Readers may wish to visit http://www.nakedcapitalism.com/ and scroll down to find a guest post by me on the book "Animal Spirits", or click directly to that post by clicking here.
This invited guest post is a follow-on to the May 10, 2009 EBR post titled Yves Smith, "Animal Spirits", and the Big Lie Technique.
Yves Smith, proprietress of Naked Capitalism, requested that I not comment on her in this book review she posted today; therefore the reworked version that more thoroughly focuses on the book rather than a theme.
I am beginning a review of "Wall Street Under Oath", by Ferdinand Pecora, with a focus on the current financial crisis rather than on the 70-year old book per se, and anticipate that this may also receive an airing on NC.
Copyright (C) Long Lake LLC 2009
Showing posts with label Yves Smith. Show all posts
Showing posts with label Yves Smith. Show all posts
Sunday, June 14, 2009
Sunday, May 10, 2009
Yves Smith, "Animal Spirits", and the Big Lie Technique
One of the important moments in the financial blogosphere occurred at the end of a lengthy and impassioned post by Yves Smith at Naked Capitalism, where she opined:
The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.
Unfortunately, the financial and business has become political. Yves is hardly a right-winger; for her to use that terminology for a candidate who she fervently hoped would do the correct things is sad and shocking. (And appropriate!)
In that context, please consider the points made in a supposedly important book by two noted economists: a Nobel Prize winner- George Akerlof- and the even more famous Robert Shiller- in the popular book "Animal Spirits".
The book's subtitle is "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Allegedly this is an Important work (for a popular economic tome). Perhaps within academic economics, it is worth reminding one's colleagues that Adam Smith and other empirical economists such as Keynes, who all theorized in words (not that Keynes did not also reduce his theories to equations) that at the root of economic actions are humans with emotions and non-rational expectations etc. etc. To non-economics such as a physician, however, this "insight" is jejune. of course individuals make non-rational decisions. How could one think otherwise?
The point of this post is how political "Animal Spirits" is, how mainstream it is, and how misguided it is.
Let us get right to the point. The book praises Asian economies for emphasizing saving. It ascribes the amazing long-term growth of the Singaporean economy to forced, massive savings. Yet it discusses the current American economic difficulty with a complete disregard to this philosophy:
The overwhelming threat to the current economy is the credit crunch. It will be difficult and perhaps even impossible to achieve the goal of full employment if credit falls considerably below its normal levels. (P. 86)
DoctoRx here. It's not clear if the authors are referring to the absolute level of credit or the growth level of credit.
The authors then go on to ascribe the current alleged credit crunch- which as I have previously blogged (citing such sources as the New York Fed to prove my point), only exists in relation to the loosest, most irresponsible granting of credit in generations- to a loss of animal spirits:
The segment of the financial system that initiated loans, and then passed them on, was fragile. It fell. In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. (P. 90)
DoctoRx here. The context of this passage makes it clear that government must cure the populace of this decline in animal spirits, of loss of confidence. How? With a hair of the dog strategy:
On pages 90-92, the authors have effusive praise for the Fed/Treasury solution of the Term Asset-Backed Loan Facility (TALF). They say (P. 92):
More generally, TALF shows us that there are two sides to creative finance: It may have gotten us into this crisis. But its genius may also get us out of it. (Emph. added; P. 92)
What is the "genius" of TALF? Basically, banks get to make a great deal of money with minor downside, with the Fed and Treasury taking substantial risk for limited upside. This is "genius"?
Now we get back to the beginning of this post. The entire set of actions of the government, which has really included the formerly-independent Fed ever since the Bear, Stearns/JPMorgan Chase bailout of March 2008, has been based on the combination of "high handed" and "Big Lie" tactics.
Why do I pick on Shiller and Akerlof? Well, consider that Dr. Akerlof is the husband of Fed Governor and Democratic stalwart Janet Yellen, and the authors have a classic 1960's Tobin-type liberal bias:
This had been the vision in prev ious generations of those who established central banks: the role of central banks is to insure the credit conditions that enable full employment. (P. 90)
From bogus "stress tests" and overvalued "legacy" securities, extending to the noted academics Robert Shiller and George Akerlof, we are besieged by lies large and small and political agendas everywhere.
