NEWS #99

From October 4, 2010 to December 19, 2010

December 19, 2010

Any emphasis (bolding) I put into any text today is my own. Comments within parenthesis are my own.

First, a note from the Orange Section.

"A problem with the long term nature of your argument: If Businesses ultimate liquidate in perpetuity they will eventually cease to exist. This violates the Survival Instinct and is thus highly unlikely. Ultimately, demand will never reach zero. Zero Demand is basically the realm of science fiction, ie Nuclear Holocaust, mankind is extinct. So barring the rise of Skynet, there will inevitably be a bounce. The question is when.

Furthermore, look at the incentives regarding business decision making. When I read that article, the question that comes to mind is: "why are managers making these decisions?" Part of it, IMO is that we have excess capacity in the system. (Yes, verily.) Another issue is we are in a downturn. There is also the negative business bias currently emanating from Washington. Finally, many firms have liability issues. All of these macro factors incent liquidation over investment. Remember, capital investment is all about the risk/reward and the influences on that analysis are constantly changing.

GM failed because it was inefficient. They got bailed out because their union made political contributions to the right guy at the right time. That business should have died. Instead the Government kept it afloat and allowed the inefficiency to persist in the system. As you said, Ford cut costs as they saw the storm forming. In essence Ford was a net liquidator as they knew they needed to prepare for the coming winter. The key here is that eventually there will be a Spring. When the Spring comes trickle down will trickle down as then the risk influences will turn positive and be magnified by favorable policy. (Really? More about this later.)

The policy question for Washington is how to make Spring come faster. Bailouts, Stimulus, Keynesianism, Regulation, Green Jobs, etc. are not working. I would argue have never worked. If I were them I'd consider that consumer balance sheet rehab, ie deleveraging, is what is needed in order to create more free cash flow for consumers. The fastest way to achieve this is tax cuts. Give them more money to recover. Only consumer spending will create sustainable job growth. The alternative is a Japanese Malaise. (Protecting the big money guys from feeling the pain did not work out very well for the Japanese, so we are doing exactly the same thing. And if only consumer spending will create sustainable job growth, perhaps we should regulate credit so that debt overhang does not restrict consumer spending in the future the way it is doing now? The U.S. consumer is tapped out, too many are unemployed, and there is too much unused capacity for any kind of bounce back to occur.)

I think a critical issue in this bear market/depression is the detachment between the equity markets and Washington from Main Street USA. Equity Markets are being artificially raised through institutional dollars and financial illusions perpetrated by the Federal Reserve. (And here, Oh Orange Section, you are exactly on the same page with Mr. Christopherson.) The indexes do not represent the real economy just as Government Stats are a liar's game. The elites are in power consolidation/pain avoidance mode. Eventually that house of cards is going to come down..."

.................

Red and White D sent me this link to 'Guest Post: Extreme inequality helped cause both the Great Depression and the current economic crisis', on NakedCapitalism.Com. I think this is a must read for all Benders. It certainly reflects my own thinking. I quote it extensively below.

"It is clear that when banks become too big, it harms the economy. Economist Steve Keen says that 'a sustainable level of bank profits appears to be about 1% of GDP', and higher bank profits lead to a Ponzi economy and a depression.

But most mainstream economists dismiss the idea that wealth inequality among individuals causes economic crises.

Of course, some ideologues will argue that even discussing inequality is waging class warfare, and smacks of an attack on capitalism.

However, the father of modern economics - Adam Smith - disagreed.

And as Warren Buffet, one of America's most successful capitalists and defenders of capitalism, points out:

'There's class warfare, all right, but it's my class, the rich class, that's making war...'

And as I have previously noted, radical concentration of wealth actually destroys capitalism, turning it instead into socialism for the rich.

...Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:

First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealthy, there is less overall spending and less overall manufacturing to meet consumer needs.

Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:

Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were 'no more poker chips to be loaned on credit,' in [former Fed chairman Mariner] Eccles' words. And 'when their credit ran out, the game stopped.'

And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:

'In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.'

Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.

But I believe there may be a fourth causal connection between inequality and crashes. Specifically, when enough wealth gets concentrated in a few hands, it becomes easy for the wealthiest to buy off the politicians, to repeal regulations, and to directly or indirectly bribe regulators to look the other way when banks were speculating with depositors money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy."

..................

Does Trickle Down Work?

And so we come to it. I want to issue a specific challenge to the Orange Section. In his book 'Pants On Fire', Paul Christopherson states that he can find no empiracle evidence that money does actually trickle down. Now, it occurs to me that we have at hand a classic opportunity to test Trickle Down. First, we have the ten years of the Bush Tax Cuts that have just elapsed. We also have the ten year period before that when tax rates were higher. So we have the two decades: 2001 through 2010, and 1991 through 2000. The first is clearly, in my mind, the great Trickle Down experiment. The rich got to keep more of their money. What did they do with that money? Did they, in fact, invest and create jobs with it? Or was investment and job creation higher in the ten years previous when taxes were higher? That is the question.

I will be generous with the Orange Section and give him lots of time to collect data and mount his arguments. We are in no hurry here. Mr. Christopherson (a fellow Minnesotan of the Orange Section) may be dead wrong. Or, he may be right. Let us see. Will the Orange Section take up this challenge?

I would like to point out here that Trickle Down is a theory of human behavior, and humans are very messy and complicated beings. There is one huge and glaring assumption with Trickle Down of which we should all be aware: that given the opportunity to keep more wealth, that the wealthy will 'do the right thing' and create more jobs with it. But the wealthy may not actually 'do the right thing'. In an attempt to increase the return on their money, they may just rampantly speculate and corrupt the financial system with their dealings. It is their choice. Well folks, we have just had a ten year experiece of Trickle Down. How do you feel now? Is the assumption that comes with the Trickle Down theory correct?

