The Staggering Fiscal Costs of Bailing Out a Financial System in Crisis
In his February 27th column in the Financial Times Martin Wolf considers further my “12 steps scenario to a systemic financial crisis” that he had very thoughtfully presented in his previous column.
In the new column Wolf makes a series of interesting points. First he argues that my “analysis suggested a highly plausible worst case scenario, not the single most likely outcome”. Second, he argues that, even in this worst case scenarios, the expected losses for the financial system (that I estimated to be about $1 trillion) and thus the potential fiscal costs of a bailout of the financial system would be only 7% of GDP, an amount that a large economy such as the US can easily afford: as he argues the US public debt would increase in that scenario only to 70% of GDP. And the yearly costs of servicing such increased debt would be – in his view – “a mere 0.2% of GDP in perpetuity. This is a fiscal bagatelle”.
What should we make of his argument? For now I will not debate whether my scenario is plausible or not; let us leave aside this debate for now and let us concentrate on the fiscal costs of a bailout of the financial system in this “worst case scenario”. Will it be only 7% of GDP or more? I will argue in this article that such fiscal costs of a financial crisis could be much higher than 7% of GDP, as high as 19%, even leaving aside the even bigger losses in the net worth of the private sector that a severe financial crisis would imply.
Here are a number of reasons why the overall financial losses and the fiscal costs of a bailout of the financial system could be much higher than 7% of GDP…
First of all 7% of GDP still represents $1 trillion of greater stock of public debt. And $1 trillion is not spare change, even for a large country like the US. The S&L crisis cost the US budget about $120 billion (closer to $250 billion in today’s dollars). A cost of $1 trillion is at least four times as high. Also consider the political consequences of asking the US tax payer to allow the increase of the explicit debt of the US government by $1 trillion in order to bail out the financial system. Currently even much more modest proposals to use a few billions of public money to deal with the foreclosure crisis are met with political resistance; let alone thinking of adding another $1 trillion to the US public debt.
Second, in past episodes of fiscal bailouts of a financial system in crisis, such as those described by Wolf in a chart in his column, such bailouts have been usually associated with a formal or effective nationalization of most or all of the banking system. In a financial crisis the entire capital of the banking system is often wiped out and, ever after shareholders have lost all of their equity, the value of the assets of the banks is below the value of their liabilities (deposits and other insured debts). Thus, a fiscal bailout and recapitalization of the banking system requires an effective nationalization – until banks are cleaned up, recapped and sold back to the private sector – of the banking system. So in this $1 trillion (7% of GDP) fiscal bailout scenario, you would get an effective nationalization of a good part of the US banking and financial system. Is this nationalization a consequence that the US – the beacon of free market capitalism – is comfortable with? As it is, already now the partial recapitalization of the US financial system is occurring via foreign government-owned entities – the sovereign wealth funds – providing the new capital. So, regardless of whether it would be the US government or some foreign governments to take control of US financial institutions we would be on the way to an effective domestic or foreign nationalization of the US financial system.
Third, in this financial crisis scenario the real losses for the net worth of the US private sector are much higher than $1 trillion. With home prices having already fallen by 10% relative to their peak, $2 trillion of the value of equity in US homes (housing wealth) has already been wiped out (14% of GDP). Since home price are almost certain to fall by another 10% in 2008 and beyond a 20% cumulative fall in home prices is equivalent to $4 trillion of losses (or $28% of GDP). And an eventual cumulative fall in home prices of the order of 30% is highly likely at this point; that would wipe out $6 trillion of housing wealth (or 48% of GDP). 48% of GDP is a much bigger loss than 7% of GDP.
Fourth, in an average typical US recession – even in a mild one such as those in 1990-91 and 2001 – the S&P500 falls by an average of 28% and often it takes five to ten years for the index to recover its pre-recession level. Given that the US stock market capitalization was about $20 trillion at its peak in 2007 that 28% loss would wipe out another $5.6 trillion (or 39% of GDP) from the net worth of the private sector.
Fifth, commercial real estate was – like residential real estate – in a bubble that is now starting to go bust as reckless lending and underwriting practices similar to those in residential mortgages were experienced in commercial real estate mortgages. Prices of commercial real estate are expected to fall by 10% to 20% that would wipe out a few additional trillion dollars from the value of such assets.
Sixth, and most important, my estimate of $1 trillion of losses for the financial system was based on the view that total credit losses on mortgages would be around $300 to $400 billion while the other losses of the financial system (on consumer debt, commercial real estate loans, leveraged loans, downgrade of the assets insured by monolines, loans to non financial corporations and holdings of corporate bonds, credit default swaps) would add up to another $600 to $700 billion. But the total credit losses on mortgages may end up being much higher than $300 billion and as high as $1 trillion to $2 trillion.
The reason is as follows: today there are already over 8 million households with negative equity in their homes (i.e. the value of their homes being lower than the value of their mortgage debt); if home prices fall by another 10% (20% cumulative) the number of households with negative equity would be over 16 million; and if home prices fall by a cumulative 30% about 21 million households would have negative equity. As discussed in a previous column of mine in this scenario of negative equity households have a strong incentive to walk away from their homes and saddle the banks or holders of the mortgage with the loss deriving from the difference between the mortgage value and the home value.
Based on work done by Calculated Risk I have argued that in this scenario of massive “jingle mail” the losses for the financial system would be at least $1 trillion and as high as $2 trillion. To get $ 1 trillion of losses one does not have to make heroic assumption: even assuming only a 20% (rather than 30% fall in home prices) and even assuming that only half of the 16 million households with negative equity “walk away” you easily get losses of the order of $1 trillion (assuming that the average mortgage is $250k and that the loss to the creditor is about 50% with the latter assumption based on the fall in the price of the home, the legal and other costs of foreclosure and the additional costs of selling a home in a very illiquid market). With larger home price depreciation and thus larger numbers of households walking away the losses can be as high as $2 trillion.
These are staggering amounts that would totally wipe out all of the capital of the US banking system and lead to a systemic banking crisis. So, in the worst case scenario if the losses on mortgages are $1 trillion (or in an extreme case $2 trillion) rathe
r than the current estimate of $300 billion and, if on top of these losses the additional credit losses from consumer credit, commercial real estate, leveraged loans, etc. are another $700 billion the total losses for the financial system would add up to at least $1.7 trillion ($1 trillion plus $700 billion) and as high as $2.7 trillion ($2 trillion plus $700 billion). $1.7 trillion adds up to a maximum fiscal bailout cost of about 12% of GDP (not 7%) while $2.7 trillion adds up to a maximum fiscal bail-out cost of about 19% of GDP.
Now 12% of GDP is not spare change and, certainly, 19% of GDP is a staggering amount (ten times higher than the fiscal bailout cost of the S&L crisis). Of course some of the losses would be taken by the shareholders of the banks and financial institutions; but a clean and fair fiscal bail out of the financial system – that reduces the fiscal costs – would imply first wiping out all of the shareholders of these institutions (as their capital/equity is fully destroyed by such losses) and a formal nationalization of a good part of the banking and financial system. And thus in such a scenario one has to ask again the question: what are the implications of a potential nationalization of a good part of the financial system of the most advanced capitalist country in the world?
Some final and additional considerations.
First, if millions of households exercise their legal option of walking away from homes with negative equity, even before any government intervention the losses for the financial system would be larger than the equity in the system. So banks and other financial institutions would be insolvent and forced to be taken over by the government leading to the need for a fiscal bailout (as most bank liabilities are effectively safe given deposit insurance).
Second, proposals for a fiscal resolution of the foreclosure crisis do not necessarily prevent this effective bankruptcy of the banking system. For example, if as proposed by folks such as Mark Zandi and Alan Blinder, the government were to buy via auctions distressed mortgages and RMBS, the only way to limit the fiscal cost of such government intervention would be to buy such mortgages at their true market value that is equal to the value of the property once the full downward price adjustment has occurred. In this best case the government does not lose much money on such a scheme of taking over mortgages and repackaging them in lower loan value and lower interest rate mortgages for distressed borrowers. However in this scenario: first a good part of the mortgages are effectively nationalized; and second the full losses deriving from the difference between the market value of the home and the value of the original mortgage are then absorbed by the creditor financial institutions. Thus you end up again with a situation where the equity of these financial institutions is wiped out, they become insolvent and the government is then forced to take them over and incur the fiscal costs of bailing them out and recapitalizing them.
Conversely, if the mortgages are bought – via auctions – at a price that is higher than the eventual market value of the home, the fiscal costs of this effective nationalization of the mortgages becomes potential very large (as the government takes the downside risk of the further fall in home values and eventual default of households with negative equity) while the financial sector’s equity is less than fully wiped out. Thus, in this scenario the weaker financial institutions go belly and are nationalized – in spite of this partial bailout of the shareholders of these entities – while the stronger ones do not go belly up only because the public sector provides a massive bailout (equivalent to the difference between the secondary market value of the mortgage and the true underlying value of the home). In summary, regardless of whether you nationalize mortgages (in the scenario of the government buying a whole bunch of such mortgages) or nationalize the banks you end up with massive losses (again possibly as high as $1 trillion to $2 trillion for mortgages alone) that are – in one way or the other – fiscalized.
In conclusion, it used to be said that “a million here, a million there and soon you are speaking about real money”. In this case we need to amend the saying to “a trillion here, a trillion there and soon you are speaking of staggering amounts of money and massive fiscal bailout costs”. Martin Wolf says that a fiscal bill of 7% of GDP is modest and affordable. But the analysis above suggest that the fiscal bill of bailing out a banking and financial system that suffers a systemic crisis would be at least 12% of GDP and as high as 19% of GDP. Even for a rich country like the US 19% of GDP (or $2.7 trillion of additional public debt) is not spare change nor is a “fiscal bagatelle”. And saddling every US household with an additional $30,000 of debt in perpetuity is not small burden either. And all this is true even leaving aside the other $10 trillion plus of losses in the net worth of the US private sector (fall in the value of residential real estate and commercial real estate, and in the value of the stock market) that a severe recession and financial crisis would imply.
The wise Wolf is himself – at the end – very aware of the political economy of a financial system where in good times the profits are privatized and in bad times the losses are socialized. This is not a politically sustainable regime. As he correctly puts it:
“This is not a crisis of “crony capitalism” in emerging economies, but of sophisticated, rules-governed capitalisms in the world’s most advanced economy. The instinct of those responsible will be to mount a rescue and pretend nothing happened… Worse, the institutions that prospered on the upside expect rescue on the downside. They are right to expect this. But this can hardly be a tolerable bargain between financial insiders and wider society. Is such mayhem the best we can expect? Is so, how does one sustain broad support for what appears so one-sided game?”
This is indeed a one-sided game where financial insiders privatize profits while the massive losses of their reckless behavior – searching dangerously for yield, gambling for redemption, being subject to distorted incentive not to monitor their lending and risky investments – are systematically socialized during a crisis. This is actually “crony capitalism” of the worst kind, as bad as the one that plagued emerging market economies and led to their severe financial crises in the last decade.
PS: in this article I have left aside the complex issue of what are “inside” assets versus “outside” assets (or net worth) of an economy. Financial losses are in part a redistribution of wealth from creditors to debtors and thus “inside” assets that should not affect the net worth of an economy. But they can have financial consequences on net worth for several reasons. First, a financial crisis that leads to a credit crunch can cause a recession that reduces the value of output/income that is generated by the economy; this is a real loss of income and welfare. Second, the part of loss of net worth that is driven by an asset bubble and excessive investment in assets (such as residential and commercial real estate) that eventually go into a bust is a real wealth loss as it signals that too much was invested for many years in assets with low returns. Thus, the sharp fall in the market value of such assets (residential and commercial real estate and value of equities) reflects this low return on such capital goods, another factor that reduces long-term consumption and economic welfare.
337 Responses to “The Staggering Fiscal Costs of Bailing Out a Financial System in Crisis”
Guest • February 28th, 2008 at 2:40 pm
http://www.ft.com/cms/s/0/1aa2daea-e48d-11dc-a495-0000779fd2ac.html Why Washington’s rescue cannot end crisis story By Martin Wolf Financial Times Published: February 26 2008 17:34 Last week’s column on the views of New York University’s Nouriel Roubini (February 20) evoked sharply contrasting responses: optimists argued he was ludicrously pessimistic; pessimists insisted he was ridiculously optimistic. I am closer to the optimists: the analysis suggested a highly plausible worst case scenario, not the single most likely outcome. Those who believe even Prof Roubini’s scenario too optimistic ignore an inconvenient truth: the financial system is a subsidiary of the state. A creditworthy government can and will mount a rescue. That is both the advantage – and the drawback – of contemporary financial capitalism. In an introductory chapter to the newest edition of the late Charles Kindleberger’s classic work on financial crises, Robert Aliber of the University of Chicago Graduate School of Business argues that “the years since the early 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks, and the frequency and severity of financial crises”*. We are seeing in the US the latest such crisis. All these crises are different. But many have shared common features. They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes. With variations, this story has been repeated time and again. It has been particularly common in emerging economies. But it is also familiar to those who have followed the US economy in the 2000s. When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system. Credit growth slows, or even goes negative, and spending, particularly on investment, weakens. Most crisis-hit emerging economies experienced huge recessions and a tidal wave of insolvencies. Indonesia’s gross domestic product fell more than 13 per cent between 1997 and 1998. Sometimes the fiscal cost has been over 40 per cent of GDP (see chart). By such standards, the impact on the US will be trivial. At worst, GDP will shrink modestly over several quarters. The ability to adjust monetary and fiscal policy insures this. George Magnus of UBS, known for his “Minsky moment”, agrees with Prof Roubini that losses might end up as much as $1,000bn (FT.com, February 25). But it is possible that even this would fall on private investors and sovereign wealth funds. In any case, the business of banks is to borrow short and lend long. Provided the Federal Reserve sets the cost of short-term money below the return on long-term loans, as it has for much of the past two decades, banks can hardly fail to make money. If the worst comes to the worst, the government can mount a bail-out similar to the one of the bankrupt savings and loan institutions in the 1980s. The maximum cost would be 7 per cent of GDP. That would raise US public debt to 70 per cent to GDP and would cost the government a mere 0.2 per cent of GDP, in perpetuity. That is a fiscal bagatelle. Because the US borrows in its own currency, it is free of the currency mismatches that made the balance-sheet effects of devaluations devastating for emerging economies. Devaluation offers, instead, a relatively painless way out of a slowdown: an export surge. Between the fourth quarter of 2006 and the fourth quarter of 2007, the improvement in US net exports generated 30 per cent of US growth. The bottom line, then, is that even if things become as bad as I discussed last week, the US government is able to rescue the financial system and the economy. So what might endanger the US ability to act? The biggest danger is a loss of US creditworthiness. In the case of the US, that would show up as a surge in inflation expectations. But this has not happened. On the contrary, real and nominal interest rates have declined and implied inflation expectations are below 2.5 per cent a year. An obvious danger would be a decision by foreigners, particularly foreign governments, to dump their enormous dollar holdings. But this would be self-destructive. Like the money-centre banks, the US itself is much “too big to fail”. Yet before readers conclude there is nothing to worry about, after all, they should remember three points. The first is that the outcome partly depends on how swiftly and energetically the US authorities act. It is still likely that there will be a significant slowdown. The second is that the global outcome also depends on action in the rest of the world aimed at sustaining domestic demand in response to a US shift in spending relative to income. There is little sign of such action. The third point is the one raised by Harvard’s Dani Rodrik and Arvind Subramanian, of the Peterson Institute for International Economics in Washington DC, (this page, February 26), namely the dysfunctional way capital flows have worked, once again. I would broaden their point. This is not a crisis of “crony capitalism” in emerging economies, but of sophisticated, rules-governed capitalism in the world’s most advanced economy. The instinct of those responsible will be to mount a rescue and pretend nothing happened. That would be a huge error. Those who do not learn from history are condemned to repeat it. One obvious lesson concerns monetary policy. Central banks must surely pay more attention to asset prices in future. It may be impossible to identify bubbles with confidence in advance. But central bankers will be expected to exercise their judgment, both before and after the fact. A more fundamental lesson still concerns the way the financial system works. Outsiders were already aware it was a black box. But they were prepared to assume that those inside it at least knew what was going on. This can hardly be true now. Worse, the institutions that prospered on the upside expect rescue on the downside. They are right to expect this. But this can hardly be a tolerable bargain between financial insiders and wider society. Is such mayhem the best we can expect? If so, how does one sustain broad public support for what appears so one-sided a game? Yes, the government can rescue the economy. It is now being forced to do so. But that is not the end of this story. It should only be the beginning. * Manias, Panics and Crashes, Palgrave, martin.wolf@ft.com
Guest • February 28th, 2008 at 3:04 pm
Ha, look at gold breaking a new record! Oil goes over $102! Fun times ahead!!!
Guest • February 28th, 2008 at 3:17 pm
Dell huge miss after the bell!
Guest • February 28th, 2008 at 3:21 pm
Professor. Home run!
Alessandro • February 28th, 2008 at 3:39 pm
Micheal Jackson ‘walking away’ from a $25m mortgage on his Neverland Valley Ranch. The ranch will be foreclosed and sold on March the 19th. Now this is quite a ‘subprime put’ being exercised! ”Superstar, Sub-Prime Our clients expect full disclosure. In that spirit we note that the current owner, Michael J. Jackson, is a well-known musician whose fame has drawn four-season tourist traffic and a near-permanent paparazzo presence to the ranch gates. Now on his second attempted comeback after being acquitted of molestation charges in 2005, he is also, for the first time in years, earning serious money. Whether he can make his next payment of $212,963 on a $23 million loan secured on the property remains doubtful, however.” http://www.timesonline.co.uk/tol/comment/leading_article/article3448718.ece In other news Jackson fans call for the GSEs conforming limit to be raised to $25m 
JLarkin • February 28th, 2008 at 3:39 pm
Things are playing out with Alt-A just as Nouriel wrote many times: http://www.marketwatch.com/news/story/ubs-valentines-day-disclosure-causes/story.aspx?guid=%7B8F3407B8%2DA83A%2D4CE4%2D94CA%2DADAD5B1FAC3C%7D&siteid=yahoomy
Guest • February 28th, 2008 at 3:45 pm
If, as will eventually need to be done, the US government doesn’t nationalize the legitimate and shadow banking systems, they will have to cross the Rubicon on inflation. Hyper-inflation will allow us to dodge the realities of the immense national, corporate, private debt and this flood of money would allow financial institutions to remain solvent (at least on paper). Once the system cleans out and the losses socialized not upon the taxpayers but upon every creditor and holder of the USD, they might reissue currency and probably back it with some commodity. The loss of good will, confidence, and reputation might be recovered after many decades. Of course the corollary repercussions would be tremendous. Loss of markets, nationalization of global US holdings, military skirmishes, loss of mandate in UN, IMF, World Bank, trade organizations, military compacts. War could erupt over less. BUT, would the alternative have a preferable outcome? In the worst case scenario, and after nationalization, our government would need revolutionary change. Change in social programs, assumption of debt, regulation of credit and banking, military programs, foreign affairs. I truly hope all of this is only speculative and that the USA won’t be forced into a corner from which it will emerge a very, very different creature. Changes forced under fear rarely transform a government to another form having greater liberty and greater opportunity.
Octavio Richetta • February 28th, 2008 at 3:49 pm
The Professor says: … Now 12% of GDP is not spare change and, certainly, 19% of GDP is a staggering amount (ten times higher than the fiscal bailout cost of the S&L crisis). Of course some of the losses would be taken by the shareholders of the banks and financial institutions; but a clean and fair fiscal bail out of the financial system – that reduces the fiscal costs – would imply first wiping out all of the shareholders of these institutions (as their capital/equity is fully destroyed by such losses) and a formal nationalization of a good part of the banking and financial system. And thus in such a scenario one has to ask again the question: what are the implications of a potential nationalization of a good part of the financial system of the most advanced capitalist country in the world? This is indeed a one-sided game where financial insiders privatize profits while the massive losses of their reckless behavior – searching dangerously for yield, gambling for redemption, being subject to distorted incentive not to monitor their lending and risky investments – are systematically socialized during a crisis. This is actually “crony capitalism” of the worst kind, as bad as the one that plagued emerging market economies and led to their severe financial crises in the last decade. … So it looks like the situation may be messier than anyone, even the worst gloom and doom forecasters, had anticipated. And the problem is that even though a government bailout may be the only way out, the repercussions of such a bailout would be so detrimental that in fact the whole thing seems to be a case of “dammed if you do, dammed is you don’t”. The problem has no feasible “all live happily thereafter” solution. IMHO, A trillion USD cost for a bailout is not the worse case scenario, it actually looks like a very likely [and even conservative] outcome. We are not talking paranoia here, MW’s scenario is very realistic. The biggest chunk of the problem is housing. With our “great efficiencies” we did such a great job of driving supply and prices to the stratosphere, that no matter what is done now to put an “artificial” floor to the free fall it won’t work. The US economy cannot take it. J6P just does not have the income to be able to buy the homes even at 30% below current prices. Banana republic thinking will not work. You need real productivity, real jobs, making solid real income, so that people themselves can provide a floor to the housing market. The credit bubble has burst. No more kidding around, fooling around, the music has stopped. No income, no house. People will be able to buy a house only if they save for a down payment of at least 10% and the price is low enough so that their salary results in monthly outlays for mortgage, insurance, taxes, repairs, etc. that meet established guidelines (at most 35% of before tax income and this is quite liberal). Neither Bush, nor Paulson, nor the Fed, nor the Banks, not the NRA, nor Obama if he makes it, nor all the bailouts in the world will be able to put an artificial floor to house prices, the us economy will. And the floor in prices seems to be at least 20% under current price levels. What is the direct implication of this? The banking system can indeed go bankrupt just on housing (never mind cc debt, student loans, collapsing CRE, a 20% loss in equities, personal income getting even worse via the recession layoffs, etc.) It ain’t pretty. How long can the world economy continue to operate in “Teflon mode”? (Professor remember to have your IT people do something so that people don’t loose their posts. I was lucky I saved this one before posting otherwise I would have lost it!)
Octavio Richetta • February 28th, 2008 at 3:58 pm
And I forgot, congrats to the Professor on a great post. I second the “home run” call above. Also, great posting by all above, in particular: Written by Guest on 2008-02-28 15:45:19 IMHO, what you don’t want to happen will happen and in the long term it will bring change for the better: ”n the worst case scenario, and after nationalization, our government would need revolutionary change. Change in social programs, assumption of debt, regulation of credit and banking, military programs, foreign affairs.” Things have to get really messy for good change to happen.
Anonymous • February 28th, 2008 at 4:04 pm
Pushing on a string. http://www.cnbc.com/id/15840232?video=667644236&play=1 But finally someone willing to man-up and be honest about a balance sheet.
Anonymous • February 28th, 2008 at 4:18 pm
The global equities markets, being HIGHLY coupled, are facing extreme short and long term secular bear markets. Volatility is heightening without any sign of moderating. The credit markets have become so deeply infected and Byzantine that large swathes of debt cannot be purchased due to the risk exposure. Crash goes the credit markets. The commodities are siphoning huge amounts of liquidity but liquidity which is highly speculative and elevating risk there. Caveat Emptor Fixed assets are under tremendous deflationary strain. Plant and equipment already is saturating market. Excess capacity in manufacturing abounds. Most currencies are adopting highly inflative policy. Some pegged or closely allied with USD inflating just to maintain PPP. USD is losing value YOY at unacceptable levels for any investor to hold cash for long. Government bonds are secure but returns are below inflation. Large investors are willing to trade negative real returns for RETURN OF capital. In short, There is no country (Safe Haven) for Old Money. Except maybe precious metals and energy. A great bond trap for loose money though and plays to the hand of the US gov’t.
Guest • February 28th, 2008 at 4:26 pm
Dollar broke down below $74! Red alert, all hand, brace for impact! dollar, watch out below! Abandon the ship!!
Guest • February 28th, 2008 at 4:30 pm
i will be surprised that arab countries continue to peg dollar. FED to the world, the hidden message “no inflation, I will keep cutting rate to 0%”
Anonymous • February 28th, 2008 at 4:30 pm
The professor speaks only to the potential damage to the U.S. If I’m not mistaken, the credit, leverage and speculative excesses actually occurred on a global scale especially in the foreign developed ecomomies. What happens then?
Octavio Richetta • February 28th, 2008 at 4:34 pm
From the up move in bonds today, and the close to 1% loss in US equity markets (when MMs could have easily closed February in the black), it would appear that equity markets are coming back to reality and will break on the down side. Will they be able to pull a rabbit out of the hat tomorrow and close February in the black? Where is RH?
Zatoichi • February 28th, 2008 at 4:38 pm
@OR Your posting are some of my favorite! Did you see yesterday’s “shoulder” postings? Red tape on traders “shoulder”? Red means down. Shoulder is the triple top or head and shoulder in equity chart. Tipping the hat…look for 7%+ down move from yesterday’s high. Your welcome.
Guest • February 28th, 2008 at 4:40 pm
@Martin Wolf: “…Those who believe even Prof Roubini’s scenario too optimistic ignore an inconvenient truth: the financial system is a subsidiary of the state.” So, now that the losses are rolling in, “the financial system” belongs to the people. Well, what a convenient “inconvenient truth” for the bankers. I’m sorry, but Wolf’s argument has no traction. The one single statement above would sink his whole argument. In the United States of America, the “state” still happens to be the citizens. The state is not the government. Wolf, conveniently for the big international financiers, is saying that their financial system is a subsidiary of the American people; that their debts are the people’s responsibility to pay — to save their “system.” Joe 6-Pack should mop up the losses left behind by the big financiers such as Goldman Sachs but he should keep his dirty fingernails off the toff’s “privatized” riches. Well, I say, Joe 6-Pack doesn’t need Goldman Sachs, Hank Paulson or Ben Bernanke or their “financial system.”. Let them out source their services. Let them go to another country to assist the politicians in plundering the people’s purse. Joe 6-Pack already has paid an exorbitant price for the services of a private central bank and its friends – a decline in his prosperity, an increase in the size and corruption of his government, a growth in his taxes, the economic well-being of his nation retarded by easy Al’s credit, financial sector control of his markets, a gutted manufacturing base and job market, the loss of his home…
Octavio Richetta • February 28th, 2008 at 4:51 pm
Written by Guest on 2008-02-28 16:40:40 Great post! I was ready to fire you this before reading the whole post: …And the state is actually a subsidiary of the people of the US, whom the state and the financial system keep on screwing… But this will stop! Written by Zatoichi on 2008-02-28 16:38:06 Thanks for the compliment. Are you writing from Japan?
Anonymous • February 28th, 2008 at 4:58 pm
Hai! Tadaima tegami o kaiteiru. @OR http://en.wikipedia.org/wiki/Agent_provacateur Think the 1930′s…agent provacateur. http://www.cnbc.com/id/15840232?video=667812171&play=1 Likey Jamesu Bondo innu da Muuvie. You get, right?
Alessandro • February 28th, 2008 at 4:59 pm
@Guest on 2008-02-28 16:40:40 Martin Wolf: “Those … ignore an inconvenient truth: the financial system is a subsidiary of the state.” It’s just a mistake of the composer, what he really means is: “the state is a subsidiary of the financial system”.
Octavio Richetta • February 28th, 2008 at 5:01 pm
Written by Guest on 2008-02-28 16:26:57 (rates going to 0%) Written by Guest on 2008-02-28 16:30:28 (USD @ 74) Don’t worry, there is a bright future for the USD. I have already started reading about it being the next carry trade currency… I don’t take this very seriously at this point but… Look at it this way, if the FED wants to inflate away the extreme leverage of our economy; then, the USD could be the ideal carry trade currency… Borrow USD at 1% (shorting the 3mo. treasury once it gets there – coming soon to a theater before you)and buy commodities… Bush on national TV today: We support a strong USD policy. Remember he is the son of the guy who said read my lips no more taxes:-)
Guest • February 28th, 2008 at 5:18 pm
reverse share splits new hybrid loans that come with dilutive warrants more financial weapons against shareholder rights
JMa • February 28th, 2008 at 5:31 pm
somebody please draw a cartoon with Bush, Paulson and Bernanke as monkeys covering their ears, eyes and mouth sitting next to each other in the middle of Times Square with the caption hear no recession, see no recession and speak no resssion – have every billboard flashing recession in the background… or even better take recession out and insert inflation same location with the signs in the background listing all of the commodity prices, make one ounce of gold $5,000 and if there is room show someone holding a gun to an old woman trying to steal her gallon milk
ptm • February 28th, 2008 at 5:37 pm
John Williams @ Shadowstats.com http://www.shadowstats.com/article/276 (Subscription required) Says the February M3 growth accelerated. Numbers for the first 11 days of February hint that, the year-to-year change in February’s monthly average for the SGS-Ongoing M3 would increase to a near-record annualized 16.5% from the previous annualized January rate of 15.5%. So let’s see… 17% * $960 = $163 or gold at a minimum of $1,123/Oz?
Anonymous • February 28th, 2008 at 6:33 pm
Sire of Sorrow — Joni Mitchell http://www.thestreet.com/s/kass-ten-good-reasons-to-cry/newsanalysis/investing/10405349.html?puc=_tscs
Ken Tobin • February 28th, 2008 at 6:33 pm
Prof NR, Great Post! I write to provide a correction to the figure you quoted for the ’80s S&L loses. Appears S&L bail total price tag was was $500 Billion ($130 billion came from taxpayers) as per GAO per NY Times Article. http://query.nytimes.com/gst/fullpage.html?res=9401E5DE1E39F930A25754C0A960958260
Guest • February 28th, 2008 at 6:34 pm
Happy days are here again!!! February 28, 2008 Write-Downs Send A.I.G. to $5 Billion Loss BYREUTERS American International Group, the world’s largest insurer, swung to a large fourth-quarter loss, hurt by a write-down of derivatives exposed to bad mortgage investments. A.I.G. said on Thursday its fourth-quarter loss was $5.29 billion, or $2.08 a share, compared with a profit of $3.44 billion, or $1.31 a share, in the year-ago quarter. A.I.G., a multi-line carrier offering property, commercial and life insurance, said its adjusted fourth-quarter loss, which excludes capital gains, losses and hedging activity, was $3.2 billion, or $1.25 a share. In the year-ago quarter, New York-based A.I.G. earned $3.85 billion, or $1.47 a share, from operations. A.I.G. said the quarter included a pretax charge of about $11.12 billion for a net unrealized market valuation loss related on its credit default swap portfolio.
