Newsweek Announces the End of the Banana

The Recession is Over, Newsweek declares.

Newsweek is supposed to be a reporter of the news. NBER dates the onset and end of recessions ("bananas"). There was denial from many economists that a recession was on all throughout the first half of 2008. Newsweek may well be correct, but on the other hand, the headline may be literally false. Thus EBR takes this headline more in the contrarian spirit than in the "Glad you told me, guys" vein.

In any case, it hardly matters to most people. The Merchants of Debt retain their primacy in the structure of the economy. That's at least one strike against long-term economic health. Yet it need not be fatal. We will not know tomorrow; it takes a lot longer than that to have a better sense from the perspective of the future where you really are now.

In the meantime, Wall Street is selling newly-created stocks and bonds at a rapid pace as corporate insiders fail to buy the stocks of their own companies. A strange time with many cross-currents . . .

Copyright (C) Long Lake LLC 2009

Where Has All the Money Gone?

The world has gone mad today,

And good's bad today,

And black's white today,

And day's night today . . .

Anything goes.

-Cole Porter, "Anything Goes"

Shortly after Barack Obama gave an interview to the New York Times in which he confided that Team Obama pays no attention to bloggers, the blogger barbarians are at the gates of the castle of Big Finance.  This time, they have the law with them.  It has now been revealed that NY Att'y Gen'l Cuomo is squeezing BofA's CEO Ken Lewis; BofA has been sued for enabling the alleged Cosmo scam on Long Island; and now it appears that the law is coming down on AIG, initially in the person of Joseph Cassano, who ran the AIG Financial Products division that (in) famously sold credit default swaps (i.e., insurance against bonds defaulting) without reserves. And so on and so forth.  As with Watergate, the revelations are beginning to cascade.  Perhaps people will reflect that Bernard Madoff was not just some scamster but was a founder of the NASDAQ, a major player in it, and that the NASDAQ per se largely functions as a scam from the standpoint of the average "investor".  And why are Citi and BofA reported to be buying broken CDOs at 30 cents on the dollar while carrying them on their books at 80-90 cents?

Why does Chris Whalen of the Institutional Risk Analytics, who testifies before Congress and does business in the financial arena in America, say in a post this week that:

 As we said of Mexico two decades ago, Americans now live in a Mafia State that is beyond control.

Our political class is entirely captive of Wall Street, the result of decades of corruption and moral decay. Our nation's capital is controlled by a criminal gang that masquerades as an elected government. . .

"Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or "Loss Given Default" (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody's, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss."

With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. As we told our friend David Kotok at Cumberland Advisers, just remember to buy the bonds, not the equity, no matter what investment situation you may be considering during most of 2009. In the current environment, be a creditor, not a shareholder.

DoctoRx here.  Now that financial company insiders have been able to both sell and short-sell more stock at inflated prices after the last manipulated rally, the truth comes out.  The CEO of Morgan Stanley is reported yesterday to say to his employees that 2009 will be tough, and in the last fewdays Tim Geithner has said that the banks are not in fact all that well-capitalized, a fact supported by the CEOs of BofA and JPMorgan Chase.  And as far as the bonuses go, not to worry, as predicted here recently:

Bank of America May Raise Investment Bankers’ Salaries by 70% 

By Jacqueline Simmons and Josh Fineman

March 27 (Bloomberg) -- Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover of Merrill Lynch & Co., people familiar with the proposal said.

Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said.

“We regularly review our compensation programs,” Bank of America said in an e-mailed statement. “Such a review is particularly appropriate during such challenging times. While various alternatives are being considered, no decisions have been reached.”

DoctoRx here:  The anonymous Email is an obvious lie.  The only non-decision may be the exact salary numbers.

Adjusted for inflation/deflation, the stock crash of the last 17 months is worse than that of the Great Depression at the same time frame, and the same things are happening.  Spain is in deflation, with an unemployment rate of 14%; its Prime Minister said the unemployed may as well just f--- because there's no work to be had.  Mish at www.globaleconomicanalysis.blogspot.com has two recent posts, one about banks walking away from foreclosures because the properties aren't worth foreclosing on; and one on cities abandoning parts of their own municipalities and shrinking.  The accounting standards board, FASB, is revealed to be a bunch of lap dogs.  Last year, it refused to implement its rule requiring the Citis of the world to take on-balance sheet their SIVs, providing a pitiful non-reason for its reversal.  Now we have:

 Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes 

March 30 (Bloomberg) 

Four days after U.S. lawmakers berated Financial Accounting Standards Board ChairmanRobert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. . .

Please review the first paragraph immediately above.  Bloomberg says that this rule change would "improve profits" at Citigroup.  WRONG.  It would improve reported profits.  Economic profits cannot be changed by an accounting change.  Who will be fooled by FASB's supine behavior?  Only the small investor, that's who.

