had begun looking very promising, and in a typical bull market, you want to buy the leader of the damaged sector that would be poised for a bull market recovery.

If NTRS needed to sell below-market price equity rather than debt, bad news on JPM could follow.  This has been a scripted recovery in the financials created solely by the continuing alliance between Big Finance and Big Government, an unholy alliance which continues to drain America of its money and its spirit.

Copyright (C) Long Lake LLC 2009 

Monday Morning Update: Good News Remains Scarce

This blog has since inception considered Tim Geithner to be the bad penny and asked that his nomination as Treasury Sec'y be withdrawn. Thus it is with positive emotions that an important blog from Naked Capitalism was seen this morning, titled Are the Knives Coming Out for Geithner? If you haven't, please read it.

That post by Yves Smith and the lengthy NY Times article that it keys off of, are not in conjunction with an apparent pandemic of swine flu enough to knock the stock market off its stride.

Yesterday, however, Larry Summers was reported on by Bloomberg as follows:

“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said yesterday on “Fox News Sunday.”

In conjunction with this downbeat comment from Dr. Summers, TrimTabs reported today via Email that:

- U.S. Economy in Much Worse Shape Than Wall Street Realizes: Income Tax Withholdings Drop 3.1% Y-o-Y in Past Four Weeks, and TrimTabs Online Job Postings Index Falls 4.2% in April.

In addition, the debt monster is back: Bloomberg reports that companies have sold a record $468 B in debt so far this year (presumably this is a record for this far into a calendar year).

The news remains poor, and a veteran market observer comments (courtesy of Zero Hedge and GreenLightAdvisor Views):

Richard Russell of Dow Theory Letters, provides the following note April 20, 2009:
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

To the above list one might add that around now is the time that a traditional honeymoon period ends for a media-favored new President. The Geithner lashing out of the leading Democratic organ, the Times, may signal a less gauzy picture of the new administration reaching the public, which in turn could lead to a less optimistic view of the future.

We shall see what we shall see.


Copyright (C) Long Lake LLC 2009

Not All's Well Despite Ending Well

As far as weeks go, all's well that ends well?  We beg to politely differ.

Many people have seized on snippets of less-than-horrible economic data in February and March to proclaim that the newly-minted bull market (all major averages up over 20%) has "legs".  Let us hope, but here are some narrow-bore comments and bigger picture points gathered by EBR over the past few days.

Firstly, an expert opines negatively:

NEW YORK (Reuters) - U.S. credit markets are not showing the same optimism on the economy as U.S. equities, suggesting that the recession will run far longer than most expect, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said on Friday. . .

"In general, credit markets have not demonstrated the same sense of enthusiasm as the equity market," El-Erian said, adding corporate credit spreads are still elevated.

"I suspect technical factors are in play (in the equities market), and have been over the last few days," he added. "The weakening correlations suggest that fundamental drivers are being overwhelmed, for now, by short-term technical repositioning."

Next, Nouriel Roubini (RGE Monitor, subscription required), who has not been proven wrong yet throughout this economic and markets agony, has just now disclosed all his financial assets are in cash except for his (relatively small) 401(k).  He continues to reaffirm his bearishness both on the economy and stock market.  He looks for 11% headline unemployment by about midyear 2010 and for the economy to underperform consensus by shrinking every quarter in 2009 and only rebounding to keep pace with population growth in 2010.  Here is a summary from his website of different unemployment forecasts:

Unemployment rate forecast (not online)- RGE Monitor: 10% by 2009-end and 11% by Q3 2010 with close to 4.6 mn job losses in 2009; Morgan Stanley: 10% by 2009-end; Goldman: 9.5% by end-2009 and 10% by 2010-end; JP Morgan: 8.7% by 2009-end; Merrill: 9.9% by Q4 2009 and 10.4% by Q4 2010. Merrill Lynch: depression-style job losses with close to 3 mn net payroll loss during Oct-08 and Feb-09 with steepest employment loss since the 1940s. Fed: 8.5-8.8% in 2009, 8-8.3% in 2010 and 6.7-7.5% in 2011.

Note the Fed is the outlier in the above listing!

Roubini is therefore bearish on the stock market at this level and incidentally is bearish on gold, as he is in the deflationist camp.

Meanwhile, the publicists highlighted the "good" news.  What was not highlighted as much was information such as the following:

A services index from the Institute for Supply Management, a Tempe, Ariz.-based trade group of purchasing executives, fell to 40.8 last month from 41.6 in February. Economists surveyed by Thomson Reuters expected the index to edge up to 42.

"We haven't stopped free-falling," said Joel Naroff, president of Naroff Economic Advisors (ed:  Bloomberg's top economist for 2008).

The highlighting of positive news items is seen in bull markets.  Look to buy economically sensitive assets when there is legitimate good news but it is being ignored, such as in the winter and spring of 2003.

Other bits of truly bad news from the March unemployment report were ignored or nearly ignored.  The unemployment rate increase was correctly dismissed as a "lagging" indicator.  However, January unemployment data were quietly revised to show almost a 100,000 greater count; and, there are 3 forward-looking bits in the unemployment data, and 2 of the 3 were unequivocally bearish:  hours worked (record low since data collected in 1964), and temporary help employment. 

It is good to go to as many experts who have predicted matters correctly this cycle.  Here are excerpts from an interview with the correctly-bearish financial company analyst, Meredith Whitney, in U.S. bank woes just the start, says Whitney:

As recently as six months ago, she was forecasting that at least $2-trillion (U.S.) of available credit card lines would be eliminated by nervous bankers by the end of next year. Now she thinks she underestimated the cutback and has revised the number to $2.7-trillion. Although it's not possible to gauge the direct impact on spending by already depressed consumers, the effect is bound to be enormous.