The good government types found on the blogosphere, such as Yves Smith and many other such as Mish, Barry Ritholtz, Jesse and Simon Johnson, are powerless voices in the wilderness. Even the President who they by and large supported as a candidate has dissed them, saying that his administration pays no attention to (mere) bloggers.
And so Big Finance continues its primacy, and the culture of Serfing USA, with a government insistent on more and more debt even as the citizenry tries to escape its own personal debt, uses every tool of modern persuasive communications up to and including the Big Lie technique to continue to enrich the Merchants of Debt even as those companies such as auto manufacturers that actually make useful physical products are left to die and ordinary people who believed the Big Lie that house prices never decline and were therefore placed in overpriced homes by the Merchants of Debt are sent to tent cities to rot with no help from the Party of Franklin Delano Roosevelt and while the financiers of this disaster not only keep their estates and fine art purchased with the proceeds of these nefarious transactions but continue to receive all the fruits of this productive nation that Washington, D.C. can provide.
Can all this really be occurring for some paltry campaign contributions?
Copyright (C) Long Lake LLC 2009
The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.
Unfortunately, the financial and business has become political. Yves is hardly a right-winger; for her to use that terminology for a candidate who she fervently hoped would do the correct things is sad and shocking. (And appropriate!)
In that context, please consider the points made in a supposedly important book by two noted economists: a Nobel Prize winner- George Akerlof- and the even more famous Robert Shiller- in the popular book "Animal Spirits".
The book's subtitle is "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Allegedly this is an Important work (for a popular economic tome). Perhaps within academic economics, it is worth reminding one's colleagues that Adam Smith and other empirical economists such as Keynes, who all theorized in words (not that Keynes did not also reduce his theories to equations) that at the root of economic actions are humans with emotions and non-rational expectations etc. etc. To non-economics such as a physician, however, this "insight" is jejune. of course individuals make non-rational decisions. How could one think otherwise?
The point of this post is how political "Animal Spirits" is, how mainstream it is, and how misguided it is.
Let us get right to the point. The book praises Asian economies for emphasizing saving. It ascribes the amazing long-term growth of the Singaporean economy to forced, massive savings. Yet it discusses the current American economic difficulty with a complete disregard to this philosophy:
The overwhelming threat to the current economy is the credit crunch. It will be difficult and perhaps even impossible to achieve the goal of full employment if credit falls considerably below its normal levels. (P. 86)
DoctoRx here. It's not clear if the authors are referring to the absolute level of credit or the growth level of credit.
The authors then go on to ascribe the current alleged credit crunch- which as I have previously blogged (citing such sources as the New York Fed to prove my point), only exists in relation to the loosest, most irresponsible granting of credit in generations- to a loss of animal spirits:
The segment of the financial system that initiated loans, and then passed them on, was fragile. It fell. In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. (P. 90)
DoctoRx here. The context of this passage makes it clear that government must cure the populace of this decline in animal spirits, of loss of confidence. How? With a hair of the dog strategy:
On pages 90-92, the authors have effusive praise for the Fed/Treasury solution of the Term Asset-Backed Loan Facility (TALF). They say (P. 92):
More generally, TALF shows us that there are two sides to creative finance: It may have gotten us into this crisis. But its genius may also get us out of it. (Emph. added; P. 92)
What is the "genius" of TALF? Basically, banks get to make a great deal of money with minor downside, with the Fed and Treasury taking substantial risk for limited upside. This is "genius"?
Now we get back to the beginning of this post. The entire set of actions of the government, which has really included the formerly-independent Fed ever since the Bear, Stearns/JPMorgan Chase bailout of March 2008, has been based on the combination of "high handed" and "Big Lie" tactics.