The noose and the cops are closing in on the Establishment.  Newsweek's pitiful attempt to smear Paul Krugman went nowhere.  Felix Salmon at Portfolio.com reported:

Newsweek's Fearful Krugman Profile

Evan Thomas has a profile of Paul Krugman on the cover of Newsweek. The 2,825-word article has six on-the-record quotes about Krugman; none of them -- not even the one from his mother -- are particularly flattering. No one is quoted saying a single nice thing about Krugman's economics or his opinions.

Salmon got it right with his title.  Newsweek and the Establishment are afraid of the truth.  While DoctoRx and Dr. Krugman have different political philosophies (big vs. small government), Dr. Krugman believes in "speaking truth to power", as his party liked to say when they were out of power.  As this blog has noted on numerous occasions, Dr. Krugman has been critical of Barack Obama's economic policies before Mr. Obama became President Obama.  

One can pick one's preferred time of when things went seriously, structurally wrong.  The Left goes back to Reagan.  I would more simply go back to the Asian contagion, when the average U. S. stock peaked around 1997-98, but the bubble was then perpetrated.  Ever since then, bubbles have been blown and burst.  However, there are now no bubbles left in the stock market, as all stock groups are in well-defined downtrends, and forget about real estate.  Only gold and Treasuries/government mortgage-backed securities are in defined up-trends.  One suspects that that's where the big money has been flowing, as the public continues to disbelieve that these markets are toppy. Even the ad for gold in the Super Bowl was for the public to sell its gold, not to buy it, and thus did not signify a top.

Some major unanswered questions include:  

1.  How will the financial fraud on the public, which is well on its way to being revealed for all to see and is thus coming to a climax, be resolved;

2.  In the midst of the worst financial crisis since the 1930s, how did America get as President the single least experienced President in its modern history, whose political career most resembled that of Robert Morse in "How to Succeed in Business Without Really Trying"?  (Remember the song, "Oh, I Believe in You . . .?);

3.  How much wealth will be/is left after all that has been looted by the banksters  and the insider/CEO has been revealed;

and

4.  Where have the looters been stashing their gains?

For individual investors, their pecuniary interest is actually most importantly revealed by #4.  This is where technical analysis, with trend-following rather than assuming reversion to the mean, may help.  After all, if you're a looter, your wealth has to be somewhere.  It's not logical for it to be sitting in T-bills just waiting for stocks to bottom "tomorrow" if you know that you and your ilk have appropriated for yourselves more than the public can imagine.  If it's in T-bills, it's to protect capital against deflation; in deflationary bananas, stocks have no bottom.  Back to Whalen:

"As global deflation proceeds, those with cash shall be king . . ."

This could be the financial equivalent of Watergate, and potentially more consequential.

Copyright (C) Long Lake LLC 2009

Monday Morning Musings

The current Newsweek has some condescending and surprising comments from a head honcho, Even Thomas, in an article on Nobel winner Paul Krugman.

Krugman, who is justly famed for a lifetime of accomplishments, is, according to Thomas, merely enjoying a Warholian moment:  "Krugman is having his 15 minutes and enjoying it . . ."  (Just to remind people, Warhol suggested that in the future, due to media everywhere, anybody would be famous for 15 minutes, even if he/she had done little or nothing to deserve a few minutes in the limelight.  I would instead ask, what has Even Thomas ever done to allow him to disparage a Nobel winner?

More substantively, look at the tile and subheading, and then some text:

 Obama’s Nobel Headache

Paul Krugman has emerged as Obama's toughest liberal critic. He's deeply skeptical of the bank bailout and pessimistic about the economy. Why the establishment worries he may be right.

By Evan Thomas | NEWSWEEK

Published Mar 28, 2009

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he's wrong, and you sense he's being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see.

DoctoRx here.  Yes, what Krugman sees is that Obama/Geithner policies are the same failed/failing Bush/Paulson policies, with the same sleepwalking Congress doing whatever the President and Big Finance tell it to do.

Meanwhile, in case you missed it:

Geithner’s Toxic-Asset Plan on Slow Track as Values Deteriorate 

By James Sterngold

March 27 (Bloomberg) -- The Obama administration’s plan to remove distressed assets from bank balance sheets may take three months to begin operating, risking further deterioration in the value of the securities and driving up rescue costs.

DoctoRx here:  It's a good thing this turkey might just never get off the ground, because Geithner subsequently said:

“To get out of this we need banks to take a chance on businesses, to take risks again”.

Econblog Review begs to differ.  Banks took far too many risks.  If you go the track or Vegas, take risks and lose, and then have to go to your rich Uncle named Samuel for a loan.  This is especially soon when Uncle is financially stressed, has a large family which increasingly is looking to borrow or get a gift of his money, and when Uncle Samuel's family thinks you've been wasting to much money already and just don't deserve more of his.

Conclusion:  Geithner must go.  The day his "resignation" is announced, I may turn wildly bullish, especially if he is succeeded by a Volcker type, meaning someone who actually believes in fiscal sobriety and wants to encourage saving, not borrowing.

Meanwhile, let's look at some economic statistics.