Guest • February 28th, 2008 at 6:43 pm
“A financial enema for a sick animal” Nothing like an Ivy League Education overlaying a Chicago brickbat http://www.cnbc.com/id/15840232?video=667246069&play=1
Kokopelli • February 28th, 2008 at 7:39 pm
Bailing out the financial system in the current manner of transferring the liability to the taxpayer via FRE, FNM and Federal Home Loan Banks is already leading to hyper inflationary commodities pricing. We can see this every day as the price of all commodities rise rapidly. The only way this will stop is thru direct withdrawal of the extra speculative fuel. The fed needs to raise the rates. Slow down the inflationary spiral and speculation, not encourage it. I’m not going to hold my breath. I think it is to late to rescue the US economy. As the rise in the commodities prices work their way thru the system, the number of families who can no longer pay their existing credit obligations will just keep rising. As more and more lose their homes and futures, there will be more and more anger and desperation. Things don’t look very good for US right now. So as inflation raises the prices of food, energy, products of all kinds and everything else, the GDP may stay high and not fall but that doesn’t mean we have a functioning healthy economy. Garbage in and garbage out. The other thing is that the financial institutions made much of their money in putting deals together, not in the measly interest arbitrage. As they destroy the consumer, who will borrow from them, who is it that are going to sell the loan to? If they can even find any borrowers, not speculators to lend to it I will be surprised. The system is going down. No amount of bailing is going to fix a system that has lost faith in itself. Or one that relies on speculation, not productive capacity to function. This is the Monopoly game. The GDP may keep going up but the money is in the hands of the fewer and fewer players. The money supply even increases as you pass go, or in this case, use the carry trade and future contracts. As the game goes on, there are fewer and fewer players until only one is left. The end result is a total financial collapse for everyone but the winner. And then what do they have? With out the consumer and the engineer and the teacher? Is that what we want? Is that what America has come to? This Martin Wolf writes like it is OK for this to happen. He is an idiot and has no real idea about the real consequences of the actions he proposes. None of his or anyone else’s proposals do anything to increase actual output or add value to US products. All they want to do is sell America and leave a shell.
Guest • February 28th, 2008 at 8:28 pm
Beware 5th columnists. They are amongst us.
Octavio Richetta • February 28th, 2008 at 8:33 pm
Did some quick searching and I am 99% sure the AIG news came after hours (can someone confirm?) So this plus Dell news mean Europe and the US should be pretty red tomorrow. Europe was down almost 2% today. I get a feeling markets will resume the free fall they experienced around the MLK holiday. Here comes Benny!!! Amazing! Asia is pretty red with Japan down 2.5% @ 9:30est But Shanghai is up 0.6% I would bet it is IMPOSSIBLE for it to close positive and that the China market will resume its free fall as soon as US hard recession is more evident which looks like it will be sooner rather than later. http://finance.yahoo.com/intlindices?e=asia
Guest • February 28th, 2008 at 8:41 pm
Painting up the red tape. Neckline-shoulder-whooooops
Octavio Richetta • February 28th, 2008 at 8:47 pm
Written by Guest on 2008-02-28 20:28:14 What do you mean? Don’t you think we get a high enough doses of conspiracy theory stuff to start talking code stuff. Say what you mean. FYI: http://en.wikipedia.org/wiki/Fifth_column To me, a good example fifth columnist example would be offshore US corporations that evade taxes. But it appears you mean something else…
Anonymous • February 28th, 2008 at 8:59 pm
The UK media always tries to make other countries situation look worse than the one at home:-P If it’s not about the overvalued Euro, then it’s about how the ECB will “soon have to slash rates”. I see this sort of articles as politically motivated. It’s often some bank workers who are quoted as saying things like this, by the way, and I suspect it’s because they want to protect their own interests. If UK was forced to lower their rates below ECBs, there is a big risk that a lot of foreign investments would start flowing to EU instead. Besides it would not surprise me if it was the UK pound that actually was overvalued, being about $2 USD. Or how has it even been $2 USD anyway, considering that: -it’s not a reserve currency -UK has very little domestic industry Another funny thing that the media does is to bring up something about how the growth of UKs GDP during the last X years was a source of envy with other EU nations. But what they don’t say is that that growth was based on SPENDING, not on PRODUCTION. And now when the spending era is going to end, it’s interesting to see how this affects the pound. Here’s a question for some… We have 2 blocks of nations: A. a “socialist” EU (excluding UK), with: -5 weeks of vacation time for most workers -government healthcare -5+ auto manufacturers in good economic standing AND ON THE OTHER SIDE OF THE RING… B. a capitalist U.S.A., with -2 weeks (or none) of vacation time for most workers -not many gov’t benefits -auto manufacturers in economic dudu THE QUESTION IS: How is A able to have a more expensive currency than B? cheers
J. • February 28th, 2008 at 9:04 pm
anon @ 2008-02-28 16:30:57 you asked about rest of world consequences. The attached, from 2004, might be of some help. In a very small nutshell, this crisis has no borders — fictitious capital throughout the world will be devalorized while, as we should already know, those costs associated with the attempts to prevent this will be extreme and unevenly distributed. The “Dollar” Crisis, and Us By Loren Goldner http://home.earthlink.net/~lrgoldner/dollarcrisis.html
mock turtle • February 28th, 2008 at 9:21 pm
several days ago Mr. Wolf referenced what was a reasonable approximation of what’s going on. since then he appears to have been taken to the “woodshed” the latest writing reads like he was, possibly, forced by the patriarchs, who are in a panic, to kinda sorta take it back.
JLC • February 28th, 2008 at 9:34 pm
Excellent post Professor. A grand slam.
Guest • February 28th, 2008 at 9:53 pm
Is war the answer? US warship sails towards Lebanon The USS Cole was attacked by al-Qaeda in 2000 The United States has ordered a warship to take up position off the coast of Lebanon in a show of support for the country’s embattled government. The deployment of the USS Cole is being seen as a warning to Syria which – along with Iran – backs the opposition. The Western-backed government and the opposition have repeatedly failed to agree a deal to end political impasse. A US official quoted by news agencies said the move was “a show of support for regional stability”. ”We are very concerned about the situation in Lebanon. It has dragged on very long,” the unnamed senior US official told Reuters news agency. http://news.bbc.co.uk/2/hi/middle_east/7270102.stm How, besides the obvious deflection of attention from economic woes, will war help the US economy or financial institutions?
Anonymous • February 28th, 2008 at 9:54 pm
“Third, in this financial crisis scenario the real losses for the net worth of the US private sector are much higher than $1 trillion. With home prices having already fallen by 10% relative to their peak, $2 trillion of the value of equity in US homes (housing wealth) has already been wiped out (14% of GDP). Since home price are almost certain to fall by another 10% in 2008 and beyond a 20% cumulative fall in home prices is equivalent to $4 trillion of losses (or $28% of GDP). And an eventual cumulative fall in home prices of the order of 30% is highly likely at this point; that would wipe out $6 trillion of housing wealth (or 48% of GDP). 48% of GDP is a much bigger loss than 7% of GDP.” Homeowners without debt have lost in reality nothing. Just the fictious part that was available a little while ago. Only the indebted homeowners matter really. Debt matters! The redistribution of wealth was an excellent remark indeed. Those who have cash in their hands will soon be able to acquire cheap assets. Those who have debt lose theirs. This has been the outcome of all great financial crisis in the world. The problem seems to be rather a political one than economic. The bailout by the government – by your own government or by the IMF (if don’t have a credible government) – will ultimately be the solution. However, there are many ways to choose from. Some of the solutions cost the taxpayers more than the others. As Galbraith put it: the only form of acceptable socialism in the USA is the socialism for the rich people. After all socialism has always been capitalism, namely state capitalism. Watch the FHLB, the GSEs. Wait until December. The Change will happen whether you want it or not!
K inTX • February 28th, 2008 at 10:22 pm
How, besides the obvious deflection of attention from economic woes, will war help the US economy or financial institutions? Written by Guest on 2008-02-28 21:53:10 Well the U.S. is an arms exporter and that business might pick up. If a draft was instituted (can’t keep paying those high dollar contractors) then you could burn off “excess” population on the battle field, which might make the employment situation look better at home. And other countries might think again about dropping their dollar peg. Who know what those crazy Americans will do? Historically economic downturns have often been brought to a close by a war. We already have one soooo maybe we just need a bigger one? /Mostly snark.
Passaconway • February 28th, 2008 at 10:42 pm
11:40EST Yen 104.800 USD. Storm Warning ?
Wolf in the Wilds • February 28th, 2008 at 10:53 pm
I had to retype this post.. because somehow, my earlier version couldn’t be loaded up. Mr Wolf is correct in most cases when he says that the financial system is subsidiary to the state. However, if the currency of the state is the defacto world currency, the result can be very different. The US is now at a junction where both roads lead to unpleasant destinations. Unfortunately, there is no third road: (a) The US government decides to nationalize the financial system and socialize the costs. The US Treasury will have to issue more debt to finance this bailout. Taxes will be raised on the citizens to pay for this debt. The Federal Reserve will embark on a path to inflate the market or in this case, devalue the USD. At some point, the US$ lose its status as the world reserve currency. Inflation will be rampant as import prices rise. Commodity prices in US$ terms will balloon. The US will be judged like any other country in the world: on its fiscal policies, its balance of trade, its debt servicing. There will be a new reserve currency. This will not stop the job losses. It will not stop a recession. The world will not escape unscathed. Foreign investment will pull out of the US. Countries FX reserves will decline in value. The new world paradigm will emerge. And probably politically unacceptable to the US. (b) The US government lets the financial system collapse. Losses are taken. Credit creation comes to a halt. The US goes into a deep depression. Banks in the US will be replaced by new healthy institutions. Assets prices will collapse. Jobs losses and bankruptcies will increase. Fiscal policy will be aimed at pump-priming (still more borrowings but its investment in productive capital). The Fed will take up the role of containing inflation and maintaining the value of the US$. There will be pain and there will be losses as the excesses of the last decade is purged from the system but at the end of the day, the economy will recover, like it always will. The US can maintain some sort of credibility, and the US$ will not be reduced to being a junk currency. Its status as one of the reserve currencies can be maintained. This is equally politically unacceptable. The US is faced with 2 hard choices. Either she loses its global hegemony through its currency, or it takes a very painful economic adjustment for her excesses. Both outcomes are unpleasant but either appears unavoidable. There is no magic wand that can make this go away. Throughout human history, there has always been occasions when the excesses get out of control and periods of painful adjustment always follows. This is no different. We are at the cusp of the biggest financial and economic crisis in the last 6 decades. The excesses have to be purged. Only then can the world economy move forward again. I just hope it doesn’t lead to a more destructive outcome. Remember that WWII was preceded by economic crisis. Lets hope we don’t walk down that path.
alexcanuck • February 29th, 2008 at 12:01 am
Wolf. Something about submitting when another post is waiting loses your post. Best to copy your text just before hitting submit. If you get “thanks for your comment” all is well. If not try again.
Anonymous ibid. • February 29th, 2008 at 12:32 am
Nouriel, while the costs could be as high as you propose, they could be much lower. Here is an example. Suppose that someone has a $200,000 mortgage on which they are paying $800 per month. Now the mortgage is about to reset to $900 per month, which the owner cannot afford. If the government buys the mortgage, the bailout costs $200,000. But if the government pays the reset, inflation will reduce the monthly cost of the mortgage back to $800 within no more than 5 years. In other words, under very conservative assumptions, the homeowner should be able to resume payments within 60 months. That makes the cost of the bailout $6,000. As a second layer, suppose the lender eats $50/month. Then, the cost of the bailout is only $3,000. The reason that you come up with these enormous figures for the costs of the bailout is because you assume that Washington is politically frozen into its current posture of complete idiocy. You may be correct. But at least–PLEASE- tell your readers that the reason for the high cost is political, not financial or economic.
Guest • February 29th, 2008 at 12:33 am
wolf, it is inevitable…
Guest • February 29th, 2008 at 12:40 am
The US government should not bail out “its” banks. The Wall Street banks are not US banks, they are worldwide institutions. They have not a smidgen of loyalty to this country or any other country.
Little Saver • February 29th, 2008 at 1:20 am
About lost posts: I found it helpful to open the preview window and to keep it open until the post appears on the RGE page after refreshing. A copy of the post is still available in the preview window in case of a loss after sending.
Guest • February 29th, 2008 at 2:44 am
Dear Roubini, I find your article very interesting. Just i think you exagerate a little bit when you talk about the number of household who will leave the house, that they will be around 16 millions. Now my point is the following: don’t you think that this persons as soon as they leave their house they will look for a new house maybe at a cheaper price? Basically saying that 16 millions persons leave the house is a little bit too pessimistic, because at the same time 16 million will look for a new house. So that the loss might be smaller…. I would appreciate your comments on this. If you have time….:) Have a nice day.
Guest • February 29th, 2008 at 2:44 am
Dear Roubini, I find your article very interesting. Just i think you exagerate a little bit when you talk about the number of household who will leave the house, that they will be around 16 millions. Now my point is the following: don’t you think that this persons as soon as they leave their house they will look for a new house maybe at a cheaper price? Basically saying that 16 millions persons leave the house is a little bit too pessimistic, because at the same time 16 million will look for a new house. So that the loss might be smaller…. I would appreciate your comments on this. If you have time….:) Have a nice day.
Guest • February 29th, 2008 at 3:03 am
@Guest on 2008-02-29 02:44:46, How do you propose that 16 million people leaving homes will buy cheaper ones? Most have no savings. Even if they could borrow money, the banks are no longer lending because many of them are just as insolvent as they people leaving their homes. So precisely how do people “look” for a new home???
Detlef Guertler • February 29th, 2008 at 3:06 am
@Wolf: You wrote: Banks in the US will be replaced by new healthy institutions. What kind of institutions? IMO that’s not a question of health (financial soundness) but of trust. You (and a lot of other people around here) don’t trust in the US Government. Okay. You (and a lot of other people around here) don’t trust in the Fed. Okay. You (and a lot of other people around here) don’t trust in Wall Street and the rest of the US financial system. Okay. But whom do you trust? Or whom can you trust? In gold? In god? In the catholic church? All not very viable. And not very american. The USA are the land of the free, the herald of free enterprise, the economy that rewards better than any other economy in the world the one who has the right idea at the right place at the right time. So: Look for an entrepreneurial solution to avoid the meltdown or to rebuild a financial system. An entrepreneurial solution needs an entrepreneur. And for rebuilding a financial system it should be someone known to everybody and trusted by everybody. And, of course, he should be American. I’d say there are two guys out there that could do it. The first is Warren Buffett. His advantage: You can be sure you can’t sell him crap. His disadvantage: You can’t be equally sure that he never sells crap. And, of course, he’s old, perhaps a bit to old to manage the rebuilding of the US financial system, what will last at least a decade or so. So for me best guess for the one who saves America is – Steve Jobs. His advantage: He never buys crap, he never sells crap, and if he does a mistake, he apologizes for that. If Steve Jobs would re-invent the bank, or the money, the way he did it with computers, MP3-players, music download and mobile phone – you would trust him. You would put your I-Bucks (“the money for the rest of us”) in his I-Bank, because you know Steve doesn’t betray you. Of course the I-Bank will not be called I-Bank. After am meltdown no-one will trust in any company named “bank”. That’s what happened in France after the John Law bubble burst in 1720, and that’s why a lot of French banks are not called banks: Crédit Lyonnais, Crédit Agricole, Société Génerale etc. I’d call it I-Society…
Octavio Richetta • February 29th, 2008 at 4:26 am
Headlines about as bad as usual, or worse. Some more cheap talk about supporting a strong USD this time from Paulson, Yeah, him and Bush have lots of credibility:-) The markets seem to do the opposite of what they say… http://www.bloomberg.com/index.html?Intro=intro3
Guest • February 29th, 2008 at 4:40 am
Can only mean one thing……..RALLY!!!
Guest • February 29th, 2008 at 5:23 am
It’s time you made a stand For a fee, I’m happy to be Your back door man, hey Dirty deeds done dirt cheap Dirty deeds done dirt cheap Dirty deeds done dirt cheap Dirty deeds and they’re done dirt cheap, yeah Dirty deeds and they’re done dirt cheap
Flanders Fields • February 29th, 2008 at 6:06 am
Financial Firms Face $600 Billion of Credit Losses, UBS Says By Abigail Moses Feb. 29 (Bloomberg) — Financial firms are likely to face at least $600 billion of losses from the financial crisis, UBS AG analysts said in a report today. Financial institutions have written down or lost about $160 billion so far. Losses from banks and brokers will make up more than half of the losses at $350 billion, according to estimates from UBS’s global banking team. “Leveraged risk positions are a cancer in this market and the sooner it is treated the better,” wrote Geraud Charpin, head of European credit strategy at UBS in London.
Guest • February 29th, 2008 at 6:39 am
NEW YORK (Reuters) – The agency that sets accounting standards will look into how U.S. banks treat off-balance-sheet vehicles that contributed to the more than $150 billion in losses that have hit financial institutions, the Wall Street Journal reported on Thursday. Robert Herz, chairman of the Financial Accounting Standards Board (FASB), told the Journal the agency will look into rules that allow banks to keep assets in special financing vehicles, off the books. FASB will weigh whether problems stemmed from the accounting rules, disclosure requirements or the way banks complied with existing rules, Herz said in an interview. The rules were crafted following the collapse of Enron Corp in an effort to limit the use of the sort of off-the-books vehicles that Enron used to hide its true financial state. But banks found ways around some of the new rules, the report said. FASB previously did not believe there was a problem with the accounting for these vehicles. The current financial crisis has altered that thinking, the report said. What isn’t clear, Herz told the Journal, is whether to change the rules, increase disclosure or force banks to better comply with existing rules. ”Whenever you have a stress test like this in the market and people are saying there are reporting problems, we need to understand the nature of those problems and to what extent there’s something we have to change,” Herz said. “But we also don’t want to have blanket rules that make everyone consolidate everything.” Any changes could have a major impact on the banking business. Citigroup Inc (C.N: Quote, Profile, Research), for example, had some $1.1 trillion in assets in off-balance-sheet vehicles in 2007.
Jason B • February 29th, 2008 at 6:43 am
A stress test? A STRESS TEST!? This is a calamity. This is not a choice of either or’s. FASB should change the rules, increase disclosure AND force banks to better comply with NEW rules. Holy cow, I just can’t believe this.
Guest • February 29th, 2008 at 6:51 am
There is no currency on earth that will preserve you entirely from the Fed’s devaluation. Only relatively can you hedge in currencies, recommend the Singapore dollar or Swiss Franc. Gold Bugs are coming into their own. Hold a portion of your portfolio (at least 20%)in gold, but stay nimble to sell in event of market manipulation. This has occurred often in the past. Remember these end game scenarios have been preconceived by moneymen for years. Their game plans are already in place. I would stay away from global equities/bonds entirely–it is increasingly apparent that they are not even trying to hide their rigging. Free and fair markets vanished some time ago, but now there is no longer even the pretense. Stay as liquid as possible with stockpile of necessities for short term living. Liquidity will allow you to acquire very cheap bargains. Your hard decisions will be how to select the best assets to purchase amoung the many that will present as the imprudent seek to obtain transaction value by any means. Ultimately we are going to cross through a most severe and scarring economic downturn. Today on cnn.money and via shadowstats, M3 was shown at 16%+ and rising exponentially. Your fiat currency will devalue to nothing soon. In a terrible irony of history, the German Bund and Mark may actually be a much better life preserver. We are being herded from stall to cattle crush as our government has ceased to view us as people of divine liberty with inalienable rights but rather as feudal slaves to serve their goals and purposes.
ES Root Canal • February 29th, 2008 at 6:57 am
s&p futures getting sacked, minus 15pts and counting. Friday bloody Friday? Let’s get this party started. May the Fractal be with you
Anonymous • February 29th, 2008 at 7:51 am
They’re unwinding a large number of bonds today…BAD. The vultures are going to be gorging. Some money is going to be liquidated out of equities to take advantage of these once-in-a-lifetime deals. If you’re going to make money anymore; it will be riding the fat cat’s tails.
Leo70 • February 29th, 2008 at 7:54 am
Is the commodity bubble creating a farm-land bubble?
charlie • February 29th, 2008 at 8:41 am
There’s clearly going to be some kind of bailout needed. I think it’s best to follow the S&L model. The banks that fail get taken over by FDIC and depositors are insured up to the FDIC limit. The goverment may have to kick in some extra money to FDIC, but it will be the most efficient and least costly solution. All the other schemes have a fatal flaw. They try an acrosss the board bailout of all banks, regardless if they’ll ultimately need bailing out or not. Even during the great depression, only about 20% of the banks failed. The rest managed to stay afloat on their own and didn’t need a goverment bailout. There were goverment programs that aided the banks, but nothing along the scope of what some politicians are proposing. Citigroup and Merril got money from investors in other countries. Some will issue bonds that will be bought up by foreigners. If there’s a loss, the loss will be spread across the world, not concentrated on the US Gov’t. Let the systems that are in place work. They’ve worked in the past and won’t require the creation of massive beaurocracy as at additional cost.
Flanders Fields • February 29th, 2008 at 8:51 am
MBIA Writing `Very Little’ New Business, Predicts More Losses By Shannon D. Harrington Feb. 29 (Bloomberg) — MBIA Inc., the world’s largest bond insurer, is writing “very little” new business amid the credit- market turmoil and debt-rating reviews, and the company expects losses on some its existing policies to rise significantly. “The demand for our product is the lowest it has been, and we are writing very little new business,” the Armonk, New York- based company said in a filing today with the U.S. Securities and Exchange Commission. MBIA also has observed “deterioration” in prime or near- prime home-equity loan securities it backed and may see loss payments amounting to a “significant portion” of the reserves it set aside, according to the filing. The bond insurer, which has been at risk of losing its top AAA debt rating because of a decline in the value of mortgage- linked securities it guaranteed, reported a record $1.9 billion net loss for 2007.
Guest • February 29th, 2008 at 9:06 am
Personal spending numbers from this morning confirm we are in a recession this quarter. MI cons sent plunges from 78.4 to 70.8! Gold over $970 and oil touches $103. On top of that, AIG loses $5.3 Billion after an $11 Billion charge on derivatives! ALl this should be enough to rally stocks now!! LOLOLOLOLOL. Bernanke cut coming today?
Guest • February 29th, 2008 at 9:08 am
If the Chicago PMI plunges today at 9:45-you watch the dow drop HUGE!
Flanders Fields • February 29th, 2008 at 9:12 am
15:57**VS MICHIGAN CONSUMENTENVERTR. FEB (DEF.) 70,8; CONS 70,0 15:45**VS CHICAGO PURCHASING MANAGERS INDEX FEB 44,5; CONS 49,5
ES RootCanal • February 29th, 2008 at 9:16 am
Come on Ben! Give us a “Big 50″, not some “Dinky 25″
Guest • February 29th, 2008 at 9:17 am
@ Guest re: M3 at 16+ and rising.. Could you please explain the significance of this figure?- would appreciate understanding of its implications. Thank you.
Little Saver • February 29th, 2008 at 9:21 am
Chicago Purchasing Managers Index 44,5 versus expected 49,5 Was reported in Holland at 9.49, still not reported at MarketWatch or Bloomberg at time of sending???
heliben • February 29th, 2008 at 9:24 am
rate cut by 1%… Heli
Luitenant • February 29th, 2008 at 9:26 am
See Reuters. All number published.
Tom Joad • February 29th, 2008 at 9:29 am
M3 at 16+ and rising means that the money supply is being reflated by the fed at 16% rate. This is not a linear but exponential function. Its implications are very dire for the ability of the US paper money to hold any value. In essence the Gov’t is counterfeiting money and spending it in a falling market i.e. the supply of money is vastly increasing as the pool of goods and services it obtains is diminishing. Because they are the “first” spenders, they get all the stolen value. As the population comes to understand that there is more money, fewer goods prices adjust upward and quick. Example, in November last year I purchased a large order of 50# bags of hard white wheat (used for bread etc.), it was $14.80, today I called it is $23.00. In three months its value has appreciated 55%. No stock could ever match that. That is an annual growth rate of over 200%. Your home is plummeting, your food&energy&consumables are going through the roof, additionally wages are flat and under pressure as huge layoffs are imminent. We are in for a chastening of a degree that I don’t think this generation is ready for. Time for everyone to get a new read of Steinbeck’s “Grapes of Wrath”
JLC • February 29th, 2008 at 9:40 am
Dont be so naive you guys. Banks will be bailed out, and nothing better will take their place. The whole banking system is set up with bailouts in mind – to concentrate gains and socialize losses. The Federal Reserve is nothing more than a banking cartel set up to protect their own. They will delay it as long as possible and make it look like they tried everything they could to avoid it. IMO a bailout plan has long been on the shelf. They’re not idiots – they knew something like this was coming. Now they’re trying to keep the system together long enough for those on top to get out while they can. A bailout has been in progress for months now, via the FHLBs and the TAF. We are now seeing a shift from covert to overt bailout. Its already a done deal, so we might as well get over it. Once again, the many will pay the price for the actions of the few.
Guest • February 29th, 2008 at 9:50 am
Written by Detlef Guertler on 2008-02-29 03:06:13 Is this the same Steve Jobs of option backdating fame? Really trustworthy!
gloomier • February 29th, 2008 at 9:54 am
@JLC I couldnt agree with you more. Wall street runs the gvt and they knew about this. They are just trying to do this is a slow ordelry fashion to the middle class. We are all going to the gas chambers thinking they are showers. But the US and wall street will pay for their actions. Now I know why The NRA was so adament in keeping guns legal. I never would thought I would say that. Hopefully there will not be anarchy, but their are enough crazies out there who have waited for the moment to arrive. WWIII anyone.
Guest • February 29th, 2008 at 9:58 am
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Lot • February 29th, 2008 at 10:13 am
@Detlef Guertler It may be the pervasive negativity talking, but the only solutions to this crisis will not preserve status quo. This is bigger than the 1929 event. In 1929 the bubble popped because of rampant stock speculation and margin issues. One trigger–now too many triggers to count. Today, we have the credit market GONE! No debt funding for municipalities, sovereigns, corporations, large- middle-scale entities BOOM! No asset backed securities of any kind being written! Credit so plentiful yesterday GONE! From garden of eden to Gobi! Today, we have overleveraging to such an extent that it can never be paid without hyperinflation. Consumer, corporate, city/county, state, federal, international extreme debt. Consumer debt will lead to absolute (even negative)pullback in spending, and then defaults. Deflation drain in all hard assets and durables. Hungry? Eat that McMansion, Eat that Hummer, Eat those Widescreens because wheat will double in price in next 3 months and again 6 months after that. Ranchers are reducing supply of meat due to ethanol/grain price spikes. Why do you think AG is the big recent buy? There will be Famine! Maybe not as badly in US but bad. There are no DECOUPLINGS that can pull us out. SWFs are now spent. Watch the global markets everyday–either painting all green or all red. There is no or little counter-correlation, where the US goes, everyone else goes. And the US is circling the drain in tighter and tighter radii. Currency devaluation will destroy confidence. Banks? may remain solvent, but trust GONE! Currency-no trust. Creditors? Won’t lend again anytime soon, no faith. Right now every smart money holder is hedging as fast as possible just to preserve present value without much concern for future value and hunkering down for a maelstrom. The only viable market (consult all history in times of extreme stress) will be an underground black market, even barter market. Never have there been so few ants and so many grasshoppers…er…locusts. Come plagues of Egypt.
joachim boaz • February 29th, 2008 at 10:15 am
20De wijsheid is niet moeilijk te vinden en wordt als het ware van de daken geschreeuwd. 21Zij is te horen in de drukte op de straten, op de plaatsen waar mensen samen zijn. Op de toegangswegen van de stad roept zij: 22″Slechte mensen, hoelang blijft u nog prat gaan op uw slechtheid? En spotters, hoelang blijft u genieten van uw eigen sneren? Hoelang blijven dwazen de wijsheid negeren? 23Laat mijn vermaning een les voor u zijn. Want ik zal u laten zien wat ik wil en wat ik denk. Als verfrissend water stromen mijn woorden u tegemoet. 24Ik riep, maar u luisterde niet en niemand zag hoe ik mijn hand uitstak. 25Mijn raad hebt u naast u neergelegd en mijn vermaning wees u van de hand. 26Daarom zal ik lachen wanneer u valt en de spot met u drijven, als u in het nauw zit. 27Mijn spotgelach zal u in de oren klinken, wanneer uw leven snel en meedogenloos wordt verwoest en u niets anders overblijft dan angst en uitzichtloosheid. 28Ja, dan zullen ze mij roepen, maar geen antwoord krijgen. Zij zullen hun best doen mij te vinden, maar zonder resultaat. 29Zij wilden immers niets weten van kennis en inzicht, van eerbiedig ontzag voor de HERE? 30Zij legden mijn adviezen naast zich neer en schokschouderden over mijn vermaningen. 31Daarom moeten zij de gevolgen dragen en ondervinden wat zij zich op de hals hebben gehaald. 32Want hun onwil wordt hun dood en hun voorspoed zal bedrieglijk blijken; ook die kan hun val niet voorkomen. 33Maar wie wel naar mij luistert, hoeft zich nergens zorgen om te maken, want dergelijk onheil is voor hem niet weggelegd.” Proverbs 1:20-33 http://www.abcgallery.com/R/rembrandt/rembrandt7.html It’s all been done before.
Anonymous • February 29th, 2008 at 10:18 am
Little Saver on 2008-02-29 09:21:32: Chicago Purchasing Managers Index 44,5 versus expected 49,5 Was reported in Holland at 9.49, still not reported at MarketWatch or Bloomberg at time of sending??? The answer to your “why” question is that the the shit is deeper than what can be seen. The pieces to the puzzle are not what the pieces seem to be.
Guest • February 29th, 2008 at 10:22 am
Jobless claims, continuing claims, consumer sentiment, ISM Non-Mfg, Chicago PMI…the list is now endless and the conclusion unavoidable-we are in a recession! George W. looks like the biggest MORON for his idiotic comments yesterday! Recession fair value on the S&P500 is under 1180…see ya there!