Why do I pick on Shiller and Akerlof? Well, consider that Dr. Akerlof is the husband of Fed Governor and Democratic stalwart Janet Yellen, and the authors have a classic 1960's Tobin-type liberal bias:
This had been the vision in prev ious generations of those who established central banks: the role of central banks is to insure the credit conditions that enable full employment. (P. 90)
Having recently finished reading Niall Ferguson's "The Ascent of Money", I would have to call that statement a Big Lie as well. The evolution of the Bank of England into a central bank was most assuredly not to insure full employment for the subjects of the Crown. It was much more to help finance wars, imperialistic expansion, and other matters. Similarly, while the origins of the U. S. Federal Reserve are a bit controversial, full employment in the U. S. was for the most part a given before the Great Depression (though the level of wages was another matter). The country in those days was much to busy growing and much too rural not to use more workers somewhere to do something. From the New York Fed itself on the creation of the Federal Reserve in 1913:
The Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. (Ed: This post from the NY Fed lacks a close to the quote mark; alert readers who noticed the missing "end quote" should complain to the Fed!)
From bogus "stress tests" and overvalued "legacy" securities, extending to the noted academics Robert Shiller and George Akerlof, we are besieged by lies large and small and political agendas everywhere.
The good government types found on the blogosphere, such as Yves Smith and many other such as Mish, Barry Ritholtz, Jesse and Simon Johnson, are powerless voices in the wilderness. Even the President who they by and large supported as a candidate has dissed them, saying that his administration pays no attention to (mere) bloggers.
And so Big Finance continues its primacy, and the culture of Serfing USA, with a government insistent on more and more debt even as the citizenry tries to escape its own personal debt, uses every tool of modern persuasive communications up to and including the Big Lie technique to continue to enrich the Merchants of Debt even as those companies such as auto manufacturers that actually make useful physical products are left to die and ordinary people who believed the Big Lie that house prices never decline and were therefore placed in overpriced homes by the Merchants of Debt are sent to tent cities to rot with no help from the Party of Franklin Delano Roosevelt and while the financiers of this disaster not only keep their estates and fine art purchased with the proceeds of these nefarious transactions but continue to receive all the fruits of this productive nation that Washington, D.C. can provide.
Can all this really be occurring for some paltry campaign contributions?
Copyright (C) Long Lake LLC 2009
Friday, April 3, 2009
Yves Smith Says Team Obama Uses "Big Lie" Technique, and Other Unpleasantries of the Day
Today is another busy news day.
The Economic Cycle Research Institute is out with its monthly U. S. Future Inflation Gauge. ECRI has maintained this measure for over 60 years. It has fallen massively over the past 18 months and is back near its lowest level in history at 79.3, at about a 51-year low. Inflation probably averaged 1% in the next 5 years after sinking to that level, only rising after the guns-and-butter Viet Nam era (1964 onward).
ECRI also reports another marginal uptick in its Weekly Leading Indicator, which remains well below its very low level of November 2008 and still at a very severe 22% below year-ago level. This suggests a continued slowing of the economy through year-end, with stabilization at very low levels of economic activity.
I intend to do a post on the ECRI and its usefulness, or lack of such, to investors, in the near future.
Consistent with the above, there is truly bad news behind the headlines of the Labor Department's unemployment report. Not headlined are two data points. The average supervisory work week has shrunk to a record low since records began in 1964: 33.2 hours.
And, consistent with the lack of work available and the very low USFIG, January's unemployment number was revised upward substantially, from 655,000 to 741,000.
Labor Department's broadest measure of unemployment is U-6, which can be found on Table A-12 of the basic unemployment report available at www.bls.gov, shows that almost 1 in every 6 members of the labor force is either unemployed, underemployed or too discouraged by labor market conditions to bother actively looking for work. While comps are difficult to obtain, it would appear that the definition of unemployment used in the 1930s is more like U-6 than the headline U-3 (8.5% in March). Given that the Obama "stimulus" program has no relation to FDR's emergency work programs, it is virtually certain that U-6 will hit 18% sooner rather than later.
(Note also that ADP's March non-farm job loss count was 742,000, exactly the current Labor Dep't count of Jan. job losses. The ADP and Labor numbers have tracked each other very well for some months now (www.adpemploymentreport.com); expect further downward revisions in the Labor numbers for Feb. and March, I'm afraid.)