December 15, 2010

Tobby Connor sends along this posting:

BAD BREADTH

"I've noted before that at intermediate turning points we will usually see breadth diverge from price.

The McClellan oscillator is now showing a large negative divergence and has moved back below zero despite the market making new highs.

On a slightly more serious note we are also starting to see a divergence in the advance/decline line for the first time since the cyclical bull began.
The last time this happened the market was entering the final topping process of the last bull market.
I think that is probably the case here also, as I think we are already in a very large topping pattern.

As you can see on the chart the next four year cycle low is due sometime in 2012.

Bernanke has massively increased the monetary response in an attempt to halt the secular bear, and we know how the last attempt to control the market turned out (we got the second worst recession since the Great Depression and the second worst bear market in history). I fully expect the next leg down in the secular bear to be even worse that the last one - not only in the stock market, but also in the economy.

Greenspan already proved that you can't meddle in the markets without eventually causing bad things to happen. Unfortunately Bernanke doesn't seem capable of learning that lesson and has now made the same mistake again only on a much larger scale. I'm confident it will only lead to a much larger collapse in the end.

We will almost certainly dip below the '09 lows at the next 4 year cycle low, probably in nominal terms and certainly in inflation adjusted terms.

Once the impending intermediate degree correction runs its course we will get what I believe will be the last rally in this cyclical bull market. That rally may or may not make marginal new highs before rolling over into the next leg down in the ongoing secular bear market.

I expect by this time Bernanke's insane monetary policy will have spiked inflation high enough to collapse the economy again and the global stock markets will begin the trip down into another devastating bear market.

In 2012 they won't be calling it a Great Recession they will be labeling it by its true name; The next Great Depression!"

It seems Toby Connor has come around to my view. This is a Depression folks.

The Orange Section has replied with a very lucid arguement. Highlighting is my own.

"Response to your comments:

I think you guys are missing my point. The issue is one of opportunity cost, specifically risk/reward. It also a case of short term vs. long term thinking. My argument is that blindly stating "If Corporations have profits then they should have more jobs" fails to factor in a variety of external factors that determine whether or not an investment in Capacity (jobs) makes business sense. If the economy is shrinking, and in the case of a business, it's specific market, then it does not makes sense to add capacity the company does not need, regardless of your tax rate or government incentives. Trickle Down Economics will never work in such a situation, not because the idea is flawed, but because it is not applicable to a situation of decreasing demand. Trickle Down requires demand growth to be effective. The idea of trickle down is that if you decrease business risk (tax obligations) you make investments less risky and therefore more likely to occur. If the whole economy is shrinking then business could pay zero taxes and they still wouldn't expand because they know the demand is not there to create the ROI needed to justify the investment. In other words, profits do not create demand in the short run.

This is my point about the two articles missing the bigger picture. If demand influences investment decisions, then the issue should be dealing with aggregate demand/excess capacity and not worrying about corporate profit levels. In terms of the demand issues, we've traveled this road extensively over the years. The issue is people having excess debt and no longer being able to finance their lifestyle via real estate asset appreciation. The demand that was created by real estate literally disappeared in 2008. Now you have an economy built to support a level of demand that longer exists. In simple terms we have this:

Demand pre-2008 Meltdown = X
Demand today = Y

X - Y = Z

Z = Slack Aggregate Demand

The only effective way to bring back the lost jobs is to shrink Z over the LONG RUN. Business will invest when there is an opportunity for growth. Shrinking Z creates such an opportunity. In my opinion the issue presented by the Authors only reinforces two conclusions:

1.) Government Demand is not a substitute for Consumer Demand in the Long Run
2.) Current Policy Direction is not growing Consumer Demand
3.) Current Policy Direction serves to increase overall business risk, making investment less likely

That article I sent you in my one email talks about this in the context of the Asian Steel Markets. Do you think that with a lower Corporate Tax it would be wise for the Japanses Steel producers to build new Foundry's? According to the two articles the answer is yes. According to Eclectica, the answer is to short the Jap Steel regardless."

The Orange Section makes a sound case that investment decisions over the short term (1 to 36 months) have little or nothing to do with Trickle Down. He is very right about that. Business leaders have a hard time looking at the reduced demand we are seeing in the economy now, and concluding major investment and/hiring is called for. However, I should point out that 'Pants On Fire' by Paul Christopherson is taking the longer view, and is saying that Trickle Down does not work there (if it ever did) because the very nature of the corporate decision making has changed, that 'optimizing stock holder value' puts short term gain ahead of long term investment (and therefore growth). As far as I can determine, Mr. Christopherson's arguements can not be refuted, and I have looked at them very hard.

Here is one of his main points:

Businesses (listed on exchanges) are net liquidators. They distribute more through dividends, share repurchases, mergers, and private equity deals than they invest.

In essence, following the above strategy, a company will (gradually at first, and faster as time goes on) lose market position, due to a failure to invest more than it distributes. 'Optimizing stock holder value' only bleeds value out of the company, until finally it collapses. This is exactly what happened to GM. The difference between it and Ford is that Ford saw the danger several years before GM and began a heavy reinvestment/retooling program (very unpopular with many public shareholders at the time). When the crunch came Ford was ready and GM was not. GM went bankrupt, and both the shareholders and bondholders got ripped. Oh, and one more point, 'optimizing stock holder value' always works in favor of management. And yes Virginia, all the GM execs got their bonuses even as they were driving the Chevy over the edge of the ravine.

When businesses are net liquidators, they are liquidating themselves. It is a slow bleed, but the process has only one possible end. The problem we face, as a nation, is that this practice has spread to a huge number of our corporations; so that we, as a nation, are in danger of liquidating ourselves.