Alex Grey • February 29th, 2008 at 10:24 am
I think a key factor for the overall economy is the effect that these financial system losses will have on lending. Based on Hatzius’s rule of thumb a loss of $1 billion to the financial system results in a decline of $10 billion in lending. It goes without saying that declines in lending in the $trillions (Hazius originally estimated $2 trillion in a November 10 report based on financial system losses of $200 billion) will have major repercussions for asset markets especially housing. My guess is that house prices are going to fall further than even 30%. It looks increasingly like the US faces what can only be called a financial melt-down. By the way if you look at some of what Minsky wrote this is might be better understood . Basically financial innovation that work to increase asset prices and economic activity on the upside start to work in reverse when asset prices start falling. And the key cause of the debacle we are now facing up to is the sustained and increasing pronounced decline in house prices. - Losses related to record U.S. residential foreclosures may be as high as $400 billion for financial companies, said Jan Hatzius, chief economist at Goldman Sachs Group Inc., in a report dated November 10. Credit market turmoil may reduce lending by $2 trillion and trigger a “substantial recession,” according to the report. This is based on the assumption that $200 of losses would be born by the financial system (up to late February losses have totalled about $165 billion) and based on the assumption that financial institutions have about $1 in assets for every $10 of loans, you get the figure of a decline $2 trillion in lending. - According to a more recent report of Union Bank of Switzerland (UBS) “Financial firms are likely to face at least $600 billion of losses as the crisis triggered by the collapse of sub-prime mortgages batters banks, brokers and insurers, UBS AG analysts said. Banks and brokers stand to lose $350 billion (Alex: I assume this means a further $350 billion), according to estimates from the global banking unit of UBS, the world’s largest wealth manager. Financial institutions have so far disclosed more than $160 billion of write-downs and credit losses. (Alex: Even taking the lower figure of $350 billion in losses, this would imply a decline in lending by the financial system of $3.5 trillion dollars. It goes without saying that a decline in lending of this magnitude would have serious consequences for asset markets like the housing market.)
Octavio Richetta • February 29th, 2008 at 10:24 am
Written by joachim boaz on 2008-02-29 10:15:20 In English below. nice reading. Bush who supposedly is very religious should read them. http://www.biblegateway.com/passage/?search=Proverbs+1:20-33
Guest • February 29th, 2008 at 10:30 am
“George W. looks like the biggest MORON for his idiotic comments” you are a moron for believing that he is that stupid. Those were not idiotic comments. Those were lies onto your face. Question, do you buy it? Or do people buy it? Believe or not, it is probably 50% of idiotic USA citizens who gonna buy Bush and Ben’s lies. Talk about who is idiotic. Yes, the people.
JMa • February 29th, 2008 at 10:30 am
I find it remarkable all of this decoupling talk. Decoupling from what ? Is the US decoupled from all of the other real estate bubbles in the world ? Sure ok whatever… Is the US decoupled from China’s OVER INVESTMENT leading up to the Beijing Olympics probably very similar to the ramp up one time investment in the US leading to Y2K. I mean who did not revamp their entire system leading up to 2000 in the US ? Overinvestment SPIKE followed by 2000 – 2002… The only possible story for China following the Olympics is the World’s fair in Shanghai following the Olympics. This will probably be talked about as the Olympics are now. However, either after one or the other or both, you will have a pocket of weakness as too much activity was crammed into the past 5 – 10 years. I am not blind I see the long term China opportunity which clearly obviously differs 100% from the US Y2K picture. However, right now I see charts of indices up 100s of % in a short period of time leading up to climactic dates on the calendar… Decouple your views on the markets from the MSM if you want to dwell on decoupling…
Octavio Richetta • February 29th, 2008 at 10:30 am
Wouldn’t be surprised if equity markets catch the flu again next week. It will be interesting to see what Benny will do if it gets ugly. The last FED minutes indicate they worry quite a bit about the equity market, due to the wealth effect so they say. But if fundamentally stocks below at a lower level they were eventually resume their fall. He should be a big boy and wait until 3/18 otherwise it will look like it is the end of the world… So he cuts again on 3/18 or sooner; market stalls for a while then resumes fall, and in the mean time the USD keeps nosediving and the liquidity party continues: Inflation up, commodities up, long term rates up….
Guest • February 29th, 2008 at 10:31 am
Wall street ALWAYS overestimates earnings. At teh end of 2006, they estimated on a 52 week forward look, that profits would grow slightly North of 10% and well, so far with most data in, looks like earings FELL around 5% for 2007-nice work guys, nice work.
JMa • February 29th, 2008 at 10:35 am
the next rate cuts surprise or otherwise will be sold off immediately and STAY sold off… IMHO talk about diminishing utility – like fighting California wild fires with squirt guns, bailing out the sinking Titanic with a teaspoon… “day trading”, “rogue equity trading” Fed has already made and will continue to make history shooting from the hips at day to day equity prices…
No ethics? No sanctuary • February 29th, 2008 at 11:05 am
Today, another day in the Great Reckoning A merchant in Baghdad sends his servant to the marketplace for provisions. Shortly, the servant comes home white and trembling and tells him that in the marketplace he was jostled by a woman, whom he recognized as Death, and she made a threatening gesture. Borrowing the merchant’s horse, he flees at top speed to Samarra, a distance of about 75 miles (125 km), where he believes Death will not find him. The merchant then goes to the marketplace and finds Death, and asks why she made the threatening gesture. She replies, “That was not a threatening gesture, it was only a start of surprise. I was astonished to see him in Baghdad, for I had an appointment with him tonight in Samarra.”
JP • February 29th, 2008 at 11:20 am
I was at a talk on Monday lead by a Special Counsel to a US Congress Person. There were about 15-20 bankers there. His initial take, based on discussions and meeting with the big banks (Citi, BAC, ML, etc.) is that it is really ugly and government needs to act. Interestingly, a lot of the bankers (local regional banks) did not agree. There were anecdotal comments about commercial rents being up, and loan activity on home equity loans were up – especially for business owners, and there being a lot of “activity”. Also, their home loans that they kept on the books are performing. I agree that commercial advertised rates and even agreement rates are up – but I hear that the concessions more than off-set the increases. I can see business owners tapping equity before their home depreciates more, and I can see them sitting it on the side line to “prepare” for doomsday. Of course their home loans are performing – they did the underwriting in house and the loan officer is accountable. This all seems to make some sense. Is it possible that the little regional and community banks are going to emerge unscathed while the big guys take a hit due to their financial wizardry?
Guest • February 29th, 2008 at 11:28 am
HER COME DA PPT!
Sennacherib • February 29th, 2008 at 11:30 am
@JP Listen to Insana, sounds a lot like your eavesdrop. http://www.cnbc.com/id/15840232?video=667781086&play=1 Is Insana really wearing a pink shirt, red tie? And coanchor wearing all red pant suit? That’s odd. What an odd fellow!
MV = PQ Nash • February 29th, 2008 at 11:53 am
“Why did the Lord give us agility, If not to evade responsibility?” thought thoughtful, thoughtful, pensive Ben, as he gave his printing press another spin, under knocking knees and twisted belly long stout timbers bowed like jelly For Some primal termite knocked on wood And tasted it, and found it good! And that is why your dollar’s pay Fell through the parlor floor today.
Pink flamingoes • February 29th, 2008 at 11:59 am
http://www.cnbc.com/id/15840232?video=668931697&play=1 Important that today, especially today, they head south for interviews.
jkiss • February 29th, 2008 at 12:03 pm
First energy, then base metals, then the precious ones, and finally AG. We are in the last stages of a commodity bubble. The stock crash 1929-32 preceded the commodity crash. The land bubble in 1929 is somewhat similar to what has happened to US AG land recently, rising sharply even as housing is crashing. Record wheat prices on account of shortages/high demand are somewhat similar to record oil/shortages… both feed the gold bugs. High wheat is on account of a combination of factors, not just acreage planted to corn in the us for stupid ethanol but even more on the great Australian drought, from 2002-7, where low production slashed world stocks. But, like most commodity booms, wheat price is now very subject to a collapse as US farms plant more wheat in response to much higher prices and as Australian production recovers… their winter wheat will be far higher this year than last. http://www.bom.gov.au/announcements/media_releases/climate/drought/20080107.shtml Gold demand for jewelry has crashed world wide on account of high price and, recently in the US, the recession. Demand for investment gold will crash along with AG… Oil is a little different, more stubborn on account of peak oil. However, there are some studies at theoildrum.com and others that suggest 2008 will be the last year when more oil is produced than the previous one, possibly sufficient to overcome higher demand from exporting countries and thereby leading to one last year of higher exports… more oil and recession spells lower prices for now; firming oil price in 2010 will make it that much harder to climb out of recession. Recessions reduce commodities in the absence of curtailed supply, steep recessions crash them.
Guest • February 29th, 2008 at 12:10 pm
More good news, now wonder stocks aren’t down 400 points right now: 12:58 S&P may downgrade 1,887 classes of Alt-A mortgage securities
widows of Ashur • February 29th, 2008 at 12:37 pm
Exchange trading curb rules http://www.page88.co.za/cr/trading-curbs.shtml Note we have exceeded a 190 point loss and presently stand at -250
Suecris • February 29th, 2008 at 12:52 pm
@widows of Ashur – your link says (I think, it’s not really clear) that if NYA goes up or down 190+ points, collars will be put on. NYA is, apparently, the NYSE, which is currently down around 200+ points. Are the collars in yet?
Guest • February 29th, 2008 at 12:57 pm
I though the downtick rule was eliminated?
Mark • February 29th, 2008 at 1:00 pm
@jkiss on 2008-02-29 12:03:34 ”Gold demand for jewelry has crashed world wide on account of high price and, recently in the US, the recession. Demand for investment gold will crash along with AG… ”Oil is a little different, more stubborn on account of peak oil. However, there are some studies at theoildrum.com and others that suggest 2008 will be the last year when more oil is produced than the previous one, possibly sufficient to overcome higher demand from exporting countries and thereby leading to one last year of higher exports… more oil and recession spells lower prices for now; firming oil price in 2010 will make it that much harder to climb out of recession. ”Recessions reduce commodities in the absence of curtailed supply, steep recessions crash them.” AG exists because of oil. As goes oil so goes AG. The affordability gap of food will increase: translation: a greater percentage of income will go toward food costs (and less toward consumer products). Metals and other non-food commodities will eventually flatten out at the point that more localized systems take hold: localized systems such as local currencies and food production. I don’t think that gold will “crash” anytime soon (not until local currencies make significant inroads toward displacing standard fiat currencies). On peak oil production dates, I believe that it has already been established that oil production likely peaked in 2006. Mark (the original? one)
widows of Ashur • February 29th, 2008 at 1:03 pm
@Guest on 2008-02-29 12:57:15 Just so. Withdrawn. http://quote.bloomberg.com/apps/news…d=ahZh1lKYXD8w
Anonymous • February 29th, 2008 at 1:08 pm
there is no way the FED is going to let the market drop >1000 points for very long. i would expect if the market did drop, let’s say 1350. during the market close i would expect the fed to have an “emergency meeting” and drop the FFR at least .5-.75 immediately to stop the decline
Guest • February 29th, 2008 at 1:30 pm
Breaking News >> News Conference on Ricin Find at Sin City Hotel, Man Reportedly in Coma: Watch Live
Medic • February 29th, 2008 at 1:44 pm
1. This may just be wishful thinking, but I don’t believe gold is going to decrease in price anytime soon. There are too many investors (large and small) seeking a safe haven for their money. I am aware of many people who have moved into gold to hedge against not only inflation but to weather a crash. 2. The IMF this week announced that it was planning to sell off a portion of its gold and this decision was backed by the US. It makes sense that China would be in a position to pick up this amount as it is holding too much toxic US debt and low yielding bonds. Perhaps the US convinced the IMF that this sale was a good idea as a way of “helping” China out so it would not off load their bonds? 3. Commodities will continue to rise until there is a point where their value is irrelevant and the black market or even bartering takes over for most people. At that point we will be too far down the road for gold to matter, unless you have it on hand and in small enough amounts to be easily traded for goods. If we get here, guns may be more valuable than gold. I’m starting to get a very bad feeling………..
Crimson Shield • February 29th, 2008 at 1:55 pm
Ted spread creeping up again. http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND ABX index indicating deepest lock-up in credit markets (pull up their charts) http://www.markit.com/information/products/category/indices/abx.html Gold now at 976 and rising. Would you have thought it 18 months ago?
Anonymous • February 29th, 2008 at 1:55 pm
Anonymous: Yes the market can and must go lower than minus 1000 points from here – it was at 9700 not so long ago.
J. • February 29th, 2008 at 1:57 pm
How do you propose that 16 million people leaving homes will buy cheaper ones? Most have no savings. Even if they could borrow money, the banks are no longer lending because many of them are just as insolvent as they people leaving their homes. So precisely how do people “look” for a new home??? Written by Guest on 2008-02-29 03:03:02 Broaden the definition of ‘leave’ to include not physical but financial leaving. ‘You’ remain in the house but ‘you’ do not pay — in many cases it is either impossible or too expensive to determine ownership. IOW, as a legal-political structure, the whole cloth of private property has become frayed and will become moreso.
J. • February 29th, 2008 at 1:59 pm
How do you propose that 16 million people leaving homes will buy cheaper ones? Most have no savings. Even if they could borrow money, the banks are no longer lending because many of them are just as insolvent as they people leaving their homes. So precisely how do people “look” for a new home??? Written by Guest on 2008-02-29 03:03:02 Broaden the definition of ‘leave’ to include not physical but financial leaving. ‘You’ remain in the house but ‘you’ do not pay — in many cases it is either impossible or too expensive to determine ownership. IOW, as a legal-political structure, the whole cloth of private property has become frayed and will become moreso. Written by J.
Softwarengineer • February 29th, 2008 at 2:01 pm
IS THIS A SCENARIO FOR SOCIALIZED WELFARE TO THE RICH ELITE BANKERS? The Fed keeps reducing interest rates lately and we watch our savings accounts fetch like 2% less in 2008 than 2007? Gee….we can all afford to retire on like $10M cash, with theses measly CD and money market rates? Meanwhile home mortgage rates may drop like a measly 0.2% if you’re really lucky, or even increase to like 6.7% recently; depends on the bank. I assumed great credit and 20% down fixed too. Check it out. OK, who’s pocketing the welfare scooped from our joke 401Ks???? The impact of lost income for retirements wasn’t even covered by Dr. Roubini or the “Wolf” guarding the chicken house; but in my opinion, its not a mitigating factor to sweep under the rug at all. There’s a huge Baby Boom glut about to retire and if they have no incomes or drastically reduced 401K incomes [stock losses included with money market and CDs]; granny bar the door, Wolf’s $1 trillion is a complete joke, especially with their 80M upper tier type homes suddenly on the market, as they downsize for retirements. And…..welfare to the rich elite banks doesn’t necessarily “trickle down” to today’s new home buyers with fed rate cuts. In fact, lately, its just the opposite.
Guest • February 29th, 2008 at 2:06 pm
My calculations suggest the dow SHOULD close down 417 points today but we are now in teh “witching” hour where the PPT lurks…lets watch and see…
Magen David Adom Rot Schild • February 29th, 2008 at 2:07 pm
http://en.wikipedia.org/wiki/Nathan_Mayer_Rothschild Gold, accumulate gold, hoard gold?
Guest • February 29th, 2008 at 2:08 pm
Volume is running lighter today at this time than it was yesterday-now downside selling conviction?
KJ Foehr • February 29th, 2008 at 2:13 pm
It sounds as if the munibond market and some hedge funds are crashing today. “Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world, The blood-dimmed tide is loosed, and everywhere The ceremony of innocence is drowned; …” W.B. Yeats I look for more fearful selling next week and possibly another futile emergency rate cut by Ben. And what rough beast, its hour come round at last, Slouches towards New York to save us?
Guest • February 29th, 2008 at 2:17 pm
Looks like a daily double bottom is in in the market-lets see if there is any “mystery ammo” that suddinly pushes us higher in the last 45 mins…
Guest • February 29th, 2008 at 2:22 pm
rinse lather repeat cycles working—->working poor——–? out of water and shampoo
Guest • February 29th, 2008 at 2:22 pm
Sell
ES TraderRT • February 29th, 2008 at 2:30 pm
Looks like a daily double bottom is in in the market-lets see if there is any “mystery ammo” that suddinly pushes us higher in the last 45 mins… Written by Guest on 2008-02-29 14:17:04 I’m with ya, Guest, I’m with ya. Time to cover and head for happy hour. What a great session it was, don’t get many like today.
Guest • February 29th, 2008 at 2:43 pm
3:41[JPM] J.P. Morgan says home equity potfolio losses likely to rise 3:41[JPM] Q1 home equity losses could hit $450 mln, J.P. Morgan says 3:41[JPM] J.P. Morgan says in filing that card charge-offs to rise
J. • February 29th, 2008 at 2:54 pm
jkiss on 2008-02-29 12:03:34, ’…last stages of a commodity bubble’ Very true but this bubble has had much less to do with production cost/supply/demand than with the floods of money into commodity futures, a flooding that became particularly noticeable as long-only funds, in search of higher returns, began reallocating into these markets post-2004 (really, from later 2003). Prices were beyond fundamentals even in early 2006 and have only become moreso. Of course, for those who believe that futures markets are efficient (no matter how often proven not to be), this would not stand out and all the justifying stories and rumours would be accepted, accepted without the necessary skepticism and analysis. ’Peak oil’ is one of those stories which has by some been so easily taken as fact no matter how often its major proponents are debunked. The BRIC story, particularly China, is another as are those of global grain shortage which often seem to depend on forecast ending stocks. Not to say there have been zero fundamental bases since this is never an either/or but to note what should be evident, that commodity prices became financialized, that this is far too often ignored and that they can (will) deflate much more rapidly than imagined. Australia? Grain crop up despite SA drought Posted Wed Feb 20, 2008 9:43am AEDT The grain crop is up significantly on the previous drought year. South Australian grain farmers have had a significant improvement in their harvest. Yields are up almost 80 per cent on the previous drought year.
Guest • February 29th, 2008 at 2:56 pm
3:54[JPM] JP Morgan reclassifies $4.9 bln in LBO loans as investment 3:54[JPM] JP Morgan says LBO loans continue to deteriorate in Q1
Guest • February 29th, 2008 at 2:56 pm
3:54 [JPM] JP Morgan reclassifies $4.9 bln in LBO loans as investment 3:54 [JPM] JP Morgan says LBO loans continue to deteriorate in Q1
Medic • February 29th, 2008 at 2:56 pm
I think I’m feeling worse over the last 55 minutes. WOW! This was impressive to watch. It reminds me of the flood I saw once. The water was so strong, but looked less than menacing; until I watched a garage float by and hit a railroad bridge – the destruction was complete and impressive and quick. The water just kept flowing……
Guest • February 29th, 2008 at 2:58 pm
Too little too late PPT, Dow headed up quickly now!!
Bierce • February 29th, 2008 at 3:04 pm
Then dies the State!–and, in its carcass found, The millionaires, all maggot-like, abound. Alas! was it for this that Warren died, And Arnold sold himself to t’ other side, Stark piled at Bennington his British dead, And Gates at Camden, Lee at Monmouth, fled?– For this that Perry did the foeman fleece, And Hull surrender to preserve the peace? Degenerate countrymen, renounce, I pray, The slothful ease, the luxury, the gay And gallant trappings of this idle life, And be more fit for one another’s wife.
Guest • February 29th, 2008 at 3:11 pm
Sure didn’t fell like it but the S&P actually was down 3.5% for Feb. NASD was off about 4.5% for the month. That ought cheer 401K folks up.
sns • February 29th, 2008 at 3:18 pm
You Walk Away http://www.nytimes.com/2008/02/29/us/29walks.html?em&ex=1204434000&en=6405f44e3f6019a8&ei=5087 Banks Eat It ~~ kiss me when my lips are bitter ~~
SSBN-619 • February 29th, 2008 at 3:32 pm
Don’t fight the Fed or the Banks… Even when they lose, you lose. Remember Andrew Jackson
4822 • February 29th, 2008 at 3:45 pm
Medic: “3. Commodities will continue to rise until there is a point where their value is irrelevant and the black market or even bartering takes over for most people. At that point we will be too far down the road for gold to matter, unless you have it on hand and in small enough amounts to be easily traded for goods. If we get here, guns may be more valuable than gold. “ http://www.bloggingstocks.com/2008/02/28/calpers-investments-in-commodities-to-impact-the-u-s-economy/ Calpers’ investments in commodities to impact the U.S. economy The commodities fad took a major step toward becoming an investment trend when investment giant Calpers — the $240 billion California Public Employees’ Retirement System — announced it may increase its commodities investments 16-fold to $7.2 billion through 2010, Bloomberg News reported Thursday. Calpers, the largest pension fund in the United States, said it would hold between 0.5% and 3% of its assets in commodities. Last year the fund invested $450 million in commodities. Strong emerging market growth, particularly in China and in sections of Latin America, has created a bull market in oil, commodities and raw materials, and many economists say these assets are likely to outperform both inflation and selected investment classes in 2008, and possibly for a longer time period…
Wild Bill • February 29th, 2008 at 3:58 pm
In the space of one month, I was homeless, hungry and destitute. I wandered down by the bus depot and saw a guy setting up two milk crates and a plank behind his van. He put up a hand painted sign that said: “I.B. Nightflyer-Mortgages”. He called me over and showed me how I could get a mortgage with no income, no down payment and no up front costs. Well, I signed right up and bought a house. Then I signed up some more, and bought an apartment complex. I rented out the apartments and moved into the new house. Everything was O.K. until my mortgage payments went through the roof and a few of my tenants quit paying rent. Next thing ya’ know, they was forclosin’ on me. Well sir, I went to court and boy did I get a surprise. It seems as how ole Mr. Nightflyer sold my mortgage to somebody who diced it up, shredded it, fricasseed it, reformulated it, regurgitated it and ephemeralized it. Here was this high classed lawyer representing a multi-national bank, an’ all he had to show he was the lender, was a yellow sheet of paper from a legal pad with some Chinese writing on it. The judge threw him out of court and I went back to my place and continued living rent free. I decided to share the wealth so I cut my tenants rent in half and still made a fortune. I even threw a few bucks towards the town for taxes since they weren’t gettin’ any from the escrow money since no one can prove who I owe my mortgage money to. It sure is a privilege to be able to wake up in the morning knowing I am millions of dollars in debt, with forty-three cents worth of equity in real estate, and knowing I’m getting’ richer every day. What a great country.
Guest • February 29th, 2008 at 4:14 pm
Grain commodities so high for only one reason. Too much money looking for a home. Next bubble food, AG, minerals Look for wheat at $2/lb.
JLC • February 29th, 2008 at 4:17 pm
Would you say it is a commodity bubble, or the beginnings of what Mises called a crack up boom? Either way, I think commodities have a long way to run.
Octavio Richetta • February 29th, 2008 at 4:43 pm
Written by Wild Bill on 2008-02-29 15:58:34 n the space of one month, I was homeless, hungry and destitute. I wandered down by the bus depot and saw a guy setting up two milk crates and a plank behind his van. He put up a hand painted sign that said: “I.B. Nightflyer-Mortgages”. He called me over and showed me how I could get a mortgage with no income, no down payment and no up front costs. Well, I signed right up and bought a house. Then I signed up some more, and bought an apartment complex. I rented out the apartments and moved into the new house. Everything was O.K. until my mortgage payments went through the roof and a few of my tenants quit paying rent. Next thing ya’ know, they was forclosin’ on me. Well sir, I went to court and boy did I get a surprise. It seems as how ole Mr. Nightflyer sold my mortgage to somebody who diced it up, shredded it, fricasseed it, reformulated it, regurgitated it and ephemeralized it. Here was this high classed lawyer representing a multi-national bank, an’ all he had to show he was the lender, was a yellow sheet of paper from a legal pad with some Chinese writing on it. The judge threw him out of court and I went back to my place and continued living rent free. I decided to share the wealth so I cut my tenants rent in half and still made a fortune. I even threw a few bucks towards the town for taxes since they weren’t gettin’ any from the escrow money since no one can prove who I owe my mortgage money to. It sure is a privilege to be able to wake up in the morning knowing I am millions of dollars in debt, with forty-three cents worth of equity in real estate, and knowing I’m getting’ richer every day. What a great country. Great post! Along with Michael Jackson’s Subprime PutTM post by Alessandro yesterday. Here is the latest on it: http://news.bbc.co.uk/1/hi/entertainment/7270842.stm Goes to show the important thing is not how much you make but how much you spend. God knows how many million USDs he blew in all kinds of junk. He could easily have been a billionaire with just a little bit of planning.
Jason B • February 29th, 2008 at 4:48 pm
Next boom – anything that hurts when you drop it on your toe: Qualitatively, there are three stages of inflation. We will simply call these stages (1) “low inflation”, (2) “high inflation”, and (3) “hyperinflation” although even Austrian terminology varies widely and is inconsistent even among the classical authors. We define inflation to be “low” when consumer prices grow slower than money supply. In other words, even though money supply increases, general prices rise relatively less. Because of this, some people refer to this stage as “hidden inflation”: there is indeed inflation, but you don’t see much of it. Prices rise slower for two related reasons. First, because people believe that the price increases are temporary and that prices will soon get back to normal, they spend less from the new money and increase their cash holdings in anticipation of the more favorable prices in the future. In short, the social demand for money increases. Second, because people have more cash, rather than spending it all, some of it will be channeled into various investments, such as stocks, bonds, and real estate. Therefore, asset prices begin to rise; many people mistakenly think of these as bull markets and not as inflation. In addition, incomes rise faster than inflation, thus the real purchasing power of consumers, businesses, and the government increases. Rising incomes, coupled with stock, bond, and real estate bull markets generate a sense of prosperity. Economic activity accelerates, and a boom is under way. Everyone sees the benefits of inflation, and no one sees its drawbacks. Optimists call it “good”, politicians call it “benign”, bankers call it “under control”, and poets call it “tame”; yet for Austrians it is only a prelude to even more inflation. Now comes the crucial point to emphasize about the stage of low inflation: because the government generates revenue out of the increased money supply, since money supply grows faster than prices, the government actually increases its real purchasing power. This extra purchasing power is popularly known as an “inflation tax”. In short, the government benefits directly from “low” inflation. As a corollary, as long as inflation is low, the government stands to benefit and will therefore continue to inflate. However, low inflation cannot last forever. Sooner or later, people wake up to the fact that inflation is here to stay and that current high prices will get even higher. They realize that they gain by buying now, so they step up their purchases. General prices now begin to accelerate higher. As a result, the government revenue falls in real terms, and if the government accelerates the money supply, consumers respond by accelerating even further their purchases. Now consumers begin to spend not only all the new cash that they get, but also that extra cash that they have hoarded while inflation was low. At this point prices begin to increase faster than money supply. Now the economy switches into a qualitatively different regime: from one of “low” inflation, to one of “high” inflation. As Rothbard puts it in his Man, Economy, and State, “This stage of inflation is the beginning of hyperinflation, of the runaway boom” (p. 876, 4E). In economic terms, the increase in the quantity of money causes a fall in the demand for money. Now inflation has reared its ugly head. It is no longer benign, but vicious. Prices continue to rise and incomes can’t keep up with them; real incomes fall and people begin to feel impoverished. Interest rates begin to reflect the new inflationary expectations and as a result begin to rise. As a consequence, bond prices fall, the stock market drops, and real estate falters. Feelings of prosperity vanish, and consumers retrench their spending. Good times turn into bad times (even though technically these are still boom times and the bust has not yet even begun). As the situation continues to exacerbate, prices rise further while at the same time people reduce their cash holdings. As a result, a crisis develops where there is a perceived shortage for cash, and there are more cries for further inflation in order to alleviate the cash shortage. At this point, two scenarios are possible: (1) hyperinflation or (2) deflationary bust. In the first scenario, the situation gets so out of control that financial authorities oblige the public’s demand for more money and accelerate the money supply, now almost exponentially. This is “hyperinflation”, the third and terminal stage of inflation. Mises refers to this as flight into real goods or the crack-up boom. His description from Human Action is as follows: “Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them” (p. 428). And Rothbard calls it flight from money and describes it as “getting rid of money as soon as possible in order to invest in real goods—almost any real goods—as a store of value for the future. This mad scramble away from money, lowering the demand for money to hold to practically zero, causes prices to rise upward in astronomical proportions. The value of the monetary unit falls practically to zero… The economy in effect breaks down” (p. 876). Hyperinflation ruins the middle class and wipes out the fixed income groups. It finally leads to unemployment and lower standards of living. In the second scenario, before runaway inflation gets totally out of control, the pain of inflation becomes so unbearable and widespread that the government has no choice but to put an end to it. More importantly, as opposed to the clear benefits from low inflation, during high inflation, the benefits of the government from more printing are actually increasingly negative, since price inflation quickly erodes the purchasing power of the budget. Having little to gain, and standing to lose even more, the government reluctantly stops the printing presses, terminates the boom, and the bust begins its course. According to Rothbard, the bust is clearly better than hyperinflation. For the purposes of our analysis, description of the bust is irrelevant.
JLarkin • February 29th, 2008 at 5:30 pm
Interesting news about auto suppliers dealing with strikes that blow back onto the GM plants forcing temporary plant closures. No worries, there’s plenty of SUV inventory. UAW workers standard of living is going down the tubes. Suppliers may not be able to withstand the turmoil, so expect bankruptcies in the automotive supply chain, more layoffs to come, more cities and towns with troubles. Fewer people able to buy SUV’s… another vicious circle. Any parts manufacturers owned by private equity firms? http://www.chicagotribune.com/business/sns-ap-gm-american-axle,0,3155149.story ”American Axle had been using stockpiled parts to keep supplying GM and its other customers, although it appears those supplies are running out. The company makes axles, drive shafts and stabilizer bars. GM accounts for about 80 percent of American Axle’s business, with 10 percent going to Chrysler LLC and the rest to other automakers. Unless the strike is lengthy, GM is unlikely to be hurt by the parts shortage because the company has an ample supply of pickups and large SUVs, analysts have said. GM has more than a 150-day supply of pickups and more than 100 days worth of the SUVs, said Erich Merkle, vice president of auto industry forecasting for the consulting firm IRN Inc. in Grand Rapids. After four or five weeks, other GM parts suppliers could also be forced to close plants, Merkle said. Some of the suppliers are in poor financial condition and would have trouble withstanding a shutdown, he said.”
Dan from Seattle • February 29th, 2008 at 5:38 pm
It will be interesting to see how average person/family will respond to all of the mounting financial pressures. As a mid-career engineer myself, I have seen the ‘golden-age’ of good compensation and benefits slowly atrophy away over the last two decades. In fact, to the point I am now considering a career change into banking and finance; where I have observed both friends and relatives receive much higher compensation. Octavio Richetta, I recall reading earlier that you had a background in chemical engineering, do you have any recommendations? Thank you, driatt@yahoo.com
Guest • February 29th, 2008 at 5:42 pm
Happy days are here again!! Prosperity is just around the corner!! The Standard & Poor’s 500-stock index is off to its worst start to a year since 1941. A survey showed consumer confidence at a 16-year low. http://www.nytimes.com/2008/02/29/business/29cnd-stox.html?ex=1362027600&en=342059deacd9566c&ei=5089&partner=rssyahoo&emc=rss
JMa • February 29th, 2008 at 5:52 pm
quick rogue-day-trading Fed, pull your rate cutting gun out of your holster and fire at the falling equity prices from your hips like a cowboy in the wild wild west ! careful now, only a few bullets left there shooter !