Moving along to the blogosphere, it is interesting to observe how certain passionate critics of the Bush-Paulson approach to the financial crisis have stayed objective after Mr. Obama became President, and others have kind of sort of joined "Team O" while trying at the same time to be interesting and objective.
Amongst the former, I would note Mish at www.globaleconomicanalysis.blogspot.com. He has a series of posts excoriating the PPIP and has not fallen for Team Obama hype. Mish is of the Austrian school of economics and has an amazing track record of forecasting the economic downturn and the low-inflation/deflation environment. He also is a darn good market timer.
Another blogger who was definitely in the Obama hope-change camp is Yves Smith of www.nakedcapitalism.com. She has definitively changed her tune, and her site is currently displaying a variety of well-informed opinions and reports. Here is a quote from Yves herself from the conclusion of today's post, Treasury Trying to Defend Bank Gaming of Public-Private Partnership:
The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.
Well! Obama-phile no more, it would appear.
Finally, also on NC is the overlooked report that Hedge Fund Bridgewater Says No to Public Private Partnership Program:
Now illustrating our (Ed: Yves'/NC's) latest concern, that the Treasury may turn out to be the Gang That Can't Shoot Straight, our ongoing reservation, that there may be no way to make the program work for banks and investors even with hefty government subsidies, may be coming to pass. . .
The turndown by Bridgewater is particularly significant. (Ed: They only manage $80 B!)
Is this the beginning of the end for PPIP?
What Nouriel Roubini recently called the "Made-Off" economy, with Ponzi schemes built into the system of much greater scale than the Madoff one, is currently on a glide path to a 1995 level of economic activity, if one takes the numerical ECRI weekly leading indicator as predictive. Given potent deflationary forces and "crowding out" of private borrowing by the massive projected Federal deficits, the outlook for business remains unexciting, and when brilliant thought leaders such as Yves Smith start describing Team Obama as using a technique associated with Team Hitler, one should watch out for the public to gradually adopt that viewpoint.
Copyright (C) Long Lake LLC 2009
Monday, February 23, 2009
Set It Right
In dealing with the ongoing financial crisis, the Obama Administration is going that of G W Bush one worse.
During times of crisis last year, Treasury Sec'y Henry Paulson would appear Sunday afternoon to make an announcement of some feckless but important action. The rationale was to get the news out before the Asian markets opened. (Why? We've got troops in Japan, not the other way round.)
A disquieting pattern may be emerging out of Treasury. Recently it had a delayed major policy talk by Mr. Geithner which was widely panned for being merely the announcement of a plan to have a plan. Last night we saw a Sunday evening trial balloon. This also moved Asian markets, as Bloomberg.com reported in Citigroup Rises on Report Government May Boost Stake:
Citigroup, Inc., which has accepted $45 billion from the U.S. taxpayer, climbed as much as 28 percent in German trading following a report that the government may increase its stake in the lender.
Citigroup was up 24 percent at $2.41 a share as of 12.05 p.m. in Frankfurt trading today. The New York-based bank slumped 44 percent last week on concern it may be nationalized. .
(Note: the "news" came out before the European markets opened. In response, the Japanese stock market moved from down about 2% to almost even. Also note that the stock has been plummeting for a year and a half, as it has become more and more clear that not only is the Company insolvent, but it has been much more disastrously run than its peers.)
The lender is in discussions with U.S. officials about an increase in the government’s ownership, the Wall Street Journal said earlier today, citing people familiar with the situation. The government may end up owning as much as 40 percent of Citigroup’s common stock, while the bank’s executives would prefer the stake to be closer to 25 percent, the Journal said. Citigroup spokesman Jon Diat declined to comment.
“It’s good news that the bank likely won’t be 100 percent nationalized,” said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London. “It’s a relief even if only 20 percent remains out of government hands.”
(My comments:
1. The Haynes comment is gibberish. What difference if Government owns 80% or 100% of a worthless company? And on what evidence is he even concluding that Citi will not be 100% nationalized?)