December 14, 2010

Here are three links of note:

'Fed Has Only Temporarily Beat Deflation', by Mike Mish Shedlock on Minyanville.com. What Shedlock does not include is the huge deflationary hit (trillions) the U.S. is taking on falling housing prices.

Ben Smith sends this link: '10 reasons to shun stocks till banks crash', by Paul B. Farrell on MarketWatch.Com.

Keith sends this link: 'Why Eric Sprott sees silver as the next big investing windfall', by Shirley Won on TheGloveAndMail.Com.

.............

In my last posting the Orange Section failed to account for two items:

Premise 1: Corporate Profits are High
Premise 2: Unemployment is not going down

If profits are so high, why is this money not spurring the economy with job creation? The old Trickle Down arguement state that that is exactly what SHOULD be happening. But it is not. Why?

First, here is a graph Red and White D sent me. It is from www.calculatedriskblog.com.

Since my last posting I have aquired 'Pants On Fire' by Paul Christopherson. Let me quote extensively his explanation for what is going on.

"However, in today's economy, businesses are net liquidators. They distribute more, on balance, through dividends, share repurchases, mergers, and private equity deals, all of which are capital-extractive, than they invest. Share repurchases may drive up share prices, but they are not 'investments'; cash goes down on the left-hand side of the balance sheet, and equity goes down on the right, and the result is an entity less able to invest. The stock market god demands this; it is called 'optimizing shareholder value'.

The liquidation process inflates the value of management's stock options, and it produces dividends to private equity, but it chokes off investment, growth, and jobs. Today's stock market is not an engine of the economy; it is its braking system. The stock market is no longer primarily a source of capital for growth; it is an exit strategy, a liquidation mechanism. Since 1991, according to Grant Thornton, the number of U.S. exchange-listed companies is down by 22 percent. Adjusted for real GDP growth, the decline is a staggering 53 percent. This means that the number of buyouts and mergers has exceeded initial public offerings by a lot, which puts the lie to the stock market as capital-raising device myth. It is the reverse, and associated U.S. job losses are estimated at 22 million."

December 6, 2010

The Orange Section sends this note.

"I have a counter point to part of the article you posted about US Corporate Tax Rates. That author doesn't take his analysis far enough. His argument is basically:

Premise 1: Corporate Profits are High
Premise 2: Unemployment is not going down
Conclusion: Corporations are Greedy

Digging deeper we see how this is flawed. How do Corporate Profits translate into lower unemployment, ie jobs? The Answer, IMO, is that Profits are invested back into the economy. So the question that I think the high profits premise begs is why aren't high profits being invested? That answer is more likely one of the drivers of high unemployment in my opinion. My view is that the reason profits are being hoarded is uncertainty. Demand is slack, the tone out of Washington is similar to this author and very anti-business, regulations are multiplying, and taxes are increasing. (it isn't just corporate tax, it is also Obamacare, discussions on a potential VAT, etc.) What is ironic is that you quote another paragraph where the author agrees with me. He states plainly "savings is what funds business investment." He should be asking why the Corporations do not think there is a return on investing their profits.

Interesting after this rant on Corporate Profiteering, he starts to make more sense. Indeed, excessive borrowing is part of the problem. Not so much that money is cheap, but because of Debt Overhang. Economics does not seem to have a sound understanding of cash flow and income statements. It doesn't adequately account for the demand cost of Debt Payments. Slack Aggregate Demand is the main antagonist in this malaise. The solution, albeit painful in the short term, is Austerity. Unfortunately we are hell bent on following the Japanese policy path. This will be a disaster for younger Generations. Japan has essentially done everything in its power to prevent the wealthy from feeling the economic pain. In exchange for this economic aspirin they have traded away the opportunity for the younger generations. America is now on a path towards the same outcome.

Here is an excellent, albeit long read, on the macro trends coming down the road.

http://www.zerohedge.com/article/hugh-hendry-december-commentary-must-read#attachments"

December 5, 2010

I have been very busy and have neglected this site. I will try to devote more time to these pages in the future (Matt).

A thought provoking link is this:

'Fed Ranks Among Those With 'Biggest Lies'', by Paul Christopherson on Minyanville.Com. I quote the article below extensively. Highlighting is my own.

"The tireless, and tedious, push to cut taxes on big money continues. On the corporate side, after-tax profits as a share of gross domestic product, now $1 for every $9 in the economy, have never been higher. And private-sector job growth has never been lower. Business earnings have peaked, in part, because taxes paid, as a share of the corporate tax rate, have never been so low. For multinationals, the US today is, in fact, a tax haven. But, incredibly, the Business Roundtable gang can still claim, and does, that the US corporate tax rate is high, and the way to create jobs is to cut it. Opponents of corporate welfare have been described as business haters, if not Socialists. If today's environment may be characterized as anti-business Socialism, it makes one wonder what the alternative would look like."

The U.S. tax codes are so convoluted that nothing is as it seems to be. Corporations and the wealthy have loopholes in the taxe system wide enough to pave freeways through. The fact is that the stated tax rates for these top earners have nothing to do with the rates they actually pay, which is universally lower.

"Using tax cuts (especially those for the top bracket), capital gains and dividend cuts as economic stimulus is just magical thinking, which keeps getting proven over and over, for three decades now. A big reason the reviled economic stimulus plan did not do more good than it did (it did a lot) was because three-eighths of it was magical-thinking tax cuts. Thirty years of trickle-down have yielded just one visible outcome, namely, the greatest concentration of wealth since the Egyptian pharaohs. Private-sector job destruction has also never been greater. It is time to get past trickle-down. Tax cuts may be just the thing, but not because they create jobs; the case should be made on other grounds.