Medic • February 29th, 2008 at 6:27 pm
@ Dan from Seattle: You might want to wait a while to see if banks and finance companies are still in need of help. My guess is that the people you know who have been much better compensated than you over the last several years may be looking for jobs shortly. It won’t take long for the re-financing industry to die. My friend who does it (and did VERY well the last 10 years) has now changed companies 4 times in the last year and is not making anywhere near the money they did just 18 months ago.
oy vey • February 29th, 2008 at 7:04 pm
@ Dan from Seattle: He might wait and see if there any banks left. A better job would be with the FDIC.
Guest • February 29th, 2008 at 7:55 pm
@ Guest on 2008-02-28 14:40:16 Re: Martin Wolf ”A more fundamental lesson still concerns the way the financial system works. Outsiders were already aware it was a black box. But they were prepared to assume that those inside it at least knew what was going on. This can hardly be true now.” PJB: How true and more (worse) even today, still. ”Yes, the government can rescue the economy. It is now being forced to do so. But that is not the end of this story. It should only be the beginning. “ PJB: If one is to accept his, then a really vast stretch of trust in the incompetence of those asleep at the helm, is necessary. Mr. Benanke has only been aware of the dire status for the past 6 weeks – at most and most of his brethren are still in denial! ’Institutions are right in requesting a bailout’ – well, it is human nature for children to be forgiven their sins by their parents: there is something dramatically wrong with this logic. Isn’t civilization about values or have I got it all wrong – it is about accepting incompetence and criminality as “excellence” as it is indeed practiced today. ”Power sharing” (the right of the powerful to harvest the resources of those that cannot protect themselves) has always been the domain of the priest classes while the most powerful resource (the real economy)remains ‘held-in-place’ by “trust” – albeit, misplaced. PeterJB
Guest • February 29th, 2008 at 7:56 pm
@ Guest on 2008-02-28 14:40:16 Re: Martin Wolf ”A more fundamental lesson still concerns the way the financial system works. Outsiders were already aware it was a black box. But they were prepared to assume that those inside it at least knew what was going on. This can hardly be true now.” PJB: How true and more (worse) even today, still. ”Yes, the government can rescue the economy. It is now being forced to do so. But that is not the end of this story. It should only be the beginning. “ PJB: If one is to accept his, then a really vast stretch of trust in the incompetence of those asleep at the helm, is necessary. Mr. Benanke has only been aware of the dire status for the past 6 weeks – at most and most of his brethren are still in denial! ’Institutions are right in requesting a bailout’ – well, it is human nature for children to be forgiven their sins by their parents: there is something dramatically wrong with this logic. Isn’t civilization about values or have I got it all wrong – it is about accepting incompetence and criminality as “excellence” as it is indeed practiced today. ”Power sharing” (the right of the powerful to harvest the resources of those that cannot protect themselves) has always been the domain of the priest classes while the most powerful resource (the real economy)remains ‘held-in-place’ by “trust” – albeit, misplaced. PeterJB
Guest • February 29th, 2008 at 8:29 pm
@ Guest: “How, besides the obvious deflection of attention from economic woes, will war help the US economy or financial institutions?” 2008-02-28 21:53:10 The Economics of Depression… and War… “For three long years I have been going up and down this country preaching that government…costs too much. I shall not stop that preaching.” F.D.R. speech of acceptance July 2, 1932 Within months, the largest Federal appropriations in America’s history swept in dozens of welfare and work programs, such as the WPA. It was the era of “Tax, Tax, Tax, Spend, Spend, Spend.” But in 1939, a full decade after the crash, reports Robert S. McElvaine in “The Great Depression,” 9.4 million Americans remained unemployed… 17.2 percent of the work force. “Few would have predicted it in the heady days of 1933, or even 1935 or 1936 (and many people fail to realize it today), but the Great Depression outlived the New Deal.” And then, make-work gave way to make-war…
Mark • February 29th, 2008 at 8:29 pm
@J. on 2008-02-29 14:54:17 ”‘Peak oil’ is one of those stories which has by some been so easily taken as fact no matter how often its major proponents are debunked.” Sorry Mr. Panglosian, but there are far more folks out there demonstrating peak oil who have real credentials than those who are supposedly debunking them. Sigh, I can’t believe that there are people out there that still think the world is flat! Peak oil IS the reason why all the markets are now so messed up. It’s total confusion as there’s no more ammo to provide economic growth. The bubbles were based on cheap energy. Face the music… Mark (the original? one)
Guest • February 29th, 2008 at 9:26 pm
make work made way for make war the make work at least left us with power plants, buildings, art works and parks that are still with us today. what do we have to show for our cultural footprint today? as for make war-it was the Nazis with a huge war machine that threatened the planet that we were fighting.
Guest • February 29th, 2008 at 9:30 pm
Written by Dan from Seattle on 2008-02-29 17:38:06 email me at last@gmail.com
Guest • February 29th, 2008 at 9:34 pm
@Lot “Deflation drain in all hard assets and durables. Hungry? Eat that McMansion, Eat that Hummer…” Hummer’s falling numbers http://www.mercurynews.com/business/ci_8403738?nclick_check=1 NATIONALLY: Sales of GM’s Hummer brand dropped nearly 22 percent last year. • 2007: 55,986 • 2006: 71,524 LOCALLY (Silicon Valley): The fallout was more pronounced locally, as registrations of new Hummers fell by half. • 2007: 141 • 2006: 278 Hummer dealership owner to close shop in dispute with GM By Matt Nauman Mercury News 2/29/08 Sales of big SUVs are in the toilet. Headlines scream of $4 gas by spring. So it’s no surprise that Silicon Valley Hummer is going out of business, right? Neither factor helped, admits Ron Battistella, the dealership’s owner – but that’s not the whole story. Ultimately, his disagreement with General Motors about the future of the store led to his decision to close it. He’ll stop selling new Hummers within a week… By late 2002, a front-page story in the Mercury News chronicled the hottest-selling vehicle in the nation – the Hummer H2. Local dealers couldn’t keep it in stock… Silicon Valley Hummer opened on Stevens Creek in 2003. Gas was selling for $1.41 a gallon then. It’s now $3.44 on the West Coast. The Hummer H2 gets 12 mpg in the city and 16 mpg on the highway… Steve Smith, president of the Silicon Valley Auto Dealers Association, thinks 2008 will be a year of consolidation, especially among dealers selling domestic brands such as Hummer. ”Times are getting tougher,” he said. Two bankruptcy filings may signal more ahead SHARPER IMAGE, LILLIAN VERNON HIT BY FALLING SALES http://www.mercurynews.com/business/ci_8322405 NEW YORK – A weak holiday season and a struggling economy led retailers Sharper Image and Lillian Vernon to file for bankruptcy this week, and analysts predict others could soon follow them as consumer spending worsens. ”You’ll see a record number of bankruptcies over the next 50, 100, and 1,000 days,” said Burt P. Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group. “Consumers are cash and credit constrained. They’re out of purchasing power.” Both Sharper Image, known for its high-tech novelty gadgets, and Lillian Vernon, which sells low-cost gifts and gadgets through its catalog and Web site, have long been plagued with falling sales. But retailers across the sector have been laying off staff and closing stores as consumers cut back on discretionary spending… The International Council of Shopping Centers projects 2008 store closings of all types could reach 5,770 stores in 2008, the largest number of closings since 2004. Retailers as a whole reported their worst January same-store sales in almost four decades. Flickinger said the problem is partly food and fuel inflation. While consumers used to pay 10 cents of every dollar for food and fuel, they now pay up to 20 cents per dollar. ”Companies are contracting and collapsing,” he said. “You’ll see it in food and drug, discount and department stores, as well as specialty stores and dollar stores. Every major form of retailing.” Recent retailers to declare bankruptcy http://www.mercurynews.com/nationworld/ci_8322415 Some other retailers that have filed for bankruptcy over the past several months: • Canton, Mass.-based electronics retailer Tweeter Home Entertainment Group filed for bankruptcy in June. It was acquired by Schultze Asset Management, which continues to operate the company. • Fort Worth-based home furnishings retailer The Bombay Co. declared bankruptcy in September, and closed the last of its stores in January. • New York-based Levitz Furniture filed for bankruptcy in November. The company has since been liquidating its inventory. • Lyndhurst, N.J.-based Harvey Electronics, a high-end audio-video retailer, filed for bankruptcy protection in December. • Wickes Furniture, a Wheeling, Ill.-based company owned by private investment firm Sun Capital Partners, filed for bankruptcy earlier this month. • Jewelry and home furnishings retailer Fortunoff, based in Uniondale, N.Y., agreed this month to sell its business to NRDC Equity Partners, which owns the Lord & Taylor department store chain, through a bankruptcy process. Source: Associated Press
Anonymous • February 29th, 2008 at 9:42 pm
Say what you will, but I wouldn’t mind having a Hummer.
Guest • February 29th, 2008 at 10:37 pm
Pearls and Pepper Here are the economics of wars of aggression — from Montaigne to Bob Dylan: “So many goodly cities ransacked and razed; so many nations destroyed and made desolate, so infinite millions of harmless people of all sexes, states and ages massacred, ravaged, and put to the sword; and the richest, the fairest, and the best part of the world topsiturvied, ruined and defaced for the traffic of pearls and pepper: Oh, base conquest!” Michel de Montaigne: Essays, III,1588. John Brown By Bob Dylan John Brown went off to war to fight on a foreign shore. His mama sure was proud of him! He stood straight and tall in his uniform and all. His mama’s face broke out all in a grin. ”Oh son, you look so fine, I’m glad you’re a son of mine, You make me proud to know you hold a gun. Do what the captain says, lots of medals you will get, And we’ll put them on the wall when you come home.” As that old train pulled out, John’s ma began to shout, Tellin’ ev’ryone in the neighborhood: ”That’s my son that’s about to go, he’s a soldier now, you know.” She made well sure her neighbors understood. She got a letter once in a while and her face broke into a smile As she showed them to the people from next door. And she bragged about her son with his uniform and gun, And these things you called a good old-fashioned war. Oh! Good old-fashioned war! Then the letters ceased to come, for a long time they did not come. They ceased to come for about ten months or more. Then a letter finally came saying, “Go down and meet the train. Your son’s a-coming home from the war.” She smiled and went right down, she looked everywhere around But she could not see her soldier son in sight. But as all the people passed, she saw her son at last, When she did she could hardly believe her eyes. Oh his face was all shot up and his hand was all blown off And he wore a metal brace around his waist. He whispered kind of slow, in a voice she did not know, While she couldn’t even recognize his face! Oh! Lord! Not even recognize his face. ”Oh tell me, my darling son, pray tell me what they done. How is it you come to be this way?” He tried his best to talk but his mouth could hardly move And the mother had to turn her face away. ”Don’t you remember, Ma, when I went off to war You thought it was the best thing I could do? I was on the battleground, you were home . . . acting proud. You wasn’t there standing in my shoes.” ”Oh, and I thought when I was there, God, what am I doing here? I’m a-tryin’ to kill somebody or die tryin’. But the thing that scared me most was when my enemy came close And I saw that his face looked just like mine.” Oh! Lord! Just like mine! ”And I couldn’t help but think, through the thunder rolling and stink, That I was just a puppet in a play. And through the roar and smoke, this string is finally broke, And a cannon ball blew my eyes away.” As he turned away to walk, his Ma was still in shock At seein’ the metal brace that helped him stand. But as he turned to go, he called his mother close And he dropped his medals down into her hand.
wawawa • February 29th, 2008 at 11:07 pm
Bernanke says US slowdown will eclipse dotcom bust http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/28/bcnben128.xml
subgenius • March 1st, 2008 at 12:35 am
just in case it hasn’t been posted before… http://www.youtube.com/watch?v=dE-LDfroa1w
GSM • March 1st, 2008 at 2:11 am
Anyone who doesn’t believe there will be a massive bailout will be destroyed financially in it’s aftermath. Does any sane thinking person really believe that US can sit idly by when the very core of their financial existence melts down? You can be more than 100% certain that a bailout will be mounted, in fact several I would guess. Because the real enormity of the truth will be too big to disclose publicly at one time. Will it be successful? Well I suspect that success will be measured in many ways and often with rather unconventional metrics. But for certain its going to be very traumatic and it will not be a several quarters event. You will be witnessing a once in a century event that will takes many years, maybe decades to recover from. NR has catalogued most of the damage areas; - Personal wealth destruction. - Financial asset destruction. - Currency destruction. - Credit destruction (Bond market). Some more though; - Job destruction. - Societal destruction. - Local services destruction. - Runaway inflation from currency destruction and commodity inflation. - Worldwide confidence destruction. - Loss of the “world’s reserve” status. These are similar afflictions visited on many Latin American countries in the recent past. They though had the good fortune to be aided in their Bailout by the US. But the big difference; their peoples are not unacquainted with these desperate hardships- wheras the US population largely is a “virgin”. This coming event (s) has the potential to in all respects extinguish the “American Dream”. That tells me that recovery will be a very long and arduous process for US society. It is quite possible in these situations that the populace will command the state to “take over”. Centrally control all assets, resources and institutions, for the common good. Yes, I know this is extreme, but this is where the path leads. It remains to be seen if that destination is reached. Therefore, for those of us dealing with this very distasteful menu of choices, it remains as always- what to do? First and foremost protection of wealth. From and by whatever means is available. Protecting the wealth of family home will be a very difficult situation for many. Also highly import is protection from the lethal effects of a massive decline in the dollar that must occur.
GSM • March 1st, 2008 at 2:26 am
Whenever you have a stress test like this in the market and people are saying there are reporting problems, we need to understand the nature of those problems and to what extent there’s something we have to change,” Herz said. “But we also don’t want to have blanket rules that make everyone consolidate everything.” Any changes could have a major impact on the banking business. Citigroup Inc (C.N: Quote, Profile, Research), for example, had some $1.1 trillion in assets in off-balance-sheet vehicles in 2007. Written by Guest on 2008-02-29 06:39:25 “Any changes could have a major impact on the banking business” Exactly the medicine that is required! I read recently somewhere that the US Govt had changed the structure of governance at the FASB. The upshot being that there will be LESS dilution of authority across the board and MORE centralizing of authority in the Chairman. This would indicate that control of accounting rules and laws in the US will be even more nepotistic- if you believe as I do that the FASB is governed primarily for the benefit of the industry it oversees, with the wider public being significantly less of a concern. Enron lives! If you take Herz’s comments above in that light, he seems to be setting up an argument for LESS disclosure on the basis of beaurocratic costs. Which is pretty rich when considering that the US banking systems capital has been wiped out due to cavalier, unsafe and opaque banking practices.
GSM • March 1st, 2008 at 2:39 am
Recessions reduce commodities in the absence of curtailed supply, steep recessions crash them. Written by jkiss on 2008-02-29 12:03:34 This is music to my ears jkiss! I hope there are many more with your investment stance. It will make them that much more earnest and effective “converts” when the light finally dawns, which in time it most certainly will. Commodity prices , like share prices always fluctuate. But there is much more than crop size or land use that is underpinning AG prices.
Octavio Richetta • March 1st, 2008 at 6:12 am
A well-balanced view on the inflation/deflation debate from Mauldin: http://www.investorsinsight.com/thoughts.aspx IMO, long term he will be right, but I will continue speculating on soft commodities and gold at the margins until the fed stops cutting rates/it is clear than the roof is falling.
Detlef Guertler • March 1st, 2008 at 6:21 am
@GSM on 2008-03-01 02:11:42 This coming event (s) has the potential to in all respects extinguish the “American Dream”. I respectfully disagree. The American Dream is one of the most powerful roots a society can have. The story of the pursuit of happiness will not be destroyed, even in the most horrible economic nightmare – it will be redefined. Maybe “happiness” will no more be translated in “Hummer H2″, but in “Mercedes Smart” or “Tatamobil” or “fresh milk”, but it is the stuff that made the USA tick, and it will continue to do so as long as the States of America are United.
Octavio Richetta • March 1st, 2008 at 6:23 am
Abelson on subprime bailout proposals. I agree with him 200%! http://online.barrons.com/article/SB120432892362604291.html?mod=9_0031_b_this_weeks_magazine_columns&page=sp … You need go no further than a quick glance at some of those hare-brained schemes to rescue homeowners from the housing morass to get an inkling of how much real damage they could wreak. The notion of mandating fixed or lower interest rates for five years on underwater mortgages holds great promise of turning a thoroughly nasty shambles that might go on perhaps for three more years, all the while gradually sorting itself out, into a home-building Ice Age that could last for decades. Or take the idea (please, somebody take it, but do remember to give it a decent burial) that Uncle Sam should shoo the wolf away from the door of the multitudes of unfortunates facing foreclosure by throwing money at the ravenous beast. Intentionally or otherwise, its proponents grossly underestimate the ultimate tab. As Ed Hyman’s ISI Group observes, one such proposal, under the aegis of Barney Frank, head of the House Financial Services Committee, blandly estimates the price of such a bailout as $15 billion-$35 billion when, in fact, it’s odds on to run well into the hundreds of billions. But, heck, Washington already has calmly projected a $400-billion deficit for the current fiscal year ending September (not counting the $10 billion or so a month being spent on Iraq). So what’s the dif, whether we end up being $400 billion or $600 billion, or for that matter, $800 billion, in the red? Isn’t that what printing presses are for? As to the eagerness to get Fannie Mae and Freddie Mac involved, both of which more than met expectations by just reporting humongous losses for last year, it’s undeniably an inspired conception. Everyone knows that the surest way to stiffen the resolve of a recovering alcoholic in his never-ending tussle with the demon rum is to give him a drink. Our pair of humbled quasi-government mortgage dispensers, having, in response to belated regulatory prodding (is there ever any other kind?), closed their eyes, swallowed hard, taken write-downs up the ying-yang and strived to clean up their act and kicked out the bad old guys, all in atonement for past sins, are being urged on all sides to forget their new-found prudence and start doing business at the same old stand. As we’ve suggested before, for all the ethical cleansing and operational changes, neither Fannie nor Freddie is exactly in a position to play that role. Even after all the scrubbing, finances of neither are exactly pristine. A nicely wrought piece on the two in Friday’s Wall Street Journal points out that the Office of Federal Housing Enterprise Oversight, or Ofheo for short, which awoke from its slumbers a few years back and aggressively pushed Fannie and Freddie to mend their feckless ways, reckons that the book of business (loans carried on its balance sheet and mortgages it has guaranteed) is a cool 81 times Fannie’s net worth and 167 times Freddie’s. Even using book value as measured by the somewhat more forgiving usual accounting standards, Fannie is leveraged 20-to-1 and Freddie 30-to-1. Any massive ballooning of loans such as envisioned by the bail-out brigade would, of course, kite those already formidable ratios (two and three times greater than those of the 20 largest U.S. banks) and force the two to scrape up copious amounts of capital. If the pols panting to get Fannie and Freddie to act as a firewall against foreclosure and rescue a million desperate homeowners — all of whom and spouses presumably vote — get their way, the result, we regret to say, will not halt foreclosures or ease the plight of besieged homeowners. What such efforts are more likely to achieve is to significantly worsen the housing imbroglio by adding Fannie and Freddie to the casualty list.
Octavio Richetta • March 1st, 2008 at 6:32 am
Barrons’ Abelson on last week events: REALITY FINALLY REARED ITS UGLY HEAD on Wall Street last week and scared the natives silly. It struck with a relentless barrage of mighty thunderbolts. When the trading week finally called it quits, the grand delusion that had been sustaining stock prices and buoying investor spirits despite ominous signs of trouble and barely suppressed fears and forebodings, lay shattered. And all the happy talk it had generated fell silent. The grand delusion, of course, was that the market was going through a normal correction (the people offering such reassurance somehow invariably neglected to say what precisely was being corrected). As to the obvious causes of concern — the sagging economy, the monster impact of the great credit drought, the total collapse of housing and its dire effect on the value of the average Jane and Joe’s biggest investment, the wicked spurt in the price of food and virtually all of life’s other annoying necessities, the murkier job outlook — the grand delusion, propagated by more than a few economic savants, was that the Fed would cut rates to the bone and the government would cough up billions and everything would be hunky-dory. Market pundits smiled wisely (sometimes it’s hard to tell whether they’re really smiling or it’s just gas) and soothingly rolled out the bromides: The market always climbs a wall of worry; everybody’s bearish, which is an infallible contrary indicator (need we say, it emerges after two seconds of investigation, that by no means is everybody bearish); history (or at least that part of it the pundits choose to remember) tells us that lower interest rates mean higher stock prices…gosh, you probably know the specious spiel better than we do. In the event, the grand delusion proved no match for reality. And the latter came last week, as intimated, not in dribs and drabs, but in a torrent. Oil prices for the first time ever reached $103 a barrel, and that fueled forecasts of $4 a gallon at the pump. Gold, which has proved a much better gauge of inflation than any of those laughable official measures our blessed government uses, also roared to an historic high of $978 an ounce and seems girding for a run at $1,000. The dollar, meanwhile, continued its dizzying descent to new lows, aided by Ben Bernanke’s vow in his trudge up to Capitol Hill to keep cutting rates. And the slasher all but promised another meaningful whack this month. Stick around, there’s more. The consumer, as the die-hard optimists (a slowly shrinking group) never tire of reminding us, account for 70% of GDP; the not very subtle implication, of course, is that the poor soul can’t help himself and will yet fire up the economy with a burst of spending. Except — his spending dried up in January and was flat for the second month in a row, the fist time that’s happened since Katrina put a dampener on the numbers back in 2005. To continue the extraordinary litany of woe: Reflecting the decidedly downbeat mood of the populace, the Conference Board’s index of consumer confidence took a steep drop in February, sinking to 75, from January’s 87.3, the lowest reading since just before we invaded Iraq in February ’03. The drooping consumer mood, moreover, is not likely to perk up much in the weeks ahead, with new claims for unemployment insurance beginning rise in earnest after a long period of backing and filling, with jobs increasingly hard to get and companies more inclined to fire than hire. (It wouldn’t knock our socks off to see negative employment for February or a rise in the unemployment rate). By this time, we’re sure you’ve got the point and probably are more than a tad depressed. However, we think it’s worth noting that even the supposed good news turns out to be perhaps not all that good on closer inspection. For example, the gracious rating agencies, so conspicuously mum during those exuberant years when financial high-crimes and misdemeanors were rife in the fantasy world of credit creation, briefly gave the market a lift by improbably affirming the AAA ratings of the leading muni bond insurers. Yet for the most part, the insurers’ problems with the junk stuff in their portfolios are alive and ill, while solutions to those problems remain elusive. Similarly, IBM’s disclosure that it may buy back as much as $15 billion of its own stock heartened investors briefly, as well. But we view the announcement in a somewhat different light. For we think it speaks volumes about the state of the economy that the company can’t find anything more promising in which to invest such a tidy bit of change than its own stock.
Octavio Richetta • March 1st, 2008 at 6:39 am
Another good take on last week events by Santoli. Interesting observation on commodities: http://online.barrons.com/article/SB120432895454404299.html?mod=9_0031_b_this_weeks_magazine_columns Anxiety Without Panic — For Now BE WARY WHEN A METEOROLOGIST SPEAKS of “unstable air masses” and “fast-moving storm systems.” They mean, “Don’t be surprised if I’m wrong here.” Market commentators today know well the feeling. The news has been inexhaustibly bad, providing every sort of excuse to shun financial risk. But, as we all need to be reminded, it’s not what’s in the news today, it’s what’s already in the price that matters. This column has suggested that for the January market lows to be breached in a big way, it would require lots of fresh nasty economic and credit news. Well, we’ve been getting just that. After Friday’s meaty 2.5% drop, the indexes remain just a bit above those January levels. Anxiety without panic is merely uncomfortable and not cathartic, and we remain in this sort of condition. Robert Shiller of Yale maintains a Crash Confidence Index, a monthly survey that asks individual and institutional investors if they are confident that the market won’t crash in the next six months. The latest confidence readings are the lowest in five years. About 35% of the respondents are confident the market won’t crash, down from 57% a year ago. Still that’s above the early-2003 range in the mid-20s. Getting closer to what’s “in the price,” Thomson Financial’s Baseline method of divining how much investors are paying for future S&P 500 earnings — a calculation that accounts for core earnings and risk-free rates — are at rock-bottom levels. This could mean the market is now banking on major downside risk in earnings, or that T-bill rates are excessively depressed. At minimum, this refutes those who insist the market is now pricing in analysts’ too-high 2008 profit forecasts. For students of sentiment, the Friday Wall Street Journal headline “Commodity Prices Surge, As Investors Seek a Haven” belongs on the syllabus. Commodities as a haven from a weaker economy is a noteworthy notion, reflecting a fundamental reversal of the rules of the old playground game of rock-paper-scissors. In this version, rock (any material thing) beats paper. This can go on awhile, given the asset flow rate and the rather small size of tradable commodities. Bianco Research estimates the total value of present open interest in domestic commodity futures is about $425 billion — less than ExxonMobil (ticker: XOM) alone. You know what a sinking dollar does besides raise nominal prices of rocks and sticks and seeds? It makes it easier to service dollar-based debts. But this storm will have to pass before that matters one bit. ..
Octavio Richetta • March 1st, 2008 at 7:09 am
Ignore the title. A good view/summary of the current credit market turmoil. Article closes with recommendations of municipals, junk bonds, CRE bonds, high quality agency mortgages,emerging market debt but IMO this is stuff for the pros, and, IMO, it is still early; even the Grosses of the world will find themselves “catching falling knives” for a while (In his latest pieces you can see Gross “talking his book”. Disclosure: I am 20% PTTDX and 5% PSSDX) http://online.barrons.com/article/SB120432864648204203.html?mod=9_0031_b_this_weeks_magazine_main&page=sp Where a Bond Pro Is Finding Value Interview With Mary Miller, Director, T. Rowe Price Fixed-Income Group By LAWRENCE C. STRAUSS THE CREDIT MARKETS HAVE BEEN DISTRESSED SINCE LAST SUMMER. The signs are everywhere: the ongoing subprime-mortgage debacle, rising credit spreads, a liquidity squeeze in short-term markets, jitters about the health of bond insurers and worries about the slowing U.S. economy. To get a better handle on the credit markets, Barron’s turned last week to Mary Miller, who heads the fixed-income department at T. Rowe Price. Miller joined the Baltimore-based asset manager in 1983 as a credit analyst, focusing on munis. Eventually, her duties expanded. Now a vice president of T. Rowe, she keeps close tabs on corporates, junk bonds, emerging-market debt, asset-backed holdings, municipals and other fixed-income securities. In addition, she keeps her hand in portfolio management. As the manager of the T. Rowe Price Tax Free Income Fund (ticker: PRTAX) since 1997, Miller has compiled a strong and consistent record. She now co-manages it with Konstantine Mallas. The fund, which invests exclusively in munis, places in the top 20% of its Morningstar peer group based on one-, three-, five- and 10-year returns. To their credit, Miller and her team have mostly avoided the minefields associated with subprime mortgages, collateralized debt obligations and structured investment vehicles, or SIVs. Mary Miller Barron’s: There are a lot of interconnected issues in the credit markets, most of them unpleasant. Let’s start with the big picture and some context. Miller: Last year was a tale of two markets. In the first half, there were worries about rising interest rates and tightening credit spreads; the complete opposite occurred in the second half. Treasuries were one of the best-performing assets, along with Treasury Inflation Protected Securities, or TIPS, owing to some worries about inflation. Corporate credit, municipals and high yield lagged in the second half of the year. What’s your read on 2008? It might also be a tale of two markets, although maybe not quite as pronounced as what we saw last year. But for roughly the first half of this year, there’s going to be continued pressure on credit markets. We still see it, and there is still work to be done in terms of correctly valuing and rating securities. An added worry is a weaker economy. So the weak loan in 2007 is not a better loan in 2008. We’re really not out of the woods. One of the biggest signs of that stress is widening credit spreads. What do you see going on there? Just take a look at investment-grade corporate credit. Those spreads have widened this year by an additional 38 basis points, or 0.38 of a percentage point, to 237 over 10-year Treasuries. In June of last year, which marked the lows in spreads, that number was about 75 to 80 basis points. It reached about 200 at the end of 2007. So you have to figure out whether you’re being adequately compensated for that risk? Yes, and some markets may be ahead of the current risk. Let’s take the high-yield market. At the lows of mid-2007, spreads were about 250 basis points over Treasuries, versus nearly 750 recently. That would imply a default rate of close to 7%. We’re not even close to that kind of a default rate yet. It’s coming, however. Last fall, the default rate was about 0.5%. In January, it was 1%, and we expect it will creep higher because this environment doesn’t favor high-yield. But you could argue that the market has gotten ahead of the risk level of the high-yield market. So if you think defaults will peak around 5%, which is what we think, then you may be compensated for high-yield holdings. But the pattern there has been the same in the corporate bond market year to date — a steady widening of spreads. So there is reason to be cautious. Another problem is the liquidity squeeze, whether it’s SIVs or the auction-rate-securities market, where a major disruption recently caused rates to spike, albeit temporarily. What’s your sense of how money-market funds are doing in this difficult environment? Parts of that market are just not functioning well. Asset-backed commercial paper, which is what stands behind structured investment vehicles, is still very illiquid. Last year was really about subprime and home-equity loans that had been put into structured vehicles, financed with short-term commercial paper. The credit problems around the housing market and mortgage market were affecting SIVs. The difficulty, in some cases, was being able to look down into the loan collateral. This year, it’s a little bit different. There is more concern about the other loans that may be in these SIVs — auto loans or credit-card receivables, for example — because we are beginning to see some pressure and loan delinquencies there. But the SIV market is shrinking; at least a third of it has disappeared as the purveyors of these products have sold the collateral and liquidated some of the loans they held. What’s your assessment of the auction-rate securities market? There’s been a lot of turmoil. That market totals about $330 billion; roughly half is in the municipal market and half is in taxable securities. Again, the collateral is usually a long-term bond or loan and it’s being financed in the short-term market. It’s not a security, though, that’s typically held in money-market funds, because it doesn’t offer the liquidity protection that the SEC requires. But it’s a close substitute as a cash vehicle for many, many investors in the short-term market. What’s the common thread between auction-rate securities and SIVs? For auction-rate securities, it’s been a market that simply doesn’t want to buy short-term holdings backed by longer-term debt without liquidity support. Ditto for asset-backed-commercial-paper markets. Everywhere you look, it seems, people want capital and need more of it, and so providing the liquidity, which was routine in the past, is not routine today. What’s T. Rowe’s exposure to subprime? It’s minimal — under $100 million. What we hold has been relatively good vintage years for subprime mortgages, 2000 through 2004, so we are not worried about that. The lending standards changed dramatically in 2005. Prior to that, there was a subprime market with reasonable parameters. As an investor, you knew what you had. But after that, it became incredibly speculative, with a lot of deterioration in lending standards. We’ve had a steepening yield curve, with investors piling into short-term debt, notably two-year Treasuries, and shying away from the longer end of the curve, pushing yields up. What are the implications? The yield curve recently had steepened by 115 basis points between two-year and 30-year Treasuries. Ordinarily in a steeper yield curve, you start to see some leverage being put o
n. You mean for the carry trade, in which an investor borrows short term and invests in longer-term holdings, capturing the spread? Yes, the carry trade. I’ve not seen that at all. Instead, we are seeing a deleveraging trade, in which people are selling longer-term assets. Some of it has to do with the problems of financing in the short-term market. For example, when auctions fail in the auction-rate-securities muni market, often what you will see is that the issuer decides to refinance in the long-term market, adding supply there. Or you will see someone unwinding a pool of bonds that they’ve financed short-term. So there is selling, and the pressure we have really seen is on the long end, where rates are actually higher than they were at the beginning of the year. Fixed 30-year Treasuries started the year yielding 4.46%, and recently they were up to 4.58%. And longer-dated municipal bonds have sold off, as well. Another concern at the longer end of the curve is potential inflation. Right? That’s part of it, although there’s a strong sense now that, for the Fed, inflation is taking a back seat to economic growth worries. We have seen some pretty stubborn levels of inflation at the headline level, in particular north of 4% year over year. So even in a flight-to-quality trade, with Treasuries being the main beneficiary, the long end of the market is worried about longer-term inflation. You’ve indicated previously that you believe the best place to be right now is on the intermediate part of the curve, namely holdings that mature anywhere from five to 10 years out. Why? That’s been the best place to be so far this year. But you need to be a little bit further out the yield curve to benefit from falling rates. The price of the two-year Treasury just doesn’t move that much in response to rate cuts. When rates come down a lot, you need to be a little bit longer out on the curve. What’s your overall advice for bond investors right now? First, be patient. Second, be diversified. I don’t see a lot of value in the Treasury market this year. There are emerging opportunities in higher-risk sectors, but I would be patient there. There are some good opportunities in some very high-quality sectors that have gotten really beaten- up, including municipal bonds and high-quality commercial-mortgage-backed securities. If you can do your credit homework, we think that municipal bonds trading at more than 100% of Treasury yields are a very interesting investment. ….