2. Why did Bloomberg bother to highlight that idiotic comment?)
Citigroup proposed to its regulators that the government should convert a large portion of its preferred shares into common stock in a transaction that wouldn’t cost taxpayers more money, the Wall Street Journal reported.
To me, this "story" smells more like a pathetic short squeeze effort than real news.
In any case, the above Bloomberg report is disingenuous in the extreme. Currently, the Feds own a semi-senior stake in Citigroup. Why should we move down to the bottom of the credit ladder? To speculate? What are the ethics and the practicalities of the U.S. Government having a common equity stake in one particular company whose fate it controls? How unfair is that to its competitors, anyway? Does anyone suspect that Robert Rubin, who likely still holds lots of Citi stock and options, has been influencing matters to favor Citi?
Overall, given how consistently Treasury has been favoring the Citis of the world over you and me under both Presidents Bush and Obama, I'll take the Paulson approach. At least with him there was a specific policy, disgusting and ad hoc though it may have been.
Though the financial crisis has been worsening for a year and a half, does President Obama even have a policy? (Mr. Summers, the President's senior economics adviser, let it be known two months ago that he and his team were working day and night to solve this problem.)
Some bloggers answer both yes and no to the above question. Yves Smith's answer is a yes and no, disquieting answer, as her Naked Capitalism reported last night: Now It's Official: Stress Test Reports Pre-Determined. The post, which is a very worthwhile read in its entirety, references one especially odd quote from CNBC:
Said one high-level (government) official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”
Excuse me? The stress tests are designed to prove what Treasury already knows?
And if the banks (read Citi and perhaps BofA) have enough capital, what's this about giving them access to capital?
There have been innumerable references in the press comparing this economy and the financial crisis to the 1930s. Let's not forget the miserable 1970s:
Citigroup and the markets are twisting slowly, slowly in the wind (sometimes not so slowly!). The Administration, Citi, and general market information are providing modified limited hang-outs. Various leaks are providing plausible deniability. Someone may protest that he is not a crook. High-def TV may show in exquisite detail beads of sweat on some malfeasor's frenulum.
The time is out of joint. Is Barack Obama thinking Hamlet's next line:
"O cursed spite, that ever I was born to set it right!"?
Leaks and plans (forget about a plan to present a plan) are useless at best.
The dislocated financial joint must be set right.
Right away.
During times of crisis last year, Treasury Sec'y Henry Paulson would appear Sunday afternoon to make an announcement of some feckless but important action. The rationale was to get the news out before the Asian markets opened. (Why? We've got troops in Japan, not the other way round.)
A disquieting pattern may be emerging out of Treasury. Recently it had a delayed major policy talk by Mr. Geithner which was widely panned for being merely the announcement of a plan to have a plan. Last night we saw a Sunday evening trial balloon. This also moved Asian markets, as Bloomberg.com reported in Citigroup Rises on Report Government May Boost Stake:
Citigroup, Inc., which has accepted $45 billion from the U.S. taxpayer, climbed as much as 28 percent in German trading following a report that the government may increase its stake in the lender.
Citigroup was up 24 percent at $2.41 a share as of 12.05 p.m. in Frankfurt trading today. The New York-based bank slumped 44 percent last week on concern it may be nationalized. .
(Note: the "news" came out before the European markets opened. In response, the Japanese stock market moved from down about 2% to almost even. Also note that the stock has been plummeting for a year and a half, as it has become more and more clear that not only is the Company insolvent, but it has been much more disastrously run than its peers.)
The lender is in discussions with U.S. officials about an increase in the government’s ownership, the Wall Street Journal said earlier today, citing people familiar with the situation. The government may end up owning as much as 40 percent of Citigroup’s common stock, while the bank’s executives would prefer the stake to be closer to 25 percent, the Journal said. Citigroup spokesman Jon Diat declined to comment.
“It’s good news that the bank likely won’t be 100 percent nationalized,” said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London. “It’s a relief even if only 20 percent remains out of government hands.”
(My comments:
1. The Haynes comment is gibberish. What difference if Government owns 80% or 100% of a worthless company? And on what evidence is he even concluding that Citi will not be 100% nationalized?)