...The loose money policy of the last 23 years has stimulated borrowing, at the expense of saving. Since saving is what funds business investment, easy money has stifled fixed investment and put American business into slow-motion liquidation. Dis-investment by business is the mathematical flip side of dis-saving. Banks use cheap money from the Fed, which only they can access, to lend to business to fund mergers, private-equity deals, dividends and stock repurchases, all of which in turn are paid for with layoffs.

So, more than Chinese labor or immigration or technology or free trade, the Fed's loose money has crushed US job creation.

...If we know anything by now it is that when the rich get to keep more of their money -- which maybe they should but that is a value judgment -- that is what they do: They keep it. After a 30-year experiment with it, we now know the outcome -- bigger deficits, more inequality -- no spending or hiring or building new plants, just wealth redistribution upward."

I may have to buy this guy's book. He is saying what I have been saying on this site for may years.

But now, I want to take my readers back to a time in the not-too-distant past when things were a little better.

Remember the Clinton years? Remember balanced budgets...and surpluses?

What happened to change that?

1. Unfunded Drug Benefit Passed by an irresponsible Congress and signed by an irresponsible President. This alone would have served to kill the balanced budget. What is Congress proposing to do about this? Nothing.

2. Bush Tax Cuts Were not needed and did not stimulated the economy or create jobs the way they were supposed to do. Trickle down did not work. What is Congress proposing to do about this? Nothing. Congress is talking about extending this very bad piece of legislation. It was Albert Einstein who said that insanity is repeating the same act over and over, but expecting different results.

3. Making War(s) Is there anything more expensive that a nation can engage in? Why are India, China, Russia stealing a march on us right now? Well, they're not fighting any wars. They are getting free rides from us fighting ours. What are Congress and the Administration proposing to do about this? Nothing. Our leaders want more of the same.

Killing Savings The FED has been on a 30 year project to completely kill savings. Even your 401k and IRA are a form of savings. How are they doing? Not so well? What are Congress and the Administration proposing to do about this? Nothing. Our leaders want more of the same.

If you want to return to the golden years of Clinton, when budgets were balanced, when the economy grew on its own, without so much dangerous stimulus from the FED, then we have to return to a basic conservative principle:

We have to start paying for what we get, when we get it. No more deficits, not national government, not state and local government, not individual. Credit and easy money are killing us. Overspending is killing us. Our leaders just want to do more of it.

November 21, 2010

Here is a note from Red and White D.

"If you don't want to be further distressed by the bad behavior of banks stop reading, and I am not joking. If you would like a detailed look at bad boys acting badly then, lay on Macduff.

How awesome is this? At the local courthouse in the three thousand odd counties of the U.S. where property deeds of local property are supposed to be recorded the beneficial mortgage holder of record, of millions of home loans, is MERS: "Mortgage Electronic Recording System" a legal artifice designed for no other purpose than to evade local property mortgage registration fees and ease trading and securitization of mortgages by holding the records of mortgages in a giant central database called MERS with MERS being named as the mortgagee of record at the local level. All transactions of the actual beneficial ownership of the mortgage were recorded only within MERS. Only within the body of the beast can the beneficial owner of the mortgage be tracked.....well maybe, we hope, kinda sorta.

The financial services lobby is making a huge effort to legitimize this scheme in the form of federal legislation naming MERS a nationally recognized clearing house for home mortgages completely eliminating the recording of such information in the locality where the property is located.

How cool would that be! Let's eliminate all local recording of financial transactions on property in the county and turn that duty over to an organ of the really smart guys in financial services.

IF you are interested in some fascinating reading about how financial services are serving us so very well then read this little diddy.

http://georgewashington2.blogspot.com/2010/10/what-is-mers-and-what-role-does-it-have.html

If you do read it, don't ignore the comments at the end, some of which are very illuminating."

November 10, 2010

Here is a link to 'Showdown With China Increasingly Inevitable', by James Kostohryz on Minyanville.Com. I quote the article below.

"I see Bernanke’s speech as an unequivocal sign that US officials are becoming increasingly united and determined to confront China on its predatory trade and currency policies.

As a result, I now believe that the diplomatic relationship between China and the US has reached a critical inflection point. As things now stand, I believe that either China preemptively makes very significant concessions in the next few months or major and unpredictable consequences will follow."

Here is a link to 'Despite Stimulus, 6 Million Benefit-Paying Jobs Vanish in One Year', by Mike Mish Shedlock on Minyanville.Com. I quote the article below.

"In spite of losing nearly 6 million benefit-paying jobs in the last year (and not gaining another 800,00 to 1 million more based on population growth minus retirees), the unemployment rate in October of 2009 was 10.1% and it's now supposedly a half point lower at 9.6%.

Is this a crock or what?"

And here is a link to a really scary article titled 'Watch the Signs: Next Bubble Will Be in Bond Funds', by Minyan Cheesehead Mike on Minyanville.Com.

Ben Smith sends this link to 'Ritholtz: Dear Uncle Sucker', by Barry Ritholtz on CNBC.Com.

Red and White D sends all of the following links:

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq210.pdf

'China's "ant tribe" poses policy challenge for Beijing', by Ralph Jennings on Reuters.Com.

http://www.youtube.com/watch?v=3geBEc2cJGs&feature=BF&list=ULy53GzKSqrnE&index=13 http://www.youtube.com/watch?v=ZYL3j27sSH8 http://www.youtube.com/watch?v=B8PwqQ5guYk http://www.merlehazard.com/Merle_Hazard/H-E-D-G-E.html

November 10, 2010

http://www.minyanville.com/businessmarkets/articles/banks-mortgages-foreclosures-robosigning-occ-elizabeth/11/9/2010/id/31039 Despite Warnings From States, Federal Regulators Failed to Act on Foreclosure Problems by Marian Wang originally appeared on ProPublica.org.