Octavio Richetta • March 1st, 2008 at 7:35 am
More “good stuff” on last week’s events: http://online.barrons.com/article/SB120432847565304119.html?mod=9_0031_b_this_weeks_magazine_market_week Consumers’ Alarm Grows Contagious By KOPIN TAN Vital Signs AMERICAN CONSUMERS TODAY are a faithless bunch. They trust neither the economy nor the government. They worry about their jobs, their depreciating homes, the debilitated dollar, tight-fisted lenders, $4 gasoline and the creeping proliferation of $14 martinis. Just last week, the Conference Board’s index of consumer confidence plunged to its lowest level since March 2003, before the Iraq war began. Their alarm — and apprehension in the credit market — is becoming contagious. Stocks fell hard Friday as investors hoping for a swift economic rebound found their faith sorely tested on several fronts: Continued dislocations in the debt market, surging commodity prices and yet more evidence of an economy in decline. For a while last week, stock-market investors had held out hope despite the accumulation of bad news, which included data showing a 7.7% year-over-year jump in producer prices, the biggest such increase since 1981. Home prices in major metropolitan areas fell 8.9% last quarter, the steepest drop in two decades. Yet stocks held their ground and, at midweek, were 11.8% from their recent record. But by Friday, the burden began to take its toll. Worries increased that any failure by bond insurer Ambac Financial (ticker: ABK) to shore up its finances could trigger another swell of bank write-downs. A bad bet on wheat and a sharp loss from the futures brokerage MF Global (MF), which prides itself on risk management, surprised investors and unnerved the market. Crude oil pushing $103 a barrel cuts into consumers’ discretionary income, but now Dell’s (DELL) declining fourth-quarter profit raises the specter that corporate spending might be slowing, as well. Fearful that job cuts might soon follow, investors looking ahead to this week’s monthly jobs report rushed to take profits while they could. Friday’s 316-point drop marked the Dow Jones Industrial Average’s second-worst one-day loss this year, and wiped out the week’s earlier gains. The Dow ended the week down 115, or 0.9%, to 12,266. The Standard & Poor’s 500 lost 22, or 1.7%, to 1331. The Nasdaq Composite Index slipped 32, or 1.4%, to 2271, while the Russell 2000 index of small stocks fell 9, or 1.3%, to 686. The month ended on a bleak note, with the major benchmarks declining for a fourth straight month. In February, the Dow fell 3%, the S&P 500 fell 3.5%, the Nasdaq slipped 5% and the Russell gave up 3.8%. It was the S&P 500′s longest monthly losing streak since the summer of 2002. What accounts for this darkened mood? For a start, an awareness of the market’s recently improved disposition. If it weren’t for Friday’s drubbing, the S&P 500 would have chalked up its fifth weekly rise in the past six weeks. Mounting distance from January’s lows puts increasing pressure on companies to deliver what investors want: evidence that any economic slowdown will be short and shallow. And last week, companies from American International Group (AIG) to Titanium Metals (TIE) weren’t up to the task. A barely veiled promise by the Federal Reserve to cut interest rates further offered scant comfort. “To date, the Fed’s actions have failed to lift the economy,” says Jane Caron, Dwight Asset Management’s chief economic strategist. “Long-term borrowing rates have increased markedly from their January lows and financial credit conditions are as tight as they were prior to this latest round of Fed easing.” Caron expects the Fed to cut benchmark interest rates to 1.75% this year from 3% today, but even that is no quick cure, since economic growth can’t resume “until the banking system and the credit markets begin to function more normally.” Among other things, a spooked market craves more clarity about the collateral that backs bonds, and assurance about counterparty risk in over-the-counter transactions. With inflation now climbing faster than income, investors also fretted about what lies ahead. “If the Fed’s policy actually succeeded in averting a recession, it would have to tighten again hard, producing a second, worse downward lurch, as in 1980 and 1982,” notes Charles Dumas, an economist with Lombard Street Research. With inflation now climbing faster than income, investors also fretted about what lies ahead. “If the Fed’s policy actually succeeded in averting a recession, it would have to tighten again hard, producing a second, worse downward lurch, as in 1980 and 1982,” notes Charles Dumas, an economist with Lombard Street Research. As alarming as the 7.7% jump in the producer price index was, John Roque, Natixis Bleichroeder’s technical analyst, finds something else more troubling: Each time since 1947 that this index has crossed above 7%, it has continued to barrel higher, eventually reaching levels between 9.9% (in July 1948) and 19.5% (in November 1974). Fed Chairman Ben Bernanke told Congress last week he expects inflation to abate. “He’s eventually going to be right,” Roque says. “But only after it goes much higher first.” [good points!] FRIDAY’S PUMMELING OF financial stocks was a review and preview all at once: a reminder that financials remained at the epicenter of the stock market’s fears, and how it could still suffer more quakes. Financial stocks exposed to the credit cycle could fluctuate further in the coming weeks as the resetting of subprime mortgages peaks, and as efforts intensify to bail out bond insurers. For instance, Goldman Sachs analysts argue that “the worst of the credit problems in exotic mortgages is still ahead,” with total losses estimated at $100 billion, and they expect a further home-price decline of 10% to 12% to drive defaults in other mortgages beyond the subprime realm. While banks and brokers have booked large losses, more disappointment can’t be ruled out. Meanwhile, option prices on many stocks have eased off their December highs chiefly as financial stocks bounced in January. Goldman’s option strategist John Marshall suggests using options to hedge specialty-finance stocks with the greatest exposure, like Washington Mutual (WM), Fannie Mae (FNM) and Freddie Mac (FRE); brokerages like Merrill Lynch (MER) and Lehman Brothers (LEH); and banks like Wachovia (WB) and National City (NCC). IF YOU THINK THE 62% SURGE in oil prices over the past year is steep, consider the 88% appreciation of soybean prices and 164% jump in wheat. The agricultural boom is abetted by a weak dollar, speculative fervor and a world population growing faster than global food production. These numbers from Merrill Lynch almost makes you wish you were a farmer: U.S. farm incomes increased a record 22% year over year, compared with 1% two years ago. Food producers are enjoying their best pricing power since 1981, while shipments of agricultural equipment have increased 24%. How much of this upswing is already reflected in stock prices? The fertilizer giant Potash Corp. of Saskatchewan (POT) has rallied 262% in the 16 months since it was flagged bullishly in Barron’s (“On Fertile Ground,” Nov. 6, 2006), while rival Mosaic (MOS) has surged 350% in the past year and now fetches 8.5 times its book, or accounting, value. The well-run and universally admired seed giant Monsanto (MON) trades at 42 times its projected 2008 profits. Global food demand is a compelling and enduring story. But with numbers like these, it
‘s no longer a neglected stock-market story. …
Octavio Richetta • March 1st, 2008 at 7:44 am
More on the credit crunch: on how “inocent municipals” have paid the price, and the big squezze in hedge funds that hedged long municipals with treasuries.It is messy; it won’t be over/go away next week http://online.barrons.com/article/SB120432853594604165.html?mod=9_0031_b_this_weeks_magazine_market_week Market Meltdown Spreads to Municipals By RANDALL W. FORSYTH THE MUNICIPAL-BOND MARKET suffered a virtual meltdown at the end of last week, sending yields of top-quality tax-exempt securities to levels equivalent to corporate junk bonds. In a scenario reminiscent of the debacles in exotic mortgage-backed securities last summer or Long Term Asset Management in 1998, hedge funds were forced to dump munis at fire-sale prices. But unlike those previous episodes, there was no significant impairment of the credit quality of the funds’ assets. The problem was a breakdown in the market’s liquidity and the ability of these highly leveraged funds to obtain financing. As a result, the funds were left with no choice but to dump their bonds into an unwelcoming market. ”There are no bids,” declared one muni-market veteran flatly. “I’ve never seen anything like it,” adds Theresa Havell, the head of eponymous Havell Capital Management and a veteran of decades in the credit markets. Or, as an ever-optimistic muni salesman put it: “It was an orderly collapse.” Reflecting this distress, long-term muni bonds of the very highest intrinsic quality — not those with bond insurance, which the market has deemed to be of dubious value — were being dumped in distress sales at yields of 6%. For a taxable investor in a 33% bracket, that 6% tax-free yield is equivalent to 9% on a taxable security, which is what better-quality junk bonds yield. For instance, Havell cites State of Washington general obligation bonds having a solid double-A rating — “a step away from Treasuries” in terms of credit quality, in her estimation — with a 4.50% coupon and due in 2030. They traded at a tax-exempt yield of 5.93% Friday. Meanwhile, the Treasury’s 30-year bond yielded 4.42%, which is subject to federal tax. Such values are attracting savvy investors such as Pimco’s Bill Gross, who says he’s buying munis being “regurgitated” by the funds. Citigroup muni maven George Friedlander thinks muni yields are near their peaks for this cycle. The plunge in the muni market has been an outgrowth of the seizure that hit the auction-rate securities market a couple of weeks ago. (“The Credit Crisis Offers Some Unusual Twists,” Feb. 18.) Then, ARS auctions couldn’t attract sufficient bidders for these securities (which investors previously had complacently considered to be cash equivalents) because of doubts about the bond insurers backing this debt. That, in turn, impaired another arcane part of the muni market, tender-option bond trusts, which issue short-term floating-rate notes to buy long-term munis. This borrow-short-to-lend-long tack foundered as financing costs soared following the ARS debacle. The result was forced selling by hedge funds participating in these programs. Two further complications: Wall Street has been in no mood to provide liquidity with its own capital, and has been unwilling to bid for bonds that it gladly had sold to investors. Moreover, many hedge funds doing the muni-bond arbitrage hedged their interest-rate risk with Treasuries. That means they got hit both ways, by losses on their long muni holdings and on their hedges, since Treasuries soared in price as investors sought this traditional haven from the continuing crisis in the credit market and the renewed swoon in the stock market, including the Dow’s 316-point plunge Friday. Elsewhere in the credit market, the collapse in mortgages has spread from subprime to the so-called alt-A sector — loans that are supposed to be just a notch below prime quality. The collapse in that sector last week forced Thornburg Mortgage (ticker: TMA), a mortgage real-estate investment trust, to have to meet margin calls on $2.9 billion of securities backed by alt-A loans. As a result, Thornburg shares lost more than 25% of their value from Wednesday’s peak to Friday’s close. One mortgage pro tells our colleague Andrew Bary that alt-A mortgage securities trade for only about 60 cents on the dollar. Even if you make the extremely pessimistic assumption that 50% of these relatively high-quality loans default, and a lender recovers 50% of the value on the defaulted loans, they still should be worth at least 75 cents on the dollar. But such is the panic gripping the credit markets currently. The effect has been to drive investors into the Treasury market, sending yields to new lows for the cycle. Most dramatically, the two-year note’s yield, a barometer of expectations about Federal Reserve policy, plunged 34 basis points on the week, to 1.623%, the lowest level since early 2003. The benchmark 10-year yield fell 26.5 basis points, to 3.517%. Notwithstanding worrisome inflation readings, the massive dislocations in the credit market and the drumbeat of weak economic data are likely to force the Fed to continue easing, as Chairman Ben Bernanke indicated in congressional testimony last week. The federal-funds futures market is pricing in at least a 50-basis-point cut in the Fed’s rate target, currently 3%, at the March 18 meeting of the Federal Open Market Committee, and another 50 basis points by the April 28-29 meeting.
Octavio Richetta • March 1st, 2008 at 7:53 am
KJ Foehr: I think you are long term right on your deflation call. But, IMO, this is what is coming before we get there (disclosure: I am 10% soft commodities and 5% gold.) Sell Loans, Buy Harvests By KENNETH RAPOZA IT’S UNANIMOUS: THE U.S. FINANCIAL CRISIS IS UNLIKELY to see hedge funds pulling out of high-flying commodities to cover losses elsewhere. Analysts and fund managers alike agree on that. In fact, they say, the disastrous performance in debt holdings will likely have funds running to commodities rather than running away. MGE wheat futures doubled in price this quarter. Oil futures cracked a record $102 a barrel on Feb. 28. It’s not hard to see how commodities might be the saving grace of funds losing their shirts. “Hedge funds will not be dumping commodities in order to make up for losses in other accounts. I’m not hearing anyone talking about doing that,” says Shawn Reynolds, a co-portfolio manager at the Van Eck Global Hard Assets Fund (ticker: GHAAX). Last week The Wall Street Journal reported that U.K. hedge fund Peloton Partners LLP was one of the first victims in the credit crisis. Peloton is liquidating its mortgage-backed-securities fund. The idea of a similar scenario hitting commodities worries many raw-material producers dependent on the futures market to set their commodity prices for physical deliveries of everything from sugar to copper. Investor demand has sent sugar prices rising 30% in just two months, to more than 14.60 cents a pound, and New York copper up around 28%, to $3.80 a pound. If hedge funds lose interest, commodity prices fall fast. ”Despite the [credit risk], it’s really all about the fundamentals. From where I sit, equity investors are looking at commodities,” says Hussein Allidina, a financial analyst at Morgan Stanley. Among Allidina’s top picks for 2008 are soybeans, aluminum, natural gas, gold and sugar futures. The fundamental story goes like this: The world economy is decoupling from America. China and India are buying base metals to build railroads and sewer pipelines. Russia is spending billions on infrastructure. Oil fields from Kuwait to Mexico are in decline and OPEC will consider cutting production this week in Vienna. African mining nations are withdrawing licenses, or facing energy shortages. ”Every CEO in this business I speak to is fairly bullish on everything from copper to uranium. We are going to come up with serious supply constraints,” says Bart Melek, commodities strategist at BMO Capital Markets. A weak dollar against the euro also helps commodities. Last time the dollar was down so much, in 1995 and 1996, corn and soybean prices were roughly where they are today. Supply issues could now push them even higher. ”Wheat is rising around 60 to 90 cents a day. Spring wheat rose 25% in one day,” says Chris Hurt, an economist at Purdue University. “Anyone who was long on wheat is very wealthy. Anyone who was short is looking for a rope.” NYMEX CRUDE-OIL FUTURES and Nymex’s Comex gold futures set all-time highs last week as worries about inflation pumped up prices. April crude oil hit an all-time high of $103.05 a barrel, but settled Friday at $101.84, up $3.03, a 3.01% rise on the week. March gold set an all-time high of $972.10 an ounce and settled there Friday, up $27.10 on the week, a 2.9% rise.
Anonymous • March 1st, 2008 at 8:07 am
From: http://money.cnn.com/2008/02/29/markets/dollar/index.htm Ertse Bank’s Francomano, however, argues that the dollar should wind up around $1.46 against the euro by year end as investors are lured back in by a discounted greenback. ”When the bad data has been processed and the Fed has cut rates to 2 percent or so, then expect the dollar to look cheap,” said Francomano. Wonder where does he get that idea from? Pushing interest rates lower will remove a major incentive to invest in USD nominated assets.
Octavio Richetta • March 1st, 2008 at 9:43 am
Buffet’s annual letter to stockholders is out. A masterpiece and a pleasure to read even if you don’t own the stock (I sold when BRKA first reached 95K ouch:-)As usual, great teachings along with lots of smart humor. http://www.berkshirehathaway.com/letters/2007ltr.pdf
oy vey • March 1st, 2008 at 10:20 am
@Octavio Richetta I just read buffets letter.Thank you for bringing it to our attention. A wonderful piece of work. The comentary is superb.
Guest • March 1st, 2008 at 11:25 am
@GSM: “This coming event (s) has the potential to in all respects extinguish the “American Dream”… It is quite possible…that the populace will command the state to “take over”. Centrally control all assets, resources and institutions, for the common good.” (2:11:42) Sadly, F.A. Hayek points out in his 1976 Preface to “The Road to Serfdom”: “fascism and communism are merely variants of the same totalitarianism which central control of all economic activity tends to produce.” Although Hayek believed that hot socialism probably was a thing of the past, he warned than a great many in the Western world still believe in measures that, “in their aggregate effect, may well unintentionally produce this result.” Wrote Hayek, “Just because in the years ahead of us political ideology is not likely to aim at a clearly defined goal but toward piecemeal change, a full understanding of the process through which certain kinds of measure can destroy the bases of an economy based on the market and gradually smother the creative powers of a free civilization, seems now of the greatest importance.”
Anonymous • March 1st, 2008 at 11:58 am
In an outlier, contrarian temperament–consider this. Is it possible the housing bubble and credit boom was planned? A means of ramping an economy destined for a deep business cycle down trend? Did we tap foreign capital with the express intent of then devaluing our currency in order that we payback less than we borrowed in PPP terms? It would put our flagging industries on a short sugar high before the inevitable drawdown. Remember, that in the infancy of our nation, the continental currency was eventually devalued to 500:1. Even George Washington said that it would take a wagonload of currency to buy a substantially smaller load of goods. It was one of the preeminent reasons that the Constitution provided for precious metal based currency abrogated in 1971. It can and will happen again. We won’t be worth a “continental” on the int’l markets. Globalism may have been the parlor trick that allowed us to sucker-punch our global trading partners. Having obtained value, spent value, warehoused value at home in fixed assets, we will now renege through inflation as we pay back principal and interest in devalued dollars. Remember our interest rates (much of foreign borrowing pegged to US Treasury) are very low, while the rate at which anyone may now borrow is rapidly diverging i.e. mortgage interest is approaching a higher threshold now than before rate cutting exercise began. Head I win, tails you lose is being perceived as a Wall Street ruse perpetrated upon the US public, but in a larger sense it is being foisted even more damagingly upon the global nations. When they wake up finding themselves mugged, bloodied and bruised. They aren’t going to be wanting to play nice.
Guest • March 1st, 2008 at 12:16 pm
Fleckenstein: A great pretender of a rally Wall Street is riding high on collective fantasies: That key insurers are in fine shape, bad economic news doesn’t count, the dollar isn’t in trouble and more risky mortgages will fix the mess… http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/AGreatPretenderOfARally.aspx EXCERPT: The specter of municipal-bond downgrades is a function of a much larger problem: the unwinding of the credit bubble, which had the housing bubble at its epicenter. The credit bubble that has burst is going to continue to shrink the availability of credit, and the housing bubble that has burst is going to continue to unwind. The United States is not going to escape without a serious recession, which is the outcome preordained by the housing/credit bubble… Capitalists pray for socialism In any case, the determination to suppress the destructive downside of capitalism and ensure permanent prosperity is a terrible idea that will not work. Permanent prosperity, after all, is what socialism was supposed to be about, and we’ve all learned that theory doesn’t work. I continue to find it a sad irony that Wall Street — the alleged bastion of capitalism — would cling so dearly to the hope of socialism. That’s exactly what the Fed is all about. Its central planners think they can pick the right interest rate with which to run the world, even as the evidence indicates that their efforts over the last 20 years have produced two epic bubbles. This story would strike any sane person as the stuff of nightmare. Sadly, it’s our waking reality.
London Banker • March 1st, 2008 at 12:33 pm
Democracy functions well under normal economic conditions of moderate growth with well regulated labour and financial markets that prevent abuse, fraud, waste and unethical conduct. Perhaps communism and fascism arise under the same circumstances because they are compelled by the same objective – to stave off economic losses by protecting one category of citizens at the cost of wealth and civic and economic freedoms of another category of citizens. The threat to a democracy arises when massive regulatory failure leads to economic dislocation which threatens both the masses and the elites with huge losses. The masses and the elites will struggle to ensure that the other bears the bulk of loss, and the poltical system is the battlefield of that struggle. Communism arises when the masses use political clout to empower populist leaders who disenfranchise the wealthy and take their property without compensation, promising and often delivering jobs while the economy stagnates or shrinks. Fascism arises when the wealthy butress an elite which uses the political system to impoverish the masses, repress their civil rights and capacity to remove the elite from power. The masses are left unemployed, overtaxed and fearful of authority which is deployed brutally to keep order. Which way will America go? We might hope, but we can’t know. The elites have more power, and less accountability, than at any time in living memory. Enforcement of accounting, securities, banking and taxation regulations has been eroded hugely by globalisation, fragmentation of markets, shadow systems of offshore companies operating in parallel off the the books, crony capitalist capture of regulatory agencies, etc. Transparency, accountability, civil rights and democracy have been hugely eroded by the GWOT and a profiteering military/intelligence/homeland security complex that has finally come home after decades of global operations to spread its tentacles deep into America’s domestic fabric. The masses are largely ignorant of the systems that have been used to rob and disenfranchise them, buying the lies that they are being “protected” by ceding their rights and bearing the nation’s debts. This struggle is going to play for a generation, and I really don’t know what kind of world or political structures America will have ten years from now. I hope America restores transparent, accountable, market-led democracy, and some days I can believe that there are hopeful signs, but I’m not really confident. The elites will fight back and play dirty. Ricin, anyone?
Guest • March 1st, 2008 at 12:40 pm
“If you’re a consumer with great credit, you’re paying a quarter of a percentage point to three-eighths of a percentage point more than you were in September,” Hackemer said. “If you’ve got marginal credit, God help you.” http://www.bloomberg.com/apps/news?pid=20601109&sid=alwmuZu5h7UI&refer=home
Becket • March 1st, 2008 at 1:12 pm
I fear that America goes where good and noble men could not because of conscience. We have gone from “improvising our honour day to day” to “where honor should be, there is but a void”.
Medic • March 1st, 2008 at 1:26 pm
@ Anonymous on 2008-03-01 11:58:54 Just a comment here. The US Constitution is a relatively short document. It specifically gives Congress the ability “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures” – gold is never mentioned nor implied. The other flaw in your theory is that the damage done to international goodwill towards the US for any future investment would last for a long time (generations). Shooting ourselves in the foot (or more appropriately the face) would be an apt phrase do describe this plan.
Guest • March 1st, 2008 at 1:30 pm
@ Becket: I fear that America goes where good and noble men could not… “There is no nation on earth so dangerous as a nation fully armed, and bankrupt at home.” H. C. Lodge: 1916
Guest • March 1st, 2008 at 1:54 pm
Good post, London Banker. Perhaps P.J. Proudhon (1849) was a bit pessimistic about the value of government. But his characterization does underscore the advantage of free enterprise over the smothering blanket of all big governments. “To be governed is to be watched, inspected, spied upon, directed, law-ridden, regulated, penned up, indoctrinated, preached at, checked, appraised, seized, censured, commanded, by beings who have neither title, nor knowledge, nor virtue. To be governed is to have every operation, every transaction, every movement noted, registered, counted, rated, stamped, measured, numbered, assessed, licensed, refused, authorized, indorsed, admonished, prevented, reformed, redressed, corrected.”
Medic • March 1st, 2008 at 2:05 pm
@ Guest on 2008-03-01 13:54:11 I fear you may have missed the point – the government is not the issue; it is the failure of government to do its job and instead to do the bidding of the elites who control it and enrich / empower themselves. It is due to the failure of regulations that the US is in this mess – not because of them. It is because we have elected people into power who loathe and despise the government and wish to see it broken – not because it is being effectively run or utilized. It is because we have become lazy and slothful in the oversight of our government and have not held people accountable that we are in this mess – not because governments are bad. Just deal with it. The wealthy elites have done all they can to protect themselves and to Hell with the rest of us. Good governance (like good healthcare) is practiced elsewhere and works elsewhere – just not here. That’s not to say any single system is perfect, but many work better than this one. Replacing those who serve for self interests may be a good start to fixing the problem.
London Banker • March 1st, 2008 at 2:19 pm
@ Medic Many thanks for eloquently stating a view that gives me hope for America. You spoke last week about teaching others now that you are convinced. I hope you reach many others with the message you state here. If good people don’t serve in government, good government won’t serve the people.
Medic • March 1st, 2008 at 2:37 pm
@ LB: Idealism is not dead – nor is it wasted. Thanks for the kind words.
Detlef Guertler • March 1st, 2008 at 2:49 pm
@London Banker on 2008-03-01 12:33:23 Of course it’s easier to play democracy when the sun shines. But it can work in a thunderstorm, too. Until now, America neither took the way to communism nor the way to facsism. Neither in the 1910s, when communism rose in Russia, nor in the 1930s, when facsicm came to power in Germany and Spain. America opted for democracy, as well as Great Britain. I think both people like it very much to be able to oust their government. I see no reason why that should change simply because some trillions are wiped out. You wrote: “The elites have more power, and less accountability, than at any time in living memory.” I doubt that. Maybe they have better possibilities than ever to play with money; but not to play with the people. The people can get rid of their old elite and opt for a new one – if there is a new one. So for me the question is not: Democracy or facsism, the question is: Who will be the new elite? Any suggestions?
Guest • March 1st, 2008 at 3:13 pm
@Media: “government is not the issue; it is the failure of government…” The failure of government…is STILL government. As Thomas Paine said, “There are men in all ages who mean to govern well, but they mean to govern. They promise to be good masters, but they mean to be masters.” I am reminded of one of the New York Troskyites trying to defend communism in the face of the severity of Stalinism: “It’s not communism’s fault, it’s a leadership problem.” In that we must have government, IMO, the words of Paine still hold: “That government is best which governs least.”
Guest • March 1st, 2008 at 3:20 pm
I suggest we vote out the Rockefellers and Goldman Sachs in November. Just tell me where to vote.
Medic • March 1st, 2008 at 3:44 pm
@ LB: You see what we are up against? @ Guest 15:13 & 15:20: Your points are both noted. However, our current democracy is far from Stalin’s Russia and leadership is our problem as in we don’t have any. The rather pathetic group currently in charge (both parties included) has strayed so far away from honesty and integrity that they should all be replaced. This administration has entered us into a war on false pretenses, fought (effectively) to reduce individual liberties (ironic since they are the ones who vow to protect them) and let their backers (read: banks) get rich while displaying no interests in protecting citizens. Removing the money is tough. Voting / becoming involved / staying educated about issues & policies / contacting your elected officials is what we can do for now. Voting for change is what we can do in November. Removing others if we are not satisfied is what we can keep doing. We are paying a price for sloth, ignorance and disillusionment.
Detlef Guertler • March 1st, 2008 at 4:36 pm
@ Guest 15:20: Ousting Goldman may take some months longer. But at least the first step could be made in November.
Guest • March 1st, 2008 at 5:15 pm
@ALL You give far too much credit to the elites. Many are going to go down with the ship. Our taxes will go up to make up for the free-market with no regulation policies heralding back to Bush 1. We need industrial vision and long term thinking. All I ask if I am asked to pay more taxes is the benefits of euro socialism – fine healthcare, good mass transit and a decent retirement. Unfortunately the consumption society, stock buybacks, rampant outsourcing has probably screwed the pooch for much of this. It’s time some corporate dimwits to go bankrupt and visit jail for giving money to foreign nationals who took cash back at closing and went home without making any payments as well as the manipulative stock buybacks in lieu of dividends. The pendulum is going to swing against these arrogant types, but likely too much to the left. I still do not see any long term understanding that the past 20 years of globalization with no plan has been an unmitigated disaster. We’ve had false prosperity, bad values (aka live for today mentality) that when this finally hits bottom all will know was merely an illusion. People and our government need to save and it’s going to be a heck of a transition. What the Fed is doing (fueling inflation) is just mind boggling. The GAME is over. All the profit engines of Wall Street and the banks/real estate/builders are dead.
Medic • March 1st, 2008 at 5:32 pm
I am in hopes that the American populace can focus their 30 sec attention spans for long enough to not just be upset and angry enough to talk a good game, but to remain focused and take action. It will take leadership and the ability to get others to understand the real issues – not stupid things like who should be able to marry – but real issues that affect everyone. The fringes have been too active setting the agendas for too long. It is time to take our country back; not for the money we will surely lose – not for our homes or possessions but for our children and their futures.
JLarkin • March 1st, 2008 at 5:39 pm
Medic: Well put!