World trade is collapsing:

Global trade shrinks 20% since October – Speed of decline greater than during Great Depression

The best authority on real time global trade data is the Netherlands CPB Institute, which yesterday published its January trade data. Global trade are now down 20% since October. This is not annualised but actual. In other words, global trade volumes are down by a fifth compared to pre-crisis levels. FT Deutschland quotes a CPB staffer as saying this is faster than during the Great Depression (the estimates there range from 25-35% during 1929 and 1932).

In particular, Japan is in a special kind of economic Hell:

March 30 (Bloomberg) -- Japanese industrial production fell for a fifth month in February, the longest losing streak since 2001, as exports collapsed.

Factory output declined 9.4 percent from January, when it plummeted a record 10.2 percent, the Trade Ministry said today in Tokyo. Inventories fell an unprecedented 4.2 percent. . .

Japan’s exports plunged a record 49.4 percent in February from a year earlier as sales of cars and electronics dried up. Toyota Motor Corp., forecasting its first net loss in more than five decades, plans to cut thousands of jobs and slash domestic production by half this quarter. . .

Prime Minister Taro Aso is preparing his third stimulus package since October to counter the slump. Finance Minister Kaoru Yosano said on March 22 that a plan of as much as 20 trillion yen, double the total amount pledged since October, is “not out of line” as the economy heads for its worst recession since 1945.

“The longer this stretches out, the harder the domestic economy is going to be hit,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “The government really needs to come out with another package.”

DoctoRx here.  EBR begs to differ with Martin Schulz.  The government has been "stimulating" the unstimulatable for many, many years.  Japan's problems are not complicated.  First, it has an old population that gets older by the day and that is certain to shrink in number as the years go by.  So there is no growth, nowhere, no-how.  So its economy needs to be geared for sustainablility, not stimulus.  Probably it should pay down debt and invest in growing areas.  It could purchase Brazilian reals, Brazilian land, the Indian rupee and good businesses in India, growth areas in China at the right price, etc.  It should NOT follow either the example or advice of the country that continues to occupy it and print and borrow money to keep the financiers rich.

Speaking of Japan having its worst "recession" (think Depression) since 1945:

-- The U.S. jobless rate climbed in March to the highest level since 1983 and manufacturing shrank, putting the recession on the brink of becoming the longest in seven decades, economists said before reports this week . . .

Unemployment jumped to 8.5 percent from 8.1 percent in February, according to the median estimate of analysts surveyed by Bloomberg News before the Labor Department’s April 3 report. The figures may also show payrolls fell by 660,000 workers, bringing total job losses since the contraction began to 5 million.

DoctoRx again.  Don't be surprised if unemployment "only " jumps to 8.3 or 8.4% and Big Finance "economists" try to spin this as good news because it is "less than expected".  Focus on this being the longest economic banana since the 1929-32 "recession" (as it would called today).  When that ended, the trailing yield on the Dow 30 was 11%, stocks sold well below tangible book value, and forget about the Dow being at merely a 12 year low and within the range of 6 years ago, as it is now.  Who knows where things could go, but think about things another way.

The Economic Cycle Research Index of coincident indicators ("CI"), those that reflect how the economy is faring in real time, was at about 25 "units" 60 years ago.  At that time, the Dow was around 300.  That is a ratio of 12:1 Dow:ECRI CI. The ratio was about 10-12:1 until the early 1980's, when it began an inexorable rise to close to 100:1 at the market peak in 2000.  This ratio is only down now to about 55:1. 

In EBR's opinion, the stock market indeed is a weighing machine in the long run, and most people should ignore its short-term fluctuations.  Right now, there are too many economic and valuation trends and ratios that argue for caution to allow a proper margin of safety for most people or institutions that need their savings to risk much of them in publicly owned common stocks.

 

Copyright (C) Long Lake LLC 2009

Mid-day Update

From Bloomberg.com's video highlights right now:

Trichet Says ECB Weighing `New Non-Standard Measures'

BlackRock's Doll Says U.S. Stocks to Rise, Likes Energy

Somers Says Bankruptcy May Be `Positive Option' for GM

Tinsley Says BOE Hedging Bets on Scale of Asset Purchase\

And under "Portfolio Matters",

Federated's Duessel Sees S&P 500 Bottoming at 600-660. (It is now about 691.)

Where's the panic? All I see is concern.

Note: Bob Doll has come on CNBC forever with the same song. He's always nibbling on some tasty morsel of the stock market. In a rational world he would be off the air and out of a job. With plenty of stuff to snack on.

The S&P 500 was around 16 about 60 years ago. If it returned 7% yearly for 60 years, it would have grown to 94 today if it also averaged a 4% dividend yield. As is, counting dividends, it has returned about 10% per year for the last 60 years. This cannot be sustainable if inflation was 4% yearly. Thus there is no inherent reason to expect the stock market to rise from here in real terms.

The stock market is probably only back to average valuations; real estate remains overvalued on an historical standard; and the U.S. has effectively become a country where a mainstream newsweekly can one week proclaim that we are all Socialists, and another week have a cover that is largely in Arabic and that promotes radical Islam.

Where is there shelter from this storm?

Copyright (C) Long Lake LLC 2009