"Taken together, the two pieces show how efforts by state regulators and attorneys general to protect consumers -- first from the banks' irresponsible lending and later from suspected mistakes in banks' foreclosure operations -- were 'thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.' From Bloomberg Businessweek (emphasis added):

More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr, expressed skepticism.

Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of 'predatory' lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. 'People out there are struggling with oppressive loans,' Cooper recalls saying.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC 'took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West,' Cooper says."



November 8, 2010

Jim Rogers recently bashed Helicopter Ben in a speech at Oxford. Here are some pertinent links.

'Fed's Bernanke 'Doesn't Understand' Economics, Jim Rogers Says', by Simon Clark and Stephen Morris on Bloomberg.Com. I quote the article below.

"'His whole intellectual career has been based on the study of printing money,' said Rogers, who predicted the start of the global commodities rally in 1999. 'Give the guy a printing press, he's going to run it as fast as he can.'"

'Those Who Allege Debasement of the U.S. Dollar Need a History Lesson', by James Picerno on SeekingAlpha.Com. I quote the article below.

"But before I offer some supporting evidence, a quick digression into the alleged debasement of the U.S. dollar. Yes, the hazards that apply to fiat currencies are well understood, and the risks apply to every central bank that issues paper money. Over the long haul, inflation is the path of least resistance. But this problem applies to every central bank, and so it's unfair to single out the Fed on this point."

Mr. Picerno, in the above quote, makes a false arguement. He says that because 'everyone is doing it', that it's "unfair" to criticize Bubble Boy Ben for doing it too. Following that kind of logic, it would be "unfair" to criticize your teenage daughter for slashing her thighs with a hunting knife because all her friends are doing it too. A bad idea, is still a bad idea no matter how many people are doing it. What Mr. Picerno studiously avoids is the effect that inflating the currency is going to have on savings and on those on fixed incomes.

Ben Smith sends this link to 'Krugman Dementia Alert: Former Enron Consultant Says Jim Rogers 'Has Been Absolutely Wrong About Everything'',by Tyler Durden on Zerohedge.Com. I quote the article below.

"A quick compare and contrast - Jim Rogers, whose fortune is in the hundreds of millions, contrary to Krugman, who only has a worthless statue given to him by the same idiots who thought that Obama was worthy of being awarded for his 'peace' initaitives, has always had to put his money where his mouth is, while the other one's only notable claim to fame is being a consultant, and a corrupt and massively conflicted one at that, for that icon of Keynesian free markets- Enron, which Krugman could not find enough words to praise, before it was uncovered that, just like Krugman's Keynesian ideal, was a fraud, a disaster, and the biggest bankrupty at the time, in the making."

Red and White D sends these links:

"Tiptoeing through the rubble of the just so messy paperwork blues"

"Quantitative Easin'"

And the big D sends this note.

"Once upon a time I took a course on the Jackson presidency at O.U. I've forgotten most of what I learned back then but in light of recent events it kept sticking in my mind how important a part of his presidency the banking crisis of 1832 had been and how, as a populist president, he stood against the financial powers of the day by rejecting the charter of the Second Bank of the U.S. and ultimately by removing all federal monies from that bank caused its demise.

I believe the same issues are in play today that were then. Powerful forces bringing an agenda to Washington and expecting special treatment.

This link is to a great essay on the Jackson Bank Veto and its consequences by a history prof at U. of Tennessee. When you get a few minutes read it. America's early financial experiences speak volumes about our own times and makes me wonder if we humans will ever corral our financial foolishness.

http://www.neh.gov/news/humanities/2008-01/KingAndrewandtheBank.html"



November 7, 2010

Tobby Connor had a great article titled 'QE2: One of History's Greatest Mistakes Leaves Only One Sector Safe' on Minyanville.Com. I quote it extensively below.

"The first round of quantitative easing (QE) had already guaranteed that the dollar was going to be under severe duress by next spring. Ben Bernanke just added insult to injury yesterday and virtually guaranteed we'll have a major currency crisis by next spring.

I think history will come to view Wednesday as the beginning of the end for the dollar as the world's reserve currency, and unless the Federal Reserve comes to their senses soon, the dollar is doomed to follow every other fiat currency in history into an eventual hyperinflation and total devaluation.

One has to protect their purchasing power from the depredations of central bankers bent on destroying the dollar. That means one has to exchange their paper dollars for real assets. It's no longer safe to hold cash.

One can buy stocks, but soaring inflation will destroy profit margins, and the stock market is going struggle more and more to rise in the face of soaring input costs.

There's one -- and only one -- sector that's positioned to protect one's wealth from the Fed. That sector is, of course, precious metals. The more the Fed devalues, the better the fundamentals become. Gold is now entering the parabolic phase of this particular leg of the ongoing C-wave advance.

I doubt we'll ever see sub $1300 gold again for the duration of this secular bull. Now that the HUI and silver have broken to new all-time highs, we have a rare condition in that the entire precious metals sector is trading in a vacuum with no real overhead resistance. This is the only sector in the world in this position. That's the recipe for an incredible move higher in a short period of time as funds begin to chase the outperformance in the precious metal sector."

Red and White D sent this note along.

"I listened to an article this morning about this calculator on Freddiemac's web page.

Did you know home prices can't go down? Try putting a -1 into the 'appreciation rate' box and see what happens.

http://partners.leadfusion.com/leadfusion/freddiemac/home10/tool.fcs?type=popup&width=590&height=670

Ain't the human brain a wonderful thing?

I browsed the Minyanville post you quoted about QE2.