JLarkin • March 1st, 2008 at 5:41 pm
Interesting piece that harks back to Ryskamp – people will demand to stop the tsunami of foreclosures. http://biz.yahoo.com/ap/080301/the_shark_hunters.html
GTS • March 1st, 2008 at 5:44 pm
JPY and CHF should easly break their recent highs. Then sky is a limit..
Guest • March 1st, 2008 at 6:13 pm
By the end of 1893, business failures numbering 15,242 averaging $22,751 in liabilities, had been reported. Plagued by successive contractions of credit, many essentially sound firms failed which would have survived under ordinary circumstances. Liabilities totaled a staggering $357 million. This was the crisis of 1893. Citation: Whitten, David. “Depression of 1893″. EH.Net Encyclopedia, edited by Robert Whaples. August 15, 2001. URL http://eh.net/encyclopedia/article/whitten.panic.1893
Guest • March 1st, 2008 at 9:00 pm
Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns http://www.bloomberg.com/apps/news?pid=20601109&sid=au67GKPyS_Dg&refer=home EXCERPTS: Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973…. Rising foreclosures and falling property values may cut tax revenue by more than $6.6 billion for 10 states, including New York, California and Florida, the U.S. Conference of Mayors said in a November report… Falling Prices About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data. In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million. Home prices may fall at least 8 percent nationwide and by as much as 26 percent from the third quarter of 2007 before hitting bottom, according to a Feb. 13 report from a New York- based Deutsche Bank AG analyst…. D.R. Horton Inc., the second-biggest U.S. builder, held an “UnAuction” on Feb. 16 and Feb. 23 with prices cut as much as 50 percent at 23 developments in Southern California… Stockton’s metropolitan area had the second highest foreclosure rate in the U.S. last year and again in January. Almost 5 percent of households in that community were in some stage of foreclosure in 2007… At least 14 new-home auctions are scheduled through April in California, Florida, Illinois, Arizona and Nevada, said Brigitte Boudress, a Beverly Hills, California-based spokeswoman for Kennedy Wilson Inc.
Guest • March 1st, 2008 at 9:18 pm
more on “war and economics”: Ron Paul from A Statement to the Joint Economic Committee, February 28, 2008 “The continuation of the war in Iraq will end in disaster for this country. Parallels between the Roman empire and our own are numerous, although our decline and fall will happen far quicker than that of Rome. The current financial crisis has awakened some to the perils that await us, but solutions that address the root of the problem and seek to fix it are nowhere to be found. There must be a sea change in the attitudes and thinking of Americans and their leaders. The welfare-warfare state must be abolished, respect for private property and individual liberties restored, and we must return to the limited-government ideals of our Founding Fathers. Any other course will doom our nation to the dustbin of history.”
Anonymous • March 1st, 2008 at 10:11 pm
And now from Pravda, I mean Yahoo news: Russia votes for Putin’s successor http://news.yahoo.com/s/ap/20080302/ap_on_re_eu/russia_presidential_election MOSCOW – After eight years of rule that saw Russia’s influence and wealth grow while its democratic freedoms shrank, voters in the Far East were the first in this vast nation to cast their ballots Sunday for President Vladimir Putin’s successor. At least it has went better with Russia that U.S., then. If this was about the U.S. election, it should read: WASHINGTON, D.C. – After eight years of rule that saw USA’s influence and wealth diminish while its democratic freedoms also shrank, voters in the…
KJ Foehr • March 1st, 2008 at 10:16 pm
London Banker wrote on 2008-03-01 14:19:19 “@ Medic Many thanks for eloquently stating a view that gives me hope for America. …” Medic wrote on 2008-03-01 14:37:08 “@ LB: Idealism is not dead – nor is it wasted.” Here, here! Very well said! There IS much more reason now for hope in America. The neocons have failed and the American people have turned against them. The laissez faire trend of the last 25 years has ended. It has brought us to its inevitable outcome: a collapse of the financial system, and that will turn the American people against free-market capitalism for decades. The era of “government is the problem” is over. The American people will once again see the great value of their government and they will take pride in its actions. It will be a massive government intervention that will save our financial system from complete collapse. And we will see a return to greater government regulation and oversight of business, the undermining of which allowed this financial collapse to occur. There is also more hope now because of the great difficulties we face. This may seem counter-intuitive, but I don’t think it is. How many times have we heard or read, or perhaps said ourselves, that Americans have grown weak, fat, and lazy? This may change now too because of the hardships we will face in the coming months – “adversity builds character”. Did the depression and WW2 make America better or worse? Did the hardships of those years not forge the Greatest Generation, and directly cause America’s rise and its golden age of the 1950’s, which in turn enabled the idealism of the 1960’s that resulted in great advancements of civil rights, and much improved air and water quality in the 1970s? The Reagan Revolution is being overturned as we speak; its principles have been tried and found wanting. And the turning away from it, coupled with the rebuilding of America’s character, wrought by adversity, will bring about another golden age in the USA. The reports of America’s demise have been greatly exaggerated.
Guest • March 1st, 2008 at 10:19 pm
KJ Foehr, your liberal big government talk scares me. More tax on middle-class right?
J. • March 1st, 2008 at 10:47 pm
Thank you Mark (the original? one) since what I take from your post forces me to agree that, yes, if there are more people – some of whom are properly credentialed – who have ‘demonstrated’ peak oil than the number who have debunked this, and no doubt lack proper credentials, then of course that majority, somewhat like medieval flat earthers and the church, must be correct, hence also the near inherent truth of monocausal explanation.
Robert • March 1st, 2008 at 11:01 pm
QUOTE The reports of America’s demise have been greatly exaggerated. Written by KJ Foehr on 2008-03-01 22:16:47 UNQUOTE If we are unlucky and the financial system in America blows up, and the US Dollar tanks, it is not inconceivable for American strategic planners to advise the President and Treasury Sec and Sec of State to begin operations that will “protect American interests” and if possible, cause greater destruction of financial and social foundations of other countries, so that after the global “meltdown”, by default, America would still be better offf than most countries. Sounds dastardly, but if America is going to go down, you can bet, that a smart American president would want some “soft bodies” down there to cushion the landing…. Geopolitics and Machiavelli at work. We may say that the US dollar is going to implode, but if thereis any real danger of that happening, strategic capability entities in the US govt will kick in and destabilize other “rock-solid” govts – so that America does not end up at the bottom of the heap when “shit really hits the fan.” NOte, the Great Depression was really bad for America, but it was certainly worst for Germany, and many countries in Europe…. No country in this world is “decoupled” from a global systemic crisis that happens. Just read what Nouriel writes – draw some trendlines. If Nouriel is correct, I believe we have a global economic dislocation coming – in my opinion. The US will certainly not be the worst off. I’d bet on that. Americans may be dumb when you cosnider the median “lowest common denominator” but the most brilliant and influential people live in America (and I ain’t even an American). Look at how American investment banks on Wall Street stole from everyone else fro so many years – and line their pockets with billions of dollars of payouts that they don’t need to give back in a global depression. If this is not BRIALLIANT, what is? Working 16 hours for $2 an hour a day producing goods for American consumers? Before America blows up, they’d pave the road first with their adversaries – and even allies, first. This is not cynical. Other countries who are smart enough are also aware of this, and they’d like to stay as far as away from an American blow-up, if they can. But it’d be a problem…. Just my humble opinion….
Anonymous • March 1st, 2008 at 11:23 pm
Roubini has presciently preserved the postings from months past. If you want to see how far our economy has tumbled in such a short time, review those postings. Several months ago there was really a stone wall of denial about any meaningful downturn. Now CnnMoney is broadcasting M3 and depression talk. That global indexes are painting all reds over 2% isn’t uncommon. In the space of less than 100 days an absolute societal mindshift has taken place.
GSM • March 2nd, 2008 at 12:28 am
As alarming as the 7.7% jump in the producer price index was, John Roque, Natixis Bleichroeder’s technical analyst, finds something else more troubling: Each time since 1947 that this index has crossed above 7%, it has continued to barrel higher, eventually reaching levels between 9.9% (in July 1948) and 19.5% (in November 1974). Fed Chairman Ben Bernanke told Congress last week he expects inflation to abate. “He’s eventually going to be right,” Roque says. “But only after it goes much higher first.” Written by Octavio Richetta on 2008-03-01 07:35:22 The much telegraphed rock and hard place the Fed find’s itself is certainly no surprise. The novel strategy is to slash interest rates in order to reflate the economy and then raise rates at some future point to reign in prices etc etc. Same old story. Note however that this whole strategy is predicated on the proposition that the US economy will reflate or at least respond and grow to the point where growth would compel higher rates. But what is it doesn’t? What if the US economy just continues to stumble on with very low growth? A shell shocked consumer bereft of substantial prior wealth, with possibly even a nationalized stodgy , conservative banking and lending system? Housing will be a wasteland still 3 years from now. Will energy be lower?,And what of food and other necessities? .With a very lackluster economy and enormous political pressure to end the low growth nightmare scenario, do you see the Fed actually raising rates? I don’t. Certainly I don’t see it anywhere yet. So, as far out that I can see for the US is a low rate environment with low/stagnant/negative economic growth that all in all contributes to continuing dollar weakness. The variable for commodities of course will be aggregate WORLD demand. Therefore, all things considered , as long as demand remains steady to higher (it won’t be constant by any means) , therein lies a case for higher commodity prices going forward. Not that there won’t be corrections at times. But whilst the weak dollar scenario is buttressed by a positive supply/demand equation, US dollar commodity prices will be supported.
J. • March 2nd, 2008 at 12:42 am
Octavio, From the Rapoza article you posted: ”Despite the [credit risk], it’s really all about the fundamentals. From where I sit, equity investors are looking at commodities,” says Hussein Allidina, a financial analyst at Morgan Stanley. [...] The fundamental story goes like this: The world economy is decoupling from America. China and India are buying base metals to build railroads and sewer pipelines. Russia is spending billions on infrastructure. Oil fields from Kuwait to Mexico are in decline and OPEC will consider cutting production this week in Vienna. African mining nations are withdrawing licenses, or facing energy shortages.” He’s unaware that equity investors began ‘looking at commodities’ at least four years ago? Unaware that China, so also E Asian supply chains and then as well South America, is export dependent? Does he imagine that infrastructural investment within a globally embedded state capitalism is unaffected by that which it is in? Or perhaps he imagines the internal markets within these regions are much more developed than they are, an undevelopment evidenced from 150 plus million ‘floating workers’ whose wages are often unpaid, witheld and lower than the officially designated minimum, to what has been a ballooning of the informal sector throughout most of the ‘developing world’? No, he may simply be unwilling to grasp that no part of the system is immune to the consequences of overinvestment and overaccumulation which has, for some time now, been masked and mitigated through the credit inflation of a hybrid, become uncontrollable, global financial system, and that this particular system’s ending allows that which had been covered to become exposed. In short, I find the decoupling claims to be ludicrous and more to do with apologetics than much else. No doubt that Cantarell and some others are in decline, which apparently has not prevented a spike in crude and liquids production World Liquids: http://bp0.blogger.com/_fl4GqRfOC9Q/R5_VQEZ325I/AAAAAAAAAIw/cRAzfvhkDhg/s1600-h/LiquidsDec2007.jpg World Crude: http://bp2.blogger.com/_fl4GqRfOC9Q/R5_VPkZ324I/AAAAAAAAAIo/5A4Re7aG4mM/s1600-h/CrudeOct2007.jpg April 08 contract, monthly: http://www.britefutures.com/charts/rad63EDAPrice.png What the heck, since they appear so fundamental, may as well toss in weekly continuation charts for wheat: MGEX: http://charts.marketcenter.com/cis/agweb?cont=MW&period=w&size=760×400 KCBT: http://charts.marketcenter.com/cis/agweb?cont=KW&period=w&size=760×400 CBOT: http://charts.marketcenter.com/cis/agweb?cont=W&period=w&size=760×400
GSM • March 2nd, 2008 at 12:50 am
So for me the question is not: Democracy or facsism, the question is: Who will be the new elite? Any suggestions? Written by Detlef Guertler on 2008-03-01 14:49:29 For the US, the new “elites” will be the ones who offer the biggest handouts. Faithfully and earnestly elected by the beneficiaries of that largesse. There is no hope yet on the horizon for the US dollar , US debt, US deficits reduction (all of them) unless measured in a fast disappearing dollar. Handouts often come with strings attached whether they be seen or unseen. In this case I strongly suspect that the “state” will be playing a much greater overt part in everyday US life than since the 1930’s, such will be the nature of the devastation on the finances of the US people
2cents • March 2nd, 2008 at 1:04 am
@ Robert on 2008-03-01 23:01:45 You’re humble opinion is spot on. What you describe is actually a formalized plan that has been in the US arsenal for many years. There are documents that detail what actions take place if various catastrophic events happen. Some examples of what is covered include a direct foreign attack on the seat of government, an uprising of the populace against the government, a seizure of control by one branch of government, a complete loss of elected officials, an economic calamity, a medical calamity, a physical rebellion of a state or states, and certain conditions that require efficiencies absent in the normal checks and balances built into our form of government. While many of you may find one if not multiple scenarios listed above into which we are headed, please keep in mind that there are checkpoints in most of the scenarios that must be passed in order to implement the specific actions. However, I believe that it would be the last scenario that would ultimately be the one that triggers should our conditions continue to deteriorate. Our form of governing has inherent strengths that have served it well over the years, but it was recognized that these strengths could become Achilles heels under certain circumstances. I’m not saying that we are headed there, but I do think that it may surprise some that contingencies are in place and should something happen we should be able to hit the ground running and not be caught up in some kind of constitutional gridlock. I know some of you will think that I’m referring to NSPD 51 / HSPD 20, but that’s not the case. These may have been intended as refinements of the earlier plans, but I don’t have any direct knowledge of this and can only speculate. You didn’t think Cheney was going home this coming January did you? …. Scary thought.
GSM • March 2nd, 2008 at 1:38 am
@J, I don’t buy the decoupling theory either. But, the major saving nations of this world can continue high spending (on infrastructure and related themes) for their economic future, much longer than you and other families can remain solvent denying commodity inflation. As the US dollar continues to decline, home currency appreciation helps offset US dollar priced commodity inflation. This helps justify continued purchases and maintaining physical demand. Add to this the increasing affluence in hundreds of millions of new consumers globally who will consume ever increasing volumes of these commodities. They do have the money to pay up. Consider the pent up demand and lifestyle changes they are making. Once you buy that car or apartment, you wan’t the lifestyle that comes with it and those (cashed up) Govt’s want you to have it too. Consider the supply side issues as well for food and energy. All well documented. But add to that the foolish policies of nations like China who actually subsidize and cap prices , which only fuels yet more physical demand. Good land given over to biofuel production, displacing food crops. The energy component of food production costs is skyrocketing. South African mines are shutting down or curtailing production all over due to power infrastructure decay. Solutions that would change these enablers of commodity inflation are easily or quickly implemented.
GSM • March 2nd, 2008 at 3:37 am
Written by GSM on 2008-03-02 01:38:48 Sorry, typing error……. ”Solutions that would change these enablers of commodity inflation are NOT easily or quickly implemented.”
Octavio Richetta • March 2nd, 2008 at 7:07 am
This is an excelent one as it relates quite a bit to the discussion on government statistics in this blog: The Buck Has Stopped Consumers have cut back on purchases more than federal data indicates, says a research firm. By GRETCHEN MORGENSON Published: March 2, 2008 http://www.nytimes.com/2008/03/02/business/02gret.html?_r=2&ref=business&oref=slogin&oref=slogin And now read Barron’s stupid article of the week:(I bet Calculated Risk will rip it appart!) http://online.barrons.com/article/SB120432861475404187.html?mod=9_0031_b_this_weeks_magazine_main&page=sp The Consumer Is Alive — and Stable By CRAIG R. JOHNSON BECAUSE THE CONSUMER IS AILING, SO THE CONVENTIONAL wisdom goes, the economy must be near recession, or in one. It’s appropriate that this view is growing in popularity just as Mark Twain’s newly-discovered Broadway comedy Is He Dead? has become a hit. Reports of the American consumer’s demise have been similarly exaggerated. Today’s consumer statistics are badly distorted by two forms of lag — statistical and institutional — which reflect a disconnect between the accelerating rate of economic change and the ability of government and data-keeping organizations to keep pace. Both public policy and private investment decisions overly rely on databases designed well back in the last century. Meanwhile, Americans are charging toward the second decade of this century, brandishing iPhones, Wiis, Garmins and other technologies that are underestimated or omitted in industry and government statistics. For years, the Commerce Department and the National Retail Federation have compiled retail statistics, but each has been slow to track the Internet’s rise. Even now, annual NRF forecasts and its Christmas sales recap omit e-commerce. Also missing are old-fashioned direct-to-consumer sales, an important channel since Richard Sears and Alvah Roebuck sent out their first catalog. When the trade organization recently helped spook Wall Street by announcing that holiday sales rose only 3% year-over-year, the lack of e-commerce figures meant it didn’t reflect the fastest-growing retail outlet — now 7% of Christmas sales. Sales from the nation’s 15th largest retailer, Amazon, were ignored, along with those of LL Bean and other direct marketers. NRF also slights gift-card sales, which shift revenue from a November-December statistical period to January or later, depressing nominal holiday sales growth. The Commerce statistics on which NRF bases its forecasts aren’t much better. Although its advance retail report includes a category for “non-store sales” it doesn’t break out e-commerce sales until a month later. January’s sluggish retail statistics — purportedly the worst January performance on record — are further misleading due to a host of other measurement issues. Washington bureaucrats and Wall Street analysts don’t understand how sharply the consumer landscape has changed since the last century, and their statistical slips are showing. The nation’s hottest youth-oriented merchant, Apple, is not counted as a retailer in either Commerce or industry statistics. Apple’s retail unit, as the 24/7 crowds at its New York flagship attest, does $5 billion in revenues. Growing some 50% annually, Apple’s retail group generated over $2 billion at its stores and in iTune downloads this past quarter. It’s the only crowded store in many malls. Although dozens of investment analysts track stores from Abercrombie to Zumiez, retailers like Amazon and Apple — and other major mall presences such as AT&T and Verizon — are covered by tech analysts, and appear in their tech or Internet indexes rather than in retail. And, of course, eBay has created a whole new channel, consumer-to-consumer, all but ignored in industry statistics. RETAIL PLAYERS — AND STREET PUNDITS — each month breathlessly await same-store-sales comparisons, a 20th-century relic devised when stores operated in a single-format, pre-Internet world. It’s time to view “comps” for what they are: one of about a dozen statistical reports of some interest. They vary not with the economy, but primarily with retail promotion calendars and strategies for opening and closing stores. Conventional retail wisdom is too heavily focused on malls and apparel, since so many publicly traded retailers are mall-based fashion chains. But apparel, which accounted for a fifth of consumer expenditures a century ago, is now barely 3.7% of household spending. And mall traffic has been declining for years, as consumers decamp for more convenient off-mall venues, including the Internet. The widely tracked same-store-sales indexes all omit huge off-mall retailers that don’t report comps monthly, if at all. Growth at companies such as Amazon, Best Buy and Staples far outpaces troubled apparel chains’. When fourth-quarter results were released in February, Wal-Mart’s solid growth of more than 8% was lost amid the sea of soft sales at mall-specialty stores — despite the fact that, with $375 billion in sales, Wal-Mart does more business on a decent Saturday afternoon than most of those chains do annually. Many media headlines also erred by citing Wal-Mart’s 2.1% fourth-quarter comp U.S. gain as its total sales growth, rather than its actual 8.3% year-over-year increase — a respectable performance since a third of its sales now come from groceries, a slow growth area. And it achieved this in a lagging economy. Peeling apart the 0.6% fourth-quarter advance report on gross domestic product reveals two distinct problems with the widely accepted forecast of a consumer-led recession. First, the sluggish growth was mostly due to a precipitous decline in inventories — which will likely self-correct in first-quarter figures — and the residential construction slump. Second, preliminary GDP data tend to underreport both the fast-growing new Web-based economy (music downloads, for example) and the untaxed cash economy, while overweighting the declining smokestack economy. Almost ignored by analysts wallowing in the financial sector’s woes, the consumer keeps chugging along, with fourth-quarter personal consumption expenditures — 71% of GDP — up 5.9% (2.5% real) year-over-year. Main Street keeps spending while Wall Street keeps whining. Pundits and politicians declaim that household spending has risen only because consumers have been pursuing a “plastic-fueled spending spree,” or “tapping their homes as an ATM.” Consumer spending, however, is propelled primarily by the nation’s $12 trillion in personal income, which continued its solid real growth of more than 2% in the fourth quarter. According to the Federal Reserve, revolving credit increased a paltry $75 billion in the fourth quarter, and barely $200 billion in refinancing extractions are used annually for personal consumption expenditures, figures dwarfed by the $12 trillion in income. The housing correction has led to a decline in both home values and home-related consumer spending, particularly for major home improvements. But with the housing affordability index at 130 — the most bullish since 2004, according to the National Association of Realtors — and mortgage rates near their lowest in several years, the housing market stands poised for a rebound once the excess inventory gets worked off. Despite conventional wisdom that loan demand is in the ditch, refinancing and new mortgage applic
ations are near multi-year highs — and the new economic stimulus package’s barely noticed increase in FHA and conforming loan limits to $729,000 will help revive the housing sector. The latest Institute of Supply Management report on services, the most recent statistic to panic the pundits, delivered another red herring. Although widely reported (including in Barron’s and The Wall Street Journal) as suggesting a “contraction” in service activity and the broader economy, it indicated neither. It represents responses from a non-scientific survey of purchasing managers’ and third-party corporate officials’ opinions on expected business activity, for industries ranging from utilities (reported as up) to hospitality (down). People are notoriously poor predictors of future behaviors, even their own. For example, the 5.7% increase in household spending in December and January belied the September consumer sentiment surveys predicting lower year-end spending. Predictions on business spending are no better. Superior measures of business activity include actual sales, order backlog and, in the hospitality industry, bookings. Disney is a case in point: On the day of the downbeat ISM report, Disney reported record revenues and bookings ahead of last year. Real numbers should trump surveyed opinions. Finally, short-term structural shifts in the economy have been widely misinterpreted as signalling a decline in consumer activity. Energy prices rose sharply in the fall, yielding gasoline prices above $3 a gallon — which people were used to — and home heating bills 20% to 40% higher than last year — which some consumers hadn’t expected. American families were shocked, after a warm fall, to be greeted with post-Thanksgiving monthly heating bills up to $400 higher than a year earlier, taking a big bite out of Christmas lists, and dampening spending this quarter. The resulting softness in winter retail sales led prognosticators, among them the National Association of Business Economists, to predict recession. CLEARLY, THE HOUSING SLUMP AND SHARPLY HIGHER energy costs — now about 7% of household spending, the highest since the 1980s — have crimped economic growth. But even if consumer expenditures have rotated slightly from durable and non-durable goods to energy services, utilities are still part of the economy. And after every past energy shock, consumers have bounced back. A more insightful assessment of the American consumer would show that she is alive and doing pretty well. She and her husband remain resilient, though more circumspect in their spending, particularly on large discretionary items, whether the new kitchen or that second wide-screen TV. She may be going to the mall less than her mother did, since she is more likely to be at yoga or gym spinning classes — when not at work, or multi-tasking at home — but she still shops, big-time. And when spring brings lower utility bills and rebate checks in the mail, consumer thoughts may return to how to improve the home versus how to heat it. Wall Street may soon be looking at Main Street consumers and asking: What if we gave a recession, and nobody came?
Octavio Richetta • March 2nd, 2008 at 7:32 am
Written by J. on 2008-03-02 00:42:22 I agree with your view. the fundamentals indicate commodities will eventually turn around. But do you have any sense for when that may happen?
Expat • March 2nd, 2008 at 7:41 am
Hubris. THe US of A, the greatest America in the whole world, has been a dominant force in world politics and economics almost from its creation. It is inconceivable to most Americans that there could something wrong with the model. Yet, we see now that more and more consumers (we are not citizens any more, we are the American Consumer) are disillusioned. Americans are also disillusioned with foreign policy; we are torn between wanting to pretty much blow everyone “bad” up and our confusion over not being loved world-wide. Our historical perspective and, frankly, brain-washing about being Number One, impedes us in our attempts to understand the crisis and bring about solutions. “It’s not our fault” is a common refrain from Main Street to Wall Street, both blaming sub-prime for ruining their otherwise brilliant financial strategies. It must be the fault of the Chinese or Arabs. This perhaps explains why consumption and the Dow Jones are holding relatively well. And why no one in the game seems overly worried yet. Uncle Sam will ride to the rescue. Americans are at their best when things are at their worst. We are the greatest country in the world. Our financial system and capitalism are the greatest things since…well, since forever. We can’t and won’t admit defeat. So we keep buying plastic toys and keep voting for candidates who promise easy solutions. We keep pushing our problems to next year with more debt and higher inflation. Something has to give, but I fear that when this all ends up like most here believe it will, America will lash out just as it did after 9-11. While drawing parallels will no doubt spark a backlash and a flurry of attacks on my patriotism (I don’t have much left, so fire away), the parallel exists. We created Islamic extremism and reaped the storm. We created this massive credit bubble and will reap the economic storm
Medic • March 2nd, 2008 at 7:41 am
Just a couple of thoughts on the Barron’s article posted above: 1. As a higher than average earning family, we have stopped the discresionary type of spending we used to do nearly daily such as eating in restaurants. My wife and I both commented last week while ordering a pizza that we could not recall the last time we had done so. As for shopping, if my daughter was not outgrowing her clothes, we would not be purchasing much outside of groceries and fuel. Not that we drive far. My wife has a 2 mile commute and I walk to work, but still gas is consuming much more than ever before of our budget. 2. The attitude with which the article is written is another example of the disconnect that exists between those that are effected by higher food / fuel costs and those that are not. Living in northern New England, I heat with oil. My oil supplier has been dropping off small amounts every 2-3 weeks in an effort (I believe) to reduce the amount of the oil bills, but it increases the frequency. I am now paying every month what I used to pay every 2-3 months. Even with a higher wage job, this hurts – and what am I to do? I have turned our heat down as far as my wife will tolerate without wearing a coat in the house and I have added electric space heaters, but still my costs rise. I am not shopping online much with what little I have left. In fact, with what little there is left, we are trying to save as much as possible to offset other rising costs and prepare for next winter, which will be more expensive, no doubt.
Octavio Richetta • March 2nd, 2008 at 8:05 am
One needs to keep in mind the fact that once gloom and doom takes hold in the MSM it is much easier for reporters to stay with the negative beat. However, I can’t help concluding things are really in bad shape after reading articles such as the one below [which made me feel sad and concerned but still, IMO, a great piece of reporting] Is a Lean Economy Turning Mean? By PETER S. GOODMAN Published: March 2, 2008 http://www.nytimes.com/2008/03/02/business/02jobs.html?ref=business (BTW, the suggestion above about hitting “Preview” before “Send” works like a charm and it saves time vs. copying your post everytime. If your post fails, you can just go to the preview window and do a right click select all and then a right click copy to retrieve your writing and then do a right click paste into the Comment: window.) Written by Octavio Richetta
Octavio Richetta • March 2nd, 2008 at 8:16 am
Written by GSM on 2008-03-02 01:38:48 Written by Expat on 2008-03-02 07:41:33 Written by Medic on 2008-03-02 07:41:53 Your posts make excellent points.
Octavio Richetta • March 2nd, 2008 at 8:24 am
Denial in WS is still alive and well… The Jump-Start That Hasn’t Started http://www.nytimes.com/2008/03/02/business/02fund.html?ref=business
Octavio Richetta • March 2nd, 2008 at 8:31 am
… A Rerun, Maybe, but of What Show? http://www.nytimes.com/2008/03/02/business/02maker.html?ref=business
Guest • March 2nd, 2008 at 8:33 am
Americans are also disillusioned with foreign policy; we are torn between wanting to pretty much blow everyone “bad” up and our confusion over not being loved world-wide. We can’t and won’t admit defeat. So we keep buying plastic toys and keep voting for candidates who promise easy solutions. We keep pushing our problems to next year with more debt and higher inflation. —— Seems like J6P has not and will not awake. They are too deeply hooked on cocaine or opium. “candidates who promise easy solutions”? like Obama? He sounds like father in church, where all audience are preacher worshiping and wishing everything will be alright. God will fix problems for them. That is exactly what Hillary Clinton pointed out about Obama. That is exactly what I pointed out, J6P has not and will not awake. It is doomsday for US of A, because J6P just care about what they can get from government and not what they can do to turn this country around.
Guest • March 2nd, 2008 at 8:45 am
“A more insightful assessment of the American consumer would show that she is alive and doing pretty well. She and her husband remain resilient, though more circumspect in their spending, particularly on large discretionary items, whether the new kitchen or that second wide-screen TV. She may be going to the mall less than her mother did, since she is more likely to be at yoga or gym spinning classes — when not at work, or multi-tasking at home — but she still shops, big-time. And when spring brings lower utility bills and rebate checks in the mail, consumer thoughts may return to how to improve the home versus how to heat it. Wall Street may soon be looking at Main Street consumers and asking: What if we gave a recession, and nobody came? Written by Octavio Richetta on 2008-03-02 07:07:16″ ——— yes, don’t bet against “American consumer” just yet.
Octavio Richetta • March 2nd, 2008 at 8:54 am
Somewhere there is a great disconnect. Is it us or them? Thinking One Step Ahead of a Downturn http://www.nytimes.com/2008/03/02/business/02buy.html?ref=business BTW, Hussman’s note for last week is a great strategic piece. We may be in for 10 more years of low equity returns. The problem is [was] that the stock market bubble took PE ratios so high that even at the market bottom in 2002 PEs remained high and today at 16 times peak earnings they are still high enough that the 10 year expected total return for the S&P500 is just 5.65% (are you ready?), EVEN ASSUMING A TERMINAL PE OF 20! This kind of “back of the envelope” calculation is no joke. Bogle runs it all the time. Even Buffet’s letter implicitly hinted at this. Great piece by Hussman, helps keep things in perspective. So for the guys above, what is the rush to get into the market? That is how they get their fat paychecks. Economies of scale do not apply to the MF industry. The more money they manage the more fees they seem to get:-) http://www.hussmanfunds.com/wmc/wmc080225.htm
London Banker • March 2nd, 2008 at 8:55 am
@ Guest on 2008-03-02 08:33:40 It is doomsday for US of A, because J6P just care about what they can get from government and not what they can do to turn this country around. Allow me to suggest that J6P is not alone to “just care about what they can get from government and not what they can do to turn this country around”. It seems pretty clear that every corporate executive, shareholder and Wall Street financier is now obsessed with looting the US Treasury rather than taking decisions that would serve the longer term US economic interest. It’s been a long, long time since I saw any executive take a view about organically growing a company five years out, rather than scoring some quick acquisitions in the next quarter to inflate the balance sheet, hide the losses, and hit the marks for maximum bonus. And as soon as the losses become impossible to hide, those same executives are squealing to the lobbyists and politicians for relaxation of the rules, spending earmarks, and bailouts. The whole US system has stopped being about building a stronger America and become a game of seizing as much of the accreted wealth of past generations as possible before the inevitable collapse. At this point, it looks like the corporate cronies have won hands down, leaving the middle classes and poor worse off than ever – and that’s before they learn that their pensions will never be honoured and their savings plans have been looted.