2. Why did Bloomberg bother to highlight that idiotic comment?)
Citigroup proposed to its regulators that the government should convert a large portion of its preferred shares into common stock in a transaction that wouldn’t cost taxpayers more money, the Wall Street Journal reported.
To me, this "story" smells more like a pathetic short squeeze effort than real news.
In any case, the above Bloomberg report is disingenuous in the extreme. Currently, the Feds own a semi-senior stake in Citigroup. Why should we move down to the bottom of the credit ladder? To speculate? What are the ethics and the practicalities of the U.S. Government having a common equity stake in one particular company whose fate it controls? How unfair is that to its competitors, anyway? Does anyone suspect that Robert Rubin, who likely still holds lots of Citi stock and options, has been influencing matters to favor Citi?
Overall, given how consistently Treasury has been favoring the Citis of the world over you and me under both Presidents Bush and Obama, I'll take the Paulson approach. At least with him there was a specific policy, disgusting and ad hoc though it may have been.
Though the financial crisis has been worsening for a year and a half, does President Obama even have a policy? (Mr. Summers, the President's senior economics adviser, let it be known two months ago that he and his team were working day and night to solve this problem.)
Some bloggers answer both yes and no to the above question. Yves Smith's answer is a yes and no, disquieting answer, as her Naked Capitalism reported last night: Now It's Official: Stress Test Reports Pre-Determined. The post, which is a very worthwhile read in its entirety, references one especially odd quote from CNBC:
Said one high-level (government) official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”
Excuse me? The stress tests are designed to prove what Treasury already knows?
And if the banks (read Citi and perhaps BofA) have enough capital, what's this about giving them access to capital?
There have been innumerable references in the press comparing this economy and the financial crisis to the 1930s. Let's not forget the miserable 1970s:
Citigroup and the markets are twisting slowly, slowly in the wind (sometimes not so slowly!). The Administration, Citi, and general market information are providing modified limited hang-outs. Various leaks are providing plausible deniability. Someone may protest that he is not a crook. High-def TV may show in exquisite detail beads of sweat on some malfeasor's frenulum.
The time is out of joint. Is Barack Obama thinking Hamlet's next line:
"O cursed spite, that ever I was born to set it right!"?
Leaks and plans (forget about a plan to present a plan) are useless at best.
The dislocated financial joint must be set right.
Right away.
Tuesday, February 10, 2009
BARF
Per Calculated Risk today, James Galbraith has dubbed the new Treasury plan BARF: Bad Assets Relief Fund. Or perhaps it could be called Confused Relief of Assets Plan.
Yves Smith at Naked Capitalism and Mish at Global Economic Trend Analysis this morning each skewered the plan mercilessly based on last night's NY Times preview of it.
The stock market is passing its judgment of the day today, down 3-4% at a time when so many people were looking for a rally. Worse, virtually everything is down except for the safe haven plays: gold and Treasuries.
Yuccch!
Copyright (C) Long Lake LLC 2009
Yves Smith at Naked Capitalism and Mish at Global Economic Trend Analysis this morning each skewered the plan mercilessly based on last night's NY Times preview of it.
The stock market is passing its judgment of the day today, down 3-4% at a time when so many people were looking for a rally. Worse, virtually everything is down except for the safe haven plays: gold and Treasuries.
Yuccch!
Copyright (C) Long Lake LLC 2009
Monday, February 9, 2009
What a Difference a Day Makes? 12 Little Hours . . .
Last night, on our post Weekend Wrap-up, we suggested that the delay in Treas. Sec'y Geithner's speech was not really because of the stimulus bill but because his boss had not made up his mind yet. Today we find this appears to be true, as reported by Bloomberg.com in "U.S. Delays Finance Plan as Officials Debate Debt":
Treasury Secretary Timothy Geithner delayed the announcement of the Obama administration’s financial-recovery plan as officials debated proposals aimed at addressing the toxic debt clogging banks’ balance sheets.