Poor Ben, he is in dark country now. Can we really take another year or two of retail savings paying less than 1 percent?

Won't this kill fixed income deader than it already is? Or, is this the euthanasia of the rentier which J.M Keynes was so fond of? A sort of 'If the bastards won't spend their savings we won't pay them any interest and they will be forced to spend it or worse... risk it".. kind of deal. They want to turn the savers into speculators.

I'm about bored with the whole thing."



November 5, 2010

Here is a link to a must read article: 'Fed Micromanaged Economy to Oblivion With QE2', by Mike Mish Shedlock on Minyanville.Com. I quote the article extensively below.

"The Fed is going to be stuck with this garbage on its balance sheet for a long time as the following table shows.

That table explains the Fed's exit plan: none.

...There's little doubt, at least in this corner, that the plan can't possibly work. Corporate borrowing costs are the lowest in history and that hasn't spurred hiring. Will another quarter of a point lower matter? Will QE2 even lower rates that much?

Simple explanations as to why QE2 will fail are best: "Money’s Already Quite Cheap"

With mortgage interest rates at all-time lows, is this supposed to help housing? Why?

...The Fed has clearly micromanaged this economy to oblivion. Greenspan's experiment short-circuited the 2001 recession but the expense was the biggest housing bubble in the history of the world, not just in the US, but globally.

...Uncertainty Principle Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.'

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they don't know what they're doing.

Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

...Unless a miracle occurs, consider QE2 as a down payment. Meanwhile the important fact right now is benefits are set to expire on 2 million collecting extended unemployment benefits.

Lower interest rates (assuming that even happens) will not help those 2 million one iota."

Meanwhile, back at the ranch, DJIA is soaring and killing the pessimists' view of the world. Toby Connor is right. We will have little deflation when we have an activist FED...or at least no deflation in areas that the FED can control...housing not being one of them. Asset valuation of homes, both on family books and bank books continues to fall. In just three years, American Homeowners have suffered some $6 Trillion of devaluation/deflation.

Who gets the dough? Who gets the $600 Billion wallet greasing? Banks...folks who can go to the 'window' and get big slabs of that pie.

What are the Banks going to buy with that mullah? Their choices are the same as yours and mine.

I. Government Debt (bonds) But, thanks to the FED, bonds pay pretty crappy interest rates.

II. Corporate Debt (bonds) A more attractive option to be sure.

III. Stocks Some even pay dividends, and some companies are growing and will continue to grow even in the Depression we are in.

IV. Commodities These have to keep rising in price. That fact is going to weigh heavily on working stiffs as their essentials get more expensive to buy. But for those with cash, and access to the 'window', there's gold in them there hills.

V. Real Estate Will continue to be depressed and prices will keep falling, especially through 2011. Banks already have plenty of bad real extate loans on their books to get excited about this option. But, for those with a long term view, the end of 2011 and 2012 may be a great time for a long term investment in real estate.



October 23, 2010

I got some reactions from my last posting. Here is a note from the Orange Section.

"The funny thing about this is that I think the reason the gamble failed is more social and political than economic. The problem is inefficient governance and what seems to be a worldwide bias towards Marxism/Socialism/Leftism. The American consumer shouldered the weight of the world's demand and the world's elites got rich. Then the American Consumer overloaded on debt and now needs a reprieve. There is no Hercules to take the load off of Atlas' shoulders because the elites didn't share. They only consolidated their power. That is what Autocrats and Leftists do. They allocate for their own political well being, not for the economic well being of their citizenry.

The great tragedy of leftward thinking is that it disguises itself in a veil of equality, when in reality it is about the few having power over the many. Someone has to make decisions about how to allocate resources and in such an autocratic system few participants have that power. Corruption is inevitable, it, as our Founders understood, the nature of Man. Their genius has never been more apparent, at least to me.

So now here we have a Government and a Central Bank both trying to follow in the footsteps laid by their recent predecessors. The culture of 'pay it forward' and 'avoid the pain' are the current legacy of the Baby Boomers. The Fed has us at a 0% discount rate and monetizing debt, in the process punishing anyone and everyone who chooses to save. They are making it harder to earn a return and thus consolidating the challenges of unfunded liabilities and those trying to be socially mobile. The Federal Government borrows with no end in sight attempting to appease the dumbest 51% of the electorate in order to stay in power. That last sentence is what this is all about. Political Capital/ Political Power. The promises are all a curtain of deceit. They won't directly cut the benefits they promise to safeguard, they will just inflate them into nothing while asking for you to send them back for another term.

Sorry to get all political but this is my take on this whole mess. The power of allocation was consolidated in the hands of a greedy few, whether it be DC, Wall Street, or Beijing. In each case we saw resources allocated into areas that did not produce real, sustainable growth. If anything, this depression is an indictment on the socioeconomic ideas produced during the last century. By almost any measure it looks to me like 20th century ideas fall horribly short in comparison to their late 18th/ early 19th counterparts. Thankfully it looks like the American People are going to wise up and toss the crooks out in 2 weeks. The question then is whether we are just replacing them with new crooks or people with the courage to actually lead. Unfortunately, there seems to be a vast shortage of leadership today."

From Red and White D comes this message.

"I did read your last post particularly about the "farm crisis".

You are a student of human behavior. Me too, in a different way. I have reached the conclusion that the human animal will not be denied its dreams of ease and fortune through gambling. Whenever prices of something start up speculators start pumping it. ultimately the temptation is too great and it's everyone into the pool time and most take a bath.

It is such a classic behavior. We only really know about the economic history of the last 500 or so years but over and over again we are sucked into these tornados of faith.

It takes an extraordinary person not to be gulled by the markets. It is built into us: Fear and Greed. It sure as hell doesn't help when the central government is complicit in the crime.