Octavio Richetta • March 2nd, 2008 at 9:05 am
Written by Guest on 2008-03-02 08:45:52 I am sorry but, IMO, the time to bet against the US consumer has finally arrived. Of course, this is a gutsy call as it has been wrong time and time again. Without serious analysis (such as in the piece of junk Barron’s article above), it is easy to conclude that the “smart side of the bet” is to conclude the consumer will continue her resilience. “Playing smart” won’t work this time.
Octavio Richetta • March 2nd, 2008 at 9:29 am
These two compliment each other rather well: Inside the Mind Of a Debtor Nation http://www.washingtonpost.com/wp-dyn/content/article/2008/03/01/AR2008030100924.html Frugality Can Be Acquired, but It Can’t Be Bought http://www.nytimes.com/2008/03/01/business/yourmoney/01money.html?ref=business
Prof. J Taplin • March 2nd, 2008 at 10:01 am
Trim Tabs Investment Research has some pretty convincing data that we are already in a recession. http://jtaplin.wordpress.com/2008/03/02/information-cascades/
Guest 17:45 • March 2nd, 2008 at 10:05 am
´Fascism arises when the wealthy butress an elite which uses the political system to impoverish the masses, repress their civil rights and capacity to remove the elite from power. The masses are left unemployed, overtaxed and fearful of authority which is deployed brutally to keep order.´ @London Banker I disagree, the rise of fascism in Germany actually enriched the masses and massively reduced unemployment, economic conditions were improved dramatically under Hitler. There was a reliance on brutality to shut down opponents, however the majority of the German populace were more than keen do go along for the ride even though Hitler clearly laid out is intentions years before he came to power.
London Banker • March 2nd, 2008 at 11:25 am
Guest 17:45 on 2008-03-02 10:05:49 Don’t forget that both Hitler and Mussolini rose to political power by selling their para-military forces as strike breakers to brutally reinforce the power of industrialists over the workers. Pinkertons and similar groups served the same function in the USA at the time. Hitler’s economic success was largely based on borrowing in New York’s bond markets to re-industrialise and re-arm Germany, assisted by most of the big Wall Street banks but led by one Herbert Walker of Brown Brothers Harriman, the current president’s great-grandfather.
Detlef Guertler • March 2nd, 2008 at 11:37 am
@ Guest 17:45 on 2008-03-02 10:05:49 Part of the “enrichment” during the Third Reich was achieved by simply taking it away from the jews. Do you want to try that again in USA? I’d suggest to look for an other solution.
Medic • March 2nd, 2008 at 12:33 pm
I was thinking less about Hitler than I was about Shay’s Rebellion when just after the Revolutionary War the former war hero (Daniel Shay) led attacks on judges who were ruling against landowners who could not make payments on their property. Shay’s boys caused such a stir that the wealthy became very concerned because the Continental Congress was not able to control interstate finance and regulate money and contracts. Thus the Constitutional convention called for by the father of today’s banking system – Alexander Hamilton. The US constitution was the result and we were forever changed. By the way, before we all cannonize the founders please remember they were for freedom and democracy – as long as you were white, a land owner and male. Some things never really change that much……today’s federalists (such as our current Supreme Court Cheif Justice) are close adherents to the original plan.
Octavio Richetta • March 2nd, 2008 at 12:52 pm
monoliners’ troubles refuse to go away… http://business.timesonline.co.uk/tol/business/markets/united_states/article3463188.ece
Guest • March 2nd, 2008 at 1:00 pm
@ Guest: “fascism in Germany actually enriched the masses and massively reduced unemployment… There was a reliance on brutality to shut down opponents… the German populace were more than keen do go along for the ride…” Have not the German people suffered enough from prejudice? Can the peoples of nations be collectively condemned without condemning human nature itself? Is there no appeal to democratic faith in the simple honesty of soundness of the broad masses of people, and to sympathy with those millions of suffering and starving victims of total war? Consider developments after WWII: In 1947, a defeated, divided, truncated, occupied Germany was a mass of rubble, its economy a desperate scratching for subsistence. Although the Marshall Plan enabled Germany’s people to rebuild a free society and a free economy, a predecessor blueprint for genocide became the on-going principal occupation policy directive – a policy that aimed at the destruction of a nation’s people. It was the Morganthau Plan, drawn up by America’s wartime Secretary of the Treasury, Henry Morganthau, and his closest advisory, Harry Dexter White. It aimed at the permanent destruction of Germany’s industrial heart and the consequent death through starvation and disease of millions and tens of millions of Germans. “Time” magazine has aptly called it “history’s most terrifying peace”. The conservative newsletter, “Review of World Affairs,” quotes as follows from a confidential memorandum prepared by an eminent European economist: “Since the end of the war about 3,000,000 people, mostly women and children and over-aged men, have been killed in eastern Germany and south-eastern Europe; about 15,000,000 people have been deported or had to flee from their homesteads and are on the road. About 25 per cent of these people, over 3,000,000, have perished. About 4,000,000 men and women have been deported to eastern Europe and Russia as slaves….” Quoted by Sen. Homer Capehart in speech before U.S. Senate, Feb. 5, 1946. Dr. Lawrence Meyer, executive secretary of the Lutheran Church, Missouri Synod, after a tour of German stated: “About 16,000,000 German refugees east of the Oder are being deported from their homes. It has been estimated that already 10,000,000 have been driven out. The human tragedy and suffering caused by this ’Volkswanderung’ are unparalleled in history…” An authentic eye-witness report… “A large barge is slowly being towed across the Oder River. In it, lying on straw, are 300 children ranging from 2 to 14 years of age. There is hardly a sign of life in the whole group. Their hollow eyes, their swollen bellies, knees, and feet are telltale signs of starvation. These are merely the vanguard of hundreds of thousands—millions of homeless, shattered, hungry, sick, helpless, hopeless human beings fleeing westward – west of the Oder and Neisse rivers. “A trust in God—-in his goodness and mercy—-these are the only hope of Germany today. And thank God in many there is still faith in God against which the gates of hell have stormed in vain during the past decade.” (Capehart)
ptm • March 2nd, 2008 at 1:09 pm
Was chatting with a neighbor in agriculture (cotton) wholesaling who had just finished up a commodities seminar last week in Memphis. He said it was the presenter’s position that since wheat had been sold 270% over the current crop (I assumed that meant that wheat futures are 2.7 years out), that it was at the top of its price and could not go any higher without undue risk. It was also the presenters position that cotton offered the best commodities value at the moment. My neighbor went on to say that commodities is a very tricky market in the sense that when it does pop (and they don’t see any reason why it could not pop), it plummets with daily stops making it difficult to get in and sell before the market bottoms out.
a student • March 2nd, 2008 at 1:14 pm
revertibles: the past was never solved the present seems like the past while the future will tell us that the past was never solved
WAWAWA • March 2nd, 2008 at 1:25 pm
Would there or will there be a point when Federal Gov. can not raise/borrow money any more, consequently limit its spending/borrowing? There must be a limit, nothing is infinity! THANKS.
Medic • March 2nd, 2008 at 1:42 pm
We shall find the limit as soon as others are tired of underwritting our debt.
The Dane • March 2nd, 2008 at 2:09 pm
Should this be taken seriously (oilprice): Venezuela ‘sends tanks to border’ Mr Chavez has been mediating hostage releases with the rebels Venezuelan President Hugo Chavez is sending thousands of troops and tanks to the border with Colombia, marking a sharp escalation in regional tensions. Speaking on his weekly television show, President Chavez also said Venezuela’s embassy in Colombia would close. Mr Chavez said Colombian President Alvaro Uribe was a “criminal”. He said the killing of Raul Reyes, a top commander of the left-wing Farc rebels, just inside Ecuador on Saturday was a “cowardly murder”.” Source: http://news.bbc.co.uk/2/hi/americas/7274038.stm And more here: http://www.reuters.com/article/worldNews/idUSN0227633020080302 The Dane
Guest • March 2nd, 2008 at 2:49 pm
@ Anonymous: “Roubini has presciently preserved the postings from months past. If you want to see how far our economy has tumbled in such a short time, review those postings. Several months ago there was really a stone wall of denial about any meaningful downturn. Now CnnMoney is broadcasting M3 and depression talk. That global indexes are painting all reds over 2% isn’t uncommon. In the space of less than 100 days an absolute societal mindshift has taken place.” Yes! If one reads Roubini months back, it’s a building, consistent message. While details are updated, the message is clear: it’s been an economic roadmap, with analysis, of where this economy is heading. In the case of the Wall St Journal, FT, Barron’s, the NYtimes and the rest of the so-called mainstream financial press, the message itself keeps changing…often to fit private goals or private cover-up.
Stormy • March 2nd, 2008 at 2:55 pm
London Banker, I used one of your comments re the U.S. in a post at AngryBear. http://www.angrybear.blogspot.com/ ”The Latest Banking Scam: Which Dog Do We Kick.” You may find the responses interesting. I want to thank you for your forthright comments.
Guest 17:45 • March 2nd, 2008 at 3:10 pm
Don’t forget that both Hitler and Mussolini rose to political power by selling their para-military forces as strike breakers to brutally reinforce the power of industrialists over the workers. Pinkertons and similar groups served the same function in the USA at the time. @London Banker Correct and I don’t disagree with that but the point is that after he came to power economic conditions did improve with almost full employment so it is not true that Fascism necessarily leads to economic poverty for the masses. @Germans To any Germans on this site that appear to be offended by my comments, they were in no way intended to offend, I was just backing up my point with a reference from history. Don’t worry you could go back into the history of most nations and identify atrocities committed i.e. English genocide of Aborigines, The Spanish inquisition, Darfur, American genocide of native Americans, The Turkish genocide of Armenians, Serb genocide of Bosnians, Rwanda………….get my drift With regards to the commodity bubble taking place, it seems to me there’s an awful lot of investment cash looking for yield running into commodities with the expectation of inflation so prevalent. Innovation has seen the creation of a lot of open ended funds geared toward investing in commodities over the last few years which is opening up a lot more doors for cash to come in to commodities. The point I want to make is that this is distorting prices which now appear to be beyond fundamentals and more in line with greed. The sad thing is that it’s the middle class and poorer classes who will suffer as the price of basics increase all because Harry Hedge Fund is lookin´ for more yield. Just another way that the banking and finance industry screw the masses.
Guest • March 2nd, 2008 at 3:16 pm
If the US financial system were to implode, the assets (houses, factories, cars, etc.) would still be there. Somebody would own them and they would employ the same workers, more or less, to work there. And maybe debts would be cancelled, if the creditors ceased to exist, so the people would be better off. That is, except for those who work in the financial markets, real estate markets, etc. People who don’t make anything useful, but made a lot of money. They would all lose their jobs. That must be why everyone’s so concerned about a financial crisis. Because the people who actually make things for a living should not have much to fear from it.
Guest • March 2nd, 2008 at 3:58 pm
Bad news for all traders who went long on Friday. According to indicators the Asia session should be very bloody tonight and unless some miracle happens tomorrow (like a great ISM number) it might be a good idea to call in sick.
wawawa • March 2nd, 2008 at 4:18 pm
Is it too late/ too expensive to buy gold now? I am planing to buy 40 American Eagle or similar coin this week. I have never touched gold as investment before. Any Ideas? Thanks.
Wild Bill • March 2nd, 2008 at 4:25 pm
Fascists come to power like any extremist group, right, left or religious. A charismatic leader reaches out to a bunch of frightened people, frightens them even more, relieves them of their capacity for critical thinking, relieves them of all accountability for their actions and their situations, turns their fear into hate and liberally bathes some scapegoat in that hate. The Red Guards of the Chinese cultural revolution and the Brown Shirts of WWII are cases in point. In the former, young people raised in a society that venerated their elders, were converted into howling murderous gangs that preyed on their elders. On the right and on the left we see the same phonomenon. For this reason, no ethnic group or political movement has a monopoly on genocide. The organized aggression that results in genocide is as much a part of human nature as is crying or laughing. This aggression is amoral. It is responsible for much more than genocide. It powers the arts, music, literrature, humor, compassion, etc. It is responsible for mankind’s most noble acts and its most heinous. It is a very precarious tightrope we humans have been made to walk. Someone please hand me a pole so I may better balance myself. When I get to the platform, I’ll hand the pole to the next guy.
Medic • March 2nd, 2008 at 4:42 pm
@ wawawa: I would recommend something you can purchase easily and dump quickly if need be. Pete from Ca had some good advice for another person several posts ago – the basics were: deal with someone reputable and if possible local. If you are interested in not holding the gold yourself, you can go with an exchange traded fund like StreetTracks Gold ETF (GLD) – backed by physical gold holdings but easy to purchase and sell and you don’t have to worry about having large amounts on hand. Some coins are not a bad idea to hold. Smaller amounts may also be worth keeping on hand like the 1, 5, 10 and 20 gram chips available from Kitco. You may also want to consider a fund whose holdings are primarily companies that mine & process gold and other precious metals. Free advice is always worth what you pay for it – but this is at least a place to start.
Anonymous • March 2nd, 2008 at 4:58 pm
For those who want to show how sick they are of all the corruption, here it is… Sign up for “SICK OF IT DAY” http://www.sickofitday.org/ For those for whom that is not enough, here’s a book… http://www.amazon.com/Getting-Out-Leaving-America-Self-Reliance/dp/0976082276/ref=pd_sim_b_title_28 Getting Out: Your Guide to Leaving America (just be careful of where you relocate, because you may not want to move to some area with a large amount of recent Iraqi immigrants)
J. • March 2nd, 2008 at 5:49 pm
@GSM, I did not ‘deny commodity [price] inflation’; it has been evident for years: Reuters-CRB Index 1990-2008 http://www.economagic.com/em-cgi/charter.exe/crb/crb01+1990+2008+0+0+0+290+545++0 I do though consider the majority of this to have resulted not from real (global) economy fundamentals but financial flows into derivatives of the physical. Too many still imagine that prices are made through arms length exchange or, when acknowledged that finance has played a large part, insist that the futures trade is able to efficiently represent present and near future fundamentals, which is no more than to argue a type of neoclassical efficient market hypothesis rather than see the evident, that contradictions develop between the real and the financial, and in denying this takes on a quite often real ‘talking my book’ quality. To expect prices driven by financial flows to continue ad infinitum is at the same time to imagine that those holding this paper remain unaffected by a becoming worldwide credit bust while, also, to deny ever more evident real economy “slowing” or insist that this will remain local within a tightly globalized world. As I think you note, higher primary commodity prices have also been driving production costs to higher levels. How does this effect real nonfinancial, and then finanancial, sector rate of profit: slows and goes negative, which also has demand-side consequences for employment, wages, credit. Countries such as China which have depended on a combining of transnational firms, state driven infrastructure build, subsidies, or a type of ‘business as its own best customer’ method find that there has been not only too much investment but a complete inability to create sufficient employment relative to new entrants and slip more deeply into an employment based variant of immiserizing growth and particularly so when much of domestic industry is at the bottom of what’s been called “the smiling curve”.* It is never simply a matter of accumulated money. *Thanks to modularization of production, in many industries, the profitability at various stages of production has come to follow a U-shaped curve – high at the upstream and downstream processes and low at the midstream processes. Stan Shih, Chairman of Taiwan-based Acer Inc., is said to have first coined the term “smiling curve” to describe this phenomenon. Regarding personal computers, for example, value added is high at the upstream, which includes the development of operating systems (OS) and central processing units (CPU), and at the downstream, which includes maintenance services. Profitability is lowest in the midstream process, which involves such labor-intensive processes as assembly. (Chi Hung KWAN, China’s Immiserizing Growth)
Guest • March 2nd, 2008 at 6:05 pm
maybe it will be hot this time - http://www.economagic.com/em-cgi/charter.exe/crb/crb01+1990+2008+0+0+0+290+545++0
Anonymous • March 2nd, 2008 at 6:26 pm
John McCain has big decision: Who to pick as VP http://news.yahoo.com/s/nm/20080302/pl_nm/usa_politics_mccain_dc_2;_ylt=AlQMm0OpwrsGwrIiPpNglekb.3QA Who is he going to pick? Well, Dick Cheney of course! ha ha ha… [evil laughter]
Guest • March 2nd, 2008 at 7:44 pm
Can He Deliver? Obama and Global Trade By Paul Craig Roberts CounterPunch, February 21, 2008 http://www.vdare.com/roberts/080223_obama.htm Unique among the contenders for the presidential nominations, Barack Obama has raised the issue of US job loss from US corporations moving operations abroad in order to lower their labor costs and, thereby, boost profits. As reported by the Financial Times, Obama proposed a lower tax rate for US companies that maintain or increase their US workforce relative to their overseas workforce. [Obama seeks Ohio’s blue-collar vote, By Edward Luce, February 19 2008] Economists, who have crawled out on a limb in defense of jobs offshoring, quickly denounced Obama’s plan. As the US economy continues to lose relative ground, economists hold more tightly to their misconception that a country benefits by moving high value-added, high income jobs abroad and replacing them at home with low value- added, low income jobs. This view, which places the rights of capital far above the rights of labor and the duties of citizenship, is economically nonsensical as well… Obama’s concern is shared by Ralph Gomory, one of America’s most distinguished mathematicians and co-author with William Baumol, past president of the American Economics Association, of the most important book on trade theory in 200 years, Global Trade and Conflicting National Interests. Gomory has pointed out that corporations break the link between their interests and America’s interest when they offshore their production for US markets. By producing abroad, they raise foreign GDP and lower US GDP. By producing abroad, they raise the productivity of foreign labor and lower the productivity of US labor. By producing abroad, they increase the productivity capabilities and trade position of other countries at America’s expense. What can be done? Gomory suggests that one solution would be to replace the US corporate income tax with a tax based on the value-added of a corporation’s US employees. The higher the value-added of a corporation’s US work force compared to its industry, the lower the tax rate. Such a tax system would encourage corporations to keep high productivity, high-value added jobs in the US and to increase them. The aim would be to set the tax to counteract the advantage to the corporations of producing with less expensive labor abroad. Large under-utilized labor forces in China and India permit US corporations to hire abundant labor at wages substantially less than the workers’ contributions to profits, resulting in a shift of high value-added jobs abroad. Gomory’s scheme would provide an incentive for corporations to increase the value- added component from the US work force instead of capitalizing on cheap foreign labor… The continual widening of the trade deficit will eventually erode away the dollar’s value and its role as world reserve currency. Currently we are covering our trade deficit by giving up the ownership of our existing assets… Free trade theory never intended for economies to be in permanent trade disequilibrium… Official statistics show no growth in real median family incomes in many years… The United States simply cannot afford to stand by blindly while its corporations shift US GDP growth to China, India, and elsewhere abroad… President Obama and his Secretary of the Treasury, Ralph Gomery, are our last best hopes. Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term
Guest • March 2nd, 2008 at 7:48 pm
“Profitability is lowest in the midstream process, which involves such labor-intensive processes as assembly” what is next assembly with no humans and the leisure world?
Indian Banker • March 2nd, 2008 at 7:50 pm
Nikkei down 550 points wake up and go short London Banker : What is your prognosis for this week in Global Equities ?
J. • March 2nd, 2008 at 7:56 pm
Octavio, Given that I take the commodities boom to be more of an asset price inflation that’s been driven by allocation/reallocation into the derivatives of these by a constellation of higher-than-average-return-seeking CTAs, hedge funds, long-only funds, etc, than strong global recovery off the 2001-3 ‘bottoms’, and given that particular commodities are more or less effected by this, calling a top is at best problematic and, from my perspective, must take account of both financial and psychological pressures. Back on 8 Feb 08, AgWeb’s Karen Ballhagen & Scott Davis nicely captured some of the financial aspect re. wheat: Karen’s Thoughts: An enormous amount of money continues to change hands in the multiple wheat pits – primarily linked to the Minneapolis exchange. The focus of supply and demand may have run its course, leaving money as the major player. I say this in part due to the companies which are being squeezed now on the other side of this run-away market. Grain elevators and large grain companies across the U.S. and Canada are facing critical junctures in managing uncomfortable lending situations due to margin calls. Banks have become more prudent with lending in recent months due to the U.S. real estate debacle. If you look closer at the Minneapolis market, you will not only see prices have spiked to above $15/bushel on the futures, but even more serious is the potential for that to go higher yet. The daily price limit on wheat is about to jump another ten cents to 40 cents per day. At this price tag, where does that leave the end users to financially defend hedge positions? It would speak volumes to agriculture if solid grain companies start to fold under pressure due to this money squeeze. Scott’s Thoughts: I can hear it now… the old timer 30 years from now in 2038 will be telling his grandson about the wild and wooly wheat market of ’08 when prices defied gravity. But the second half of this tale has yet to be written. Margin calls and forced liquidation are now the primary driver of wheat price action as the “squeeze” in Minneapolis wheat has moved past the point where true fundamentals have much meaning. What tops this market? Probably news of elevator and/or bank failures due to the inability to meet margin calls. Expanded trading limits also have the potential to remove the artificial cap that is extending the pain indefinitely for shorts. … More broadly, I’d say that commodities have been in the Manic phase during which “investors scramble to get out of money and into illiquid things such as stocks, commodities, real estate or tulip bulbs: ‘a larger and larger group of people seeks to become rich without a real understanding of the processes involved’.” (Kindleberger) Portrayed by Marc Faber as “..through the effect of contagion, a universal urge to participate in the whirlwind of speculation. No one wants to miss out: the public because it sees only profits and no risks and argue ‘what else can I invest in – there are no alternatives’; the corporate sector because it overestimates the demand for its products or is overly optimistic about future prospects; and the professional investors because they cannot afford to be out of a rapidly appreciating market.’ ‘Near-term performance orientation, indexation, and money flows into the best performing funds force them to be in sectors which have the strongest upward moves. In a mania, therefore, the expression one hears again and again is ‘we cannot afford not to be in the market’ or ‘we cannot afford not to be in this sector.’ ’Characteristic of every investment mania is the formation of investment pools and a rising number of new issues flooding the market.” Rather than ‘new issues’, the increased flows into commodity derivatives that one of the articles you posted makes note of and that, Jan 2006, brought a major financial institution’s chief commodity trader to write that: “A flood of investment funds is driving.. prices much higher than can be supported by fundamental analysis of supply and demand. It’s a bubble which could grow a lot bigger before bursting. Commodity markets have always been strongly influenced by speculation. In this cycle though, funds deployed are perhaps double the previous high.” Well, it certainly has grown ‘a lot bigger’, which should have also increased its susceptibility to recession induced psychological shift. This bubble is on borrowed time but I would love to see oil at 125.
Guest • March 2nd, 2008 at 8:29 pm
Wawa No problem. Go buy your gold. Any of the high-purity gold coins are good choices … you can’t go wrong with South African krugerrands. You can also consider some silver. Silver has been doing very well lately (in terms of price gains). Unfortunately, Canadian maple leaf silver coins are temporarily out of supply (hopefully the mint in Canada will take a “reality pill” and start producing more soon). People are buying American Eagle silver coins instead right now. Dealers typically sell them in groups of 200 coins. Have fun. You’re buying at a time when precious metals bullion is still easily available. There could come a time in the future … when it’s actually very hard to get hold of. If you want to avoid paperwork, buy less than $10,000 worth of precious metals in any order. And shop around on your prices. PeteCA
Anonymous • March 2nd, 2008 at 8:53 pm
Wawa, GDX and GGN are ETFs holding precious metals mining companies.
Anonymous • March 2nd, 2008 at 8:58 pm
@Wawa American Gold Eagles contain only 0.91670 oz of gold although they trade at the price of other pure gold coins (American Buffalo, Canadian Maple Leaf, etc.) If you are buying for investment you might want to consider pure gold coins, however they are too soft and scratch too easily to be handled frequently so you may wish to consider American Eagles, especially the 1/10th oz variety, for survival purposes. Silver is also good and easier to trade due to its lower value.
wawawa • March 2nd, 2008 at 9:22 pm
Pete: what is the story with $10,000 order?
Anonymous • March 2nd, 2008 at 9:51 pm
Anonymous on 2008-03-02 20:58:03 American Gold Eagles contain only 0.91670 oz of gold although they trade at the price of other pure gold coins (American Buffalo, Canadian Maple Leaf, etc.) But they are 1.09 Oz 
Guest • March 2nd, 2008 at 9:51 pm
George Magnus, Minsky Moment http://www.ft.com/cms/893ac9c8-757e-11dc-b7cb-0000779fd2ac.html?_i_referralObject=671013049&fromSearch=n $ 1 trillion meltdown, right near the Roubini Mark
Perpetuum Mobile • March 2nd, 2008 at 10:07 pm
Thanks to this crisis, U.S. car makers will be even deeper in red. They will therefore need more money from foreign investors, some no doubt from oil rich countries. This will likely mean even less chances to get stricter fuel economy standards, not to even mention that ever-elusive electric car. And of course U.S. stance on cutting greenhouse gases will be lobbied to accommodate the greed.
Ralph • March 2nd, 2008 at 11:29 pm
It’s all the fault of the Banks… No, it’s this Government, who is bailing them out, this is the problem… No it’s the failure of regulation to do it’s job in successive Governments… No, it’s the people failing to demand accountability… Always someone else. I am reminded of GK Chesterton, who when The Times Newspaper asked him to be one of several eminent authors to send in an essay addressing the question; “What is wrong with the World?” wrote the following reply: Dear Sir, I am. Your faithfully GK Chesterton
Guest • March 2nd, 2008 at 11:32 pm
Wawa Withdrawals of cash over $10,000 from your bank will be reported to the Govt. Presumably, they are trying to watch for people who may be using large amounts of cash for criminal activities. But … they do keep track. Likewise, purchases over $10,000 of precious metals must be reported by your local precious metals dealer. Generally I do these transactions in amounts under $10,000 - just because I don’t like the paperwork. However, I do keep all my receipts, and I intend personally to declare all my transactions to the IRS (I’m not sure all buyers have similar intentions). Although some people buy rare coins, I suggest that you stick with the standard high-purity gold & silver coins that are traded most often i.e. keep your assets as liquid as possible. Other options include ETF’s (either bullion or mining stocks), individual stocks in junior or senior gold companies, special high-leverage funds (2X gold bull and gold bear funds), and precious metal pool accounts at some major dealers. They all have their own plus and minus considerations. Having your own physical metal is safest. PeteCA
JMa • March 3rd, 2008 at 12:15 am
“Always someone else. ” Written by Ralph on 2008-03-02 23:29:54 sell off in summer of 2006 1)reason – Middle East War sell off in March of 2007 2)reason – Shanghai surprise one day sell-off sell off in August 2007 3)reason – those gosh darn “sub prime” borrowers and lenders (idiots must be “sub” something) and quant trading programs sell off in January 2008 4)reason – rogue trader sell off in March 2008 ? 5)reason – see #1 it is never the government, elected officials, WALL STREET corruption and greed!, the regulators, the financial system itself nor simply the economic reality that slow downs and even worse occur and have so since cave men traded berries for rocks. It is ”Always someone else. ” or something else…
Taxpayer • March 3rd, 2008 at 12:26 am
Where is John law when you need him? In August 1717 Scottish businessman John Law acquired a controlling interest in the then derelict Mississippi Company and renamed it the …Compagnie du Mississippi. Its initial goal was to trade and do business with the French colonies in North America, which included much of the Mississippi River drainage basin, and the French colony of Louisiana. ….the whole (French) government debt became property of the company (debt-for-equity transaction). And the company became property of the former creditors, but effectively controlled by the government. Primarily the government paid an annual 3% interest to the company,…. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% – 400% of GDP) and was basically debt free. http://en.wikipedia.org/wiki/Mississippi_Company
JLC • March 3rd, 2008 at 12:43 am
wawawa Back when I bought my gold coins, I found that Northwest Territorial Mint had some of the lowest spreads for the physical stuff. http://www.nwtmintbullion.com/
Guest • March 3rd, 2008 at 12:46 am
Somebody fell on the market panic button. Grab on to something (gold?) cause it’s going to be wild.
GSM • March 3rd, 2008 at 2:59 am
@ J, When considering the future of commodity prices, pension fund allocations will play possibly the most dominant of roles;. Bush Deficit at Record as Treasuries Deter Pensions (Update1) By Daniel Kruger and Sandra Hernandez March 3 (Bloomberg) — Philadelphia’s $4 billion pension deficit is causing the city’s retirement-fund manager to shun Treasuries at a time when the Bush administration needs him most. Yields on 30-year U.S. bonds that fell to a record low of 4.10 percent this year are forcing pension funds to favor equities, corporate debt and commodities in an attempt to cover unfunded liabilities and meet return objectives of about 8 percent. The $240 billion California Public Employees’ Retirement System, the largest U.S. pension plan, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, spokesman Clark McKinley said. Calpers, facing pressure from state and local governments to boost returns, would reduce its bond holdings to 19 percent from 26 percent.”
ES TraderRT • March 3rd, 2008 at 5:29 am
@wawawa traders-talk.com Site Navigation to Gold Board They talk gold all day long
Octavio Richetta • March 3rd, 2008 at 6:24 am
Written by J. on 2008-03-02 19:56:43 Thanks for the great response. I am not good at/have never felt good about putting money behind investments for which the main reason to invest is that they are going up/everybody is doing it. http://search.forbes.com/search/colArchiveSearch?aname=A.+Gary+Shilling&author=gary+and+shilling Shilling is bearish about commodities but he has been for the last few years; the link above provides some interesting reading.