“Since 2006, you've had liquidity coming out of the market. That's caused consumer credit to worsen. Liquidity continues to come out of the market. Therefore, consumer credit continues to worsen,” she said logically.

And the effect on the banks? “The assets on bank balance sheets are worth less and less. And they need more and more capital.”

Without doubt, more U.S. banks will fail or end up effectively nationalized. And if that's not enough grim news, there's another black hole still to come – commercial real estate. No wonder she recently opined: “It remains clear to us that core liquidity fundamentals are deteriorating at an accelerated pace.”

Consider reading the entire (brief) article.  

In the meantime, the thought leaders in the blogosphere who detested G W Bush continue to move farther away from their last best hope for this country.  Barry Ritholtz of The Big Picture (www.ritholtz.com) wrote today, in the comments section of Part 2 of his flaying of Larry Summers, that he was "horrified" that Tim Geithner has done little more than "adapt" the Paulson approach to this crisis.  Mr. Ritholtz, a prominent Republican for Obama ("Obamacan") last fall, has to be only a hop-skip-jump away from naming Mr. Obama himself.

This issue is of special interest at this blog, which was founded in large part because the blogosphere that had harshly criticized the Bush-Paulson (+Bernanke-Pelosi-Reid-Frank etc) actions last year had expected the Obama administration to be much better, when in fact candidate Obama had supported every bail-out action by word or vote, andevery signal that came out of President-elect Obama was one of continuity with the Bush policies.

If the "bears" who have simply been correct realists continue to be correct, such as Dr. Roubini and Ms. Whitney, and assuming no dramatic change of course by President Obama, then the suspicion at EBR is that, public opinion will gradually follow that of the thought leaders, andin that case confidence in Barack Obama's policies toward Big Finance would then wane substantially.

As stated recently in an EBR post, we have already witnessed the greatest sudden wealth transfer by government from taxpayers to private companies in the history of the world.  The analogy made was to Watergate, where bombshells arose ex nihilo, and one of the most sweeping electoral victories ever by Richard Nixon in 1972 was reversed and then some.  Could Big Finance be in a situation similar to that of Nixon? 

Copyright (C) Long Lake LLC 2009

Nothing Fails Like Excess

In "Summers calls for boost to demand", Barack Obama's lead economic adviser and Robert Rubin protege/ally Lawrence Summers bizarrely recalls the single most ridiculous quote to come out of the Vietnam War, which was made by a U.S. Major named (itself bizarrely) Booris: "We had to destroy Ben Tre (the village in question) in order to save it".

From this Financial Times article:

The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.

The article goes on to quote Mr. Summers as follows:

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.

“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.

“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.

He also said:

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times.”

Let's comment, starting with the last first.

The idea that what's going on is a rare event is an endlessly repeated misstatement; some might call it a lie. This crisis began in 2007. Exactly 100 years earlier, the U.S. Government suffered a financial crisis in the "Panic of 1907", where J. P. Morgan banged the heads of other bankers to cobble together financing for the Feds.

The U.S. suffered intermittent booms and depressions, culminating in the major post-WW I Depression of 1920-21. Banks failed regularly in the 1920s. Then came the Depression. The smashing victory in WW II gave a quarter of a century of breathing room. Starting in the 1970s, we have had crisis after crisis. Third-world countries required money-printing to deal with oil price surges. Citibank was insolvent in 1980, as were other money-center banks that did the Fed's bidding in recycling the printed money to these countries. They were allowed to earn their way out of insolvency. Every Texas bank went under in the oil bust of the 1980s. Vast amounts of S&L equity vanished in the 1980s, all over the country. Many money center banks were in deep doo-doo in and after the 1990-91 recession.

Bottom line: The U.S. regularly suffers from economic busts and banking crises. What's different now is how politically well-connected the losers are this cycle, and how much they lost outside of traditional activities involving depository functions.

Moving on to the beginning quotes, let's leave matters at this:

The U.S. Government is going to excess with massive deficits and general histrionics. There was NO panic till the Government panicked late last summer and fall and began with a "sky is falling" attitude, rather than having worked out a plan last year when the Bear, Stearns failure should have awakened everyone. This business that in the short term, we should stay addicted to debt, but we'll detox in the medium term is too ridiculous to dignify with much more commentary. Just try saying that sort of stuff in an Alcoholics Anonymous meeting and see what sort of comments you get!

Larry Summers' solution is the classic solution of the financial industry: more borrowing, with the U.S. Government more or less the only allegedly credit-worthy borrower left, and more consumption from the "shareholders" of this entity. The Merchants of Debt will if possible suck the taxpayer dry till the Federal Government is on the brink of default.

A more prudent solution is to start living within our means, consume less than we produce so that we can actually rebuild our savings as a society, and "come reason together" LBJ-like to quickly have a fair and comprehensive resolution of the debt situation.

And do away with the bear-villains such as Citigroup and AIG who in this fairy tale are eating Goldilocks up.

Some un-asked for and of course to-be-unheeded advice to Mr Obama: you need a new economic advisor. Try Paul Volcker. Send Tim Geithner packing, either to State or to Goldman, Sachs or Citi.

And, especially, don't ever again "dis" bloggers (per the recent interview). The blogosphere is the only part of society that foresaw this financial mess. Try reading us. For a change. In which you can believe.


Copyright (C) Long Lake LLC 2009