I lived in Sioux City, Ia. from 74 to early 76. My territory included Spencer though I didn't get there often. Most of that country was corn and bean fields. I watched the speculation start as early as 74 when the price of corn skyrocketed. As corn went up so did the price of the incredible Iowa farmland. When I left in 76 smallish plots between 120 a. and a section were already going for up to $3k an acre. I had small town banks I called on because they had insurance agencies in them and I saw the blossoming first hand.

If you are a bank you have money to lend. Once you start lending into a booming market and accept the rising prices as the basis for loans you are inexorably stuck. If you and your fellow bankers stop pumping money into the boom, it goes bust and BINGO...you lose.

How....I mean really....how could you avoid getting caught up in such a situation?

I guess you could blame the commodity traders for bidding up the price of corn. Or, perhaps you could blame Dick Nixon's abandonment of Bretton Woods when the dollar floated from gold thus causing commodities to rise. What ever it was, it all began about that same time.

As one of the big wigs from Goldman Sachs told congress a year or two ago, 'as long as the music is playing we have to keep dancing.'"



October 20, 2010

I'm back from the cruise and ready to start writing again. First, the Orange Section sent these comments:

"On Tax Cuts and other policy changes: I think people need to be careful to recognize that the highest tax bracket also contains job creators. Fortune 500 CEO and wealthy idiot sons obviously don't garner a great deal of sympathy and are used as a political lever by those seeking power. Voters should be cautious about class envy though. In their efforts to punish some bad eggs, they will inadvertently punish those who run businesses as well. The tax code does not discriminate, it charges all of a certain income level the same rate whether that person earns their money by operated a small business or earns their income via a trust fund.

In a similar vein, the class envy thing is an old argument. Currently something like 80% or 90% of all taxes are paid by the top 10% of wage earners. To those who call for a progressive system, how much more progressive can it get? The argument about taxing the rich is nothing but a ploy to get votes. If someone wants to actually do something about the problem then they should ask if having the top income earners, who again are more often than not job creators, paying the lion's share of taxes. At what point does our progressive system become a detriment to job creation?

I don't have the answers here, I just don't want to see people get duped by such vacuous arguments that prey on jealousy and envy in order to achieve power. Frankly if that is the best argument an individual has for why they should be given power then I would argue that they won't be a very good leader.

On Globalism:

I think the quote from the Book makes a good case, but I also think it doesn't take the argument far enough. Basically the book is saying that the current form of Globalism is essentially a supply side issue and in the process the US is exporting supply, ie jobs, to cheaper economies. I don't disagree with this diagnosis. What I disagree with is the conclusion. The issue is Demand. The US essentially made a gamble that if it exported supply its demand would stay stable long enough for an emerging market to emerge. That hasn't really happened on the scale originally predicted. (Economists got a prediction wrong? What?)

These are global economic problems, but I think they have political roots. The big issue is resource allocation. Central Government makes choices based on political and not economic profit. We are seeing it in the US right now as well with the crony capitalism of the recent administration. You see it in China in a major way with how they are building infrastructure where there is no economic activity and buying military hardware. Government confiscate and the re-distribute. The problem is the redistribution does not usually go anywhere that creates economic growth. In terms of prosperity, such decision making is not sustainable. Of course, that leads to other, unpleasant questions and answers. As Rich put it succinctly in his recent discussion with me '... that is when you will wish you owned Gold and Silver'"

"The US essentially made a gamble that if it exported supply its demand would stay stable long enough for an emerging market to emerge. That hasn't really happened on the scale originally predicted."....Right on! That was the gamble that did not pay off for the U.S. Another assumption arguement made when Nixon first opened up China was that trade with that country would encourage that country to ease up on its human rights violations and its centralized power....(Political Scientists and Politicians got it wrong? What?)

"On Tax Cuts and other policy changes: I think people need to be careful to recognize that the highest tax bracket also contains job creators." Well, yes and no. Big investors who own major companies that are growing are creating jobs. But a huge amount of money just sloshes around between the DJIA 30 stocks. If a big investor sells 100,000 shares of IBM and buys GE stock...that is just sloshing around. No jobs get created.

Here are three links from Minyanville.Com that caught my eye.

1. 'Glass Half Empty: The Other Side of QE2', by Peter Atwater. I quote the article below.

"Again, since April, the 5-year Treasury has dropped 163 bps, while the comparable CD rate has fallen by just 40 bps. And today the average 5-year CD costs a bank 1.70%, while the 5-year Treasury yields 1.12%.

Ironically, QE2 will force banks to borrow even shorter than they already do just to maintain a positive spread.

But it's not just small banks that are suffering. The 'Heard on the Street' column in this morning's Wall Street Journal highlights how the falling dollar is impacting commodity prices. And, as the article points out, rising gas, corn, and other 'soft' commodity costs tend to fall disproportionately on lower-income households.

And then there are those individuals, corporations, and organizations dependent on fixed-income yields for income. Savers have clearly been taken to the woodshed. And savings-based companies, insurers like MetLife (MET), are already warning of the impact of QE2 on their 2011 results.

And for municipalities and corporations with defined benefit plans, I suspect that year-end 2010 will bring a showdown with their accounting firms, as current interest rates make those assumed returns of 7-9% an impossibility short of enormous risk-taking. And the net result could be a significant increase in unfunded pension/health-care liabilities.

Finally, and in that same theme, I'm hearing from several endowments that QE2 is forcing them to re-think their annual 4-5% draw."

2. 'Why QE2 Won't Be Enough', by Professor Pinch. I quote the article below.