Political-economic-financial commentary on the leaked version of the current thinking within Team Obama is found in Naked Capitalism in Yves Smith's post today, "Now It's Semi-Official: MLEC to Rise From the Dead":
This is so far from being a plan I cannot believe the Obama administration is putting it forward. This is well short of the sort of term sheet or agreement in principle that then gets hashed out in deal land to close a transaction. The basic structure of the New Entity is up in the air, subject to negotiation with a variety of investors who likely have differing perceptions of risk and investment time horizons (how does this work for a hedge fund that has to report its net asset value to investors monthly, for instance? That is one of a host of considerations on the investor side). Expect a rerun of the Paulson MLEC saga, weeks of floundering as the Treasury tries to herd cats.
Ms. Smith concludes without mincing words:
To put it more simply, this deal works only if the government is the bagholder, big time. This elaborate structure is merely designed to put lipstick on a pig by dignifying the fiction that there might be some upside to the taxpayer and using guarantees to disguise what the ultimate cost might be.
As is said over bagels and lox from time to time, oy!
On the deflation front, despite the turmoil and apparent political indecision in D.C., gold is down 1%. Over the past year, major down-moves in stocks sucked down all assets, even gold, which has been the strongest major commodity. Let us see if gold and McDonald's break down. If they both break down, a deflationary deluge could be upon us. If so, it's easy to avoid the news by heading south to spend the rest of their summer in Tierra del Fuego.
Copright (C) Long Lake LLC 2009
Treasury Secretary Timothy Geithner delayed the announcement of the Obama administration’s financial-recovery plan as officials debated proposals aimed at addressing the toxic debt clogging banks’ balance sheets.
Political-economic-financial commentary on the leaked version of the current thinking within Team Obama is found in Naked Capitalism in Yves Smith's post today, "Now It's Semi-Official: MLEC to Rise From the Dead":
This is so far from being a plan I cannot believe the Obama administration is putting it forward. This is well short of the sort of term sheet or agreement in principle that then gets hashed out in deal land to close a transaction. The basic structure of the New Entity is up in the air, subject to negotiation with a variety of investors who likely have differing perceptions of risk and investment time horizons (how does this work for a hedge fund that has to report its net asset value to investors monthly, for instance? That is one of a host of considerations on the investor side). Expect a rerun of the Paulson MLEC saga, weeks of floundering as the Treasury tries to herd cats.
Ms. Smith concludes without mincing words:
To put it more simply, this deal works only if the government is the bagholder, big time. This elaborate structure is merely designed to put lipstick on a pig by dignifying the fiction that there might be some upside to the taxpayer and using guarantees to disguise what the ultimate cost might be.
As is said over bagels and lox from time to time, oy!
An alternative proposal is well described by Willem Buiter ("woolly boots" in Dutch, I am told) in his weekend blog posting titled "Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer". He argues concisely that a "good bank" should be created from the valuable assets of the existing insolvent banks.
The financial institutions are active on a related front, which is to eliminate mark-to-market accounting. Yves Smith skewers this today in Mark-to-Market, RIP? It includes the opinion from a formed FDIC examiner that fraud in valuation is at Enron levels, expresses her opinion that "the idea that this move (from MTM) will mke matters better is delusional, and predicts that this idea will come to pass.
Moving on, more evidence of deflation is found in a WSJ article, "Saks Upends Luxury Market With Strategy to Slash Prices". The article details how price-slashing well before Christmas Day put small stores out of business and has made shoppers wary of buying at full price. Another scary part of the article is the quote from Saks' CEO that: "These herculean things" were done to "make sure that the company survives". We're talking one shopping season. How on the edge are how many companies?On the deflation front, despite the turmoil and apparent political indecision in D.C., gold is down 1%. Over the past year, major down-moves in stocks sucked down all assets, even gold, which has been the strongest major commodity. Let us see if gold and McDonald's break down. If they both break down, a deflationary deluge could be upon us. If so, it's easy to avoid the news by heading south to spend the rest of their summer in Tierra del Fuego.
Copright (C) Long Lake LLC 2009
Monday, February 2, 2009
Winter of Discontent
Perhaps it's time for Monopoly sets to reappear both on kitchen tables and on expensive dining room tables for twenty in Greenwich mansions.
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
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