Anonymous • March 3rd, 2008 at 6:48 am
Buffett says U.S. in recession, stocks not cheap http://news.yahoo.com/s/nm/20080303/bs_nm/buffett_dc;_ylt=AkUG8PpVkYTu4RxVA_tv9eqs0NUE NEW YORK (Reuters) – Warren Buffett on Monday said the U.S. economy is in recession and that “stocks are not cheap.” Speaking on CNBC television, Buffett also said he is no longer offering to guarantee $800 million of municipal bonds backed by MBIA Inc (MBI.N), Ambac Financial Group Inc (ABK.N) and FGIC Corp, three large bond insurers. Buffett said that “from a common-sense standpoint right now, we’re in a recession,” though the U.S. economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession. I have to repeat this last part: though the U.S. economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession Of course it will not record any straight quarters of declining GDP as long as that would be interpreted as recession and as long as the U.S. government stays true to it’s own self:-) Fat chance finding recession in the government numbers.
Guest • March 3rd, 2008 at 7:54 am
Futures seem to be recovering nicely. What’s up, I wonder?
Guest • March 3rd, 2008 at 8:47 am
Does anyone else have a problem with posting? This is just a test after three attempts.
Guest • March 3rd, 2008 at 8:53 am
Gold at $991-incredible!
Guest • March 3rd, 2008 at 8:55 am
Oil at $103.51 where does it stop???!!!! This economy is about to implode under the weight of all the negative events unfolding.
tutterfrut • March 3rd, 2008 at 9:05 am
10:01U.S. Feb. ISM falls to 48.3% vs. 47.5% expected 10:01U.S. Feb. ISM new orders 49.1% vs. 49.5% 10:01U.S. Jan. construction spending falls 1.7% Markets bounce of their lows on this ‘tremendous’ figures…
Guest • March 3rd, 2008 at 9:10 am
Wawa Others commented: “Back when I bought my gold coins, I found that Northwest Territorial Mint had some of the lowest spreads for the physical stuff. “ Be careful. Reputable dealers should be able to ship orders to you in a matter of days after receiving your payments. Check delivery times carefully when ordering. ———————————————————— Other commentators: “Gold at $991 … Oil at $103.51 …” Folks. Let’s look at the Middle East for a moment … US warships are sailing off Lebanon. Saudi has ordered all of its citizens out of Lebanon. Hezbollah has threatened a major retaliation after one of its senior leaders (Mughniyeh) was assasinated in Damascus. Israel has rushed reinforcements to its northern borders. Meanwhile, Palestinians are firing volleys of rockets from Gaza into Israel daily. What do you think is about to happen ?? PeteCA
Medic • March 3rd, 2008 at 9:10 am
Be careful out there – DOW back to near open on all this “good news” going on……
Medic • March 3rd, 2008 at 9:13 am
@ PeteCA: Are we going to Disneyland? No? Oh, then we must be planning on a strike and the start of military action so we can get rid of all this recession talk then. I knew it was one or the other.
Guest • March 3rd, 2008 at 9:17 am
Hey, just like clockwork-ISM hits a 5 year low and confirms recession and stocks rally green!
Octavio Richetta • March 3rd, 2008 at 9:27 am
http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942 Perhaps the market was expecting a worse ISM. Or as the “spin” below indicates, A number above 41.1 means economy growing so stocks go up:-) PMI Manufacturing failed to grow in February as the PMI registered 48.3 percent, a decrease of 2.4 percentage points when compared to January’s seasonally adjusted reading of 50.7 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates the overall economy is growing and the manufacturing sector is contracting at this time. Ore stated, “The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (49.5 percent) corresponds to a 2.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for February (48.3 percent) is annualized, it corresponds to a 2.3 percent increase in real GDP annually.”
Guest • March 3rd, 2008 at 9:36 am
ISM is bull! it represents roughly 30% of the economy. The service ISM was below recessionary levels. The only thin holding up teh mfg sector is the weak dollar and export growth. When wall street chooses to ignore Buffet, I head for the exits!!!
JMa • March 3rd, 2008 at 9:37 am
this is such a managed descent Nikkei moves 4% yet the DOW and S&P can never move at the very most ever a couple of %. Wow, it is amazing. Hasn’t the US exported their market manipulation techniques to the Chinese and Japanese yet ? In exchange for settlement of some of the debt, perhaps this revolutionary concept of manipulation could be taught to other countries ? The Nikkei should never see a day like yesterday EVER AGAIN ! free markets at their finest. “Free” markets and “free”dom are becoming nauseating words to me. The reality is the exact opposite.
Anonymous • March 3rd, 2008 at 9:39 am
Weee-Haw! If you going to play with China, you gotta be ready to fly the Dragon’s back!
Guest • March 3rd, 2008 at 9:43 am
The 2 yr Tres bond is telling you all you need to know, “just the facts ma’am”. Financial collapse is probable now. The “real yield” on the 2 yr is -2.78%, think about that…the smartest investors in the world are willing to live with losing purchasing power at a rate close to 3% for the next 2 years…think about that…
Guest • March 3rd, 2008 at 9:57 am
the smartest investors in the world are willing to live with losing purchasing power at a rate close to 3% for the next 2 years…think about that… I would think the really smart investors don’t park their money in the 2-year treasuries. Only the extremely conservative do that.
Anonymous • March 3rd, 2008 at 10:01 am
Notice of Fed Meeting at 11:30 am eastern is the reason for the futures recovering! Considering the Minsky Moment scenario we see, they should cut. There should be a coordinated movement by the other central banks that are meeting this week. There should be legislation for fiscal stimulus, just like was expressed at the G-7. I am just concerned that there is a pattern where the non-american markets are being pummeled in this managed descent. Another bad news on friday and monday morning rescue. MONETARY GROUNDHOG’S DAY!
JMa • March 3rd, 2008 at 10:15 am
we have had how many inter meeting moves by this Fed intervening on behalf of equity price declines right ? this became quite obvious after the Monday EQUITY massacre on other markets prompted the Tuesday move. The roots of this problem are in the credit markets which are getting colder and developing a thin layer of ice soon to become frozen solid. I hope the meeting is about the credit issue and NOT equity juicing. The dollar is sliding, commodities are exploding to the upside, credit markets are freezing and equities are possibly rolling over. Day trading, rogue trading Fed, will you shoot from the hips again with the only move you seem to know, pull out the rate cutting gun and shoot. The equity markets have seen this move MANY times now and at some point diminishing utility will substantially kick in and then what ? Equity reality SHOULD set in… what is the source of this 11:30 meeting of the Fed ?
Alessandro • March 3rd, 2008 at 10:20 am
@Anonymous on 2008-03-03 10:01:49 With oil, gold and EURUSD simultaneously to all time record heights, the FED is believed to cut in response a mere 300pts down in the DJIA? That would signal sheer panic to anyone. Doesn’t look reasonable to me. @Rich H do you see this as the beginning of one more shake down?
iNnOsInZ • March 3rd, 2008 at 10:24 am
Tech Bubble 1999 – 2001 > Housing Bubble 2003-2007 > Commodities Bubble 2007 – ????
Alessandro • March 3rd, 2008 at 10:25 am
@JMa ”Day-trading Fed”, I love it!
JMa • March 3rd, 2008 at 10:44 am
Thx Alessandro ! i do not see this Fed meeting on wsj.com, bloomberg.com or cnbc.com and trying to decide it is out there besides HERE ! is it being reported on tv anybody ? i can not believe this freaking financial shock and awe by the Fed to keep the charts moving along and dragging out the inevitable.
K in TX • March 3rd, 2008 at 10:58 am
Bloomberg says it’s a regularly scheduled meeting: http://www.bloomberg.com/apps/news?pid=20601087&sid=abS3JfF.Gf_c&refer=home Treasuries Fall as Speculation Over Special Fed Meeting Eases By Daniel Kruger March 3 (Bloomberg) — Treasuries fell as traders’ speculation eased that Federal Reserve policy makers would meet today to decide on a possible reduction in the discount rate. “They assumed there’s going to be a rate cut today, and then they find out the meeting is a regularly scheduled meeting, and then they turn around and sell the positions they just bought,” said Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc., one of the 20 primary dealers that trade directly with the Fed. Fed spokeswoman Michelle Smith said today that the meeting is “regularly scheduled” and “nothing out of the ordinary.”
Guest • March 3rd, 2008 at 11:04 am
This supposed Fed meeting has done nothing for bank stocks-they are still down on the day almost 1%. Last secret meeting, the bank stocks were up like 3% before we heard anything. Somthing doesn’t jive here…
Guest • March 3rd, 2008 at 11:22 am
The so-called conservative revolution of recent times was co-opted by the neo-conservatives, whose promise was “better government.” Alas, it was only a different slant on the FDR-LBJ power grab…not “better”…but “bigger”! Why, then, should Hellasious of Sudden Debt fame alienate half of his readers by sticking labels on them and their beliefs as “extremist movement Republicans”? http://suddendebt.blogspot.com/ In a comment posted February 27, 2008 9:00 AM, Hellasious said… “Instead of LESS government, we should be asking for BETTER government. ”It is astonishing how effective extremist movement Republicans have been in convincing many otherwise informed and astute people that the best government is one that can be drowned in a bathtub. ”Democracy and freedom CANNOT function without excellence in government. But fascism can, and did in the past. And this includes communist fascism, if I may twist the terms around a bit.” The following quote is on Sudden Debt’s masthead: The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance. (Cicero, 55 BC) Has Hellasious jumped ship?
Guest • March 3rd, 2008 at 11:29 am
When is wall street going to price in the inevitable? A recession is a forgone conclusion right now fro everyone in the world but the US Fraud market…
WAWAWA • March 3rd, 2008 at 11:57 am
See who is in the bottom of the list! When this insanity ends, it would not be pretty. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
Guest • March 3rd, 2008 at 12:20 pm
Gold about to ram through $1000.00!!!!
Guest • March 3rd, 2008 at 12:21 pm
@PeteCA “Folks. Let’s look at the Middle East for a moment … US warships are sailing off Lebanon… Israel has rushed reinforcements to its northern borders. Meanwhile, Palestinians are firing volleys of rockets from Gaza into Israel daily… What do you think is about to happen ??” The implication that Israel is being attacked, I see as unfair. What you say is true but with the most important part, IMO, left out – the unequalness of battle and the lack of justification for Israel’s use of heavy tanks, jet aircraft and sophisticated missiles in response to unauthorized Palestinian rocket squads allegedly firing homemade rockets and mortar from the border. The result has been heavy lost of life among Palestinians civilians. The Israeli army rolled into the eastern areas of the northern Gaza Strip “after several militant groups, including Hamas and Islamic Jihad (Holy War), claimed to have launched dozens of homemade rockets and mortars at Israel despite the offensive.” What do I think is going to happen? According to Israeli Deputy Defence Minister Matan Vilnai, unless Palestinians in Gaza stop firing “missiles” into Israel, ”they will face a holocaust…” http://news.monstersandcritics.com/middleeast/news/article_1393510.php ”Speaking to members of the Palestinian National Council (PNC) in a meeting held in Ramallah, President Abbas said the current Israeli escalation was ‘very dangerous.’ ”‘What is actually happening in Gaza is more than a holocaust,’ he said in reference to a recent statement by an Israeli official. ”‘I do not think what Israel is doing is in retaliation to the missiles, which we condemn,’ said Abbas. ‘These missiles cannot be of the volume to justify this horrifying act, which required, regrettably, the use of a word despised for over 60 years and this word is ‘holocaust’.'” Mar 1, 2008, 12:14 GMT
Guest • March 3rd, 2008 at 12:23 pm
Didn’t a freefalling dollar cause the 1987 crash? Don’t loook now but…
Kenneth Tobin • March 3rd, 2008 at 12:26 pm
At first we were told there was no housing bubble. Next, we were told Alt A paper was fine, and problems were contained to sub-prime securities. Lastly, media said government handouts, and lower interest rates should solve this crisis. Blah, blah, blah. Now, it appears that Fair value accounting (FASB 157 – mark to market)is providing clues into a new wave of significant loses for financial services companies. FYI, FASB 157 must be adopted by March 31, so expect more losses through-out the spring. See story below. Jumbo Mortgage company Thornburg is bearly hanging on. http://dailybriefing.blogs.fortune.cnn.com/2008/03/03/margin-calls-thrash-thornburg-again/ Margin calls thrash Thornburg again: “The turmoil in the mortgage financing market that began last summer continues to be exacerbated by the mark-to-market accounting rules which are forcing companies to take unrealized write-downs on assets they have no intention of selling,” he said Monday. “In this environment, the current market price of assets has become disconnected from their underlying recoverable value, resulting in increased volatility and imprecise quarter-to-quarter comparisons of asset valuations.”
JMa • March 3rd, 2008 at 12:32 pm
“Didn’t a freefalling dollar cause the 1987 crash? Don’t loook now but… Written by Guest on 2008-03-03 12:23:12″ sure it was part of the technical picture – particularly the part where it broke to multi year lows. not so this time, we had the technical equivalent long ago – i have mountains of losses to vouch for it too… apparently, now foreigners holding us stocks are not part of the equation ? either that or they enjoy getting double whammied on the nominal and currency losses on their us investments. foreign holders of us equities must all be financial masochists.
Guest • March 3rd, 2008 at 12:38 pm
Wall street just gets more and more l00ny! Now, 2008 YOY estimated growth is running at 19.31%!! This is just getting silly! By the way, the difference now between “actual” earnings expectations and GAAP(Liars)adjsuted earnings is now up to $27.43!! This means that roughly 28% of this years earnings are going to be made up, ficticious! OUT OF CONTROL!!!!
Anonymous • March 3rd, 2008 at 12:40 pm
Are investors now torching homes with negative equity? Very intereting story below… $2 million homes burn in ‘act of terror,’ developer says http://www.cnn.com/video/#/video/us/2008/03/03/vo.wa.elf.fire.aerials.kiro
Guest • March 3rd, 2008 at 12:41 pm
Fair value on expected actual earnings is 871, fair value on expected GAAP is 1301-no wonder everyone wants to ignore reality…
Guest • March 3rd, 2008 at 12:41 pm
Crude busting $104 now!
tutterfrut • March 3rd, 2008 at 1:59 pm
Is Nasdaq going to test previous low, today?
Anonymous • March 3rd, 2008 at 2:15 pm
Up from here
Anonymous • March 3rd, 2008 at 2:19 pm
Here comes the calvary…I mean the PPT!
Guest • March 3rd, 2008 at 2:27 pm
Thonrburg Mrtg down 60% today! Yup, thats bullish as hell! LOLOLOL PPT appears to be very active at new lows today-can’t let the market force their hand before the 18th meeting or the $ will collapse….
Guest • March 3rd, 2008 at 2:30 pm
stocks gonna go green for the day
Guest • March 3rd, 2008 at 2:34 pm
More bullish news: U.S. car sales down sharply in February as consumers struggle with a credit crunch and a housing slump.
Guest • March 3rd, 2008 at 2:37 pm
More “bullISH” nows for everyone… The National Association of Purchasing Management-Chicago reported Feb. 29 that business activity fell to the lowest level in more than six years. A Philadelphia Fed gauge showed the deepest contraction in seven years, while the Fed Bank of New York’s economic index was the weakest in almost five years. Government data also have pointed to a slowdown. Orders for durable goods excluding transportation equipment fell in January for the third time in the last four months, Commerce said last week. Factory production stalled in January, with car output falling, the Fed said Feb. 15.
Anonymous • March 3rd, 2008 at 2:42 pm
The PPT lives! Your tax money hard at work.
JMa • March 3rd, 2008 at 3:01 pm
what a great come back ! USA USA USA ! ! ! USA rules the capital markets of the world ! Simply the best hands down !
Guest • March 3rd, 2008 at 3:02 pm
Ahhhh, there is the miraculous 100 point rally in 20 minutes!
tutterfrut • March 3rd, 2008 at 3:08 pm
@Jma ”USA rules the capital markets of the world!” Working hard to earn its status of banana republic, you mean.:)
J. • March 3rd, 2008 at 3:11 pm
@Anonymous on 2008-03-03 06:48:40 Fat chance finding recession in the government numbers. Try the Chicago Fed’s National Activity Index (CFNAI). Its 3-mos moving average has been negative every month now since (and including) Sept 2006. Now this may not be ‘proof’ of recession but, on its readings since Mar 1967, all long sequences of negative months have been recessionary. http://www.chicagofed.org/economic_research_and_data/cfnai_data_series.cfm The ‘two consecutive negative quarters’ notion is the media version, not what the Nat Bureau of Economic Research (NBER) bases its calls on, though that org is always very late — the Chicago data is better.
Guest • March 3rd, 2008 at 3:22 pm
You watch now, mark my words, even with the HORRIBLE weekly claims data last month and the even MORE HORRIBLE continuing claims numbers last month, the Fed can’t afford negative payroll growth so we will have a miraculous GAIN of like, say, 125K jobs. I think the next move for the Fed will be just to stop publishing the employment reprot next…
tutterfrut • March 3rd, 2008 at 3:25 pm
Fannie, Freddie to Overhaul Appraisals in Cuomo Deal “We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers,” Cuomo said. http://www.bloomberg.com/apps/news?pid=20601087&sid=aSUcfdxfq4xs&refer=home No kidding! Really? And he found this out all by himself? Wow, let’s hope he gets paid enough for such a brillant analysis. Must have a quite exceptional academic degree.
JMa • March 3rd, 2008 at 3:26 pm
http://www.markit.com/information/products/category/indices/cmbx.html http://www.markit.com/information/products/category/indices/abx.html now i know why the equities rallied, these credit indices settled down today ! the EXACT opposite is true – ABX nearly all tranches closed on lows, CMBX spreads majority closed at widest, no final LCDX available yet… i think us equities must maintain some secret property which only a select few are aware of. maybe if you roll up the paper stock certificates and smoke them you will live forever. the story has not broke yet, but it must be out there. maybe if a stack of stock certificates are pressed together they become diamond-like instantly and can cut through anything or maybe when you press them together they turn into oil and may be used as fuel… one thing i do know is when governments artificially support their prices, the paper acts as an elixir keeping the masses blind from the harsh economic reality lying directly ahead of them.
The Dane • March 3rd, 2008 at 3:26 pm
“banana republic” Look at wikipedias page for a definition: http://en.wikipedia.org/wiki/Banana_republic Sadly wikipedia is not updating the page, as you can see under “Modern usage” one country is missing. The Dane PS.: The AMBAC “plan” is really working out fine as the AMBAC-stockprice is showing today.
Anonymous • March 3rd, 2008 at 3:41 pm
Those of you in US equities NEED to know. They are running game-play theory on you. Supercomputers which gauge all market indicators, volume, momentum, etc. are being used to analyze, evaluate, and automatically trade. Your trying to make the market bend to your interpretation of reality, is going to leave you very frustrated and poorer. It is like Kasparov taking on big blue; what minor wins gained pale to losses as the silicon continues to learn at the carbon-based’s detriment. Several wise and seasoned professionals have warned that this is no market for Mom and Pop. CDO squared? Caveat Emptor squared.
Octavio Richetta • March 3rd, 2008 at 4:16 pm
Written by JMa on 2008-03-03 15:26:23 You have got to be patient. The stock market and the economy are related by they are not one of the same. The market’s position has been one of extreme hope; yet, the overwhelming cascade of bad news and evidence of weakness has resulted in four down months in a row. The market in its never ending optimism clings to any bit of slightly good news that comes out. Anything that gives it some hope the recession will be a mild one. There is still a lot of confusion and that is good. Otherwise we would reach bottom in one day of trading. Market is not even at 15% from the record high in October (is this correct?) so there is still opportunity to catch some of the downside. The break down started again last week, I would expect bounce backs from now on to be lighter and farther in between. Fed will continue to cut, inflation in the short term will continue to rise, Professor GOLD will continue to give central banks and the shadow banking system failing marks, the stupidity of ethanol subsidies and speculation will continue to offer support to agricultural commodities.
Octavio Richetta • March 3rd, 2008 at 4:22 pm
Written by The Dane on 2008-03-03 15:26:28 http://finance.yahoo.com/q?s=abk AMBAC down 11% today and continues to slide after hours. I don’t follow the stock closely so your remark threw me of for a second.
RedCreek • March 3rd, 2008 at 4:23 pm
Voila. Resigned, leaving the Titanic in NY and moving to London, where I am taking up a job in risk arbitrage (event driven, special situations, merger arbitrage). I will read this blog with even more interest than I have been doing so far…
Octavio Richetta • March 3rd, 2008 at 4:29 pm
Transcript of Buffet CNBC interview today. Great stuff! http://www.cnbc.com/id/23449591 Thanks to Cr for the link.
The Dane • March 3rd, 2008 at 4:35 pm
@Written by Octavio Richetta on 2008-03-03 16:22:38 He he, just a little bit of irony. The Dane PS.: look at the positive side, not everything is going down, some things are going up like gold, oil, foreclosures, silver, gasoline, unemployment, wheat and other commodities.
JMa • March 3rd, 2008 at 5:59 pm
@Octavio as far as being patient, i have been waiting over one year and a half… and although the economic story is fascinating to follow especially here, i am looking at charts for the most part and am ready based on historical comparisons for at least a retest of the lows if not a move below those lows… i can not stand the daily noise, the rumors, the news, etc. apparently, too much negative stuff overnight with nikkei down 4%, BA with bad news last friday night and Buffet’s sell signal this AM. add these tidbits up in the casino and i guess the house had to close unchanged or up… technically, still ready for a retest and wish the MSM, news, rumors would just either get the hell out of the way or come up with some miraculous positive news for once which the casino managers can arrange for the market to sell off on…
RedCreek • March 3rd, 2008 at 6:21 pm
Kudlow, on CNBC tonight, claims that the USD plunge might hurt US “PRESTIGE”. Can someone please tell this guy that most of the world is already sticking up the middle finger to the US? The action, these days, is happening in Eastern Europe, China, India, Brazil and in very much up and coming Central Asia and – indeed – certain pockets in Africa (investments driven by Europe and China). The Eurozone has 450m people; the US has 315m people. We are witnessing the fall of the US empire and the US TV is worrying about US PRESTIGE…
Anonymous • March 3rd, 2008 at 6:38 pm
Louise Yamada…get your fix here. http://www.cnbc.com/id/15840232?video=671700945&play=1
Guest • March 3rd, 2008 at 6:42 pm
“Crude busting $104 now! Written by Guest on 2008-03-03 12:41:59″ wow, $103.95, but can be at $115 easy.
Guest • March 3rd, 2008 at 6:44 pm
$CRB going higher and higher too. deflationists shout “don’t worry, there is no inflation, because deflation will triumph over inflation”!!!! Good god grieve.
Guest • March 3rd, 2008 at 6:51 pm
the way gold is adding at least $10 a day. we will bust thru gold $1000 within this week.
Guest • March 3rd, 2008 at 6:54 pm
gold busting thru $1000 doesn’t scare me. what scare me is if it bust thru uptrend channel and go higher. deflationists shout “there is no inflation!!!!”
WAWAWA • March 3rd, 2008 at 7:05 pm
Speaking of Gold. Today, I bought some from a San Diego dealer. I got Four, 1oz American Eagle at $1021/each Four, 1oz Krugerrand at $1001/each I will buy more later this week. To be honest, I do not know why I am excited about it, price of gold may even go down. But, I feel I am among few privileged ones, does not make sense, does it? GOOD LUCK TO ALL
WAWAWA • March 3rd, 2008 at 7:12 pm
Louise Yamada is my hero, so as Dr. Roubini and Calculatedrisk.
Guest • March 3rd, 2008 at 7:50 pm
First tsunamis, now Ebola. People are running out of descriptive terms I guess Asset-Backed, Commercial-Mortgage Spreads Met `Ebola’ (Update4) By Jody Shenn March 3 (Bloomberg) — The extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records last week, as the debt-market slump prompted banks, hedge funds and other investors to shun the securities. The extra yields, or spreads, over benchmarks have surged since mid-2007 as a weakening U.S. economy erodes confidence in the bonds’ credit quality and as losses on debt investments lead to forced sales and reduced demand. The spread widening may herald more losses for the world’s largest banks, which have reported more than $180 billion in mortgage-related losses. “People are calling it financial Ebola,” Ed Steffelin, a senior managing director at GSC Group in New York, said in a telephone interview last week, referring to the deadly, contagious virus named after
Guest • March 3rd, 2008 at 8:00 pm
Wondering how long it will take before discussions start about a “Nuevo Dollar” or a “Strong Dollar”, following the example of what Chavez recently introduced in Venezuela.
RedCreek • March 3rd, 2008 at 8:44 pm
Bloomberg: “Paulson expects new capital markets proposals in weeks”. Great. Will probably peg the USD to the New Venezuelan Strong Bolivar. Can’t elaborate on this idea though, urgently gotta watch American Gladiator. And American Idol.
Guest • March 3rd, 2008 at 9:41 pm
the current econ situation is so dire that is unbelievable mkts are not down “big time” its like an alien breathing in front of your face and youre too paralyzed to do anything IMO TPTB do NOT have a SOLID backup plan if we go into a recession…(thus the denial on recession) i personally believe they wouldve let the mkt fall if they have a way of recovering (they surely can gain a lot of Profit, i mean if you knew the game in advance and you know its possible to be done) Maybe the “Smart Money” are scared S**T too
Anonymous • March 3rd, 2008 at 10:27 pm
Looks like NAFTA has been brought to the fore, so here’s the first “don’t you dare to kill it” turd outputted to the media…contains serious threats by a Mexican avocado sales person and others…real purpose is probably to help mold public opinion… So don’t read it if you have a tendency to believe what’s in the news (whether Internet or TV). Mexicans say changing NAFTA may force them to move to U.S. http://news.yahoo.com/s/mcclatchy/20080303/wl_mcclatchy/2867869
JLC • March 4th, 2008 at 12:02 am
@GSM Hello GSM. I must say that the opinions and investment outlook you express on this blog are very close to my own. I am curious, what other blogs or information sources do you visit frequently? Thanks in advance. JLC.
Rich H • March 4th, 2008 at 12:06 am
@ JMa Stick to the comedy!!! (Not because I don’t like what you have to say… but its just that the sarcastic stuff is top notch!!! (The sat shooting update was my favorite to date.)) As for my bit of advice. We dropped friday, with a sell on Japan Monday morning to cover losses. We were cash strong on monday morning here. Buffet is the perfect example of chatter I listen too. His “advice” must be read correctly. If he says “buy”, that means he already did! If he says “hold, that means he’s selling. If he says sell… he’s looking to buy. You misread his backhand intentions. His ccomments are made to dicount the purchases he needs to make! (BerkHath got CREAMED last month!!! He needs to make that up) Likewise, the YCT further unwind on the down asian market. If we’re down big, followed by a big down, (with YCT being significant) a turnaround typically follows. Just my take, Rich H p.s. I’m brushing up on my old drawing skills, and working on the Hank, Ben, GWB Political Cartoon / here no/ see no / speak no “recession”.
Guest • March 4th, 2008 at 12:27 am
God. Where to start? There are many bad assumptions that go into this calculation. I agree that a 30% price drop is probably. I will give you that one. Next, realize that the country is not monolithic. Most of the country will see 15% declines and some areas like California, Arizona, Nevada and Florida (Bubbleville) will see 40% declines. Now most of the country with 15% declines will be OK. Sure they will lose money but most people will not be underwater. Even the ones that are won’t be underwater by much. A very small fraction of those people will walk away and create losses for the banks. Now lets analyze Bubbleville. Much of those bad loans made in 2006-2007 that will be way underwater were the toxic variety (subprime, pay-option, Neg-am etc) that were securitized and sold off to hedge funds, pension funds and especially overseas financial institutions. I would guess that over half of them were sold overseas. Many of these people will walk away but no where near half. Maybe 10-20% is about right. They certainly won’t walk until they are very far underwater. So overall I would expect that maybe 10% of these people will walk (nation-wide average) and that only half of those losses will be to the regulated US banking system. Since you assumes that 50% would walk and that this was all in the banking system, my estimate is 10 times smaller. That makes a huge difference. If anything close to 10 million people try to walk away from their homes, the government is likely to step in and say, “Na-ah”. Ruthless foreclosure is not something that can be done en-masse. They will find some way to stop speculators from getting out of their obligations, the law be damned. There are so many ways to socialize losses that it is hard to know in which direction to look. The Fed has already done its part to increase bank profitability. Tax break for banks might be the next one or tax-breaks for people who stay in their underwater homes. A low-low-low government refinancing scheme seems likely.
Dave • March 4th, 2008 at 12:28 am
God. Where to start? There are many bad assumptions that go into this calculation. I agree that a 30% price drop is probably. I will give you that one. Next, realize that the country is not monolithic. Most of the country will see 15% declines and some areas like California, Arizona, Nevada and Florida (Bubbleville) will see 40% declines. Now most of the country with 15% declines will be OK. Sure they will lose money but most people will not be underwater. Even the ones that are won’t be underwater by much. A very small fraction of those people will walk away and create losses for the banks. Now lets analyze Bubbleville. Much of those bad loans made in 2006-2007 that will be way underwater were the toxic variety (subprime, pay-option, Neg-am etc) that were securitized and sold off to hedge funds, pension funds and especially overseas financial institutions. I would guess that over half of them were sold overseas. Many of these people will walk away but no where near half. Maybe 10-20% is about right. They certainly won’t walk until they are very far underwater. So overall I would expect that maybe 10% of these people will walk (nation-wide average) and that only half of those losses will be to the regulated US banking system. Since you assumes that 50% would walk and that this was all in the banking system, my estimate is 10 times smaller. That makes a huge difference. If anything close to 10 million people try to walk away from their homes, the government is likely to step in and say, “Na-ah”. Ruthless foreclosure is not something that can be done en-masse. They will find some way to stop speculators from getting out of their obligations, the law be damned. There are so many ways to socialize losses that it is hard to know in which direction to look. The Fed has already done its part to increase bank profitability. Tax break for banks might be the next one or tax-breaks for people who stay in their underwater homes. A low-low-low government refinancing scheme seems likely.
ignatius • March 4th, 2008 at 4:32 am
new thread
Alex Grey • March 6th, 2008 at 11:44 am
House prices in free fall in California? While based only on two months data the latest Case-Shiller index for Decemebr 2007 shows that in some cities I would characterise house prices as being in free-fall in the past two months: (San Fancisco, down 6.4% from October to December; Los Angeles, down 6.7%, San Diego, down 6.8%). These declines annualised are approaching a 40% rate. We will know more in the coming months but my guess is that sellers are panicking. Given the large inventories (10+ months supply) and the steady price decline my guess is that setters have put two and two together and concluded that they do not want to wait and watch prices of other houses for sale (and by implication their own realisable price) decline for almost the next year. The result is that they are acting aggressively to cut prices to sell their houses more quickly. These discounted houses are what is selling and so what is showing up in the Case-Shiller Index.