"So the table has been set and we know the dish that's being served: asset class deflation versus dollar devaluation. It's a theme that's had tremendous staying power as the price action we see across all of these assets is truly symptomatic of a world inundated with money supply and the universe of investable assets hasn't kept up with money supply growth. In other words, the universe of investment opportunities hasn't expanded at the same rate as money supply growth over the past decade."

3. 'The Ride of the Keysian Cowboys', by John Mauldin.

...................

Yesterday's news included a lawsuit filed by the FED, PIMCO and others against BankAmerica for supposedly giving false claims in regards to certain bonds that were related to the mortgage debacle. So, the suits begin. There will be a lot of those over the next few years. Here is another potential well of suits. As mortgages got sold and then CDO'ed and passed through many many hands, the train of ownership (of the mortgage) got muddied or even broken. Now what do you call it when someone sells something that supposedly is backed by a security... but there isn't one there because the train/trail of ownership is broken? It's called fraud folks. How many bonds were sold that supposedly had mortgaged backing them, but didn't. Ouch. Lawyers will do well.

I'd like to quote something from pages 23-24 of a book titled: Dewey, by Vicki Myron. The book is about a cat that is adopted by a library in a small Iowa town. The quote is about what happened to the town back in the 1980s.

"The farm crisis wasn't a natural disaster like the Dust Bowl of the 1930s. This was primarily a financial disaster. In 1978, farmland in Clay County was selling for $900 an acre. Then the price of land took off. In 19892, farmland was selling for $2,000 an acre. A year later, it was $4,000 an acre. Farmers borrowed up and bought more land. Why not, when the price was going up forever and yhou could make more money selling off land every few years than you could farming it?

THen the economy took a downturn, The price of land began to drop and credit dried up. The farmers couldn't borrow against their land to buy new machinery, or even new seed for the planting season. Crop prices weren't high enough to pay the interest on the old loans, many of which had rates of more than 20 percent a year. It toook four or five years to reach bottom, years with false bottoms and false hopes, but economic forces were pulling our farmers steadily down.

In 1985, Land O'Lakes, the giant butter and margarine manufacturer, pulled out of the plant on the north edge of town. Soon after, unemployment reached 10 percent, which doesn't sound too bad until you realize that the population of Spencer had fallen from 11,000 to 8,000 in just a few years. The value of houses dropped 25 percent seemingly overnight. People were leaving the county, even the state of Iowa, looking for jobs.

The price of farmland plummeted further, forcing more farmers into foreclosure. But selling the land at auction couldn't cover the loans; the bankds were stuck with the loss. These were rural banks, the backbones of small towns. They made loans to local farmers, men and women they knew and trusted. When the farmers couldn't pay, the system colapsed. In towns all across Iowa, banks failed. Banks were failing across the entire Midwest. The savings and loan in Spencer was sold to outsiders for pennies on the dollar, and the new owners didn't want to make new loans. Economic development stalled. As late as 1989, there wasn't a single housing permit issued in the city of Spencer. Not one. Nobody wanted to put money into a dying town.

Every Christmas, Spencer had a Santa Claus. The retailers sponsored a raffle and gave away a trip to Hawaii. In 1979, there wasn't a vacant storefront in town for Santa to set up shop in. In 1985, there were twenty five empty storefronts downtown, a 30 percent vacancy rate. No trip to Hawaii was offered."

That's a bust folks. I've lived through several here in Casper, Wyoming. These kinds of events used to be local or regional, used to be industry based. Not so now. The Feds and the FED decided to allow families to gamble on their mortgages, and to allow multiple bond holders to do the same. All was financed by a lax FED and an ocean of money that could be borrowed at very attractive interest rates. Allowing all that gambling to be based upon a family's biggest investment was a horrible idea. And that horrible idea even got promoted by the FED itself (Alan, everybody- ought-to-have-an-ARM, I-never-saw-any-asset-inflation Greenspan). Now this bust is nationwide. Nationwide busts are, at the minimum, Recessions. This one is a Depression. The length of time between the debacle and the beginning of the lawsuits is certainly telling. In a Recession the suits would come a lot quicker. In a Depression the shock lasts longer, a lot longer, and the reactionary lawsuits are delayed by years.



October 9, 2010

The Bender will be on vacation from October 10 to October 18 and will be unavailable to answer email, or put up comments.



October 4, 2010

Red and White D gave me a book to read. It is ILL FARES THE LAND by Tony Judt. I want to quote from page 194 of this book where Mr. Judt is taking about Globalism.

"After decades of rapid growth, India's per capita GDP in 2006 ($728) remained only slightly above that of sub-Saharan Africa, while on the UN Human Development Index - an aggregage calculus of social and economic indicators - the country ranked some seventy places below Cuba and Mexico, not to speak of fully developed economies. As for modernization: despite its enthusiastic and much-touted participation in the globalized economy of high technology industry and services, just 1.3 million of India's 400 million workers had jobs in the 'new economy'. To say the least, the benefits of globalization take an extraordinarily long time to trickle down.

Moreover, we have no good reason to suppose that economic globalization translates smoothly into political freedom. The opening up of China and other Asian economies has merely shifted industrial production from high wage to low wage regions. Furthermore, China (like so many other developing countries) is not just a low wage country - it is also and above all a 'low rights' country. And it is the absenseof rights which keeps wages down and will continue to do so for some time - meanwhile depressing the rights of workers in countries with which China competes. Chinese capitalism, far from liberalizing the condition of the masses, further contributes to their repression.

As to the delusion that globalization will undercut governments, facilitating the rise of corporatist market states where massive international corporations dominate international economic policy-making: the crisis of 2008 revealed this for a mirage. When banks fail, when unemployment rises dramatically, when large-scale corrective action is called for, there is no 'corporatist market state'. There is just the state as we have known it since the 18th century. That is all we have."



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